VCLT’s Article 62: A valid basis for withdrawing from the ECT
Introduction
In August 2022, rain-induced flooding in Pakistan, which scientists linked to climate change, affected 33 million people and took the lives of 1,500. In July 2022, scorching heat waves across Europe killed 2,000 people in Spain and Portugal.
While states attempt to tackle climate change, the biggest challenge comes from the limited time during which they must meet their obligations under the 2016 Paris Agreement. According to the Intergovernmental Panel on Climate Change (IPCC), the peaking of greenhouse gas emissions should occur by 2025 to limit global warming to 1.5°C. As of 2022, this leaves us with only 3 years.
In this race against time, the constraints imposed on states by the 1994 ECT, its 20-year sunset clause, and its lack of climate action provisions are a significant concern. Tackling climate change will require an estimated USD 275 trillion in capital spending until 2050, yet the ECT continues to divert government funds toward compensating fossil fuel investors.
A process to modernize the ECT was started in 2019; however, the proposed changes have been criticized for their inability to address today’s challenges. In the face of these failed efforts, states have begun announcing their intention to withdraw from the ECT. At the time of writing, this includes France, Germany, Luxembourg, Poland, Slovenia, Spain, and the Netherlands.
On 3 November 2022, in response to growing withdrawal announcements, the ECT Secretariat posted a news update on their website, stating that a Contracting Party to the Energy Charter Treaty (ECT) wishing to invoke Article 62 of the VCLT with respect to the ECT, including the ‘sunset clause’ of Article 47, may need to show that the changed circumstances were essential at the time of the conclusion of the ECT, their change was unforeseen, and that such change radically transforms the extent of obligations under the ECT.
This article is a response to this news update.
Article 62, VCLT: A brief overview
The ILC incorporated Article 62 in the VCLT because it felt it was necessary to allow parties to withdraw from the treaty due to changing circumstances[1] to prevent imposing an undue burden due to its continued operation.[2]
In view of the above-stated purpose, this article shows that the chilling effect of the ECT on the ability of states to enact climate action measures amounts to a fundamental change of circumstances, and state parties to the ECT should be allowed to invoke Article 62 to withdraw from the ECT and neutralize the sunset clause contained in Article 47 of the ECT.
Unforeseeability
A state would be precluded from invoking this article if the change of circumstances was foreseeable at the time of the conclusion of the treaty.[3]
By the time the negotiations for the ECT started, climate change had become immediately observable. In fact, 1988 was recorded as the hottest year to date, and in the same year, the IPCC was set up. In 1990, the IPCC’s first report correctly predicted an increase in global mean temperature of about 1°C above the present value by 2025.[4] Then, in 1994, the United Nations Framework Convention on Climate Change (UNFCCC) entered into force and the ECT was opened for signature. Consequently, it would be difficult to prove that climate change was unforeseeable at the time the negotiations for ECT started. Instead, this article argues that it was the impact of the ECT on the ability of states to enact climate action measures that was unforeseeable.
I. ECT’s Impact on the Ability of States to Regulate Was Unforeseen by Its Negotiators.
At the time of its conclusion, the ECT was understood as an instrument to protect investment and promote responsible energy governance. The negotiators of the ECT could not have reasonably foreseen that the ECT would be abused by investors to thwart climate action measures. On the contrary, they actually believed the treaty would prove useful in combatting climate change.
The preamble of the ECT does not only recall the UNFCCC, but also recognizes the “increasingly urgent need for measures to protect the environment.”[5] However, the current reality is far from the negotiators’ expectations. Today, the ECT has been utilized in 17% of all claims relating to fossil fuels, making it the IIA that has generated the highest number of investor–state arbitrations in the fossil fuel sector. While the mere threat of an ISDS claim is enough to cause states to backtrack on their decisions. For instance, a Canadian investor was successfully able to stop France from enacting a law that would have ended fossil fuel extraction, in France and all its territories, by 2040. This led the IPCC, in 2022, to declare the ECT as an obstacle to fossil fuel phase-out.
The threat of ISDS to undermine a state’s regulatory powers has been dubbed “regulatory chill.” UNCITRAL’s Working Group III on ISDS reform has identified it as a concern warranting further consideration, in particular, how the mere threat of ISDS has “discouraged States from undertaking measures aimed to regulate economic activities and to protect economic, social and environmental rights.”[6]
According to UNCTAD’s database, 1,186 out of a total of 1,190 cases were initiated after the ECT was signed in 1994, and the first case under the ECT was initiated in 2001.[7] Consequently, at the time of ECT’s conclusion, the negotiators could not have foreseen the chilling effects of the ECT. Had the negotiators foreseen this possibility, the ECT of today would have been drafted much differently, as evidenced by today’s climate-focused modernization process.
II. Unforseeability in Gabčíkovo-Nagymaros
On the issue of unforeseeability, the ECT’s news update quoted the ICJ: “The Court does not consider that new developments in the state of environmental knowledge and of environmental law can be said to have been completely unforeseen.”[8] This quote needs to be understood in context. The ICJ rejected reliance on evolution in environmental law because the treaty in question had included provisions that allowed parties to incorporate environmental norms through negotiation.[9]
When a treaty includes provisions that allow accommodation of changing circumstances, parties cannot resort to Article 62; however, this limitation is lifted when negotiations do not produce an agreement within a reasonable period of time.[10]
In the present scenario, while modernization efforts are being pursued to make the ECT climate friendly, their success is highly unlikely. Not only are the reform efforts insufficient to tackle climate change, but the recent resolution by the European Parliament urging EU states for a coordinated withdrawal from the “climate-wrecking agreement” has made its success highly unlikely. According to the former Secretary-General of the ECT, “If the modernisation process fails, I don’t see a future for the Treaty.”[11] As a result, states may be stuck with an outdated version of the treaty, with no option but to withdraw.
The Existing Circumstances Were “Essential” for the Decision to Enter the ECT.
According to Article 62(1)(a), the circumstances existing at the time must have constituted an essential basis for consent. This implies that had the parties foreseen the change of circumstances, they would have concluded the treaty on different terms.[12]
Presently, the ECT includes a reference to the UNFCCC in its preamble; however, the reference does not create any binding legal obligation as preambles are often criticized as mere hortatory statements.[13] Though preambles can play an important role in the interpretation of provisions, had the reference to the UNFCCC actually influenced tribunals to interpret the ECT’s provisions in a climate-friendly manner, the reform efforts would not have been necessary. And, while Article 19 refers to environmental aspects, it does nothing to prevent the threat of ISDS. Instead, insertion of phrases such as “economically efficient manner” and “cost-effective” in Article 19 only increases the scrutiny of climate action measures by states.
The current structure of the ECT and its inherent potential for abuse by the fossil fuel industry is evidence that its negotiators did not foresee this treaty being abused as such. Had they foreseen this, the ECT would not have extended diverse protections to the fossil fuel industry. Standards of investment protection would have provided a carve-out for fossil fuels and a right to regulate clause would have been incorporated. These changes, which are too little too late, have only recently been added to the reform agenda.
The Change of Circumstances “Radically” and Directly Transforms the Obligations Under the ECT, Making It Unduly Burdensome
Article 62(1)(b) requires states to prove that the fundamental change of circumstances has radically transformed the extent of obligations still to be performed. Continued operation of the ECT acts as an obstacle to combatting climate change, as the mere threat of ISDS can prevent states from enacting climate action measures. This is due to the asymmetric nature of ISDS, the cost of proceedings, and the high amount of damages awarded by tribunals. This may be a bigger problem for states with limited economic resources, as the high compensation owed to investors in the fossil fuel industry will prevent them from taking action. This is why states cannot be reasonably expected to continue protecting the fossil fuel industry due to the obligations assumed under an outdated treaty.
In 2021, in response to a decision to phase out fossil fuels, the Netherlands was slapped with claims by Uniper[14] and RWE.[15] Both investors relied on the ECT as the basis of their claims. The claimed amount by the two investors surpassed EUR 2 billion. Similarly, when Italy introduced a moratorium on offshore oil drilling, it found itself facing a claim by a U.K.-based investor, Rockhopper, which has since been awarded EUR 241 million.[16] Whereas back in 2009, Germany was faced by a claim from Swedish investor Vattenfall that claimed EUR 1.4 billion for delays in granting permits for a coal-fired power plant.[17] The threat of such claims drives up costs incurred in parallel settlements. To make matters worse, as more states enact policies to phase out fossil fuels, such claims are only expected to increase, costing states billions since the “ECT applies to 19% of all treaty-protected oil and gas projects.”[18]
The undue burden imposed by the continued operation of the ECT is not just economic. The ECT places an obligation on states to continue to protect the fossil fuel industry, and this would result in the further perpetuation of climate disasters, threatening the very existence of humanity. According to recent estimates, investors protected by the ECT will release 129 Gt of carbon by 2050, amounting to 22% of IPCC’s budget to keep global warming below 1.5°C. In the words of the ICJ, this would “imperil the existence or vital development of one of the parties.”[19]
Possible Outcomes
States invoking Article 62 can either terminate, withdraw from, or suspend the treaty. There are no separate conditions for any of these outcomes, and it is left to the discretion of the party invoking the principle. In the context of climate change, suspending the ECT may be beneficial, as this will give state parties the time to renegotiate a climate-friendly version. However, reform efforts may be time-consuming and ineffectual, and, given the likely failure of the modernization efforts, withdrawal and termination may be the only options.
Third-Party Arbiter
In Fisheries Jurisdiction, the ICJ introduced the concept of a third-party arbiter in the application of Article 62.[20] In this instance, the third-party arbiter could be the ICJ or an ad hoc tribunal formed under Article 27 of the ECT. It should be noted, however, that withdrawal can be evaluated individually for each state,[21] and the burden of proof will not be on the state party relying on Article 62 but on the state party alleging the change as foreseen.[22]
Author
Raza Ali recently graduated from the Geneva Graduate Institute with an LL.M in international law. He is currently a legal intern at UNCITRAL and previously worked at the International Disputes Unit at the Office of the Attorney-General for Pakistan. This article is based on his LL.M paper, “Climate Change: A Fundamental Change of Circumstance,” which addresses the application of Article 62 of the VCLT broadly to IIAs.
Notes
[1] International Law Commission. (1966). Draft articles on the Law of Treaties with commentaries 1966. https://legal.un.org/ilc/texts/instruments/english/commentaries/1_1_1966.pdf
[2] Ibid.
[3] Dörr, O., & Schmalenbach, K. (Eds.). (2017). Vienna Convention on the Law of Treaties: A commentary. Springer Berlin Heidelberg. https://link.springer.com/content/pdf/bfm:978-3-662-55160-8/1.pdf
[4] IPCC Working Group I. (1990). Policymaker Summary. XI. https://www.ipcc.ch/site/assets/uploads/2018/05/ipcc_90_92_assessments_far_wg_I_spm.pdf
[5] Preamble, ECT 1994.
[6] United Nations Commission on International Trade Law. (2019). Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-seventh session (New York, 1–5 April 2019). https://undocs.org/en/A/CN.9/970
[7] AES (I) v Hungary (ICSID Case No. ARB/01/4).
[8] Gabčikovo-Nagymaros Project (Hungary v Slovakia) [1997] ICJ ICJ GL No 92, ICJ Reports 7 61.
[9] Dörr & Schmalenbach, supra note 3, p. 1159.
[10] Ibid., p. 1162.
[11] Beckman, K. (2020). Interview: A new Energy Charter Treaty as a complement to the Paris Agreement. Borderlex. https://www.energycharter.org/fileadmin/DocumentsMedia/Other_Publications/A_new_Energy_Charter_Treaty_as_a_complement_to_the_Paris_Agreement.pdf
[12] Villiger, M. E. (2009). Commentary on the 1969 Vienna Convention on the Law of Treaties. Martinus Nijhoff Publishers, p. 774; Dörr & Schmalenbach, supra note 3, p. 1163.
[13] Firger, D. M., & Gerrard, M. (2010). Harmonizing climate change policy and international investment law: Threats, challenges and opportunities. Yearbook on International Investment Law & Policy, 50. https://scholarship.law.columbia.edu/faculty_scholarship/1671
[14] Uniper v Netherlands (ICSID Case No. ARB/21/22).
[15] RWE v. Netherlands (ICSID Case No. ARB/21/4).
[16] Rockhopper v. Italy (ICSID Case No. ARB/17/14).
[17] Vattenfall (I) v Germany (ICSID Case No. ARB/09/6)
[18] Tienhaara, K., Thrasher, R., Simmons, B. A., & Gallagher, K. P. (2022). Investor–state disputes threaten the global green energy transition. Science, 376(3594).
[19] Supra, note 9.
[20] Fisheries Jusrisdiction (United Kingdom v Iceland), Decision on Jurisdiction [1973] ICJ Reports 1973 3 (ICJ) [45].
[21] Dörr & Schmalenbach, supra note 3, p. 1159.
[22] Ibid., p. 1162.