Energy Charter Treaty under fire over threat to global climate action

Governments are due to agree reforms to a treaty that allows energy companies to sue states for lost profits and could be used to claim damages if they move to phase out fossil fuels.

Oil_Field_California
Old oil fields in Northeast Bakersfield, California. Image: Babette Plana, CC BY-SA 3.0, via Flickr.

 Ministers from more than 50 countries are meeting in Brussels on Friday to finalise reforms to an international treaty that critics claim could hinder climate action by helping fossil fuel firms sue governments whose plans hurt their bottom line.

Since the late 1990s, the Energy Charter Treaty (ECT) has allowed energy companies and investors to challenge national policies that could undermine their profits.

Legal claims from the fossil fuel industry are on the rise, fuelling concern that the threat of legal action could deter governments from enacting clean energy policies vital to achieving international climate goals.

After failing to agree during a round of talks in May and additional days in June, negotiators met on Thursday in a last-ditch attempt to hammer out a package of reforms, ahead of a ministerial meeting on Friday to finalise the new rules.

Friday’s gathering is meant to conclude a four-year process of modernising the treaty, to bring it in line with evolving policy agendas to tackle global warming, with some European countries pressing to quit if they don’t get what they want.

Here we outline the key features of the ECT and how it’s being used by some corporations to undermine climate action:

What is the Energy Charter Treaty, and why was it created?

The ECT is a legally binding pact signed by 52 countries - mainly in Europe, Central Asia and the Middle East - and the European Union.

It was drawn up at the fall of the Soviet Union to protect European energy firms with fossil fuel assets in ex-Soviet states.

“There was a big fear that (former Soviet Union) countries could fall back into communism and that investors would be expropriated,” said Cornelia Maarfield, senior trade and investment policy coordinator at Climate Action Network (CAN) Europe.

These cases will take a long time and that there is a lot of money at stake, so some governments might delay the fossil fuel phase-out decision or not take it at all.

Cornelia Maarfield, senior trade and investment policy coordinator, Climate Action Network Europe

The ECT aims to promote energy security by protecting energy firms against risks to their investments and trade, such as having their assets seized or contracts breached.

It grants the right to challenge governments over policies that could harm investments - not just in fossil fuels but also in hydro-power, solar, wind and other clean energy sources.

Signatories are also obliged to facilitate cross-border energy flows and minimise the environmental impact of energy use, although the treaty has no binding climate targets.

Why does the ECT pose a threat to climate action?

Research from the International Institute for Sustainable Development (IISD) shows that legal claims made by fossil fuel companies challenging environmental measures are on the rise.

Most are based on contracts, but investors making claims based on international law most frequently bring them under the ECT.

Under the treaty, claims can be pursued through national courts or international arbitration channels called investor-state dispute settlement (ISDS).

The IISD has warned that putting climate pledges made at COP26 into practice could lead to a slew of lawsuits that would add to the cost of climate action and hinder its implementation.

“You know that these cases will take a long time and that there is a lot of money at stake… So some governments might delay the fossil fuel phase-out decision or not take (it) at all,” said Maarfield.

A new study by Boston University, Colorado State University and Queen’s University in Canada reveals that the costs of possible legal claims from oil and gas investors challenging government action to curb fossil fuels could reach $340 billion.

That could rise by another $45 billion if the 32 countries that are in the process of joining accede to the ECT.

Who is pursuing legal action under the ECT?

Today five multinational companies are suing governments for loss of earnings over green action for a total of $18 billion, four of them using ECT investor-state tribunals.

German energy companies Uniper and RWE have brought claims against the Netherlands following its decision to phase out coal, and British firm Rockhopper is challenging Italy over its ban on oil and gas exploration around the coastline.

Slovenia is also facing a claim from British company Ascent Resources over a new regulation requiring the company to undergo an environmental impact assessment before it can extract gas.

ECT officials note that about 60 per cent of disputes under the treaty concern renewable power generation, involving things like changes to incentive schemes and regulation.

IISD researchers are concerned that future measures to stop leaks of the greenhouse gas methane from gas and oil pipelines and wells could also spark new disputes.

Most investor-state cases concerning fossil fuels have been decided in favour of the private sector.

“The way the damages are calculated leads to huge awards, which have never been seen at the national level,” said Nathalie Bernasconi-Osterwalder, executive director of IISD Europe, noting damages could stretch to billions of dollars, calculated on real losses and anticipated future losses.

Rockhopper, for example, is claiming compensation of up to $350 million for both funds spent and expected profits in its case against Italy.

How could the treaty be reformed?

In 2018, ECT signatories launched a modernisation process to make the treaty compatible with the Paris Agreement, among other climate policies such as the European Green Deal.

Signatories agreed on 25 areas for reform, but those do not include ISDS nor a sunset clause that allows countries to be sued for up to 20 years after withdrawing from the treaty.

Progress has been slow, with reports that Japan and Azerbaijan are opposing some of the proposed reforms.

“There is one big barrier to changing anything … which is that all parties have to agree unanimously,” said Maarfield, adding that some ECT members “are very reluctant”.

In June, negotiators tentatively agreed on applying UN transparency standards to treaty-based investor-state cases, under which almost all information concerning proceedings would be made available to the public.

The European Commission had also proposed an amendment that would exclude all future investments in fossil fuels from ECT protection but would allow existing investors to sue countries for up to 10 years after the reforms are agreed.

Leaked cable reports reveal the commission is now trying to reach a compromise with Japan on a 15-year phase-out for existing investments.

CAN Europe is also concerned that proposed reforms would expand the list of energy types protected under the ECT to include low-carbon hydrogen, renewable hydrogen, biomass and biogas, increasing the potential for claims against states that regulate clean energy.

The EU is considering withdrawing from the ECT if the reforms do not align it with the bloc’s climate objectives

Support for withdrawal is growing, with Germany, the Netherlands, Poland and Spain reportedly asking the European Commission to consider exit scenarios. France also favours withdrawal, while Italy quit the ECT in 2015, citing budget restrictions.

“It’s pretty clear that if there is no agreement now at this conference, (withdrawal) should be the next step,” said Maarfield. “We really hope that they would then pursue this and not go back on their promises and try to negotiate longer.”

While the deadline to reach agreement is set for Friday, ministers have until the legal approval of any reforms in November to decide to withdraw.

This story was published with permission from Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers humanitarian news, climate change, resilience, women’s rights, trafficking and property rights. Visit http://news.trust.org/climate.

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