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

Activists from Extinction Rebellion occupy an oil tanker during a protest calling for an end to fossil fuels, in central London, Britain, April 16, 2022. REUTERS/Henry Nicholls

Activists from Extinction Rebellion occupy an oil tanker during a protest calling for an end to fossil fuels, in central London, Britain, April 16, 2022. REUTERS/Henry Nicholls

What’s the context?

European Union is to exit a treaty that lets fossil fuel firms sue when climate policies hit profits

  • EU Council adopt decision to withdraw from treaty

  • Global accord lets oil firms sue over green policies

  • European countries already quitting pact individually

LONDON - European Union countries have unanimously agreed to leave the Energy Charter Treaty, an international agreement protecting energy investments, over concerns it undermines efforts to fight climate change.

The 1998 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 burning fossil fuels.

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

EU countries formally adopted a decision on May 30 to withdraw from the Treaty, although it will allow member states to remain part of the ECT, if they choose.

Here are some key features of the ECT:

What is the Energy Charter Treaty, and why was it created?

The ECT is a legally binding pact with some 50 signatories, mainly countries in Europe, Central Asia and the Middle East, plus 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.

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The cost of the ECT

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

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, where it is common for the private sector to be awarded large payouts.

Fossil fuel companies have been awarded at least $82.2 billion by states in disputes brought under investor-state dispute settlement since 1977, a report from International Institute for Environment and Development and the Columbia Center on Sustainable Investment 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 $340 billion.

Why withdraw from the ECT?

The European Commission, the EU's executive arm, last year proposed the whole bloc withdraw from the ECT, 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 proposals 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.

Twelve European countries have individually walked away from the treaty, mostly over climate concerns.

Ireland, Denmark and Portugal announced their withdrawals in 2023, after Spain, the Netherlands, Poland, France, Germany, Luxembourg and Slovenia walked out in 2022.
Britain announced in February it would quit the treaty.

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

What happens next?

The EU's decision to withdraw from the ECT will come into effect in one year. 

Member states that choose to remain part of the ECT will be able to support the modernisation proposals at the Energy Charter Conference, expected before the end of 2024. 

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.

This article was updated on May 30, 2024, after the European Council adopted the decision to withdraw from the treaty.

($1 = 0.8246 pounds)

(Reporting by Beatrice Tridimas; Editing by Helen Popper)

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