Obscure energy treaty threatens huge state losses over climate action

Italy's multi-million-dollar payout to a UK oil and gas company has sparked renewed calls for the EU to quit a treaty critics say could hinder efforts to phase out fossil fuels.

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Nam Theun 2 Project Transmission lines on the Nakai Plateau in Khammoune Province, Lao PDR. Image: World Bank Photo Collection, CC BY-SA 3.0, via Flickr.

British oil and gas company Rockhopper has won more than £210 million ($245 million) in a lawsuit over Italy’s ban on offshore drilling, fuelling concern among climate experts about the impact of a controversial energy treaty used to bring the claim.

Since the late 1990s, the Energy Charter Treaty (ECT) has allowed energy firms and investors to sue governments whose plans to cut emissions from fossil fuels hurt their bottom line.

The Rockhopper verdict is the latest ruling in a growing number of legal claims from the fossil fuel industry.

Critics are concerned that the threat of legal action could deter governments from enacting clean energy policies vital to achieving international climate goals.

At a conference in June, member countries concluded a four-year process of modernising the treaty, intended to reflect evolving policy agendas to tackle global warming.

But climate groups branded the reforms “greenwashing”, saying they do not align the ECT with the Paris Agreement to curb climate change - not least because they allow investment protection for fossil fuel firms for at least another decade.

Fossil fuel companies are making obscene profits in the cost-of-living crisis and now they also want to make more money when governments actually take action to limit something like offshore oil drilling.

Cleodie Rickard, trade campaigner, Global Justice Now

Several European countries and the European Parliament are urging the European Commission to withdraw from the treaty before the reforms are ratified in November.

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.

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 hydropower, 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 using international law most frequently bring them under the ECT.

Those ECT claims can be pursued through national courts or international arbitration channels called investor-state dispute settlement (ISDS).

The IISD has warned that putting into practice pledges made at the COP26 U.N. climate summit last November 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 Cornelia Maarfield, senior trade and investment policy coordinator at Climate Action Network Europe.

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?

Rockhopper was among four multinational companies suing governments for loss of earnings over green action using ECT investor-state tribunals.

The company pursued a claim against Italy after the government banned oil drilling along the country’s coastline, causing Rockhopper’s plan for a new oilfield to fall through.

“Fossil fuel companies are making obscene profits in the cost-of-living crisis and now they also want to make more money when governments actually take action to limit something like offshore oil drilling,” said Cleodie Rickard, a trade campaigner at advocacy group Global Justice Now.

“This (Rockhopper) case will have a chilling effect on climate action, as climate scientists have warned.”

Other claims under the ECT have been brought by German energy companies Uniper and RWE against the Netherlands’ decision to phase out coal, and by British firm Ascent Resources against Slovenia’s requirement for an environmental impact assessment of fracking plans.

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 oil and gas 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 they could stretch to billions of dollars calculated on real and anticipated future losses.

Rockhopper won more than £210 million in its recent case - well over the £33 million the company is said to have invested in the drilling project.

How is the treaty being 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.

After 15 rounds of talks, member governments reached an agreement in principle in June, which will now be turned into a legal text.

Green groups have criticised the European Commission for signing up to the ECT reforms, which they argue are not enough to align the treaty with climate policies.

ECT signatories rejected a European Commission proposal to end protection for all future investments in fossil fuels.

Instead, negotiators agreed on a “flexibility mechanism” that allows individual countries to end investment protection for fossil fuels in their territories, in keeping with their respective climate goals.

Only the European Union and Britain have agreed to exclude fossil fuel investments from protection under the ECT, a rule that will apply after August 2023.

Existing investments will be protected until 2033 at least.

Britain, however, will continue to apply the ECT to investments in gas power plants fitted with carbon capture technologies.

The ISDS process and a sunset clause allowing countries to be sued for up to 20 years after withdrawing from the treaty remain unchanged.

The list of energy types protected by the ECT has also been expanded to include carbon capture and storage, hydrogen, biomass and biogas - which critics say increases the potential for claims.

The European Parliament and countries such as Germany, the Netherlands, Poland and Spain are pushing the European Commission to withdraw from the treaty.

France also favours withdrawal, while Italy quit in 2015, citing budget restrictions.

“The European Parliament won’t ratify a greenwashed ECT - they want real changes, which the reform doesn’t deliver,” Maarfield said in a statement, urging the commission to admit that the updated ECT is “a failure” and initiate an exit.

Ministers have until November, when parties to the ECT will meet to ratify its new text, 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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