Energy Charter Treaty: reform will only happen when energy ministers get involved

Negotiations are underway for the reform of the Energy Charter Treaty (ECT), an international trade agreement under fire from former Energy Charter executives, members of the European Parliament, and NGOs. Created at the end of the cold war, it was designed to protect cross-border energy investments – in a fossil fuel world – from political risk.

Clare Taylor quotes the critics who say it no longer makes sense for the treaty to protect oil and gas investments when the world is committed to phasing them out. Worse, the ECT is making our climate targets harder to hit because, as Taylor explains, of the gaps in an agreement written before energy efficiency and demand-side investments meant anything. Any reform of this global treaty requires unanimous consent, so great pressure will be needed for meaningful change. Only if pro-climate ministers at the national and EU level get involved will it happen, conclude the critics.

During 8-11 September 2020, closed negotiations on modernisation continued between the contracting parties to the Energy Charter Treaty, an international trade agreement on energy supply and transit which has come in for mounting criticism over the past two years.

In June 2018, the incompatibility of the treaty with Europe’s climate and energy goals was highlighted in a report published by civil society organisations Corporate Europe Observatory and the Transnational Institute. Major issues of concern include the effect of ‘regulatory chill’, whereby governments can be dissuaded from enacting progressive climate legislation due to the prospect of costly legal action initiated under the terms of the treaty.

Oil and Gas companies can sue nations for phase-out

The treaty enables non-national investors in energy supply (oil and gas, electricity including that which is generated from renewables and nuclear) to sue governments in private arbitration proceedings, under undefined concepts such as ‘indirect expropriation’ or ‘fair and equitable treatment’. Only companies can bring suit. A country can only defend itself; it cannot sue a company.

One example is that of Canadian company Vermilion which in 2017 threatened France with a lawsuit when the government considered issuing an incremental ban on oil and gas production. Other examples include the energy major Rockhopper’s case against Italy which was triggered by the Italian Parliament’s ban on all new oil and gas operations near the country’s coast, and Uniper’s claim for up to €1 billion compensation in response to a Dutch government plan to phase out coal power by 2030. This overall effect of ‘regulatory chill’ was recently acknowledged in an arbitration journal as ‘a legitimate public policy problem’.

Former Energy Charter executives are rebelling

Further criticism of the treaty has come from within the Energy Charter secretariat itself, a publicly funded organisation which supports Member States in implementing the treaty. The treaty must be ‘reformed, replaced or terminated’ wrote Sarah Keay-Bright, energy expert and a former Energy Charter secretariat employee, in one of a series of articles published in spring 2019 in Energy Post and Foresight magazine.

One of the articles in Keay-Bright’s series for Energy Post was co-authored by Steivan Defilla, a former Director of the Energy Charter secretariat. Both recommend radical reform of the treaty: ‘The entire Energy Charter process should be evaluated, including its governance arrangements, institutions and instruments, any of which might only be achievable by amending the ECT.’

Perhaps unsurprisingly, a subsequent piece published in Euractiv in June 2019 centred on a leaked report describing ‘multiple failings of the Energy Charter secretariat’.

Pressure from parliaments

More recently, European policymakers are waking up: in July 2020, an editorial opinion published in Euractiv and signed by more than a dozen MEPs stated that ‘If the treaty cannot be reformed, then it must be scrapped.’

Momentum continues to grow: earlier this month a cross-party coalition of parliamentarians from across the EU issued a joint statement on asking for a fundamental rewrite of the Energy Charter Treaty. The statement was signed by close to 150 lawmakers from across the EU and national parliaments, mainly belonging to the greens, socialists, leftists and liberal political parties.

3 big deficiencies

A leading issue for those campaigning for reform is ending legal protection for fossil fuel investments. Head of the Energy Charter secretariat Urban Rusnák responded to this issue in a recent interview: ´The Treaty is neutral. It protects all energy investments, fossil fuels, renewables, nuclear.’

However, as Keay-Bright highlighted, energy efficiency and demand-side investments are not legally protected under the treaty. Nor can fossil fuels be considered as entirely neutral in the context of the European Union’s flagship policy for a Green Deal, which has the leading objective of ‘no net emissions of greenhouse gases by 2050’, a position that is reflected in the European Investment Bank’s phase-out for lending to fossil fuel projects by 2021. The central, perhaps rhetorical, question: “Can we be technology-neutral in these days of climate emergency?” was posed by Yamina Saheb, an independent energy consultant (and former Energy Charter secretariat employee) during a recent webinar on the modernisation process.

A second major issue is the high number (88/130) of known ‘Investor State Dispute Settlement’ (ISDS) claims under the treaty that are intra-EU disputes, i.e. between companies and national governments of European Member States. This situation may be incompatible with EU law: the European Court of Justice found in the landmark ruling Achmea that the provisions contained in an intra-EU bilateral investment treaty sideline and undermine the powers of domestic courts. Although the Achmea ruling applies only to bilateral investment agreements between Member States of the EU, the case’s reasoning may also be applied to multilateral treaties such as the ECT.

Thirdly, the ECT’s legal mechanism that allows companies to sue national governments in private tribunals is an ISDS, originally devised as a forum in which to resolve conflicts between countries and the foreign companies that do business within their borders. ISDSs are used in many trade agreements and have come in for fierce criticism. There have been concerns about the current ISDS perceived deficit of legitimacy, transparency, independence, impartiality and accountability, and a separate ISDS reform process is underway via the United Nations Commission on International Trade Law.

None of these three controversial issues is on the agenda of the ECT modernisation process currently taking place.

What will happen next?

In fact, it appears that little has been resolved thus far in the ECT modernisation process, despite the surrounding – and mounting – controversy. All the countries who are contracting parties to the treaty must unanimously agree amendments to the treaty. Japan, which is of the G7 countries the most heavily invested in foreign fossil fuel energy supply, adopted an early position of opposition to any reform. There is no end date for the modernisation process.

However, “we are not throwing in the towel just yet” according to Marjolaine Meynier, a French member of parliament from En Marche. Maynier was speaking during a recent webinar on the modernisation process. “Energy ministers are waking up to the issues and beginning to talk with each other,” she added.

Luxembourg’s energy minister Claude Turmes is also advocating for reform. “We see that investors will use the treaty to recover the value of fossil fuel assets even if the democratic and scientifically based decisions have been taken to phase out fossil fuel use.” On the ECT modernisation process to date, Turmes sees “limited engagement so far. Only DG Trade is active.”

Turmes went on to highlight the urgent necessity of a consolidated EU negotiating position: in order to table agenda items for the next round of the ECT modernisation talks on 3 December, the EU must internally agree a “politically complicated position” – between trade, energy and climate – by 15 October.

“We need Vice-President Timmermans to be in the game. EU climate policy is jeopardised by the Energy Charter Treaty,” said Turmes. Furthermore: “Is DG Clima concerned about the Energy Charter Treaty? I think they should be, and proactively ask that the treaty be made compatible with the Paris Agreement. We need to advance now…change will only come when we have a progressive EU mandate.”

Meanwhile, the pushback has begun as ‘elite global’ law firm Volterra Fietta are set to host a webinar on ECT modernisation on 17 September. Panelists include Carlo Pettinato (DG Trade) who is leading the ECT negotiations on behalf of the European Union, arbitration lawyer and former Energy Charter secretariat legal counsel Graham Coop, and associates of the Brussels Energy Club such as Andrei Belyi, an expert in energy law and also a former employee of the Energy Charter secretariat. The webinar seeks to address the question: ‘the Energy Charter Treaty: Is it still fit for purpose and how could it be improved?’ Watch this space.

Clare Taylor is a Brussels-based journalist covering the energy sector

Article first published on Energypost.eu