Spotlight |
The uncertain fate of the Energy Charter Treaty
In February 2023, the European Commission proposed a collective exit of the EU member states from the Energy Charter Treaty (ECT). Here, Leigh Crestohl of Zaiwalla & Co outlines how the ECT operates, the reasons for this proposed withdrawal, and the potential implications this would have on the energy market
AT A TIME WHEN public attention is focused on European energy security, it may seem surprising that the future of the Energy Charter Treaty (ECT) should elicit controversy. Nevertheless, despite five years of efforts to modernise the 1994 treaty, the EU has recently advocated a mass withdrawal, and other states may follow.
Momentum for withdrawal certainly seems to
be growing. Following Italy’s lead in 2016, France, Germany and Poland have notified their withdrawal.1 Other member states are said to be considering withdrawal, and the ECT recently received robust criticism in a UK House of Commons debate.2 At the core of the controversy is a perception that
Above: Leigh Crestohl is a partner at Zaiwalla & Co.
the ECT favours fossil fuel investment and restricts governments from pursuing renewable and clean energy initiatives to meet commitments under the Paris Agreement (2015). There is concern that such initiatives have and will continue to provoke large claims under the ECT’s investor-state dispute settlement (ISDS) provisions, a process criticised by some as producing disproportionate monetary awards in favour of fossil fuel investors. Whilst the Energy Charter’s Secretary General has challenged EU Member States to support the agreed modernisation in order better to meet those concerns,3
entirely stymied. This article briefly discusses the ECT, modernisation and possible implications that the EU position may have for future developments in this area.
Below: The EU has recently advocated a mass withdrawal from the treaty
What is the ECT? The ECT is a multilateral treaty signed in 1994 that
establishes “a legal framework in order to promote long-term cooperation in the energy field, based on complementarities and mutual benefits, in accordance with the objectives and principles of the Charter” (Art. 2).4
It emerged following the collapse
of the Soviet Union, and with a view to western investment in the transitioning energy markets of Eastern Europe and central Asia. There are 53 Contracting Parties, including the EU (as a “Regional Economic Integration Organisation” (REIO)), its individual member states, EEA members and the United Kingdom, Ukraine, Turkey, and several Balkan states are signatories, as are central Asian countries. Japan is the most notable member outside those regions. Since 2018, Russia no longer considers itself a member.
10 | May 2023 |
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The ECT includes guarantees commonly found in investment protection treaties. For example, investments must be accorded fair and equitable treatment. In the case of a breach, an investor may at its election submit a dispute either to a national court or to arbitration. In this respect it is like many bilateral investment treaties (BIT) currently in force. A Contracting Party may withdraw from the ECT. However, under article 47(3) the ECT continues to apply to covered investments for a 20-year period following withdrawal. This “sunset clause” is now highly controversial, as discussed below.
ECT modernisation
Modernisation discussions began in 2017, and by June 2022 there had been 15 rounds of multilateral negotiations resulting in an agreement in principle on 24 June 2022.5
Although an exhaustive review the process is now at best delayed, if not
is beyond the scope of this article, a few elements deserve mention. Firstly, a “flexibility mechanism” was agreed. This permits a Contracting Party to exclude investment protection for fossil fuels when considering its individual energy security and climate goals. The UK and EU intend to apply this to existing investments after a period of 10 years, and to all new investments within the scope of the ECT made after August 2023. Secondly, the “right to regulate” was further emphasised, and a stand-alone article included to reaffirm a Contracting Party’s right to regulate for “protection of the environment, including climate change mitigation and adaptation”. Thirdly, proposed changes to the arbitration
process are intended to address transparency concerns including a requirement that parties disclose third-party financing of their costs. In addition, monetary damages are to be limited to the loss suffered by the investor and the award of punitive damages is to be prohibited. Modernisation needs to be ratified by 75% of the Contracting Parties. The EU and its member states alone represent a sizeable voting bloc, calling into question whether ratification is achievable.
Criticisms of the ECT The ECT is seen as a creature of its era, and thus
an outdated obstacle to transition to renewable energy. Recent large arbitration claims and awards against western European states under the ECT fuel concerns about “regulatory chill”, leading one former UK minister to describe the ECT as a “relic from a
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