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Investigate Europe | 14 December 2021
Energy Charter Treaty: stalled reform fuels EU fears for climate
By Maxence Peigné, Harald Schumann and Nico Schmidt
European governments are losing patience in talks to modernise the controversial Energy Charter Treaty (ECT), according to documents leaked to Investigate Europe. After two years of dialogue, no deadline has emerged to fix this pact, which allows big emitters to sue states for enacting green reforms.
Within 2050, Europe is to have cut almost all greenhouse emissions. That is going to be demanding enough. But the little-known Energy Charter Treaty could become a massive threat to the EU and its member states in trying to achieve their climate targets. Investigate Europe delves into the treaty and its ramifications for climate neutrality. Read more "The Energy Charter Treaty"
Eight rounds of negotiations to put the treaty in line with climate goals have so far fallen flat. Meanwhile, foreign investors can still sue governments when policies threaten their corporate interests. Some EU countries are already entangled in cases about coal phase-outs and off-shore drilling bans.
As the ECT conference takes place on 14 and 15 December 2021, anxiety is growing among European delegations. Several are contemplating withdrawal, amid fears that the treaty could derail climate goals and see corporations receive billions of taxpayers’ money.
Despite a ruling by the European Court of Justice that the ECT is incompatible with EU law, member states are likely to be at risk of being sued in the foreseeable future. Companies, arbitration institutions and scholars expect little change, as proceedings could move abroad.
Previous analysis by IE showed that three-quarters of all disputes involve European firms going after EU states. Just in Europe, the treaty protects €344.6 billion of fossil infrastructure. With huge payouts at stake, lawmakers have blamed the ECT for “threatening the climate ambition of the EU,” as the Union pledged to be carbon neutral by 2050.
The European Commission told IE that work will continue into 2022, with a summit in June in a bid to find a consensus. Yet, faced with stalled negotiations and the limited clout of EU judges, some governments are losing faith behind closed doors.
Leaks show frustration and fears of a deadlock
IE got access to a series of diplomatic cables from the Council of the EU, where the ECT’s modernisation is often on the agenda. These confidential notes, written in October and November 2021, indicate frustration and fears of a deadlock. Here’s what they reveal:
The outcome of the eighth round was mixed and partly disappointing, in the eyes of the Commission. The process is difficult and could take years, with no concrete deadline in sight.
Poland, France, Spain, Greece, Latvia, Hungary and Cyprus are all demanding a legal assessment of a coordinated withdrawal, but the Commission thinks this would put the EU in a tight spot, as such a text could later be used in court.
The French are insisting that a joint exit should be seriously explored, as discussions have led to little hope for a positive outlook. They don’t believe talks could end by mid-2022. Paris and Madrid are asking for a clear date to walk away, should there be no breakthrough.
Germany also worries that current proposals are straying from the EU’s original red lines.
In order to quit the treaty as a bloc, a qualified majority is needed (55% of member states and at least 65% of the EU population). But Brussels dreads the consequences in the absence of a unanimous vote in the Council, if that means forcing countries out against their will.
“The chances of finding an acceptable agreement are rather slim”
A unanimous vote is precisely what’s also needed at the ECT conference to overhaul existing rules. Most of the 55 signatories are in Europe and Asia. They include the European Union and its member states (with the exception of Italy). When the pact was drawn up in 1994, it sought to integrate the energy sector of the former Soviet Union while securing western investments in the east. Yet, today, national interests are diametrically opposed between parties.
Three bones of contention keep a deal out of reach. First is the economic activity, which defines the energy sources that should be protected. Second is the arbitration mechanisms and the jurisdiction of tribunals. Third is transit — that is, the treaty’s application in countries where energy travels but doesn’t stop. Say, when a pipeline crosses land that belongs to neither the producer nor the buyer, for example.
“The overall progress in the negotiations is limited,” laments a Polish diplomat contacted by IE. “Many countries consider that the chances of finding an acceptable agreement are rather slim.” This official, who requested anonymity, adds that Poland frets about years of delays between a potential compromise and its implementation.
“It’s already been two years, we’re going to have to move up a gear,” observes an energy attaché from another member state. “We’ll need a political trigger in the coming months to wrap it up next year.” Speaking to IE, this delegate points out a key discrepancy: “The EU came to the table asking to drop fossil fuel but many other states were dragging their feet because they’re oil and gas producers.”
In the wake of the ECT’s growing influence, the Commission pushed the modernisation process that started in 2018. Brussels’ main goal was to reaffirm the primacy of EU law and promote the Paris Agreement.
Europeans initially proposed a draft reform whose core idea was to gradually stop covering new polluting investments.
Other negotiators rebuffed it without exception. Therefore, a second option emerged from the modernisation committee of the ECT, a group steered by Austria, Luxembourg, Switzerland, Japan and Azerbaijan.
It came up with a “flexible” solution to allow the scope of the treaty to vary between countries. In other words, Europeans can halt fossil fuel protection, as long as others can keep it in place.
“The Commission’s text attracted zero support, so now it has to be the flexible approach or nothing,” regrets the energy attaché.
The EU lacks support
Documents seen by IE show that the EU is struggling for backing outside its borders. The United Kingdom and Switzerland are not reliable partners, while Japan is its main opponent. Along with Kazakhstan, Tokyo ruled out a blanket phase-out of fossil fuels. The Japanese delegation even refused to include a nod to the Paris Agreement in one official communication. Azerbaijan has also proven to be a rival, rejecting any reference to labour rights.
“We understand that we need to adopt carbon neutrality,” an Asian representative to the ECT told IE. “But we need to see the reality of supply, and we don’t know when fossil fuels should be taken out of the treaty.”
To defend their own interests, some countries have already decided to pull out of the ECT: Russia in 2009, Italy in 2016, Australia in 2021. Nonetheless, they can still be prosecuted under the so-called “sunset clause”, a provision that safeguards existing assets for 20 years after withdrawal. Following in Rome’s footsteps could be tempting for the EU, but the perspective of two decades of liability makes it a gamble.
Italy is still bogged down in a lengthy trial against UK-based Rockhopper, which is asking for some €240 million over an offshore drilling ban. Elsewhere in Europe, the Netherlands is facing two German energy firms in court, following its decision to shut coal plants. Uniper is claiming a reported €1 billion, and RWE confirmed to IE that it is seeking €1.4 billion.
To avoid similar troubles, Germany agreed last year to cough up €4.35 billion in compensation for its power companies, as part of its coal phase-out plans. In exchange, beneficiaries accepted not to take Berlin before arbitrators.
“It’s going to be a huge disaster and years of litigation”
Yamina Saheb, a whistleblower and a former head of unit at the ECT Secretariat, told IE that lawsuits will multiply as a result of the Paris Agreement and COP26. “It’s going to be a disaster and years of litigation,” she predicts. “All parties will be sued if they try to implement these declarations and we simply won’t be able to meet climate pledges.”
In total, the ECT Secretariat has recorded 142 legal actions since 2001. But the true number could be higher. Claimants are not obliged to report prosecution and on the treaty’s website, the tally stops in August 2021. In fact, IE found at least two recent intra-EU trials not logged by the ECT. They were brought against Spain in September and Romania in November.
The ECT is not compatible with EU law
One glimmer of hope for activists came from the European Court of Justice, which, in September, ruled that the ECT should not be used in intra-EU litigation. “The only thing that will save us as Europeans is the implementation of this decision, not the modernisation,” warns Saheb, who now works for OpenExp, a Paris-based think-tank. Many member states also expected judges to subdue the treaty this way.
But it’s not that straightforward. “In essence, it means national courts in Europe should not give effect to awards that result from intra-EU arbitration,” details Christina Eckes, professor of European Law at the University of Amsterdam. “However, based on how different tribunals have dealt with EU law so far, they will very likely say that the ruling does not bind them.”
ECT courts can be set up ad-hoc anywhere in the world, but those listed by the secretariat all register with one of three established institutions: the International Centre for Settlement of Investment Disputes (ICSID), the United Nations Commission on International Trade Law (UNCITRAL), and the Stockholm Chamber of Commerce (SCC) in Sweden.
IE contacted them to understand how the news would impact them. Only the ICSID and UNCITRAL replied to explain they can’t control tribunals under their rules. The ICSID confirmed that it had no provisions in place to stop registering new intra-EU litigation.
RWE and Uniper also told IE that the Court of Justice’s decision shouldn’t affect their proceedings against the Netherlands. Rockhopper didn’t wish to comment on its own case against Italy, which seems to have been slowed down by the ruling, as per the company’s own public records.
“Tribunals will be established outside the EU,” anticipates Eckes. “And companies may also turn to non-EU courts to enforce their awards and track down governments’ money in third countries.”
A rushed compromise?
IE reached out to the European parties of the ECT to gather their positions on the modernisation process. Their answers can be summed up in a statement sent by the Commission: the EU and its member states will push hard to bring about the reform, but alternatives, including a withdrawal, may be considered as a last resort.
Separately, the UK said the treaty had to align with climate pledges but also noted it played an important role in protecting British businesses, adding the country had never faced a claim under the ECT.
The ECT secretariat didn’t reply to requests for comments.
Looking ahead, four more rounds of discussions will take place before the next summit of June 2022. While diplomats who spoke to IE doubt this calendar, the Commission is keen to have a text on the table by then. But if Brussels has its way, campaigners suspect there will be no time for parliamentary consultation.
“The timeline doesn’t foresee a moment for anyone to properly debate the outcomes,” deplores Cornelia Marfield of Climate Action Network (CAN). “They fear scrutiny of the results as they know that withdrawal would become inevitable.”