Which future for the Energy Charter Treaty?

Many European States have expressed their intention to withdraw from the Energy Charter Treaty, arguing that the ECT is not in line with their climate goals and that it limits their right to regulate in the public interest. This controversial international investment agreement was signed in the aftermath of the Cold War, when the dissolution of the URSS provided the opportunity for Europe to get access to the Russian energy resources for meeting its growing energy demand, and for Russia to obtain foreign investments in order to financially sustain internal reforms. Today it has 53 parties including the EU but not Russia, and it covers energy production, supply, consumption and investments in the energy sector: its broad scope, as defined by Article 2, is to establish a multilateral framework for promoting cooperation in the energy field, supporting an open and competitive energy markets.

One of the issues that has attracted major criticism is the closed-door arbitration system between member States and foreign investors. The investment protection mechanism under Article 26 ECT allows energy companies with the headquarter based in one of the member States to sue the government of another member State if it endangers their existing investments; at the time of drafting, the rationale beyond it was to secure investments in countries facing unstable political conditions, where there was a concrete risk of nationalisation or expropriation of foreign companies. However, throughout the years, the arbitration mechanism has been increasingly misused by oil and gas companies to file suits against States that are trying to introduce environmental legislations oriented towards energy transition to renewable sources, thus impairing companies’ revenue by discouraging the use of fossil fuels. Just by considering the pending disputes the Secretariat is aware of (the parties to State-investor arbitrations are not obliged to notify to the ECT Secretariat the existence of proceedings, casting more and more doubts on the transparency of those), more than 20 cases have as a subject matter environmental legal reforms affecting the oil industry.[1] An emblematic example is provided by the Netherlands, that last year was sued for EUR 1.4 billion by the German company RWE, that owns a power coal-fired plant near Groningen, for banning the burning of coal for electricity production from 2030 in line with State’s commitment to phase out coal in line with its obligations under the Paris Agreement.

Despite previous cases showed that this kind of claims are likely to be overruled, the proceedings are lengthy and costly; as a matter of fact, the ECT became the most frequently invoked international investment agreement, pinching efforts, resources, and money from States. Since no transparency requirement exists regarding investment disputes, legal predictability and stakeholders’ trust in the arbitration process are undermined. There are no references to legality requirements, such compliance with domestic or anticorruption regulations, neither to investor obligations pertaining the use of natural resources, human rights or corporate social responsibility. Furthermore, another important critical point is represented by the sunset clause as established under Article 47(3): when a State notifies its withdrawal from the ECT, the legal effect of the treaty continues to cover investments made before the withdrawal date for a period of 20 years. Although sunset clauses are not prohibited under international law, the terms of this specific one appear to be disproportionate, thus relevantly affecting future policies and policymakers.

All these fallacies, together with a general lack of flexibility, are some of the reasons why the ECT has been frequently defined as outdated: it belongs to the old-generation IIAs that perpetuate inconsistencies by creating overlaps and fragmentation in treaty relationships. Instead of promoting solutions for problems concerning a field that is continuously evolving along with new technologies, it designs obligations that inhibit the ability of States to change their regulatory frameworks. Since 2017 the parties started negotiating a modernisation of the ECT within the Energy Charter Conference, explicitly tackling the investor-State dispute resolution mechanism and hoping to allow States to undertake regulatory actions affecting existing investments covered under the ECT when those actions aim to protect the environment. A Modernization Group was appointed, between 2021 and 2022 many rounds of negotiations were hold, and it led to an agreement that will be adopted if nobody challenges it before of the 22^nd of November. An unlikely event according to the letter that the three Spanish ministers sent to EU representatives, stating that ‘Spain cannot support the modernized treaty for reasons of coherence’ since the government judged the amended treaty insufficient and therefore decided to withdraw.[2]

However, the recent wave of announced withdrawals reflects a general dissatisfaction among EU member States about the reform outcome, considered insufficient to meet governments ambitious climate objectives. In the end, ECT represents and will continue to represent a serious obstacle to the energy transition, with States at risk to engage in draining litigations for implementing environmental policies in line with international environmental law. Pushed by European States for getting access to Russian resources, the treaty became an autonomous instrument that endangers its founders, kept in check by oil companies. More than two decades after its entry into force, the energy sector is facing different challenges that were not envisaged by the ECT drafters, and many attempts to reform the treaty failed to have an impact on the current problems related to the ECT legal framework. Because of the difficulties in reforming or amending a text that in terms of quality would need a complete switchover, not to talk about a possible termination, withdrawal appears to be the only viable solution. Aligned with its member States’ major opinion, it is envisaged a joint withdrawal involving also the EU itself, that should take a stend defending the Green Deal goals and its rule of law; as ruled by the ECJ in the Komstroy case, the primacy of the EU system is undermined by the fact that State-investor arbitration bodies have jurisdiction over intra-EU disputes. Anyway, European governments and the European Union should exercise due diligence when contemplating a mere withdrawal without trying to modify the sunset clause beforehand.

By The European Institute for International Law and International Relations.