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Germany withdraws from the Energy Charter Treaty

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Germany has announced plans to withdraw from the Energy Charter Treaty (ECT), on the grounds that it contradicts climate ambitions and is inconsistent with the goals of the Paris Agreement.

  • Germany withdraws from controversial energy investment treaty.
  • Up to €1.3 trillion could be paid out to fossil fuel companies on the back of state policies to drive climate action.
  • The ECT is being used to push the cost of energy transition onto taxpayers rather than fossil fuel companies.

The Energy Charter Treaty was signed in 1994 and it is arguable that it is no longer fit for purpose in the 21st Century. It was set up as a multilateral scheme to manage international investments in the energy sector, particularly to protect energy firms operating in the former Soviet Union from ‘hostile’ legislation or policy change, by giving such companies the right to sue for compensation.

Fossil fuel companies are using the ECT to sue states for climate policies

Today however it is being used by fossil fuel companies to sue countries which change the rules around energy developments. Since investors can sue not only for the value of their infrastructure but also for lost profit expectations, the actual sum of possible compensation claims could be even much higher.

When Italy changed the rules around where it was possible to search for oil, ensuring that no search would be allowed within 12 miles of Italy’s beaches, Rockhopper sued the government in 2017 and won an award of €220 million – despite the fact that Italy withdrew from the treaty in 2016. In a similar vein, Uniper and RWE sued the Dutch government for billions of euros for its plans to phase out coal by 2030 (thereby negatively affecting RWE’s coal export business).

Vattenfall sued Germany for €6 billion for planning to phase out coal. To date, says Gunther Pauli, founder of the Zero Emissions Research Institute, there are 286 cases from traditional energy companies suing various Member State governments.

Global signatories could fund fossil fuels rather than spend on decarbonisation

It has been said that total global commitments under the Energy Charter Treaty to 2050 could see up to €1.3 trillion being paid to the traditional fossil fuel industry. In 2021 analysis from investigative collective Investigate Europe, the value of fossil infrastructure in the EU, the UK as well as Switzerland protected by the Energy Charter Treaty was calculated to be €344.6 billion.

Germany joins Slovenia, France, the Netherlands, Spain, Australia and Poland. While the EU is set to meet to talk about reforms to the treaty, with a vote scheduled on 16 November, it is difficult to see a way forward. Where it is considered particularly problematic is where it is shifting the financial burden of energy transition from fossil fuel companies to taxpayers. Opponents say massive public payouts need instead to be spent on decarbonisation and the energy transition.

While the UK has not suggested plans to leave the ECT, it is worth pointing out that Investigate Europe figures show the UK has fossil fuel infrastructure worth more than €140 billion, the owners of which could sue the state in international arbitration courts if they don’t like its policy trajectories. Germany follows with €56 billion, then France, Italy, Denmark and the Netherlands with more than €15 billion each. As the transition accelerates, 74% of Energy Charter cases are now lawsuits brought by EU investors against EU states.

The international arbitration mechanism is mostly used by the fossil industry

International Institute for Sustainable Development (IISD) research shows that the ECT uses a private form of arbitration on cases, the investor-state dispute settlement (ISDS) and that the fossil fuel industry uses ISDS more than any other sector.

The average amount awarded — over $600 million — is almost five times the amount awarded in non-fossil fuel cases. The ECT is facilitating such claims more than any other investment treaty.

According to the ISSD, “Arbitration claims challenging government actions made in the public interest, such as environmental policies or the protection of human rights and local communities, are on the rise. In particular, privileges granted to foreign investments are increasingly in conflict with efforts to curb climate change and protect the natural world.”

Even with the modernisation of the treaty, ClientEarth warns that with years until the new treaty enters into force,  foreign coal, oil and gas companies will still be able to sue EU and member state governments over their climate policies until the late 2030s – stifling progress in the very window needed to accelerate action. Meanwhile, fossil fuel investors abroad will continue to benefit indefinitely – at least for now – from the ECT’s protection. In September 2022, it called for the EU to withdraw from the treaty completely.

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