Europe’s Green Deal is under threat from Energy Charter Treaty

The EU and its member states should collectively withdraw from the Energy Charter Treaty, which protects fossil fuel investments, and go to the UN Climate Summit in New York with a call to develop a ‘Treaty for the Non-Proliferation of Fossil Fuels’, argues Yamina Saheb.

The Energy Charter Treaty (ECT) is a multilateral investment agreement which protects investments in the supply of energy. The ECT was signed and ratified by the EU and its Member States in the 1990’s.

Its original objective was to overcome the political and economic divisions between Eastern and Western Europe and to strengthen Europe’s energy security by protecting western investments in fossil fuels in the former Soviet Union.

However, today, 81% of investments protected by the ECT are intra-EU investments. And the treaty gives special protection to fossil fuels, to the detriment of cleaner forms of energy, like renewables and energy efficiency investments.

The latest illustration of this came from Uniper, the German energy company active in coal and gas. Uniper announced earlier this month that it will file an Investor-State-Dispute-Settlement (ISDS) claim against The Netherlands under the Energy Charter Treaty as soon as the Dutch Senate approves a planned ban of coal for electricity production.

The move by Uniper sounds the alarm bell for a new ISDS series against EU climate and energy policies. The EU and its member states cannot ignore this new signal.

Contrary to the long standing myth, the ECT is neither fuel nor technology neutral. ECT investment protection provisions are related to economic activities on the supply side only and fuels protected by the ECT include coal, oil, gas and nuclear. Investments in renewables are only indirectly covered through the protection of foreign investments in electricity production, distribution and trade.

The ECT is the first and only international Treaty which considers energy efficiency as a significant source of energy. However, investments in reducing energy demand are not protected under the ECT regime. Similarly, investments in the distribution of heat to multiple premises are excluded from ECT protection of foreign investments.

In other words, the ECT is an international agreement to protect fossil fuel investments and their related carbon emissions in signatory countries. OpenExp estimates carbon emissions protected by the ECT, since its entry into force in 1998, at almost double the remaining EU carbon budget for the period 2018-2050.

The ECT is a powerful instrument in the hands of foreign investors. Typically, investors value their assets based on their expected cash flows over their lifetime. In case of changes in regulations, which may lead to lowering such cash flows, foreign investors can, under the ECT regime, submit a dispute to international private arbitral tribunals and ask for high compensations for the potential loss of future revenues.

During the first decade of its application, the ECT was mainly used against host states in former Soviet Union regions. However, in the last five years, the ECT became the most popular instrument used by foreign investors to challenge changes in feed-in-tariffs for renewable energy in EU countries (mainly in Spain, Italy and the Czech Republic).

As of today, 124 ISDS cases under the ECT regime are known, out of which 82 are intra-EU cases which also fall under EU law. More ISDS cases are expected to come as the carbon neutrality target requires important changes in national regulations to phase-out fossil fuels. Foreign investments in the energy sector may well turn into high costs for taxpayers to compensate for investors’ “legitimate” expected revenues. Uniper’s announcement confirms OpenExp’s warning about high compensation costs once policies to phase-out fossil fuels will be in place.

In July, member states gave their green light to the European Commission’s proposal to negotiate the modernisation of the investment protection standards contained in the ECT along the lines of the European Union’s reformed approach. However, while the negotiating directives refer to the Paris Climate Agreement and assert the right to regulate, there is no explicit requirement to phase-out investment protection to fossil fuels. Importantly, the right to regulate will not end ISDS claims.

Amending the ECT to make it climate-proof is in principle possible. However, the unanimity vote required to amend the Treaty and its constituency make this objective unachievable. In fact, the contribution of fossil fuels to national economies is above 10% of the GDP in several ECT signatory countries. It is, therefore, unlikely that fossil fuels-based economies would vote for ending investment protection of fossil fuels.

Instead of entering into endless negotiations with fossil-fuels based economies, the EU and its Member States should, on the eve of the UN Climate Summit:

• Withdraw collectively from the Energy Charter Treaty to allow for the implementation of Europe’s Clean Energy Package and the upcoming regulations to phase-out fossil-fuels. Such regulations are needed to make Europe carbon neutral.
• Ask the European Commission to monitor ISDS cases and to make the information publicly available to civil society as required by the EU’s Better Regulation principles.
• Develop a moratorium to end intra-EU ISDS which may result from the 81% intra-EU foreign investments currently protected by the ECT.  Developing such moratorium is possible only if the EU and its Member States withdraw collectively from the ECT.
•  Join forces with the most advanced countries in their carbon neutrality targets and bring to the UN Climate Summit, next week in New York, a proposal for a Treaty for the Non-Proliferation of Fossil Fuels. Such a Treaty would be needed to effectively achieve the climate goals as set out in the Paris Climate Agreement.

This op-ed was published for the first time, on September 20th, 2019, on Euractiv