It’s time to scrap the Energy Charter Treaty

The EU taxpayer is the main loser from the continuation of the Energy Charter Treaty which locks Europe into carbon and energy injustice at a high cost to taxpayers.

According to a statement from the European Commission, Member States reached an agreement on a plurilateral treaty for the replacement of intra-EU bilateral investment treaties. However, the Energy Charter Treaty (ECT), which is the most invoked treaty in intra-EU ISDS (Investor-State-Dispute Settlement) cases, does not seem to be being considered for termination despite its high cost for the European taxpayer and its carbon lock-in effect.

The ECT is a multilateral agreement ratified by the EU and its Member States in 1998. Italy is the only EU country who withdrew from the ECT in 2015. This, however, did not prevent Italy from facing an ISDS claim under the ECT regime as the provisions of this Treaty continue to apply twenty years after withdrawal.

The original objective of the ECT was to overcome the political and economic divisions between Eastern and Western Europe as well as to strengthen Europe’s energy security. To put it simply, this Treaty was designed to secure the access to fossil fuels resources of the former Soviet Union regions by protecting Western investment in these countries.

While the ECT may have made sense in a fossil-fuel world, today the Treaty is a major threat to carbon neutrality in signatory countries. Carbon emissions protected by the ECT, twenty years after its entry into force, are almost double the remaining EU carbon budget between now and 2050.

ECT obligations are on the host state only and not on the foreign investor. The Treaty privileges and over-protects the economic rights and interests of foreign investors over the societal and economic interests of the host state and national stakeholders who have no rights under the ECT regime.

Importantly, under the ECT regime, an investor is not obliged to resolve disputes based on domestic, democratically established laws before filing ISDS claims. Arbitration tribunals are composed of lawyers privately appointed by the investor and the host state and arbitrators can order remedies, usually in the form of important monetary awards, to investors if they find that states have breached the obligations of the ECT.

Host states are legally bound to accept ISDS proceedings despite their lack of transparency and the absence of mechanisms to consider the rights and interests of other parties impacted by the investment. Unsurprisingly, ISDS is the preferred dispute settlement option by foreign investors, who are encouraged by private arbitrators to claim compensation for a fictive loss of revenues when governments modify energy or environmental policies.

The EU taxpayer is the major loser of the ECT regime. Making Europe’s energy transition a reality is unlikely as long as foreign investors have the power to water-down EU legislation through ISDS threats as shown by the French Law on ending the exploration of fossil fuels.

As of today, more than two-thirds of the known 127 ISDS cases under the ECT regime are intra-EU disputes. Investors’ claims for compensation amount to €20 billion for the 61 ISDS cases for which information is publicly available.

European taxpayers have already paid €750 million to compensate 14 EU investors for changes in national regulations. Looking deeper to intra-EU ISDS claims, it appears that more than 90% are related to changes in feed-in-tariffs in renewables.

Advocates of the Energy Charter Treaty use renewable ISDS cases to promote the ECT as an instrument to support the energy transition. In reality, the renewable ISDS cases provide evidence that ECT is an instrument to favour big investors in the energy transition at the expense of the prosumer and taxpayer.

According to the Commission statement, Member States decided to discuss the additional steps needed to draw all the consequences from the ‘Achmea judgment’ in relation to the intra-EU application of the Energy Charter Treaty (ECT).

However, it is unlikely that the Achmea ruling could apply to intra-EU ISDS cases under the ECT regime as the Treaty applies equally to all its contracting parties. Italy, Spain and Germany have tried, and failed, to use the presence of the EU as a REIO (Regional Economic Integration Area)-Contracting Party to the ECT to stop intra-EU ISDS claim.

To the contrary, arbitration tribunals state that “although the EU is a Contracting Party of the ECT, the States that compose it have not ceased to be Contracting Parties as well”. Therefore, both the EU and its Member States may have legal standing as a Respondent in an action under the ECT regime.

Intra-EU ISDS and their related costs for the European taxpayer is another reason for the EU countries to withdraw collectively from this ‘Climaticide’ Treaty instead of entering endless negotiations of a pseudo modernisation of the ECT.

It’s time for the European and national parliaments to step in and to cease the Council and Governments about the negotiating directives. This is the only way forward to protect EU citizens and to deliver on Europe’s carbon neutrality target and the objective of a just energy transition.

This op-ed was published for the first time, on October 30th, 2019, on Euractiv.