Spain will leave the Energy Charter: why is the decision important for the climate fight?

Spain has begun the process to withdraw from the Energy Charter Treaty (ECT), as announced by Vice President Teresa Ribera in statements to the newspaper

and confirm sources from the Ministry for the Ecological Transition.

The step comes after four years of negotiations to renew this treaty from the 1990s that protects the investments of energy companies against regulatory changes in the signatory countries.

Several environmental groups have welcomed this announcement as a victory in the fight against climate change, since they interpret that the end of this agreement will help nations to wean off fossil fuels, the main responsible for climate change.

These are the keys to this treaty and its possible consequences.

What is the Energy Charter Treaty?

This agreement, of which some fifty countries are part, was promoted in its day by Western Europe and was signed in 1994, already after the fall of the Iron Curtain.

Its objective was to encourage energy investments in the former countries of the Soviet Union.

Like other international treaties of a sectoral nature, the ECT has a dispute resolution mechanism between foreign investors and States.

In fact, the treaty is one of the arguments used by multinational companies in arbitration courts when they consider that a country has damaged their interests with some regulatory measure in the energy sector.

Why does it affect the fight against global climate change?

"In the treaty, fossil fuels are highly protected," explains Marta García Pallarés, from Ecologists in Action.

This environmentalist complains that the agreement hinders the transition to clean energy in an "absolutely critical decade" because the large fossil fuel companies can use it to stop energy transition policies.

Cornelia Maarfield, Trade Policy Expert at CAN Europe (a coalition of 170 organizations focused on fighting climate change), adds: “We have to get off coal, fossil gas and oil.

However, almost any action a country takes that limits the profits of fossil fuel companies can be challenged under this treaty.

Investors can request compensation of millions and even billions of euros.

This makes the energy transition much more expensive, something that can discourage governments from making the necessary decisions to curb climate change.”

Both experts recall that in its latest review of the science on climate change, the IPCC - the panel of international experts linked to the UN - warned: "Trade rules have the potential to stimulate the international adoption of mitigation technologies and policies, but they can also limit the ability of countries to adopt trade-related climate policies,” referring to agreements such as the Energy Charter Treaty.

Why did Spain abandon the treaty?

During the last four years, in 14 rounds of negotiations, the signatories have discussed the modernization of this treaty.

The final result does not convince Spain and other countries because, as Ribera warned in June, "it will not be able to guarantee the alignment" of this treaty "with the Paris Agreement and the objectives of the European Green Deal" considering that it continues to shield the interests of fossil fuels.

"At a time when accelerating a clean energy transition has become more urgent than ever, it is time for the EU and its member states to initiate a coordinated withdrawal from the ECT," he said then.

Although several European countries have been critical of the treaty, such as France, Germany, the Netherlands and Belgium, this coordinated withdrawal has not yet taken place.

The Polish Government is also now processing a law in its Parliament to abandon the treaty, although in its case it uses more reasons of sovereignty than of promoting the fight against climate change, in which the Executive of this country is not usually among the most committed European countries.

Does it only affect fossil fuels?

No. It also refers to nuclear energy and the treaty has been used by a multitude of foreign investment funds to sue Spain for cutting renewable premiums for a decade.

These funds ask Spain for around 10,000 million euros and the main instrument they use is the Energy Charter.

Spain is the country to which the most lawsuits have been filed in the last decade, with 51. So far, investors have won 21 in arbitration courts (although so far Spain has not paid and argues that a ruling by the Court of Justice of the EU allows you not to).

The Spanish Climate Change Law establishes, among other matters, a veto on new projects for the extraction of fossil fuels and uranium, which is used to produce energy in nuclear power plants.

This law, of May 2021, also contemplates the prohibition of the use of hydraulic fracturing or

.

In the case of radioactive fuels, a group of investors from the Berkeley company has already threatened to appeal against the Government if the Retortillo (Salamanca) uranium mine project is blocked, as has finally happened.

What are the effects of leaving the treaty?

“Exiting the treaty is not difficult, the countries only have to issue a written notification,” says Maarfield.

The problem is that the agreement includes a survival clause – “zombie clause”, García Pallarés and environmentalists call it – that allows investors to continue suing a country that leaves the agreement during the following 20 years for the actions it has taken. before his abandonment.

In addition, explains García Pallarés, the investors of the nation that leaves the pact could not use the ECT to sue another country.

Although they already employ strategies to bypass similar limitations.

For example, Abengoa used a Luxembourg subsidiary to sue Spain for cutting renewables.

Italy left the ECT in 2016 and already knows the implications of the survival clause.

The ICSID, an arbitration body linked to the World Bank, sentenced Italy in August to pay a fine of 190 million euros to the British fuel company Rockhopper Explorations for the veto that this country approved in 2015 for new oil and gas projects. gas within the first 12 nautical miles of the coast.

The compensation is significantly higher than the initial investment of the project (about 30 million) because the treaty allows companies to sue for the loss of future profits, not only for what was spent.

Could there be a chain exit from the treaty?

Maarfield, from CAN Europe, points out that most of the signatories of this treaty consider that "it is outdated", but the efforts to reform it have failed.

At the end of this month, the members of the EU are expected to decide whether they accept the changes that are intended to be introduced to modernize it, which do not seem to please many states, such as France and Germany, which "have already expressed their dissatisfaction with the results of the reform”, says Maarfield.

In addition, "the Dutch Parliament is demanding that its government support a coordinated exit from the EU, and many other countries simply have not yet made a decision," adds this expert who has been following the ECT negotiations for years.

“We hope that the recent announcements by Poland and Spain will create a domino effect”, he adds, and that “a coordinated exit” from the EU will take place.

Both Maarfield and García Pallarés maintain that a joint withdrawal of the European countries, as Spain wants, could dilute the survival clause, since they could close an agreement between them so that it would not be applied.

"For that reason, a joint withdrawal of as many countries as possible would be the best way to reduce the risk of lawsuits in the future," adds Maarfield.

Can it be a disincentive for green investments?

The defenders of the treaty, however, argue that it also protects investments in renewables, as is the case of the awards against Spain for the cut in premiums operated by the governments of José Luis Rodríguez Zapatero and Mariano Rajoy at the beginning of the decade. pass.

"Agreements such as the TEC do not facilitate new investments, they were closed to protect existing investments," counters Maarfield.

These types of agreements are designed to protect investments and for funds to feel more secure when supporting a project.

For years, Spain has been experiencing an avalanche of requests for the installation of wind and solar farms and is leading Europe in the installation of new renewable sources.

“Regarding investments in renewables, it is clear that investors consider other factors related to the policies and regulatory frameworks of a country to be much more important than these investment protection agreements,” added the CAN expert. .

“Brazil, for example, is one of the most popular destinations for investments in renewables, and has never joined deals like this,” she concludes.

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