Why does the EU want to quit the Energy Charter Treaty?

European lawmakers have backed plans for the EU to exit a treaty that lets fossil fuel firms sue when climate policies hit profits.

Legal claims made by fossil fuel companies challenging environmental measures are on the rise, according to the International Institute for Sustainable Development (IISD). Image: , CC BY-SA 3.0, via Flickr.

The European Parliament has backed plans for the EU to exit the Energy Charter Treaty, an international agreement protecting energy investments, over concerns it undermines efforts to fight climate change.

Since the 1990s, the Energy Charter Treaty (ECT) has allowed firms and investors to sue governments on the grounds that their profits could be hurt by policies aimed at cutting planet-heating emissions from fossil fuel burning.

Its critics say the threat of legal action under the ECT could deter governments from enacting clean energy policies that are vital to achieving international climate goals.

Here are some key features of the ECT and how it is being used by corporations to undermine national climate policies:

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 - as well as the EU.

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.

Why does the ECT pose a threat to climate action?

Legal claims made by fossil fuel companies challenging environmental measures are on the rise, according to the International Institute for Sustainable Development (IISD).

Experts warn that the risk of legal action could cause governments to delay policies to reduce greenhouse gas emissions, such as phasing out oil and natural gas production.

ECT claims can be pursued through international arbitration channels called investor-state dispute settlement (ISDS), where it is common for the private sector to be awarded large payouts.

Fossil fuel companies have been awarded at least US$82.2 billion by states in disputes brought under ISDS since 1977, a report from International Institute for Environment and Development (IIED) and the Columbia Center on Sustainable Investment (CCSI) found.

In three separate lawsuits brought under the ECT in November 2023 Jersey-based oil company Kelsch is suing the EU, Germany and Denmark for at least 95 million euros over a windfall tax on energy firms.

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

Why withdraw from the ECT?

The European Commission, the EU’s executive arm, proposed the whole bloc withdraw from the ECT in July 2023, after failing to get member states to agree to modernisation proposals aimed at bringing the treaty in line with the Paris climate agreement.

Countries opposed to the proposed reforms said they were not enough to align the ECT with climate policies because they would allow fossil fuel investments to be protected for at least another decade.

Ireland, Denmark and Portugal announced their withdrawals in 2023, after Spain, the Netherlands, Poland, France, Germany, Luxembourg and Slovenia walked out in 2022.

Italy was the first EU country to quit the treaty, in 2016, citing budget restrictions.

Britain became the 12th country to announce its intention to quit the treaty in February.

What happens next?

The parliament’s approval clears the way for EU member states to take a final decision to exit the treaty. Ministers gave their initial backing last month.

Cyprus and Hungary had wanted to stay in, while other countries were concerned that the efforts to modernise the treaty would go to waste with their departure.

To soothe those concerns, EU countries are expected to agree that they will first allow reforms to modernise the treaty to pass, before quitting.

It is unclear under what conditions certain member states may be allowed to remain party to the treaty, said Audrey Changoe, an expert in trade and investment policy at Climate Action Network Europe.

The Commission is expected to initiate withdrawal proceedings in May 2024, which will then take a year to come into effect.

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 https://www.context.news/.

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