Climate: Reform of the controversial Energy Charter Treaty threatens to fail

Created: 12/14/2021, 10:27 AM

The treaty protects fossil fuels such as coal or gas - making the reforms necessary to mitigate the climate crisis more difficult.

© Julian Stratenschulte / dpa

The EU states threaten to fail with a reform of the controversial Energy Charter Treaty (ECT).

This is shown by current research by Investigate Europe and Ippen Investigativ *.

By Maxence Peigné, Nico Schmidt and Harald Schumann, Investigate Europe

The little-known treaty threatens the EU's climate goals, because it could cost member states hundreds of billions of euros if they take ambitious measures against the climate crisis *.

This was shown by months of research by Investigate Europe and Ippen Investigativ at the beginning of the year. 

Internal documents available to Investigate Europe now show that EU states are in danger of failing to reform the treaty.

A decision by the European Court of Justice that the ECT is not compatible with EU law also seems to have little effect.

Energy Charter Treaty threatens the EU's climate targets

The Energy Charter Treaty is a little-known investment protection agreement. In the early 1990s, all EU countries, including Germany, signed this agreement to secure investments in the so-called “new democracies” in Eastern Europe and Central Asia. 55 contracting parties have now signed, including countries in the Balkans, the Middle East and the Far East. However, according to research by Investigate Europe and Ippen Investigativ, the contract has a number of problems. 

The contract is unilateral, only companies can sue states.

In addition, the wording of the contract is vague: Investors can sue if they feel they have been treated “unfairly”.

In Europe alone, the contract protects fossil infrastructures worth 344.6 billion euros, research showed at the beginning of the year.

The first examples make it clear that investors are using the treaty to intimidate EU states and demand compensation in the billions.

For fear of this, France even weakened a preventive climate law that should prohibit the extraction of fossil fuels.

Climate crisis: The process of reforming the treaty has been going on since 2017

That is why the EU Commission wants to modernize the Energy Charter Treaty. A reform process was started back in 2017. But now it threatens to fail. The participating countries have negotiated a reform eight times since 2019. But the results are devastating. Investigate Europe has several internal documents from the Council of the EU in which representatives of the EU states coordinate their negotiating positions. The confidential minutes paint a bleak picture.

As part of the modernization talks, the EU Commission wanted to ensure that the Energy Charter Treaty no longer protects any fossil fuel infrastructure in the future.

The vague text of the contract should also be made more precise.

However, the EU has so far made little progress on these projects.

During a meeting of the responsible working group in November 2021, the commission called the progress of the negotiations, according to internal documents, "partly disappointing".

At another meeting, the commission said the negotiations were "not an easy process" and "can obviously take several years".

There is no precise schedule.

Internal documents: EU wants to lift the protection of fossil fuels, block other countries

In the secret talks it stalled because some countries like Japan or Kazakhstan are massively defending themselves against the EU's proposals.

The problem: A final revision of the Energy Charter has to be approved by all 55 contracting parties.

All other contracting parties rejected an initial proposal by the EU states to gradually lift the protection of environmentally harmful investments.

Now the states are discussing a second "flexible" solution that would allow the EU states to lift the protection of fossil fuels while it could continue to apply in other contracting states.

But Japan and Kazakhstan are categorically ruling out a quick exit from coal, oil and gas - and are even blocking changes that would only affect EU countries. 

"We understand that we have to achieve climate neutrality," said the diplomat from an Asian country who is taking part in the modernization talks in an interview with Investigate Europe.

"But we also have to ensure security of supply, so we don't know when the fossil fuels can be removed from the contract."

Because of the climate crisis: EU countries want to completely withdraw from the Energy Charter Treaty

Because of the blockade, several EU states are now urging to withdraw completely from the Energy Charter Treaty. "The progress in the negotiations is manageable," wrote a Polish diplomat when asked by Investigate Europe. “Many states are of the opinion that the chances of an acceptable agreement are rather slim.” According to internal documents, Poland, together with France, Spain, Greece, Latvia, Hungary and Cyprus, demand that the Commission draw up a plan for a possible exit from the Energy Charter - Have to work out a contract. Paris and Madrid are also calling for a clear exit date if there is no breakthrough in the current negotiations. 

But a complete, immediate exit from the Energy Charter Treaty is in fact impossible.

A clause in the agreement stipulates that existing fossil fuel infrastructure will remain protected for another 20 years after a withdrawal.

What this means is clear from the example of Italy.

The country left the Energy Charter Treaty in 2016.

A little later, the British company Rockhopper sued the Italian state because the authorities had banned offshore drilling.

Rockhopper wants € 240 million from Italy.

The verdict is pending. 

Judgment of the European Court of Justice on the Energy Charter Treaty apparently not binding

Critics of the Energy Charter Treaty had hoped that a ruling by the European Court of Justice (ECJ) in September could help solve the problems with the treaty. In their ruling, the judges found that Energy Charter proceedings in which an investor from the EU takes legal action against an EU state are incompatible with EU law. A large part of the Energy Charter disputes relate to such so-called “intra-EU procedures”. But whether the judgment of the ECJ will really change anything is questionable. At least that's what several lawyers say in an interview with Investigate Europe.

"The time of intra-EU proceedings is by no means over with the ECJ ruling," warns investment protection expert Markus Krajewski from the University of Erlangen-Nuremberg.

Since arbitral tribunals refer to international law and not EU law, they could view the ECJ ruling as "not relevant", says Krajewski.

The investor could then enforce an arbitration award in a country outside the EU.

The professor of European law at the University of Amsterdam, Christina Eckes, also believes this.

"Investors will use arbitration courts outside the EU," she says.

"After an arbitration award, companies can turn to courts outside the EU to enforce their claims in third countries and have state property seized there."

Already today, climate proceedings often end up before arbitration tribunals in Washington

Most of the Energy Charter proceedings are already being carried out outside the EU, for example in Washington before the arbitration tribunal of the International Center for the Settlement of Investment Disputes (ICSID).

On request, the ICSID actually writes that the ECJ judgment may not have any consequences.

There are no provisions to stop the introduction of new intra-EU procedures. 

Even investors from the EU who are currently suing against EU states assume that the ECJ ruling will have no consequences for them.

The energy companies RWE and Uniper announced that the ruling should have no effect on their ongoing proceedings against the Netherlands.

The German companies are suing the Dutch exit from coal and are demanding compensation payments of up to one billion euros. 

All those involved look all the more closely at the ongoing reform process.

Investigate Europe has asked the EU Commission and numerous countries.

The EU and its member states "are strongly committed to reform," the Commission said.

The German Ministry of Economic Affairs writes that the ECT should “not be used in contradiction to climate protection or the energy transition.

Numerous clarifications and specifications are necessary for investment protection. " 

The EU wants to have a finished text on the table by June 2022.

In talks with Investigate Europe, however, the diplomats involved doubt that concrete decisions will be made by then.

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