Energy Charter Treaty reform: Failure in the first round

The German Presidency should end the comedy of the modernisation of the Energy Charter Treaty and work on a decision to withdraw en masse from the treaty without further delay.

In a laconic “public” communication from another era, EU citizens and lawmakers were informed about the end of the first negotiation round on the Modernisation of the Energy Charter Treaty (ECT).

However, the so-called “public” communication does not provide any information about the achievements of the negotiations, nor about the number of ECT contracting parties participating to the negotiations nor about the views of the participants on each negotiated item.

The “public” communication is only a combined agenda of the three negotiation rounds which will all take place during the German Presidency.

This implies that the first negotiation round was a failure as the following rounds will also be. The ECT modernisation process, which has no end date, cannot lead to a modernised Treaty as foreseen by the EU.

How could it be different given the profile of ECT signatory countries and the unanimity vote required to amend the Treaty. This is particularly true as Japan is openly opposed to any reform.

Unsurprisingly, the EU attempt to bring the ECT provisions on investment protection in line with those of trade agreements recently concluded by the EU and its Member States does not seem to be included in the negotiations.

The same occurred with the EU proposal relating to the creation of a Multilateral Investment Court. Japan and countries signatories of the Treaty on the Eurasian Economic Union, which includes unreformed provisions on Investor-State-Dispute-Settlement (ISDS), are opposed to any discussion on the EU proposed ISDS reforms.

More worrying is the lack of clarity about the EU’s aim to better reflect its commitment to the implementation of the Paris Agreement. This should be negotiated under the item related to the definition of economic activities in the energy sector.

Aligning the ECT with the Paris agreement is achievable only if fossil fuels are no longer protected by the Treaty. However, the EU negotiating proposal  does not require phasing-out fossil fuels from the investment protection provisions of the ECT.

Instead, the EU negotiating position claims that the “EU will table a proposal at the appropriate time in the course of the negotiations” on the scope of energy investment to be protected by the ECT in the future.

The so-called “public” communication suggests that this item would have been negotiated during last week’s first round and will not be included in the following rounds. Unfortunately, the game seems to be over for phasing-out fossil fuels from the ECT! The “modernised” ECT, if this lengthy process ends at some point, will not be Paris compliant.

Countries like Azerbaijan, Turkmenistan, Kazakhstan, Mongolia and Uzbekistan, with high contribution from fossil fuels to their GDP, are unlikely to vote to phase-out fossil fuels in the ECT. It is also hard to imagine Japan voting for the phase-out of fossil fuels given the Japanese leadership in investments in coal in developing countries.

The protection of foreign investment in fossil fuels means protection of foreign investment in greenhouse gases (GHG) and stranded fossil assets.  Estimates show that the equivalent of one-third of the global carbon budget would be protected, by 2050, by the ECT if fossil fuels are not phased-out.

Similarly, protected stranded fossil assets could reach a value of €2.15 trillion if fossil fuels are not phased-out from ECT binding provisions. This is more than the investment needed for the successful implementation of Europe’s Green Deal.

While EU negotiators are trying to resuscitate the brain-dead ECT, EU governments are offering scandalous amounts of taxpayers’ money to fossil fuels companies on the condition that they will not use the ECT to sue them in private arbitration.

The proposed German agreement of €4.2 billion to RWE and LEAG illustrates very well the fear instilled in EU governments by the ECT.

Importantly, the privileged national approach to the ECT by EU Member States will increase the number of agreements like the German one. The potential cost of ISDS claims, if the ECT continues, would reach at least €1.3 trillion, by 2050, out of which 42% will be paid by EU taxpayers.

The ECT is a multilateral agreement, ending its negative impacts on EU policies can only be achieved if EU Member States adopt an EU-wide approach. The only way forward for the EU Member States is to withdraw en masse from this Treaty.

The collective withdrawal of the EU and its Member States should be accompanied by an agreement to end the ECT sunset clause which prolongs the provisions for twenty years after the withdrawal.

As more than 70% of foreign investment in the energy sector in EU countries are intra-EU investments, the cost of ending the EU participation to the ECT will be much lower than the cost of the current individual approach.

The ECT is an invisible barrier to the climate priorities of the German Presidency. EU Energy Ministers should act boldly and stop the endless comedy of the ECT modernisation.

A decision to withdraw en masse should be taken by the European Council without further delay!

This op-ed was published for teh first time, on July 15th, 2020 on Euractiv