EU member states are starting internal deliberations on the recently renegotiated Energy Charter Treaty in council. Nikos Lavranos offers his assessment of the draft text and of what the revision heralds for the future of the agreement.
Last June, after several years of negotiations and more than a dozen negotiation rounds, the contracting parties of the Energy Charter Treaty announced their agreement ‘in principle’ on an updated treaty text.
The draft text of the agreement – which is formally due to be adopted next November – was unsurprisingly leaked in the meantime. In its ‘leaked’ version, the text confirms our initial assessment that the European Union and its member states have achieved most of their objectives in reforming the ECT .
These objectives include aligning it with the Paris Agreement on climate change and the investment protection provisions offered in CETA, the Comprehensive Economic and Trade Agreement concluded with Canada. The new treaty text also includes several new provisions which are currently under discussion within the UNCITRAL Working Group III on ISDS reforms.
In this sense, the ECT was made future-proof and will remain a crucial tool in attracting the desperately needed additional investments required to achieve the energy transition and the de-coupling from Russian gas.
However, it seems ironic, to say the least, that despite this success, the EU and its member states have simultaneously decided to gradually de facto withdraw from the ECT by making it largely inapplicable among themselves.
On top of that, Poland recently announced that it would take steps to withdraw formally from the ECT, just as Italy did in 2016.
Despite this gradual exiting of the ECT by the European union and its member states, the ECT will remain available for EU investors who have invested outside the EU – for example in Turkey or Kazakhstan – while non-EU investors, such as for example Japanese investors, would still be able to use the ECT against other parties, including the EU and its member states.
‘Right to regulate’ and ‘greening’ the ECT
As in CETA and other recent investment agreements, the ECT now contains an explicit provision on the right to regulate of states, to achieve legitimate policy objectives, such as the protection of the environment, including climate change mitigation and adaptation, protection of public health, safety or public morals.
This is further backed up by the introduction of several specific provisions reaffirming the states’ obligations to implement the Paris Agreement regarding climate change and labour rights under International Labour Organisation conventions. Essentially, this means that measures adopted to achieve these aims are to be considered compatible with the ECT.
Also, a provision has been included which encourages states promote a range of responsible business conduct rules, such as the United Nations Guiding Principles on Business and Human Rights, the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, and the OECD Guidelines for Multilateral Enterprises.
Fossil fuel carve-out
The renegotiated ECT text introduces a new level of flexibility by allowing contracting parties to selectively exempt themselves from certain important provisions of the ECT.
The matter of how to deal with fossil fuels within the ECT has been one of the most contentious issues of the modernisation process. The EU and its member states pushed for a complete carve out of fossil fuels, and then more recently proposed a transitional phase out of LNG and nuclear power until 2040.
Apparently, this was not agreeable to the other ECT contracting parties. Accordingly, the compromise solution is to enable those parties who wish so to carve out fossil fuels to do so, while allowing the other parties to maintain them.
Thus, the EU, its member states and – interestingly – the United Kingdom have opted to carve-out fossil fuel-related investments from investment protection under the ECT. This applies to existing investments after 10 years from the entry into force of the relevant provisions and for new investments made after 15 August 2023.
As a result, at least for the time being, fossil fuels will remain applicable for non-EU contracting parties to the ECT unless they opt into the carve-out too.
End of intra-EU ISDS cases
Another major flexibility provision has been added to the text, which allows Regional Economic Integration Organisations such as the EU to dis-apply certain ECT provisions among their members.
The EU being the only REIO and its member states decided to explicitly dis-apply Article 26 ECT, which is the investor-state dispute settlement – or ISDS – provision.
Consequently, investment arbitration disputes between European investors and EU member states will no longer be possible.
This effectively amounts to introducing ‘disconnection clause’, which had not been included in the original ECT text. This is a reaction to address the denial by arbitral tribunals which have not accepted, except in one decision, an implicit existence of such a clause.
All this effectively could herald the withdrawal of the EU and its member states from the ECT because, by excluding fossil fuels and the ISDS provision, there is no need for them to continue to remain party to the ECT.
Poland’s announced withdrawal from the ECT may potentially lead to other member states doing the same.
Unresolved sunset clause issue
But this is where an unresolved issue comes in: whether the ECT’s ‘sunset clause’ will also become inapplicable for intra-EU investor-state disputes.
The ECT 20-year sunset clause protects investments made before the termination of the treaty for another two decades. This means existing investors would still be able to bring intra-EU ECT disputes for another 20 years.
The leaked revised text does not amend the sunset clause. Moreover, the list of provisions which are not applicable any longer in intra-EU disputes does not mention Article 47, which is the sunset clause.
However, for existing fossil fuel investments the sunset clause is reduced to 10 years rather than completely abolished.
The sunset clause would still be applicable for investments made by European investors in EU member states before the revised ECT text entered into force if the member states withdraws before that date, meaning that investors would remain protected and would still be able to use the treaty’s ISDS provisions.
ECT protection standards match recent EU norms
Another key area where the EU and its member states succeeded is the modification of the most important investment protection standards of the ECT by effectively aligning them with the provisions contained in CETA and other EU investment agreements with Singapore and Vietnam
This arguably enhances the uniformity of recently concluded investment treaties – at least from the perspective of the EU and its member states.
The currently broadly formulated Fair and Equitable Treatment standard will be replaced by a narrow ‘closed list’ of specific FET breaches. As as a result, only certain measures may be considered as possible violations of the FET standard. This significantly curtails the room of interpretation of arbitral tribunals.
Also, the new ‘indirect expropriation’ standard, which had hitherto been interpreted rather broadly by arbitral tribunals, will be narrowed down by effectively carving out measures that are taken for the protection of public policy objectives such as the protection of the environment – including climate- and health.
This means that such measures can no longer be considered as indirect expropriation and thus cannot lead to the payment of compensation, except in rare circumstances.
A further important restriction concerns the removal of letter box companies from the scope of beneficiaries of the ECT.
Excluding letterbox companies and enhancing transparency
In line with CETA, the ECT will require proof of the investor that he or she has “substantial business activities”, which will be further defined by an indicative list of requirements, such as having a headquarter in the country, a certain number of employees and a certain annual amount of turnover. This list is similar to the one that has been included in the 2019 Dutch model BIT text.
Also in line with CETA, the Most Favoured Nation clause will be further limited by explicitly stating that it cannot be used any longer to import more favourable dispute settlement provisions from other investment treaties into ECT arbitration proceedings.
Furthermore, additional exceptions have been included such as the withdrawal or reduction of subsidies and measures adopted for the protection of international peace and security, which means that such measures cannot be challenged on the basis of the ECT.
Finally, several procedural changes will be introduced which will align the ECT with CETA and the reform proposals currently negotiated in UNCITRAL Working Group III.
The new UNCITRAL Transparency rules would be made applicable to all ECT proceedings. Amicus curiae submissions will be explicitly allowed. New early dismissal proceedings for throwing out frivolous claims will be introduced. It will become easier to impose security for costs on claimants and claimants will be required to disclose the use of any third party funder for their claims – more here.
All in all, these modifications will drastically reduce the number of ECT disputes in future. It will become much more difficult for investors to initiate and ultimately win ECT arbitration claims. At the same time, the policy space for the ECT contracting parties is significantly broadened.
It thus remains odd that despite the fact that the EU and its member states have achieved all of their negotiation aims, some of them are starting to gradually leave the ECT. This would over time weaken the importance of the ECT.
The fundamental question remains: what message is this sending out to investors and the other ECT states?