Why the Energy Charter Treaty Modernization Doesn't Deliver for Climate

The Energy Charter Conference officially adopted the “modernized” Energy Charter Treaty (ECT) at its 35th meeting on December 3, 2024, concluding a negotiation process that has run for several years. The ECT is a plurilateral treaty on investment, trade, and transit in the energy sector drawing criticism for its investor–state dispute settlement (ISDS) mechanism that allows fossil fuel investors to sue states in international arbitration over new climate policies.

The adoption of the reform follows decisions to withdraw from the European Union (EU), Euratom, Germany, France, Spain, Poland, the Netherlands, Luxemburg, Portugal, Slovenia, and the United Kingdom (Italy already withdrew in 2016). Importantly, the modernization does not hinder states that have not yet withdrawn from the ECT from doing so, and this remains the most viable option from a legal and policy standpoint. Some countries, including Ireland and Denmark, have announced such an intention. Additionally, withdrawing states are also exploring interpretative declarations and bespoke inter se agreements to neutralize the so-called sunset clause, which grants existing fossil fuel investments additional protection for 20 years following states’ withdrawal from the treaty. 

What does the modernization do?

The adopted modernization includes amendments to the treaty, updates to annexes, and procedural changes, such as designating the Energy Charter Secretariat as the interim depositary of the treaty, after Portugal’s withdrawal taking effect in February 2025. Key elements reflect a 2022 agreement on modernizing the ECT, which included proposals on a provision underlining states’ right to regulate and an optional carveout of fossil fuel investments from ISDS protection.

IISD analyzed this agreement at the time, finding that, even if reformed as per the proposals, the ECT would still obstruct governments’ climate policies—and that withdrawal combined with a neutralization of the sunset clause remained the most viable option. The numerous withdrawing states apparently shared this assessment.

When will the modernization enter into force?

The amendments now adopted will provisionally apply from September 3, 2025, unless a party opts out by March 3, 2025, and will fully enter into force after ratification by three quarters of the states that remain ECT contracting parties. Pending entry into force, investors with existing and new fossil fuel investments can continue to bring controversial investor–state arbitration claims against states that remain party to the treaty. 

Why will the ECT continue to be in tension with EU law?

According to the Court of Justice of the European Union, the ECT must be interpreted to mean that it does not apply to investor–state disputes between EU member states.

Earlier this year, 26 EU member states also signed a declaration to express their common understanding that the ECT does not and should never have served as a basis for arbitrations within the EU. Those steps notwithstanding, EU investors continue to sue EU member states in arbitration.

The proposed reform contains a clause that clarifies this common understanding of the EU member states—an element missing from the old version. This was a key element prompting the Council of the EU to oblige remaining EU member states “not to prevent the adoption” of the “modernization” of the ECT at last week’s Energy Charter Conference.

But adoption does not necessarily mean that the matter is resolved. Several member states could face constraints relating to domestic constitutional law, hindering them from provisionally applying the treaty—as previous experiences with trade and investment treaties like the Comprehensive Economic and Trade Agreement demonstrate.

This means that some states might be forced to opt out of the provisional application before March 3, 2025. In this case, member states will remain bound by the unreformed treaty until at least three quarters of all contracting parties, including them, have ratified, accepted, or approved the reform. This milestone is likely to take years.

Why won't the modernization deliver for the climate?

The result may well be that several member states continue to be bound for years to come by a treaty that EU investors—including many fossil fuel investors—use to sue other EU member states in violation of EU law. Addressing this dilemma will be a main challenge for the incoming European Commission.

In addition, once entered into force, the modernization will also have specific implications for non-EU states that are contracting parties to the ECT and who have not used the fossil fuel carveout mechanisms, as well as for any developing countries that could join the treaty in the future if the efforts to expand its membership are revived.