Energy & Environment, Energy Charter Treaty, Latest news

Of letterbox investments and renewable energy: status report on ECT modernisation

State of play in and analysis of a renegotiation of a Eurasian energy trade and investment treaty – a process where not everything is always at it seems. By Sarah Anne Aarup and Iana Dreyer.

The Energy Charter Treaty has recently come to the attention of climate activists and anti-international investment arbitration campaigners. The 1994 accord regulates trade, transit and investment in the energy sector on the Eurasian landmass and beyond.

Its original aim was to strengthen the rule of law in a sector often riddled with corruption and to protect foreign investors developing the energy resources of a host state – with mainly the post-Soviet world in mind.

Today the treaty stands accused of being a “bodyguard of the fossil fuels industry”. Some European politicians and stakeholders have asked the EU to pull out of the treaty. Investors recently turned their sights to Western European countries, suing in ad hoc international investor-state or ISDS tribunals enabled by the ECT against at times abrupt government decisions to shut down nuclear or coal factories. In such a context, public opinion has come to dislike an originally little known treaty.

The underlying dynamics shaping the talks today are that the EU wants to stop the flurry of investor-state dispute settlement cases EU-based companies have been bringing against EU member states governments in the last decade. This behaviour was ruled illegal by the European Court of Justice.

Intra-EU renewable energy cases

‘Fossil fuel bodyguard’ accusations notwithstanding, the very large majority of the investor-to-state dispute settlement cases filed under the ECT in the last decade are in the renewable energy sector. They involve companies or financial investors headquartered in the EU against other EU countries such as cash-strapped Spain or Italy – that have reneged on renewable energy subsidy promises and/or introduced taxes in the sector in the aftermath of the 2009 economic and financial crisis.

A data set run by the trade and investment organization UNCTAD in Geneva shows that out of 62 listed investor disputes brought under the ECT since 2015, only fifteen are in the traditional fossil fuels and electricity distribution sectors. The rest is about solar and wind power.

Letterbox investors and foreign governments

Many claimants in that list are investment vehicles or funds operating from countries known for their generous tax policies towards international corporate headquarters such as Cyprus, Luxembourg, Malta or the Netherlands. Some of these vehicles appear to involve monies from actors in the very country where the actual investment took place.

Other investment vehicles represent investors from non-EU Energy Charter Treaty parties that use their incorporation in an ECT country as the launchpad for their ISDS cases.

Such investors are not only investing in fossil fuels: they are also very active in the renewable energy sphere. Also note that it is not only ‘big bad’ foreign capital or governments that are suing. France’s state-owned energy company EDF, Germany’s old-fashioned energy utility EON and a German regional bank (Landeskasse) are involved in the many pending renewables cases against Spain.

The real owners of some  ‘letterbox companies’ are often not known. Others are suspected to be linked to governments whose intentions are not reassuring for Europe from a geopolitical point of view.

This is typically the case of Russia’s Gazprom via its Switzerland-incorporated NordStream2 pipeline company, which is suing the EU in a landmark ISDS case against the EU’s 2019 amendments to its Third Energy Package.

The measures would force the company to comply with extra market competition and infrastructure access obligations. But these measures would thwart some of the controversial Baltic pipeline project’s commercial aims. They would also dampen the impact of Russia’s suspected attempts at increasing and locking in its gas market share in Germany and the wider EU whilst bypassing Ukraine as a transit state for its gas exports to Europe.

Many experts – such as the British academic Alan Riley – believe NordStream2 has a weak case against the EU and could well lose. Even so, the case is resource-intensive for the EU – in terms of personnel, litigation money and the the political war of nerves with Russia and Germany over this pipeline.

Documents published by the ECT on the preliminary conversations held by its members so far on the reform process show that, if successful, reform could lead to a clampdown on many of these cases. Rules might become stricter on the identity and nationality of an investor bringing a claim against a host state. Several major ECT members appear in favour of such a move.

The ECT modernisation process

Talk of modernising the Energy Charter Treaty is a good decade old and used to be supported by a country like Russia.

The process is multifaceted – it has involved the signing of a global International Energy Charter in 2015 that included many African countries, China and a series of international organizations. That treaty expanded some key principles of the Energy Charter Treaty to the wider world and introduced some general principles of sustainable development and environmental sustainability that are largely lacking in the ‘old’ ECT. But the international charter is legally non-binding.

The fifty-member 1994 ECT currently under renegotiation is dominated by the EU, of which 26 member states are signatories. The EU and Euratom are full members in their own right too.

Russia, was put off by the fact that it lost the world’s largest investor-state dispute settlement case after state-owned Rosneft grabbed the assets of oil giant Yukos and its Putin-critic CEO Mikhail Khodorkovsky was jailed. It is now out of the picture in these talks. Russia never ratified the treaty but had provisionally applied it at the time of the Yukos case.

Other contracting parties to the treaty are Ukraine and Turkey – important transit countries whose role is key in the EU’s energy security. Other large members include Azerbaijan, Central Asian oil giant Kazakhstan – and Japan, whose companies are major investors in the sector.

After 2015, the fifty-odd ECT members went on to scope out what exactly they would be ready to discuss in their legally binding treaty. They agreed back in 2018, on a list of 25 topics on which they want to negotiate.

Negotiations on the basis of this list started this year. Three rounds of talks have taken place so far, the last one in the first week of November 2020.

Actual bargaining will only begin in 2021, after a stock-take conference in December this year. So far members have mainly compared notes and tabled texts and ideas item by item in the topic list.

EU goals: greener energy and revamped investor protection rules

The EU is pursuing two main goals.

The first is adding a green dimension to the treaty, by introducing obligations for signatory countries to abide by international environmental treaties and the 2015 Paris accord on climate change. It also wants ECT signatories to comply with core International Labour Organisation conventions and with basic United Nations human rights norms. The EU has also tabled proposals on companies’ corporate social responsibility in this field.

The second goal is to have the ECT adopt EU-style norms in investor-state dispute settlement. This covers both the substantive rights of foreign investors and of host states. Here the EU is seeking language akin to that included in its latest trade agreements such as CETA, the trade and investment agreement with Canada. CETA introduced a narrow list of circumstances when foreign investors may bring a claim against a host country – the criteria are enshrined in articles such as those covering the ‘fair and equitable treatment’ investors may expect.

The EU is also promoting the multilateral-investment court and has “invited” ECT parties to join the process currently under negotiation at UNCITRAL.

The actual format of investor tribunals is not part of the list of agreed topics for the modernisation. It is therefore not clear a revamped ECT would include a specific investor-state dispute settlement tribunal modelled in the EU’s much-touted Investment Court System.

But conversations will certainly be heading towards more transparent ad hoc ISDS tribunals and procedures, tightly defined rights for investors to bring a claim a host state, and a much stronger affirmation of a host government’s right to regulate in the name of climate and environmental protection, human rights, public health and national security.

The EU has also stated in the scoping discussions that it wants transit norms to be improved and have ECT transit countries adopt rules akin to those on infrastructure access and openness of contracts with suppliers that match the EU’s Third Energy Package.

‘Leaving the ECT’ dilemmas and helping the poorer members

The EU’s main opponents in this negotiation will not the big oil producers or transit countries – it is Japan. Tokyo opposes reforming the ECT text altogether. Japan is also more broadly opposed to the EU’s investment court plans at the UN.

At a recent debate in the European Parliament, the EU’s energy commissioner Kadri Simson said, after being quizzed about the issue of potentially leaving the ECT: “Right now, no option is off the table.” However, Simson stressed that the EU’s priority is to first negotiate and seek a mutually agreeable outcome.

EC energy commissioner Kadri Simson.

Leaving the ECT will still mean that the EU and its member states would be bound by its – unreformed – ISDS clauses for another twenty years, due to the agreement’s ‘sunset clause’. And the Commission knows that: “If the EU were to get out now, it would face the application of the unreformed ECT for the next 20 years in relations to investments in existence at the time of withdrawal. So first we negotiate,” Kadri told MEPs.

Andrei Belyi, Adjunct Professor in Energy Law and Policy at the University of Eastern Finland, also thinks there are geopolitical risks in leaving the ECT.

“Russian policy circles persistently argue that the post-Cold War world order, based among others on international law, has collapsed. So in case the European Union withdraws from the treaty, it will give a reason for these policy circles to [think that they were right],” Belyi said.

Other academics Borderlex has talked to also fear views of the smaller and/or poor members of the ECT might be ignored. Countries such as Ukraine, Georgia, Tajikistan, Kyrgyzstan, Afghanistan and Mongolia should receive greater support in complying with any new ECT climate, environmental and social obligations and not bear alone the costs of complying with the new environmental norms, some argue.

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