The European Parliament is calling on the European Commission to initiate the coordinated withdrawal of all Member States from the Energy Charter Treaty (ECT).
- The Parliament has adopted a resolution that clarifies its support of an EU-wide withdrawal from the ECT.
- Fossil fuel companies have been using the ECT to sue European governments over policies to address climate change.
- Although the EU’s withdrawal is yet to be initiated, the Parliament’s resolution will have significant influence over the ending of legal protection for fossil fuels.
The Parliament has adopted a new resolution, clarifying its consent to an EU-wide withdrawal from the ECT. It requests that the EU Commission must begin to initiate this process. It also recommends that each EU Member State should support and ratify an ‘inter se’ agreement to neutralise the sunset clause, through which contracting parties are bound to the treaty for 20 years after they leave.
“The sooner the Commission realises its hands are tied; the sooner European governments will be able to accelerate their climate plans without fear of retribution through the ECT,” said Amandine Van Den Berghe, a lawyer speaking on behalf of climate-focused legal non-profit ClientEarth.
“All governments in favour of withdrawal should pressure the Commission to urgently design a plan to leave the ECT and agree to end fossil fuel protection in the EU for good,” she added.
What is the Energy Charter Treaty?
The ECT was established in 1994 as a multilateral scheme to manage international investments in the energy sector. Initially, it was developed as a way to protect energy firms with operations in the former Soviet Union from ‘hostile’ legislation or policy change, by giving them the legal right to sue governments for compensation.
It does so by using a legal mechanism known as investor-state dispute settlement (ISDS), which allows countries to be sued by foreign investors, including private entities such as fossil fuel companies, for actions that may affect their returns.
By 2020, the ECT had been ratified by 53 countries as well as the EU and the European Atomic Energy Community. As of the beginning of June 2022, approximately 150 investment arbitration cases had been instigated under its ruling.
A legal weapon for fossil fuels companies
The ECT is now being used by some fossil fuel companies to demand compensation from governments that are changing policies to tackle the climate crisis, therefore hindering their efforts.
Under the ECT, foreign investors can sue not only for the value of their infrastructure, but also for projected profit losses. This adds to the sum of possible compensation claims, leading to an average award of over $600 million.
Examples of such cases include Rockhopper’s (LSE:RKH) lawsuit against the Italian Government for limiting the area that could be explored for oil, which saw the company being awarded a whopping €220 million, and Vattenfall’s €6 billion win against Germany’s plans to begin the phase-out of coal. A similar case saw Uniper (XETR:UN01) and RWE (XETR:RWE) securing billions of euros in compensation from the Government of the Netherlands for its intentions to end coal use by 2030.
The ISDS mechanism is now used more by the fossil fuels sector than by any other industry. The ECT has been identified as the single largest contributor to ISDS claims over the forced stranding of oil and gas assets that do not align with the 1.5°C Paris Agreement goal. With this in mind, the Intergovernmental Panel on Climate Change has warned that ISDS cases could severely limit global efforts to reach net zero.
These concerns are reflected in the European context, with analysis suggesting that the continued protection of fossil fuel investments could see compensation costs reaching around €1.3 trillion by 2050. This vast pay-out to fossil fuels companies is well above the projected investment needed to implement the European Green Deal
Attempts to escape the ECT
There have been several attempts at the modernisation of the ECT, after its raison d’être became obsolete over a decade ago, when Russia withdrew from its provisional application in 2009. These ongoing negotiations, however, are yet to effectively address the Treaty’s use for the protection of fossil fuels.
Recognising the limitations it places on their climate policy initiatives, several EU Member States have already decided to withdraw from the ECT. Italy officially withdrew in 2016, while the governments of Poland, Spain, the Netherlands, France, Slovenia, Germany and Luxembourg have stated their intentions to follow suit.
Currently, exiting countries are subject to a 20-year ‘sunset clause’ that continues the protection of existing investments that are not covered by an inter se agreement. This means that, despite the rise in attempts to abandon the ECT, fossil fuel assets could effectively be insured against policy changes for another two decades.
The Parliament’s call for a united exit from the ECT, including the formation of an inter se agreement to neutralise the sunset clause, could therefore be crucial in triggering an end to the protection of fossil fuels companies once and for all. Although the Commission’s response remains to be seen, the influence of the Parliament and the decisions of eight Member States will be difficult to ignore.