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The Energy Charter Treaty: The Invisible Enemy of the Renewable Energy Movement

“Without renewables, there can be no future.

The UN Secretary-General, António Guterres, made this statement in 2022 in a press release titled World Meteorological Organization’s State of the Global Climate 2021. His aim was to place emphasis on the world’s need to transform our energy systems and speed up the international shift towards renewable energy. Renewable energy is quickly becoming central to international climate agendas, as many countries look to phase out fossil fuel investments and development. Phasing out fossil fuels is critical in order for countries to meet their promised climate goals. More specifically, in 2018 it was reported by the Intergovernmental Panel on Climate Change (IPCC) that 89% of global CO₂ emissions came from fossil fuels and the industry. The fossil fuel sector contributes staggering amounts to the climate crisis at hand, thus moving towards renewable energy holds great opportunities for a more sustainable future.

Despite this explicit need to move away from fossil fuels, 57 countries, including all the EU member states, face high legal barriers to do so. This is because of their involvement in the Energy Charter Treaty (ECT). The ECT was signed at the Hague in December 1994 and entered into legal force in April 1994. It includes the signatures of 57 countries, including international organisations such as the EU and Euroatom. According to the ECT website, the treaty is a unique legal framework designed to promote energy security through the operation of more open and competitive energy markets. Yet, this synopsis does not entirely line up with ECT definitions produced by climate groups and the public media. The environmental organisation, Client Earth, describes the ECT as an “International investment agreement that allows foreign companies to claim compensation from governments for introducing policy changes and laws that impact their profitability.” Similarly, the International Institute for sustainable development (IISD) describes the treaty as a tool used by fossil fuel investors to mitigate losses they incur from public policies. Thus two different views of the ECT are presented: one being that it is a beneficial treaty promoting open markets for the development and growth of the energy sector, and the other being that the treaty is a tool in which investment and economic growth is put over environmental protection. As the ECT continues to stifle the renewable energy movements its free-market definition has begun to fall second to the fact that it is a mechanism by which fossil fuel investors grow their returns and neglect environmental protections.

To successfully analyse this long standing treaty, it is critical to start with the definition of an investor-state dispute settlement (ISDS). This is defined as a settlement or investment court through which countries can be sued by foreign investors for certain state actions affecting foreign direct investment. It is argued that the ECT gives ISDS tribunals sufficient powers without legal safeguards to call into question the levels of environmental protection sought by the EU. More specifically, Article 19 (1) of the ECT, which centres on environmental aspects, states that “each Contracting Party shall strive to minimise in an economically efficient manner harmful environmental impacts …” and emphasises that “the Contracting Party shall act in a cost-effective manner.” Through the use of evasive language such as “strive,” “in an economically efficient manner,” and “in a cost-effective manner,” the ECT prioritises the energy cycle and fossil fuel investment over environmental protection. This structurally subordinates environmental problems to investment protection. The legal precedent set by the ECT has impacted the actions of many countries as they attempted to reach their promised climate goals. For example, the Netherlands were sued over their coal phase-out law, Slovenia for its fracking ban and just last year, the oil company Rockhopper sued Italy over its ban on offshore drilling. Thus, the ECT leaves countries liable to billions in damages and stifles their international commitment to climate change policies. In turn, this discourages countries from pursuing policies which stunt fossil fuel investment, which subsequently stunts the renewable energy movement.

For years, the EU has attempted to modernise this treaty, and in 2017, it was believed they had. The EU carried out negotiations in 2017 urging for the modernisation of investment provisions. More specifically, the EU aimed to amend investment protection provisions, making it so that future fossil fuel investments would be excluded from the scope of application. Despite these efforts to bring the treaty into the twenty-first century, negotiations did not result in actual change. As a result, many scholars argued for the withdrawal of the EU from the ECT. Scholars such as Dr. Christine Eckes and Dr. Laurens Ankersmit argued that a withdrawal was imperative. In their study titled The Compatibility of the Energy Charter Treaty with EU Law, they stipulated that the “ECT adversely affects the autonomy of EU law,” and in turn neglects to “introduce the necessary safeguards that preserve the EU’s unique legal and judicial framework.” The ECT removes agency from EU laws and their effective nature. This exhibits the outdated and no longer relevant articles in the treaty which do not serve the interests of its signatories.

Despite the ECT’s hold on EU laws and policy, signatories were cautious to withdraw. This is because of a sunset clause embedded within the treaty. This clause (Article 47(3)) states that all investments covered by the treaty at the time the withdrawal takes effect will continue enjoying protection for 20 years from the withdrawal. As a result, the EU’s exit from the treaty will hold little weight in changing the legal and financial precedent for at least 20 years. With the sunset clause in mind, the EU and its member states debated for years whether they should push again for modernisation or withdrawal. Arguments for an exit from the ECT were finally brought to fruition on 7 July 2023 in an EU press release. The press release stated that the ECT was “no longer compatible with the EU’s enhanced climate ambition under the European Green Deal and the Paris Agreement,” and as a result, “a coordinated withdrawal by the EU, Euroatom and all EU member states is now the most consistent approach from a legal and policy perspective.” This withdrawal has now given new steam to the renewable energy movement, as well as providing EU laws with greater autonomy to execute their climate objectives.

Moreover, this withdrawal now brings the sunset clause to the forefront legal debate. The EU hopes that with the backing of their member states and the UK, they will hold enough leverage to remove the legal effects of the sunset clause. This hope is yet to be realised as the UK has not announced any intention to withdraw. At this time the question of the sunset clause’s standing will be left to arbitral tribunals to decide if the clause applies to prior investments made in EU Member States. From an international law perspective, CMS argues that the sunset clause appears challenging to bypass or neutralise the ECT’s clause in combination with a coordinated withdrawal. If the sunset clause were to remain, this would be detrimental to the renewable energy movement as climate issues face a ticking clock. Thus many questions remain over the effects of the EU withdrawal and the ECT’s current standing.

To conclude, the ECT is a treaty which supplies fossil fuel companies with the means to protect their growth and development under the law and within ISDS processes. These tribunals legally stunt countries who have committed to climate goals in the Paris Agreement and the European Green deal. Moreover, the ECT has no provision stating a cap on settlement deals, thus leaving ECT signatories liable to large damages in ISDS courts. As a result, the EU and other states attempted to modernise the treaty in 2017, but attempts subsequently failed. This resulted in a stronger sentiment for withdrawal. The exit of the EU and other countries from the ECT was supported by many scholars, as they claimed that this was the only legally logical action to undertake. Thus, in 2023, the EU member states announced their exiting of the treaty. The withdrawal continues to bring about questions surrounding the future of energy investments and the potential implications of the sunset clause looms over EU country’s hopes of pushing renewable energy. Despite the continued questions surrounding the ECT and the EU’s withdrawal, the exiting of these member states serves as a significant step forward in the renewable energy movement and the international achievement of climate goals.


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