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Comment: Leaving the Energy Charter Treaty also means leaving a legal mess behind

The European Commission has announced that the EU and its member states will withdraw from the Energy Charter Treaty. This move probably heralds the end of the ECT and will leave a legal and political mess behind.

The very same parties which created the ECT in the early 1990s to ensure that gas and oil supplies from Russia into the EU are secured and to promote and protect investments in the energy sector have effectively pulled the plug on the treaty by announcing their withdrawal from it.

Failure to modernise the ECT

The meltdown of the ECT has been caused by a combination of various factors.

First, the sudden increase of investor-state arbitration casses brought by European investors against Spain, Italy and other EU member states following their retroactive withdrawal of subsidies for renewable energy producers caused a backlash against the ECT in capitals.

Second, in the context of the Paris Agreement and the EU’s efforts to speed up the transition to net-zero emissions, the ECT has been increasingly viewed as an obstacle because it also protects investments in fossil fuels.

Third, the ECT contains the traditional investor-state arbitration system, which the EU now considers unacceptable and incompatible with EU law.

Fourth, despite the fact that the EU successfully asked for a modernisation of the ECT in order to bring the treaty in line with the Paris Agreement and to exclude its application for intra-EU disputes, the text that was agreed in principle in June 2022, suddenly appeared to be unacceptable to a range of EU member states. These hard originally  declared their intention not to sign up to the modernised ECT text but decided to withdraw from the ECT altogether.

France, Germany and Poland have followed through their withdrawal announcements and by withdrawing from the ECT by the end of this year. Italy withdrew in 2016.

Meanwhile, the European Parliament has adopted a resolution calling for a withdrawal from the EU, thus effectively signalling its refusal to give its required consent to the modernised ECT text.

Facing such a fragmented situation where several EU member states were stepping out of the ECT, while others were still considering the option to sign up to the modernised ECT text, the European Commission needed to find a way to avoid legal fragmentation within the EU as to the application of the modernised treaty.

At the end of the day the commission concluded that the modernised ECT text could not be saved due to lack of support for it.  The only solution viable seemed to have been a coordinated exit for the EU as EU and all EU member states individually.

Six months after the formal announcement of the reformed treaty, the EU and its member states will have withdrawn from the ECT.

A mess left behind

While at first sight it might seem that with the common withdrawal of the EU and its member states all problems are solved, the truth is that this move will leave a legal and political mess behind, which must be cleaned up over the next years.

First, the 20 years sunset clause of the ECT continues to apply. This means that all investments made until the withdrawal takes effect will be protected for another 20 years and will allow investors to bring investor-state arbitrations against the EU and its member states. Consequently, the withdrawal from the ECT will not put an immediate end to the high number of ECT arbitrations.

Second, the modernised ECT text will very probably not be adopted by the remaining more than 20 non-EU ECT parties, – which include for example Japan, the UK and Switzerland.

As a result, the current ECT text, which is arguably not in line with the Paris Agreement, will continue to apply and therefore will not contribute to the energy transition, which was one of the reasons for the EU to modernise the ECT in he first place.

Third, and more generally, the EU and its member states have negotiated in bad faith and their reputation as reliable treaty partners has been seriously damaged.

Indeed, it is particularly notable and unprecedented that the European Commission was not able to control all EU member states after the modernised ECT text was agreed by all last year. This illustrates the fact that member states are becoming more self assured in international negotiations by taking decisions that clearly run counter the previously agreed EU position.

In other words, the dominant and coordinating role of the commission in the context of international treaty negotiations has been clearly weakened and undermined. This could have far-reaching implications also for other international treaty negotiations in the future, for example in the context of the Ukraine war.

 

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

2 Comments

  1. Kevin Verbelen

    You write “Third, the ECT contains the traditional investor-state arbitration system, which the EU now considers unacceptable and incompatible with EU law.”
    This is not correct. In Opinion 1/17 of the CJEU ISDS was considered in line with EU law. What is correct is that in the Achmea case intra-EU ISDS was considered incompatible with EU Law. Stating that the EU considers ISDS incompatible with EU law is incorrect and should be corrected.

    • nikos lavranos

      I disagree as you are mixing up the classic ISDS with the ICS in CETA as approved by the CJEU in Opinion.
      The classic ISDS is contained in the current ECT and was left untouched in the modernized ECT.
      In Komstroy judgment thr CJEU made clear that ISDS is incompatible with EU law within the EU. This case was in fact an extra EU case.
      in Opinion 1/17 the CJEU placed so many conditions for ICS to be acceptable that no ISDS system could meet that.
      So, you should NOT conflate ISDS and ICS, these are two mutually exclusive systems!

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