by Elsa Bultez–Michel and Sophie Boulanger
Reading time: 10 minutes
The Energy Charter Treaty (ECT)
Emmanuel Macron, the President of the French Republic, announced on Friday 21 October 2022, at the end of the European summit in Brussels, the withdrawal of France from the Energy Charter Treaty (ECT). On this occasion, we would like to come back to what the Energy Charter Treaty is and what room the EU has, regarding the conciliation between this treaty and its climate goals without France as a partner.
The ECT is an international agreement to promote cooperation in the energy sector in order to ensure energy security. Established in the post-Cold War context, this treaty was signed by all the members of the European Union as well as the countries of the former USSR, among them Russia. It contains provisions to develop a competitive and open energy market, to combat market distortion and barriers to competition, and to guarantee the transit of energy materials and products between member countries through certain networks, such as pipelines. This has been achieved in particular through the development of a protective framework for investors.
However, this treaty has been increasingly challenged by citizens and environmental groups as it contains provisions allowing investors, especially in fossil fuels, to file a lawsuit against states that wish to implement a greener energy policy, and thus endanger their investments, notably through a dispute settlement mechanism. These oil companies can then take states to private arbitration tribunals and claim millions of euros in compensation.
In this situation, the Intergovernmental Panel on Climate Change (IPCC) addresses the issue of investment protection policy and its incompatibility with the implementation of states’ commitments under the Paris Climate Agreement. Indeed, it seems to be a brake on the implementation of renewable energy policies, and therefore, which jeopardizes the climate objectives of the Paris Agreement.
This case raises the question of the extent to which the ECT and EU climate policy are compatible, and the possible solutions to this issue.
Is the ECT incompatible in principle with the EU’s climate objectives?
The ECT has been in existence since 1994. At that time, the Earth Summit had already been held in Rio, and the countries of the world had committed themselves to stabilize their greenhouse gas emissions. Ratification of the treaty may have favored the long-term use of fossil fuel investments, and therefore made decarbonization more difficult. Indeed, this treaty provides de facto a protective framework for fossil fuels: the world’s largest source of greenhouse gasses. Its scope rationae personae concerns the countries that are parties to the ECT, most of which are also members of the European Union.
The latter has nevertheless positioned itself as a leader in the fight against climate change and has adopted a series of regulations and legislative packages in order to achieve the objectives set by the Paris Agreement, namely not to exceed, as far as possible, the 1.5°C limit. According to the Energy Union Package, one of the five main objectives of the Union’s energy policy is to decarbonize the economy and move towards a low-carbon economy, in line with the Paris Agreement but also to promote research into low-carbon and clean energy technologies as well as prioritizing research and innovation to drive the energy transition and improve competitiveness.
The Union’s commitment to the climate, and in particular the desire to develop renewable energies in order to reduce greenhouse gas emissions, has been perceptible since the early 2000s. One example is the adoption of Directive 2001/77/EC concerning the promotion of electricity produced from renewable energy sources in the internal electricity market, to promote electricity from renewable sources, which sets the objective of increasing the share of renewable electricity in the EU’s energy consumption to 22% by 2010.
As the method of single directives is not the most effective, given the diversity of sectors to be taken into account in order to effectively combat climate change, the Union had to resort to legislative packages from 2009. The idea was to set clear objectives on a regular basis and to build legal instruments around these pre-defined objectives.
The objective of the first legislative package of 2009 was to transform the EU as a model of smart, sustainable, and inclusive growth by 2020. In this sense, a triple target was set with the aim to be reached by 2020: a 20% reduction of GHGs compared to 1990 by 2020, 20% of renewable energy in the EU’s energy consumption by 2020 as well a 20% reduction of energy consumption by 2020 by promoting energy efficiency.
After the signature of the Paris Agreement, the Union wanted to go further, and put in place a legislative package in 2016, setting the objective of 32.5% renewable energy by 2030, a 40% reduction in greenhouse gas emissions, and 32.5% energy efficiency. Since the regulation of 30 June 2021, known as the European Climate Law, a meta-target has been adopted, aiming for a 55% reduction in greenhouse gases by 2030 and carbon neutrality by 2050. Again, this target was based on the promotion of renewable energies and is incompatible with the development and maintenance of fossil fuels, as possible under the ECT.
Moreover, the ECT raises purely legal problems within the Union. The Court of Justice of the European Union has exclusive jurisdiction to settle disputes between EU Member States. This guarantees the effectiveness and uniformity of EU law, which is essential for the continued existence of the European Union itself. The CJEU ruled in 2018 in Achmea on the compatibility of recourse to arbitration for disputes between an investor from one EU state and another EU state on the basis of a bilateral investment protection treaty. It supported this jurisprudence on 2 September 2021, in Republic of Moldova v. Komstroy LLC, where it was specified that the arbitration mechanism, provided for by the Energy Charter Treaty, is not applicable to disputes between a Member State and an investor from another Member State concerning an investment in the former State.
Why reform the ECT and how?
Not substantially updated since the 1990s, the ECT has become increasingly obsolete. It has also become one of the most litigated investment treaties in the world (150 pending). EU member states are the main target of complaints from investors, most of whom are based in other EU countries. In November 2018, a process to modernize the ECT was launched. The Energy Charter Conference approved a list of topics for discussion. It mainly concerns provisions related to the protection of investments. After fifteen rounds of negotiations that took place between June 2019 and July 2022, an “agreement in principle” was reached at the extraordinary meeting of the Energy Charter Conference held on June 24, 2022, in Brussels.
What is the Energy Charter Conference?
The Energy Charter Conference is the governing and decision-making body of the Energy Charter process and was established by the ECT. Its membership includes all States or regional economic integration organizations that have signed or acceded to the ECT. It is responsible for adopting the texts of the amendments to the ECT and approving the adaptations and technical modifications of the ECT annexes. During the vote, the decision must be taken unanimously by the votes of the contracting parties present and voting. On November 22, 2022, at its 33rd meeting, the member states of the ECT met in Mongolia to adopt the modernized text. If adopted, the modernized treaty will subsequently need to be ratified by at least three-quarters of the signatory parties to enter into force.
On July 15, 2019, the Council gave the Commission the mandate to lead the negotiations on the modernization of the ECT. The aim is to raise the environmental and climate ambitions of the ECT, and to update the provisions on investment protection and the dispute settlement mechanism. The amendments relating to the modernization of the ETC have been presented in a communication from the European Commission.
What are the amendments proposed by the Commission?
On the surface, these amendments reflect a desire on the part of member states to “green” the current ECT. However, in the eyes of experts, the proposed reform of the ECT will not achieve most of the objectives set by the EU. Indeed, even taking into account the European Commission’s proposals, the treaty would “continue to pose a threat to urgently needed climate action, it would continue to be in conflict with EU law and it would undermine the EU’s reformed approach to investment protection”.
First, regarding the proposal to link the modernized treaty to core international agreements, the High Council for Climate (HCC) notes that the amendments do not “establish a hierarchy of international treaties, and in particular do not reaffirm the primacy of the Paris Agreement over the ECT”. As the HCC highlights, the proposed amendments present advances for the climate, notably with the new flexibility mechanism, and also provide for the end of the applicability of the dispute settlement mechanism between the member countries of the European Union. However, these advances are insufficient to meet its international commitments as the proposal provides for the extension of the protection of investments in fossil fuels over a period of 10 years.
Moreover, it is foreseen that this transition period would only start after the ratification of the reformed agreement and the last reform of the ECT in the 1990s took about 12 years to come into force… This means that existing investments in coal, gas, and oil would continue to be protected until 2030. Moreover, the proposal extends investor protection to new energy investments. This would therefore increase the risk of litigation. As a result, the planned protection periods would conflict with the fossil fuel divestment timetables indicated by the IPCC or the International Energy Agency (IEA).
Towards an EU-wide coordinated withdrawal?
The solution would finally be to leave this agreement “which protects the polluters”. A country’s withdrawal takes effect after one year. Several countries have already withdrawn and others have announced their intention to do so (Italy, Spain, the Netherlands, Poland, France, Slovenia, Germany, and Luxembourg).
However, this exit is not without consequences, since a specific clause, known as the “survival clause” (or “sunset clause”), nevertheless provides that investments protected at the date of withdrawal remain so for 20 years. In order to be effective and to restore the sovereignty of the States in their energy and climate policies, the States should conclude an additional agreement in order to neutralize the famous survival clause between them. A coordinated and collective withdrawal is also one of the recommendations by the HCC.
This would send a strong political signal. If the EU resigns, half of the signatories will leave and this is a very heavy share in terms of investments. On November 24, the European Parliament voted in favor of the coordinated withdrawal of the states from the ECT. We expect the same from the Commission.
Opposition to the reform of the ECT is so strong that on November 18, France, Spain, the Netherlands, and Germany refused to give the EU executive the mandate to vote as planned on November 22 at the Energy Charter Conference. The vote was postponed.
Proposal for a COUNCIL DECISION on the position to be taken, on behalf of the European Union, at the 33rd meeting of the Energy Charter Conference, 6 October 2022 [\13242/22 CC/ns TREE.2.B Delegations will find attached document COM(2022) 521 final. Encl.]
Recommendation for a council decision authorising the entering into negotiations on the modernisation of the Energy Charter Trea