Submitted by Lucia Posteraro
A new report by the independent think tank OpenEXP, supported by the European Climate Foundation, claims that the Energy Charter Treaty (ECT) contradicts the goals of the European Green Deal and the Paris Agreement. The document follows a series of calls for the abolition of the ECT by several civil society groups such as ECT’s Dirty Secrets, which believe the Treaty to be an obstacle to fossil fuels divestment.
The report is the first to comprehensively discuss the impact of this Treaty on future energy policy, in the light of the latest sustainability efforts by European institutions. It was drafted in a joint effort among several scientific experts and sustainable energy advisors, including Martin Dietrich Bauch, Rod Janssen, and Kyla Tienhaara.
The ECT versus environmental treaties
The ECT was first signed in 1994 at a time in which the end of the Cold War required cooperation in the energy domain. It was meant to integrate the energy markets of the former Warsaw Pact into Western European markets. Nowadays, environmental NGOs argue that the ECT is outdated and exclusively empowers big energy corporations, at a time when the EU has prioritized the green transition in other policy areas.
The EU’s recent Green Deal comprises 50 policy measures, among which we find a legally binding target of reducing EU emissions to net zero by 2050. In 2016, the EU had also ratified the Paris Agreement: it committed to limiting global temperature rise to well below 2°C above pre-industrial levels, with efforts to achieve a more ambitious 1.5°C target through national climate action plans.
The Treaty does not provide clear ways to deal with aspects of investment agreements that are in breach of climate commitments to decarbonisation. Since the Treaty protects the original investment agreement, there are no clauses preferring low-carbon solutions to investment in fossil fuels. The initial terms of any deal are often defended despite their clear environmental impact.
The legal provisions of the Green Deal add up to the discussion on whether international environmental law shall supersede investment treaties like the ECT. The Paris Agreement does not have enforcement mechanisms to implement its targets, and it does not have specific investment-related clauses.
This would suggest that the ECT is compatible with climate commitments as it belongs to a different regime which has no appellate body to address inconsistencies between sections of international law. However, the EU made decarbonisation a legal requirement through the Green Deal, encoding the targets of the Paris Agreement into EU law.
Some courts ruled in favour of EU law in previous cases, setting the precedent for such a transformation. This implies that the ECT might soon go against international environmental treaties unless it is drastically reformed. Concern has significantly grown since last summer, when the European Council authorised the Commission to negotiate the modernization of the Treaty on behalf of EU Member States.
The issue of corporate investment disputes
At the same time, the ECT is accused of serving the interests of energy multinationals, which employ treaty articles to sue states and discourage them from undertaking a green transition. Experts had raised their voices already in September when German firm Uniper threatened the Netherlands, asking for financial compensation for an existing deal under ECT rules.
The corporation threatened legal action after the Dutch Parliament passed a ban on the use of coal for producing electricity. The ECT does not make distinctions between renewable and fossil fuel investment. The Treaty states that members are “desirous of sustainable energy development”.
However, no party in the modernization process has so far suggested phasing out fossil fuels. Because of that, stranded fossil fuels assets that are left without value could be worth €2.15 trillion by 2050.
In its January report, the independent think tank OpenEXP pointed out that ECT dispute settlements could reach a cost of €1.3 trillion by 2050, 42% of which would be paid by EU taxpayers. As of today, 130 arbitration cases have been filed, 75 between 2013 and 2017 alone. This makes the ECT one of the most employed legal tools to file an investment lawsuit.
Since there is no obligation to make cases publicly known, Friends of the Earth argues that the actual number might be higher. There are further accusations about a lack of transparency, particularly as an internal document leak points to bad management and the selection of unskilled staff under the leadership of Slovak diplomat Urban Rusnák.
Corporations rely on the so-called “national treatment standard” to request damages, on the assumption that environmentally-friendly measures are discriminatory to firms. While ECT provisions defend states’ right to pursue the public interest when breaking a deal, legal advisors fear that corporations will still attempt to bypass it on the basis of unfair treatment.
A “survival clause” complicates the picture for states which withdraw from the Treaty, as Italy did in 2016. They can be subject to investment arbitration up to 20 years later unless an agreement is found with investors. Additionally, it is impossible to withdraw from the Treaty until five years after it has entered into force.
OpenExp argues that if EU Member States collectively withdraw from the ECT, they could cancel the clause together and incur lower costs for potential disputes in the EU. This would be possible as a high share of the EU’s foreign direct investment comes from investors inside the Union.
Dr. Yamina Saheb, former head of the energy efficiency unit in the ECT Secretariat and now lead author for the IPCC, defends the strategy: “By empowering bureaucrats who lack understanding of the ECT to negotiate, our policymakers are putting at high risk the EU Green Deal and its just energy transition objective”.
The ECT modernization process began in 2009, but topics were decided in just one year. Policy options proposed in 2019 will now have to be negotiated by the end of 2020. Dr. Saheb criticizes the plan: “Almost 10 years were used for diplomatic and procedural issues, against the only year planned for the negotiations of policy options. Importantly, the policy options are not based on sound analysis such as an impact assessment”.
As some African and Asian countries begin their path to access the ECT, she also worries that developing countries will be subject to corporate lawsuits but will have no means to defend themselves. As the ECT Conference must approve of amendments by a unanimous majority of 53 plus the European Union, environmental action may be significantly delayed and increase the chance of financial problems showing up in the future.