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Energy Charter Treaty: Withdrawing is worse than signing up to reformed deal

Poland, Spain and The Netherlands announced their intention to withdraw from the Energy Charter Treaty. The real reason for these announcements is a wish to escape recent investor-state arbitration awards.  Withdrawing from the treaty would still mean that member states are liable to investor-state dispute cases for twenty years. Agreeing to the revised treaty is the best way out.

The recently renegotiated  Energy Charter Treaty is facing a meltdown.

The European Union and its member states were particularly keen to ‘modernise’ the 1990s ECT text by aligning it with their new approach to investment treaties as illustrated by those included in CETA, the Comprehensive Economic Trade Agreement with Canada, as well as with the Paris Agreement, in order to support the fight against climate change.

After the Russian invasion of Ukraine, the need to de-couple from Russian gas and oil has added to the urgency to speed up the energy transition towards green renewable energy production.

The leaked draft text of the agreement, which is formally due to be adopted next November confirms our initial assessment that the European Union and its member states have achieved most of their objectives in reforming the ECT.

Indeed, the revised ECT text contains the strongest language of any trade or investment agreement as regards the right to regulate and has strong language on the need to meet the Paris Agreement targets. This is coupled with the flexibility to go further than other ECT members, a gradual carve out of fossil fuels from the treaty’s coverage and protection, and the banning of intra-EU ISDS claims.

The EU and its members states had every reason to be satisfied with the outcome of the renegotiations of the ECT text.

Accelerating withdrawal by EU member states

Nonetheless, over the past couple of weeks Poland, Spain and most recently the Netherlands have announced their intention to withdraw from the ECT.

Poland used as justification for its withdrawal from the ECT the incompatibility of the ISDS provision contained in the ECT with EU law, which was pronounced by the European Court of Justice in its recent case law (Achmea and Komstroy judgments).

Considering the fact that international arbitral tribunals have – with one exception – so far refused to follow the European Court of Justice’s approach, Poland argues that only a withdrawal can properly resolve the incompatibility between the ECT and EU law and thus achieve full compliance with EU law.

In contrast, Spain and the Netherlands argue that the revised ECT text is not ‘green’ enough and thus presents an obstacle to the Paris Agreement and to the energy transition.

The Spanish minister for energy Teresa Ribera said: “At a time when accelerating a clean energy transition has become more urgent than ever, it is time that the EU and its member states initiate a coordinated withdrawal from the ECT.”

The Dutch minister Rob Jetten said there had been improvements but added: “We do not see how the ECT has been sufficiently aligned with the Paris Agreement.”

France is still assessing whether the revised ECT text “matches its ambitions and objectives” and that France would “also consider a coordinated withdrawal from the ECT.” A final decision by Paris is due within days.

If Germany were to join this train of withdrawals, this would effectively result in the meltdown of the ECT.

Unconvincing arguments for withdrawal

However, the arguments presented by the member states for their withdrawal are equally surprising and unconvincing.

As regards the incompatibility of the ISDS provision of the ECT with EU law, the revised ECT text contains a very clear ‘disconnection clause’. This means that no investment arbitration disputes between European investors and EU member states will be possible any longer.

In fact, only two weeks ago the European Commission tabled a deal with and among EU member states to terminate the ECT among themselves, on the basis of an “authentic interpretation of the ECT ”.

The text tabled by the commission states that the “ECT does not apply, and has never applied to intra-EU relations” and that “therefore, Article 26 ECT [on settlement of investor-state disputes] does not serve and has never been capable of serving as legal basis for arbitration proceedings relating to intra-EU relations”.

Regarding ECT disputes that are still ongoing, the proposal obliges the member states to “inform arbitral tribunals about the legal consequences of the Achmea and Komstroy judgments and ask the competent national courts, including in any third country, to set the arbitral award aside, annul it or to refrain from recognising and enforcing it”.

The EU’s tabled deal mirrors a termination agreement which was signed by most member states in order to terminate their intra-EU BITs following the European Court of Justice’s Achmea judgment.

The revised ECT text and the proposed subsequent termination agreement provide a sufficiently clear legal basis that would ensure that no new intra-EU ECT disputes can be successfully launched.

As regards the level of greening of the revised ECT, it should be noted that 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 and thus excluding any ISDS claims from the outset.

Moreover, the revised ECT introduces a new level of flexibility by allowing contracting parties to selectively exempt themselves from certain important provisions of the ECT.

The EU, its member states and – interestingly – the United Kingdom have opted to carve-out fossil fuel-related investments from investment protection under the revised 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.

In short, a balanced and realistic solution has been found by on the one hand, phasing out fossil fuels in due course, while on the other hand, maintaining them until the de-coupling from Russian gas has been accomplished.

So neither the incompatibility argument nor the lack of greening argument brought forward by the likes of Poland of the Netherlands is convincing.

Dodging recent ECT investor claims

Indeed, these flimsy arguments are a poor attempt to disguise the real and only reason for withdrawing from the ECT, namely, dodging the dozens of ECT claims which various EU member states have been confronted with over the past years.

Spain in particular has been facing more than 50 intra-EU ECT claims resulting in damages claims totalling more than US$ 9.5 bn (€ 9.5 bn, £ 8.5 bn) so far. In fact, Spain ranks second in the world as the most delinquent country that refuses to pay the awards rendered against it, with an outstanding amount of at least US$ 700 mn (€712 mn , £623 mn).

The Netherlands has recently been hit for the very first time by a claim of German energy companies RWE and UNIPER for the announced phase out of recently build coal-fired power plants. The phase out was announced as part of the package of measures to meet the Paris Agreement targets, which the Netherlands has been relatively slow to meet. The companies were claiming € 1.4 bn (US$ 1.4 bn, £1.2  in compensation).

However, in the meantime UNIPER has been nationalised by the German government and part of that rescue deal was to force UNIPER to withdraw its claim. Moreover, the Netherlands successfully convinced a German court to throw out RWE’s claim since it must be considered incompatible with EU law following the European Court’s Komstroy judgment.

Accordingly, while the Netherlands may have been irritated by those claims, these have effectively become moot and thus cannot justify the government’s move.

Other EU member states, such as the Czech Republic, Slovak Republic, Romania, Hungary, Croatia have also faced multiple ECT disputes. It is therefore not surprising that the EU member states have a great desire to disapply the ISDS provision as has been achieved in the revised ECT text.

The most ironic aspect of all this is that the overwhelming majority of intra-EU ECT disputes concern renewable energy sources, in particular, the retroactive withdrawal of guaranteed feed-in-tariffs for solar and wind farms. Only a handful of ECT disputes relate to fossil fuels or nuclear energy, which – interestingly – have often been settled (Vattenfall v. Germany) or otherwise become moot (RWE/UNIPER v. The Netherlands).

All in all, EU member states are trying to dodge their obligations to pay dozens of green energy awards, while at the same time effectively destroying the ECT as the only investment treaty that provides some form investment protection in the renewable energy sector.

Twenty years of ISDS claims under sunset clause

One issue remains unresolved in the renegotiation, namely, the ECT’s ‘sunset clause’. This 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 announced withdrawal of the EU member states would not affect the application of the sunset clause. This is in stark contrast with the revised ECT text, in which the EU and its member states managed to reduce the sunset clause to 10 years for fossil fuel investments.

In other words, the revised ECT text offers a far better exit from the protection of fossil fuels than simply withdrawing from the current ECT.

Thus, also for this reason it is nonsensical to dump the revised ECT text, which has been agreed upon after long and complicated negotiations and which presents the most modern and greenest investment treaty in existence.

Broader implications of withdrawal

Finally, it should be recalled that the ECT has more than 20 non-EU contracting parties too, such as for example Japan, Turkey, UK, Switzerland.

What are they going to do with the revised ECT text?

Will they also withdraw or are they going to adopt the revised ECT text, with the EU member states?

But most importantly, what does the ECT meltdown mean for green energy investments in the EU? Will the demolition of the ECT really speed up achieving the Paris Agreement targets and the de-coupling from Russian gas and oil or will it lead to more insecurity in the energy market resulting in more volatile energy prices?

 

Nikos Lavranos is Guest Professor at Free University Brussels. He regularly contributes to Borderlex.

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