EU Sparks Controversy on Energy Charter Treaty Drop
European Union will withdraw from ‘anti-green’ treaty on environmental grounds, but sources warn of impact on renewable investments.
The European Parliament’s vote last week to withdraw from the controversial Energy Charter Treaty has been interpreted as a near-certain ‘death blow’ to a decades-old agreement that is widely perceived as outdated and anti-green.
But the decision, which lawmakers say is necessary to protect the European Union’s climate policies against litigation from fossil fuel companies, may not be as positive for the energy transition as some believe.
James Rogers, an international arbitration lawyer and partner at law firm Jenner & Block, said the EU’s withdrawal – which he said left the treaty “dead” – could inadvertently harm the bloc’s green energy ambitions by reducing investor protections against policy changes.
Set up in 1994 in the aftermath of the fall of the Soviet Union, in part to open up gas imports from Russia and eastern Europe, the ECT provides energy investors with legal protection against the policy whims of national governments. Governments that expropriate assets or arbitrarily change rules may be taken to arbitration under the treaty. More than 50 countries across Europe and Asia have signed up to the treaty since, with Japan its easternmost member.
But as climate change became a key policy concern in Europe in subsequent years, the ECT progressively turned into a weapon for fossil fuel companies to fight against green policies that harmed their interests. It was under the ECT that German utilities RWE and Uniper, for example, sued the Dutch government for €2.4 billion over its plan to phase out coal-fired power back in 2021.
Critics say the threat of a legal challenge under the ECT alone has a “chilling effect” on green policy – which is real but difficult to quantify.
Some of its members pushed to modernise the framework. But these efforts largely failed, and a growing number of European signatories have already left or plan to leave the treaty, including the UK, France, Germany, Spain and Poland. The EU’s departure now turbo-charges that trend.
“Finally, the fossil dinosaur treaty is no longer standing in the way of consistent climate protection, as we no longer have to fear corporate lawsuits demanding billions of euro in compensation brought before private arbitration tribunals,” Anna Cavazzini, Member of the European Parliament and Rapporteur for the Trade Committee, said following the vote last week.
Not anti-green
According to Rogers, critics of the ECT miss the fact that it also protects investments in clean energy – and that without it, they may be vulnerable to sudden policy changes.
“Those protections don’t just apply to fossil fuel, but to the wider energy sector – they cover new and renewable technologies,” he said. “What those protections really do is prevent states from taking arbitrary measures against investors. At a fundamental level, that’s not a bad thing. We don’t want governments taking arbitrary actions in a willy-nilly way.”
Rogers pointed out that the ECT had allowed renewable companies to sue the Spanish government for cutting feed-in tariffs – litigation that has cost taxpayers more than €1 billion.
While Europe will likely remain an attractive investment destination regardless of its decision to ditch the treaty, the UK’s withdrawal from both the EU and the ECT has “eroded” its reputation and will likely give investors pause.
“Then look at countries on the edge of Europe – like Lithuania,” Rogers continued. “Are you going to invest there if you don’t have a treaty? The fact remains that you have just removed something which is a massive indicator of stability.”
Not true
But as ever with controversial laws and regulations, opinions on the issue vary, and some sources expressed a contradictory view to Rogers’, calling his claims untrue.
“There is no conclusive evidence that agreements like the ECT actually increase investment flows,” said Amandine Van den Berghe, a Senior Lawyer at NGO ClientEarth who has campaigned for years for the EU’s withdrawal from the ECT. “There are so many other factors that come in when an investor makes a decision to invest or not, so this doesn’t have any impact on investment in a country.”
She pointed to research by the Columbia Centre of Sustainable Investment – an affiliate of Columbia Law School – that found “no clear evidence of a link” between treaties of this sort and investment flows.
While the EU’s withdrawal from the ECT has essentially signed its death sentence, a sunset clause included in the treaty means existing investments will be protected for 20 years. That means if a country withdraws this year, litigation risk will remain until 2044 – six years before the 2050 net zero deadline adopted by many countries.
A possible solution would be for countries to agree to drop the sunset provision, but so far the European Commission has not pursued this. With so many countries having left the ECT, however, the treaty could also simply collapse – in which case sunset provisions would no longer stand.
“A few years ago we didn’t think EU member states would start pulling out so quickly, so I wouldn’t be surprised if the ECT disappeared entirely,” Van den Berghe said.
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