EU's Coordinated Withdrawal from the Energy Charter Treaty (ECT)
On May 30th, 2024, the Council of the EU adopted a landmark decision to withdraw the European Union from the Energy Charter Treaty (ECT). This decision came shortly after the European Parliament approved the Commission’s proposal for the EU to exit the ECT in April this year.[1]
This move culminates nearly a year of deliberations initiated by the European Commission's recommendation for the EU to leave the treaty. During this period, several member states have independently exited the ECT: France on December 8, 2023, Germany on December 20, 2023, and Poland on December 29, 2023. Additionally, other EU member states, in addition to the United Kingdom, have announced their intentions to formally withdraw from the treaty.[2]
Anna Cavazzini, the rapporteur for the Trade Committee from the Greens/EFA party in Germany, remarked “Today’s vote is a major step in the right direction… In view of the climate crisis, the EU must become a climate-neutral continent as quickly as possible.”[3]
Echoing Cavazzini’s sentiment, Marc Botenga, the rapporteur for the Industry, Research, and Energy Committee representing the Left party in Belgium, stated that “The Energy Charter Treaty allows fossil fuel multinationals to sue states and the European Union if climate policies affect their profits. In the midst of a climate crisis, this is a contradiction, in addition to being very costly for taxpayers. Alongside civil society, a significant movement has been built to exit from this treaty and I am happy to see this is bearing fruit today.”[4]
Both Cavazzini and Botenga’s remarks underscore the critical need for swift action, such as coordinated withdrawal from the treaty, to address the climate crisis and transition towards sustainable energy sources. Thanks to the decision to withdraw from the Energy Charter Treaty, the path is finally clear for the EU to prioritize climate protection without being hindered by outdated and counterproductive agreements.
What Is the Energy Charter Treaty (ECT)?
The Energy Charter Treaty, commonly referred to as the ECT, is a legally binding multilateral treaty that has the objective of advancing energy security and investment protection. Amidst the dynamic geopolitical changes following the dissolution of the Soviet Union (USSR) in 1990s, numerous Western countries and their companies sought to invest in the modernization of energy sectors of in Central and Eastern Europe.[5] However, lingering uncertainties loomed over the legal protection of such investments. The ECT emerged as a response to these concerns, offering a robust legal framework to address them. By mandating parties to promote fair access to international markets on commercial terms and cultivate open, competitive markets for energy materials and products, the ECT offered vital reassurance to investors navigating the evolving geopolitical landscape, which was further solidified by the inclusion of sunset clause. Signatory states intending to withdraw are obligated to adhere to the treaty’s provisions for a period of 20 years following their exit, as dictated by this clause.[6] Finally, the ECT establishes an Investor State Dispute Settlement (ISDS) mechanism in order to resolve disputes between investors and member states.
However, while various investors across energy-related sectors are employing such legal mechanisms offered by ECT to safeguard their investments from government actions, the predominant users have been the fossil fuel industry investors. These investors play the biggest role in contributing to CO2 emissions globally, which significantly worsens climate change.[7]
Greater Financial Gains, Less Green Transition
The ECT has acted as a serious barrier against climate action and supported the fossil
fuel industry by prioritizing investors’ economic rights and interests over the social, ecological, and economic well-being of host states and their communities.[8] Fossil fuel investors have been increasingly leveraging the ISDS mechanism provided by this treaty to protect their investments and offset losses from public policies, posing a significant challenge for countries aiming to phase out fossil fuels due to climate change concerns. By suing governments, fossil fuel companies have secured record-breaking damages awards, with the average amount typically exceeding 600 million USD.[9] This trend exacerbates the financial burden on Member States, deterring them from taking the urgently needed climate actions. Instead, such judgments result in governments compensating polluters rather than holding them accountable for the detrimental environmental impacts of their operations.[10]
For example, since implementing a series of energy reforms impacting the renewables sector, including subsidy reductions for producers, Spain has been subject to 51 arbitration disputes under the ECT since 2012. Consequently, the country has been ordered to pay over 800 million EUR in damages to the fossil fuel industry.[11] Therefore, the policymakers and experts have been increasingly recognizing the ECT as a significant legal barrier to the essential phaseout of fossil fuels, requiring a swift, coordinated action from EU.
EU Investors Navigating a New Energy Landscape?
The decision to withdraw entered into force on May 30, 2024, and the withdrawal itself will take effect one year after the receipt of the notification. However, the withdrawal will trigger the ECT’s sunset clause, which stipulates that investments made before the withdrawal will remain protected throughout a twenty-year period starting from the date the withdrawal becomes effective. Consequently, EU investors will continue to benefit from ECT protection for 20 years from 30 May 2024, which allows them to bring arbitration claims against withdrawing contracting parties throughout this period. However, any new energy investments made after May 30, 2025, will no longer enjoy ECT protections.
Furthermore, the European Council states that the sunset clause will not impact investments between EU member states, emphasizing that the ECT “does not, never did, and never will” apply among them.[12] The Council is also negotiating an inter se agreement with Member States to further solidify this interpretation, meaning that EU investors will not receive protection for their investments in other EU Member States due to the sunset clause. If finalized, this inter se agreement would be considered a subsequent agreement between the parties under Article 31(3)(a) of the Vienna Convention on the Law of Treaties, potentially hindering EU investors from pursuing claims against the EU or its Member States.[13]
Towards the Greener Future
The coordinated EU withdrawal from the Energy Charter Treaty marks a significant milestone towards mitigating climate change risks. This decision is a reflection of years of dedicated advocacy by climate activists, trade unions, scientists, academics and social movements.[14]Their unified efforts have highlighted the ECT’s role in protecting financial interests of multinational fossil fuel corporations at the expense of regulatory autonomy and an effective social climate transition.[15]By exiting the ECT, the EU is taking a definitive step toward aligning its policies with its climate commitments, paving way for a greener, more sustainable future.
Reference List:
[1] Corporate Europe Observatory, “Milestone Win as EU Withdraws from Climate-Wrecking Energy Charter Treaty | Corporate Europe Observatory,” corporateeurope.org, April 24, 2024, https://corporateeurope.org/en/2024/04/milestone-win-eu-withdraws-climate-wrecking-energy-charter-treaty.
[2] Monika Dulian, “EU Withdrawal from the Energy Charter Treaty,” European Parliament , 2023, https://www.europarl.europa.eu/RegData/etudes/BRIE/2023/754632/EPRS_BRI(2023)754632_EN.pdf.
[3] European Parliament, “MEPs Consent to the EU Withdrawing from the Energy Charter Treaty | News | European Parliament,” www.europarl.europa.eu, April 24, 2024, https://www.europarl.europa.eu/news/en/pressroom/20240419IPR20549/meps-consent-to-the-eu-withdrawing-from-the-energy-charter-treaty.
[4] European Parliament, “MEPs Consent to the EU Withdrawing from the Energy Charter Treaty | News | European Parliament,” www.europarl.europa.eu, April 24, 2024, https://www.europarl.europa.eu/news/en/pressroom/20240419IPR20549/meps-consent-to-the-eu-withdrawing-from-the-energy-charter-treaty.
[5] Christina Eckes and Laurens Ankersmit, “The Compatibility of the Energy Charter Treaty with EU Law,” Dare.uva.nl, April 21, 2022, https://dare.uva.nl/search?identifier=3bf36b84-c28e-4bd3-bb21-704c4980c326.
[6] International Institute for Sustainable Development , “What Is the Energy Charter Treaty and What Does It Mean for Sustainable Development?,” International Institute for Sustainable Development, April 22, 2022, https://www.iisd.org/articles/explainer/energy-charter-treaty.
[7] Global Carbon Project, “Fossil CO2 Emissions at Record High in 2023,” Global Carbon Budget, December 4, 2023, https://globalcarbonbudget.org/fossil-co2-emissions-at-record-high-in-2023/.
[8] Center for International Environmental Law, “Overcoming International Investment Agreements as a Barrier to Climate Action: A Toolkit to Safeguard Fossil Fuel Measures from Investment Treaty Claims ,” January 12, 2024, https://www.ciel.org/wp-content/uploads/2024/01/Overcoming-International-Investment-Agreements-asa-Barrier-to-Climate-Action.pdf.
[9] Lea Di Salvatore, “Investor–State Disputes in the Fossil Fuel Industry,” International Institute for Sustainable Development, December 31, 2021, https://www.iisd.org/publications/report/investor-state-disputes-fossil-fuelindustry.
[10] Center for International Environmental Law, “Overcoming International Investment Agreements,” January 12, 2024.
[11] Borja Fernandez de Troconiz, Alex Ferreres, and Yuri Yashiro Martino, “Spain Withdraws from the Energy
Charter Treaty,” www.linklaters.com, May 21, 2024, https://www.linklaters.com/en/insights/blogs/arbitrationlinks/2024/may/spainectwithdrawal.
[12] Lukas Schaugg, Nathalie Bernasconi-Osterwalder, and Suzy Nikièma, “United We Leave or Divided We Stay? Why It’s Time for the EU to Speak with One Voice Regarding the Energy Charter Treaty,” International Institute for Sustainable Development, July 20, 2023, https://www.iisd.org/articles/deep-dive/united-we-leavedivided-we-stay-energy-charter-treaty.
[13] Latham & Watkins, “EU and Euratom to Withdraw from the Energy Charter Treaty: The End of an Era?,” Latham & Watkins, May 31, 2024, https://www.lw.com/admin/upload/SiteAttachments/EU-and-Euratom-toWithdraw-From-the-Energy-Charter-Treaty-The-End-of-an-Era.pdf.
[14] Anna Cavazzini Marc Botenga, “Recommendation on the Draft Council Decision on the Withdrawal of the Union from the Energy Charter Treaty | A9-0176/2024 | European Parliament,” European Parliament , April 11, 2024, https://www.europarl.europa.eu/doceo/document/A-9-2024-0176_EN.html.
[15] Ibid.
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