What is the Energy Charter Treaty?

The Energy Charter Treaty is a unique international agreement which established a legal framework for international cooperation in the energy sector. In particular, the ECT regulates trade (Article 29), transit (Article 7), foreign investments (Section III), environment (Article 19), competition (Article 6), and permanent sovereignty over energy resources (Article 18).^[4] The ECT was signed in December 1994 and entered into force in April 1998.^[5]  Currently, there are fifty-three  signatories, stretching from Western Europe through Central Asia to Japan, plus the EU and the European Atomic Energy Community.^[6] The ECT is the “the most frequently invoked international investment agreement,”^[7] which has given rise to more than 130 investor-State arbitral disputes,^[8] often focusing on fossil fuel investments.

Why was the Energy Charter Treaty created?

The ECT’s initial objective was to attract foreign capital, secure energy resources in Eastern Europe, and to mitigate “political risk” for the Western companies investing in the former Soviet Bloc.^[9] The prospect of neutral arbitration guaranteed by the ECT was meant to reassure foreign investors of a fair, consistent, and predictable legal regime.^[10] Furthermore, neutral arbitration was meant to protect foreign investors from the risks of corruption and weak justice systems in former Soviet countries.^[11]

What does the Energy Charter Treaty do?

The ECT provisions focus on four broad areas:

• Protection of foreign investments, based on the extension of national treatment, or most-favored nation treatment (whichever is more favorable) and protection against key non-commercial risks;
• Non-discriminatory conditions for trade in energy materials, products and energy-related equipment based on World Trade Organization rules and provisions to ensure reliable cross-border energy transit;
• Resolution of disputes between participating states, and—in the case of investments—between investors and host states;
• Promotion of energy efficiency and minimization of the environmental impact of energy production and use.^[12]

What environmental provisions does the current version of the Energy Charter Treaty contain?

The ECT explicitly mentions some of the environmental goals in its preamble. The preamble reiterates the “necessity for the most efficient exploration, production, conversion, storage, transport, distribution and use of energy,” the importance of compliance with the UN Framework Convention on Climate Change, the Convention on Long-Range Transboundary Air Pollution, and other international environmental agreements, and the “increasingly urgent need for measures to protect the environment, including the decommissioning of energy installations and waste disposal.”^[13]

Article 19 of the ECT specifically deals with the environmental protections.  Paragraph 1 requires Contracting Parties “to strive to minimize in an economically efficient manner harmful environmental impacts” along the entire energy chain.^[14] In doing so, Member States shall “act in a cost-effective manner,” “strive to take precautionary measures,” and agree to the fundamental international law principle called “polluter pays.”^[15] Article 19(3)(b) of the ECT clarifies that “environmental impact” means “any effect caused by a given activity on the environment, including human health and safety, flora, fauna, soil, air, water, climate, landscape and historical monuments or other physical structures or the interactions among these factors; it also includes effects on cultural heritage or socio-economic conditions resulting from alterations to those factors.”^[16] The ECT also requires Member States to “promote market-oriented price formation and a fuller reflection of environmental costs and benefits”^[17] to “encourage cooperation,”^[18]and “information exchange”^[19] on environmentally sound and economically efficient energy policies.  Article 19(2) provides for the dispute resolution mechanism under the auspices of the Charter Conference in case no other appropriate international fora exists for the consideration of such environmental disputes.^[20]

Why does the European Commission want to modernize the Energy Charter Treaty?

Many critics argue that the ECT allows big corporations to sue countries which pass laws aimed at reducing fossil fuel emissions to meet their obligations under the Paris Climate Accord.^[21] For example, the Netherlands just recently passed a law aimed at phasing out the production of coal power by 2030.^[22] German energy company Uniper opened a new coal plant in the Netherlands in 2016 and is now threatening to sue the Dutch government under the ECT provisions and seeking €1 billion in compensation.^[23] Another example is a UK-based oil and gas company Rockhopper suing Italy over Italy’s refusal to grant a concession for oil drilling in the Adriatic Sea.^[24] There is also an ongoing ECT dispute between the Swedish energy company Vattenfall and Germany.^[25] Vattenfall brought a lawsuit against Germany in 2012 demanding €6.2 billion in compensation over the permit delays for the company’s coal-fired power plant in Hamburg.^[26]

Since many ECT investor-State arbitration disputes indeed relate to fossil fuel investments,^[27] the idea of making the ECT more “environment-friendly” seems to be well-intended. However, it is crucially important to strike a balance between the much-needed investment protection framework—which constitutes the core part of the ECT—and minimization of fossil fuels leading to greenhouse gas emissions.

The Secretary-General of the International Energy Charter, Dr. Urban Rusnak, stated that “[t]he stakes are high” and “[i]f the modernization process fails,” he does not “see a future for the Treaty” because it “would seriously hamper the ability of the world to meet the Paris climate targets.”^[28] Dr. Rusnak correctly stated that “[t]he Paris Agreement does not protect investment. The Energy Charter Treaty does. It’s a complement to the Paris agreement.”^[29] The Energy Charter Secretariat expressed the view that “[t]he objective of the Modernised ECT should be to facilitate investment in the energy sector in a sustainable way,” such that “[t]he Modernised ECT should reflect climate change and clean energy transition goals and contribute to the achievement of the objectives of the Paris Agreement.”^[30]

On July 16, 2020, the European Parliament sent a question to the European Commission with the subject “Incompatibility of the Energy Charter Treaty (ECT) with the objectives of the Green Deal and the Paris Agreement.”^[31]The European Commission has not given an answer yet.  On September 8, 2020, a cross-party coalition of parliamentarians from across the EU Member States issued a joint statement asking for a fundamental rewrite of the “little-known” Energy Charter Treaty.^[32] European lawmakers are taking a radical position on the ECT: “We, members of the European and National Parliaments, require EU negotiators to ensure that the provisions in the ECT that protect foreign investment in fossil fuels are deleted and thus removed from the ECT … If this is not achieved … we ask EU Member States … to jointly withdraw from the ECT… The ECT risks our climate future”^[33] (emphasis added).

Such a drastic approach does not seem to be effective and, if adopted, would lead to disruption of the ECT’s main purpose—protection of energy investments. Dr. Urban Rusnak stated that the ECT equally “protects all energy investments, fossil fuels, renewables, nuclear” and that it is “the sovereign right of each country to decide what sort of investments they want to have. If they have a commitment to attract investment in renewable energy, the Treaty will protect those investments.”^[34] He also noted that “[t]he Paris Agreement and UN Sustainable Development Goals require huge investment in sustainable energy sources. However, the Paris Agreement does not protect energy investment, trade or energy transit. This is where the ECT can play a key role. The renewable energy revolution is quite new. It will require more connectivity, international energy trade and grid connections across different jurisdictions. This is all facilitated by the ECT. The treaty also protects trade in materials and equipment, such as solar panels and wind turbines.”^[35] Dr. Rusnak concluded that “[t]he Treaty is neutral” and that a “simple look at the arbitration cases proves this [because] damages awarded under arbitration cases up to now are twice as high in the renewable energy sector as in fossil fuels.”^[36]

What is likely to happen next?

If modernization of the ECT happens, it would provide for better protections in trade and transit of renewables. Furthermore, the modernization of the ECT would ensure the compliance  of the climate commitments under the Paris Climate Accord. However, the radical removal of the investment protection provisions (ECT Section III), as suggested by EU lawmakers, would remove such provisions for all energy projects—both fossil fuels and renewables. Thisapproach would increase investment risks and thus make energy resources, irrespective of their origin, more expensive for consumers. Such result would contradict one of the United Nations’ sustainable development goals—access of every person to modern energy sources as a basic need^[37]—because this goal would be impossible to achieve without proper investment protection provisions and rules for transit.

 

 

 

 

^[1] European Commission, European Climate Law – Achieving Climate Neutrality by 2050, https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12108-Climate-Law.

^[2] International Energy Charter, Public Communication on the Second Negotiation Round on the Modernisation of the ECT (Sept. 11, 2020), https://bit.ly/2FLLE5a; International Energy Charter, Public Communication on the First Negotiation Round on the Modernisation of the ECT(July 10, 2020), https://bit.ly/3hO27CX.

^[3] Statement on the Modernisation of the Energy Charter Treaty (Sept. 8, 2020), https://www.euractiv.com/wp-content/uploads/sites/2/2020/09/Statement-on-Energy-Charter-Treaty-ENG_080920.pdf.

^[4] See Energy Charter Treaty, Dec. 17, 1994, 2080 U.N.T.S. 95, https://www.energycharter.org/fileadmin/DocumentsMedia/Legal/ECTC-en.pdf.

^[5] International Energy Charter, The Energy Charter Treaty, https://www.energycharter.org/process/energy-charter-treaty-1994/energy-charter-treaty/.

^[6] See International Energy Charter, Members and Observers to the Energy Charter Conference, https://www.energycharter.org/who-we-are/members-observers/.

^[7] International Energy Charter, Updated statistics on investment arbitration cases under the Energy Charter Treaty (June 5, 2020), https://www.energycharter.org/media/news/article/updated-statistics-on-investment-arbitration-cases-under-the-energy-charter-treaty/.

^[8] OpenExp,modernization of the energy charter treaty, https://www.openexp.eu/sites/default/files/publication/files/modernisation_of_the_energy_charter_treaty_a_global_tragedy_at_a_high_cost_for_taxpayers-final.pdf.

^[9] Energy Charter Secretariat, The Energy Charter Treaty, Trade Amendment

and Related Documents, https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/2427/download, at 8.

^[10] Id.

^[11] Id.

^[12] International Energy Charter, supra note 5.

^[13] Energy Charter Treaty, Preamble.

^[14] Energy Charter Treaty, Article 19(1).

^[15] Id.

^[16] Energy Charter Treaty, Article 19(3)(b).

^[17] Energy Charter Treaty, Article 19(1)(b).

^[18] Energy Charter Treaty, Article 19(1)(c).

^[19] Energy Charter Treaty, Article 19(1)(j).

^[20] Energy Charter Treaty, Article 19(2).

^[21] Benjamin Hourticq, How the Little-Known Energy Charter Treaty is Holding Environmental Policy Hostage Equal Times (Sept. 7, 2020), https://www.equaltimes.org/how-the-little-known-energy#.X2Ytji05TOQ.

^[22] Megan Darby, Coal Generator Uses Investment Treaty to Fight Netherlands Coal Phaseout, Climate Home News (May 21, 2020),https://www.climatechangenews.com/2020/05/21/uniper-uses-investment-treaty-fight-netherlands-coal-phaseout/.

^[23] Id.

^[24] Rockhopper Italia S.p.A., Rockhopper Mediterranean Ltd, and Rockhopper Exploration Plc v. Italian Republic, ICSID Case No. ARB/17/14.

^[25] Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12.

^[26] Id.

^[27] OpenExp,Modernisation of the Energy Charter Treaty, https://www.openexp.eu/sites/default/files/publication/files/modernisation_of_the_energy_charter_treaty_a_global_tragedy_at_a_high_cost_for_taxpayers-final.pdf.

^[28] Karel Beckman, Interview: A New Energy Charter Treaty As A Complement To The Paris Agreement, Borderlex (June 6, 2020), https://borderlex.eu/2020/06/18/interview-a-new-energy-charter-treaty-as-a-complement-to-the-paris-agreement-on-climate-change/.

^[29] Id.

^[30] Energy Charter Secretariat, Decision of the Energy Charter Conference, Adoption by Correspondence – Modernisation of the Energy Charter Treaty: Mandate, Procedural Issues and Timeline for Negotiations (Nov. 6, 2020), https://www.energycharter.org/fileadmin/DocumentsMedia/CCDECS/2019/CCDEC201910.pdf.

^[31] European Parliament, Parliamentary Question, Incompatibility of the Energy Charter Treaty (ECT) with the objectives of the Green Deal and the Paris Agreement (July 16, 2020), https://www.europarl.europa.eu/doceo/document/E-9-2020-004253_EN.html.

^[32] Statement on the Modernisation of the Energy Charter Treaty, supra note 3.

^[33] Id.

^[34] Beckman, supra note 26

^[35] Id.

^[36] Id.

^[37] United Nations, Sustainable Development Goals, Ensure Access to Affordable, Reliable, Sustainable and Modern Energy, https://www.un.org/sustainabledevelopment/energy/.