Observers of the ongoing Energy Charter Treaty modernisation negotiations tend to concur: the process is dominated by the European Union and its desire to have an overhauled treaty by mid 2022.
After twelve rounds of negotiations among the more than fifty members of the ECT, the contours of a potential deal are emerging. Participants have agreed that they want to announce a political deal on 24 June.
But a closer look at the state of the negotiations indicates that getting over the finish line by that date means this will be an exercise in Brussels forcing through a few measures and seeing how far some remaining recalcitrant ECT members will play along – or whether they will be happy to let this negotiation fail.
The EU provides the majority of ECT members: almost all member states are also parties to the Eurasian energy treaty that was originally signed in the 1990s to bring Russia and the former Soviet Union into a rules and market-based energy order. The ECT no longer includes Russia – nor does it include Italy, which pulled out of a few years ago.
The Union qua Union is also a stand-alone member of the treaty. All this tilts the balance in favour of the EU in the negotiations – although not all EU member states share exactly the same goals or interests as the European Commission.
Contours of a deal
The negotiations, which started in 2020, in the middle of the pandemic, after years of preparations, have recently made a great deal of progress.
While draft treaty language is kept secret, the direction of travel for this negotiation is clear.
The first objective is to ‘green’ the treaty, i.e. to promote the use of renewable energies and comply with the requirements of the Paris Agreement on climate change. This means that EU FTA style language on trade and sustainable development will be included in the treaty.
The second key Brussels objective is to rewrite the rules related to foreign investor protection. The EU wants the language on this to resemble more or less its latest investment protection chapters or agreements concluded with countries such as Canada or Singapore.
In these deals the EU narrows down the scope for private companies to sue host governments for expropriation. The EU also gives the host state greater powers to ‘regulate’ than in earlier investor treaties, of which the ECT is one. The ‘right to regulate’ would not least cover regulations in favour of the environment – without having the threat of costly claims for damages in a private international arbitration court hanging over the regulatory process.
The third objective ties the first two together: investor protection rights would also be loosened to exclude over time the rights of fossil fuel investors. The EU wants a phase-out to happen in the coming decade – with a bit more time for gas.
The fourth EU objective is to put an end to ECT cases brought by EU-based firms against other EU member states. The commission has clamped down on intra-EU investor-state arbitration and has gained the backing of the European Court of Justice, which has ruled such cases illegal.
The negotiations also cover an old unresolved issue: terms for energy transit, for example via pipelines.
Now the EU is in a hurry to get all these changes over the line as it faces political pressure from the left-of-centre parties and environmental groups to pull out of the ECT otherwise. This is something the EU would want to avoid as a twenty-year phase-out period of the unreformed treaty would then kick-in.
There are unconfirmed reports that the EU has asked participants in the negotiations for the right to pull out of the treaty if the negotiations fail – and also not to have to live with the 20-year termination clauses. This maximalist – or cake-and-eat-it – approach appears to have ruffled feathers among some ECT negotiators.
Areas of agreement and disagreement
Negotiators have now agreed on treaty language in six out of around 25 negotiation topics: “definition of investor”, “definition of indirect expropriation”, “transfers related to investments”, “frivolous claims”, “valuation of damages”and “third party funding”.
In the topic area of transparency in investor-state proceedings, parties are moving in the direction adopting norms agreed at UN-level in this field in 2014.
The two big sticking points in the negotiations remain the definition of what is “fair and equitable treatment” and the “umbrella clause”.
On the first the the EU – and other countries – would like to see the relevant treaty language qualified and narrowed down to strictly defined illegal expropriation cases.
Some partners of the EU are also reticent to the notion of watering down or removing the “umbrella clause”. Such clauses are seen as forcing governments into investor-state arbitration in contractual situations where this is not necessarily foreseen. According to UNCTAD, umbrella clauses have tended to disappear in more recent international investment agreements.
The EU’s partners appear to have linked progress on the umbrella clause to talks to the FET. After the 12th round of talks, there is still no agreement in sight. The parties “considered that further discussions need to be held before agreeing on the outstanding issues”, says an Energy Charter secretariat readout of the meeting.
One of the most demanding partners for the EU in this negotiation is Japan – which has consistently refused to adopt EU-style proposals on investor-state arbitration in bilateral FTA negotiations, or in ongoing international negotiations towards a possible multilateral investment court. Japan hosted a dinner with the secretariat and a range of ECT parties at the beginning of the 12th round in Brussels last week to try to break the deadlock.
The parties are also still wide apart on the transit discussions.
Flexible approach on sustainability rules
To make progress on the issue of sustainable development and the phase-out of fossil fuel protection, negotiators are going towards what the Energy Charter secretariat euphemistically calls “the flexible approach”.
More concretely: parties to the treaty may announce they want their own pace in adopting new environmental rules, and take their own decision on whether and when to phase out investor protections for fossil fuels – and that this will be accepted by the others.
Our understanding is that it is the secretariat proposed this solution to unblock talks. This is clearly an approach endorsed and taken by the EU, as the commission’s executive vice-president Valdis Dombrovskis recently explained to members of the European Parliament.
The next round of ECT negotiations will take place mid May.