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The Energy Charter Treaty is on life support with little chance of revival

  • Posted on: 12 December 2022
  • By: Yamina SAHEB

After reaching an “agreement in principle” on the modernisation of the Energy Charter Treaty (ECT), the European Commission’s plans received a setback with the withdrawal of seven EU member states.

The death knell for this archaic treaty was sounded back in 2009 when Russia announced its departure from the ECT. In the past months Poland, the Netherlands, Spain, France, Germany, Slovenia, and Luxembourg have all announced their decision to withdraw prior to the ministerial meeting at which the “agreement in principle” should have been adopted.

Their decisions were motivated by a lack of satisfaction, especially from a climate change perspective, with what the 15 rounds of negotiations on the ECT modernisation had achieved.

These withdrawals should become effective by the end of 2023, increasing the number of EU countries no longer party to the ECT to eight, representing more than 70% of the EU population (Italy withdrew in 2016).

France, Germany, Spain, and the Netherlands went one step further by blocking the approval of the “agreement in principle” by the European Commission at the November ECT annual meeting. Its approval was subsequently put on ice until a meeting to be held in spring 2023.

Meanwhile, faced with this wave of withdrawals, Sabine Weyand, Director General of the European Commission’s DG Trade, took to social media, spinning the ECT as a climate-friendly initiative.

The ECT is a mixed agreement with a division of competence between the EU and the member states. The EU has full competence only on foreign direct investment (FDI) and cannot act without the consent of the member states on Investment-State-Dispute-Settlement (ISDS) or on investment portfolio.

If DG-Trade continues to push for the adoption of the “agreement in principle”, the EU would have to significantly amend the treaty to allow for its partial application in the EU (only on FDI provisions) in the EU. Aside from going against ECT principles, such a move would likely increase the negative perception of the EU by other ECT contracting parties.

In the case DG Trade finds the trick to adopt a revised version of the “agreement in principle”, there is little chance for its ratification at the EU level.

A non-binding resolution, adopted by the European Parliament, whose approval is required for the entry into force of the modernised ECT, urged the Commission “to immediately initiate the process towards a coordinated exit of the EU from the ECT”.

As a result, should a revised version of the “agreement in principle’’ be adopted next spring, the current ECT would still apply despite not being compatible with EU law, as stated in the ruling of the European Court of Justice (ECJ).

As a sensible and long-overdue solution, the EU must withdraw, unilaterally, from the ECT, triggering the withdrawal of the remaining member states

Killing the ‘sunset clause’

The EU and member states’ withdrawal should be accompanied by an agreement to cancel the ‘sunset clause’ between EU countries. This clause, which DG Trade did not propose to include in the list of items to modernise back in 2018, extends for twenty more years the protection of foreign investment made in countries leaving the ECT.

To put an end to any avenues for litigation against EU countries by foreign investors in the energy sector, member states and the EU should also introduce a non-ECT use conditionality. This would prevent companies from invoking the ECT ‘sunset clause’ to access public subsidies whether directly (through infrastructure or state aid) or indirectly (through tax exemptions).

With such conditionality, it is unlikely that foreign investors would seek to activate the ‘sunset clause’ given that the energy sector is heavily subsidised, and the role public procurement plays in energy investments.

The ongoing energy crisis provides additional evidence of the uselessness of the brain-dead ECT to ensure EU energy security. And if that wasn’t enough evidence to show that the EU has nothing to lose by jettisoning it, it remains on very shaky ground.

Even the Commission’s executive vice-president Frans Timmermans admitted that: “every day it’s becoming more difficult to justify the EU participation in the ECT”.

The only remaining questions are when the President of the European Commission will finally take over from DG Trade and work on the withdrawal of the EU or should France, Germany, Spain, and the Netherlands grasp the nettle and push the Commission to start the withdrawal process.

Either way, the ECT is on life support with little chance of revival.

This post was published for the first time, on December 12th, 2022 on Euractiv