Key Questions Remain as Governments Announce “Agreement in Principle” for Modernized Energy Charter Treaty

After a lengthy negotiation process, Contracting Parties at the June 24 meeting of the Energy Charter Conference reached an agreement in principle to modernize the Energy Charter Treaty (ECT)—an outdated investment treaty that protects fossil fuel investors at the expense of critical climate action.

The Energy Charter Secretariat’s brief communiqué provides a non-exhaustive summary of the outcome, though the details shared so far suggest that some of the treaty’s most worrisome aspects might not have been resolved. While many questions remain unanswered, the communiqué published last week indicates that the ECT, even in its revised form, is likely to continue standing in the way of efforts to expedite the phase-out of fossil fuels and safeguard our planet.

Flexible approach to fossil fuel investments leaves climate impact uncertain

Crucially, the ECT Contracting Parties aim to adopt a so-called “flexible approach” to fossil fuel investments, allowing individual members to exclude protection for such investments in their territories in line with their respective climate targets.

As indicated in its previous proposal, the European Union (EU)—now joined by the United Kingdom—intends to distinguish between existing and future fossil fuel investments, setting August 15, 2023, as the dividing line. Fossil fuel investments made before that date will continue to benefit from investment protection for 10 years after the modernized ECT enters into force. In contrast, fossil fuel investments made after that date would no longer be protected, albeit with significant exceptions. These exceptions are likely to include certain investments in fossil gas, power plant conversions, and gas pipelines, given earlier EU proposals.

It is currently unclear whether any of the remaining 24 Contracting Parties intend to adopt a similar approach at this stage. In addition, the stance taken by the EU and the United Kingdom UK would grant more than a decade of additional investment protection to oil, gas, and coal projects and therefore falls significantly short of the Paris Agreement’s climate objectives.

No reform of investor–state dispute settlement

The agreement in principle will continue to allow foreign investors to use the ECT’s much-criticized investor–-state dispute settlement (ISDS) mechanism to bring direct arbitration claims against host countries, circumvent national courts, and claim exceedingly high amounts of compensation. The additional inclusion of new energy materials and products, such as hydrogen, in the scope of the treaty further increases this litigation risk.

According to the communiqué, the agreed text still has provisions on fair and equitable treatment, indirect expropriation, and most-favoured nation treatment. These provisions, even if qualified, complicate states’ ability to regulate in the public interest, given the prospect of legal challenges under the treaty. While some of the treaty’s investment provisions seem to have been moved closer to the EU’s more recent approach taken in other investment negotiations, many questions remain open.

Recent arbitral decisions suggest that including more detailed investment provisions or exceptions in treaty texts will not necessarily safeguard states’ regulatory space. Also worrisome is that the ECT’s 20-year sunset clause remains intact, meaning that the treaty will continue to allow investors to bring claims for years even if a state decides to withdraw from the treaty in the future. Given that the sunset clause has been seen as a barrier to withdrawal for many of the ECT’s Contracting Parties, leaving it in a modernized ECT makes it difficult for governments to leave if they find the treaty does not serve their climate action goals.

Worrisome signals for the final modernized ECT

The reaching of an agreement in principle is one step in the process of reforming the treaty, and certain procedural steps still need to be taken to adopt a finalized treaty text. For the EU, this will first require a vote on the proposed agreement by the Council of the EU. The final version of the modernized ECT will then need to be adopted by a unanimous decision of all Contracting Parties present and voting at the Energy Charter Conference on November 22, 2022. In order to enter into force, the treaty must also be ratified by at least three quarters of all Contracting Parties, which could take months or years.

Until then, and except for widespread provisional application, which remains uncertain, the existing version of the ECT will remain in place, continuing to complicate efforts by governments to fulfill the ambitions and objectives of the Paris Agreement. Looking ahead, the discussion of a coordinated withdrawal of the EU and its member states is not off the table, as Spain, as well as the European and Dutch parliaments, have recently demanded that the European Commission take such a decision.

With the agreement in principle not yet public, it is too soon to say what a modernized ECT truly means for states’ ability to regulate in the public interest and take ambitious climate action. If, however, the provisions described in today’s communiqué do make it into the final treaty, Contracting Parties need to take a close look at the implications for pledges made at the Glasgow Climate Conference (COP 26) —and assess whether a coordinated withdrawal from the ECT, in addition to neutralizing the sunset clause, is a better option for fulfilling national and international climate goals.

Author

Lukas Schaugg is an international law advisor at IISD and a PhD-researcher in investment law at Osgoode Hall Law School, Toronto, Canada.