Energy Charter Treaty diplomats have closed in on difficult negotiations to ‘modernise’ a treaty that originally aimed at promoting trade and protecting energy investments on the Eurasian landmass after the fall of the Soviet Union.
The review process is concerned with achieving environmental and climate change mitigation goals as well as narrowing down the scope of investment protection provisions included in the treaty. The key changes agreed today by the parties aim to achieve just that.
Ministers of the more than fifty parties to the treaty announced they had finalised the negotiations. A text will be presented “by 22 August 2022 for adoption at the Energy Charter Conference on 22 November 2022”, says the official Decision released by the secretariat after an ad hoc ministerial level meeting at the ECT’s headquarters in Brussels today.
Most changes were requested by the EU, which accounts for more than half the membership.
Despite Brussels’ manifest negotiation success, the treaty’s future still faces political headwinds.
Paris agreement commitment, fossil fuels investment protection carve-out
The modernised treaty will commit all signatories to abide by the 2015 Paris Agreement on climate change – among other environmental commitments. It also commits the parties to abide by the core International Labour Organisation conventions.
The updated treaty is expected to include a formalised conciliation process should there be a disagreement among signatories as to whether one party violated the Paris agreement obligation. This would involve a report by an appointed conciliator.
The new rules will also allow signatories to reduce the time by which currently active investments in fossil fuels are protected to ten years according to an agreed “flexibility principle”. Currently the time for protection is indefinite.
The aim is to reduce the risk that potentially quickly enacted shutdowns of fossil fuel extraction or energy production sites with the aim of meeting EU or Paris Agreement-related climate goals are contested in international arbitration cases.
This concern has been heightened by the fact that two investment arbitration cases were brought against the Netherlands in 2021 under the ECT related to the country’s decision to phase out coal-based electricity generation.
Only the EU and the UK have so far signed on to the carve out.
“The EU and the UK have opted to carve-out fossil fuel related investments from investment protection under the ECT, including for existing investments after 10 years from the entry into force of the relevant provisions and for new investments made after 15 August 2023 as of that date with limited exceptions,” states the ECT secretariat.
Narrowed-down investor rights
The treaty narrows down the scope of investment protection rights in several areas. The treaty language builds on benchmarks established in recent EU investment protection treaties such as those agreed with Singapore or Canada.
Among others, the new provisions circumscribe closely the ‘fair and equitable treatment’ standard to specifically defined situations related to unlawful expropriation and discrimination.
The new text also narrows down the scope of investments covered by the protection provisions. “The new definition excludes the coverage of judicial and administrative decisions and arbitral awards as well as limits the coverage of claims to money and credit arising solely from commercial transactions for the sale of goods and services,” today’s decision text says. “Specific public debt instruments are excluded from the coverage of the dispute settlement provisions.”
The new deal introduces a range of safeguards against arbitration cases in an attempt to reduce the case-load. This includes provisions against ‘frivolous claims’.
This also includes language that enshrines the ‘right to regulate’ for environmental, health and other public policy reasons.
Some types of investors will not be allowed to launch arbitration cases, especially ‘mailbox’ companies many of whom are located in European financial centres. Individuals who hold the nationality, or are permanent residents, of the host country at the time of making an investment are also excluded from the benefits.
Intra-EU ECT cases carved out
The EU also enshrined the principle into the revised treaty that intra-EU ISDS cases shall not apply. The European Commission, supported by recent rulings of the European Court of Justice, considers that intra-EU arbitration cases under are illegal. Intra-EU ISDS cases are the majority of recent arbitration tribunals established under the ECT in recent years.
Brussels did not request the establishment of such a court system in the ECT to replace ad hoc ISDS tribubals.
Instead it is betting on such a court being established as part of the United Nations system – also known as the UNCITRAL Working Group III process – this decade. It then wants to put the ECT under that umbrella to resolve disputes between international investors and host states.
The commission also considers that the ECT itself should not apply among member states, given a principle of the primacy of EU law over international law on its territory asserted with increasing strength by the European Court of Justice.
The commission is expected to initiate a formal termination process for the treaty among its member states in due course.
Lightning rod for climate activists
The ECT, whose initial purpose was to introduce international market-based and rule-of-law standards to places such as Russia, Central Asia and Central and Eastern Europe after the fall of the iron-curtain has become a punching bag for Western European climate activists on the one hand and some Western European member states on the other.
The latter had started to be on the receiving end of financial compensation claims under the treaties’ investor-state dispute settlement provisions.
Italy withdrew from the treaty in 2016 after a flurry of arbitration cases were brought by investors after it reduced its subsidies to renewable energies in the wake of the eurozone crisis. Spain has also turned highly critical of the ECT for the same reasons.
Germany and the Netherlands were also sued for the first time ever by foreign investors in recent years. Germany was sued by the Swedish state-owned energy company Vattenfall – after Berlin shut down nuclear power plants in 2011.
Climate activists have set their sights on the treaty, demonising it as ‘climate action killer’. Some NGOs want to see the treaty disappear entirely.
“From a climate perspective, the expected reform outcome is a failure,” the Climate Action Network wrote already in a note in March 2022. “No contracting party will end investment protection for fossil fuels in a timeline that is necessary to align with the Paris agreement.”
A new court case launched by five young persons at the European Court of Human rights this week challenged the ECT for protecting the fossil fuel economy that is bringing life threatening climate instability.
The international climate activist group Extinction Rebellion organised a sit-in at the ECT secretariat on Thursday.
Most ISDS cases in renewable energies
While NGOs have construed the ECT as a fossil-fuels based treaty, the agreement is in itself technology neutral.
The vast majority of ECT cases concern disputes between foreign investors and host states over renewable energies – generally over changes in financing schemes.
A database maintained by UNCTAD in Geneva on ISDS cases lists seven new cases initiated under the ECT in both 2020 and 2021. Only two cases out of these seven concern fossil fuels – oil extraction and coal-fired power plants.
ECT “withdrawal” spectre
The powerful NGO movement is leading some EU member states or constituencies in national parliaments to consider withdrawing altogether from the treaty.
In a motion for resolution adopted this week the European Parliament asked the commission and member states “to start preparing a coordinated exit from the ECT” should its demands on ECT reform not be met.
The EP’s demands are “a revised ECT protects the right of states to regulate, is in line with EU law and EU investment policy, that it immediately prohibits fossil fuel investors from suing contracting parties for pursuing policies to phase out fossil fuels in line with their commitments under the Paris Agreement, and that investment protection is only granted to real investors and not to purely financial or speculative”.
At first sight, most demands have been met. Unless member states and MEPs change their mind on the mandate they gave to the commission it will be difficult for the NGO community and hardened capitals or MEP to argue for a withdrawal.