Why climate-conscious EU could exit the Energy Charter Treaty

• EU governments have already started to quit individually
• Treaty could cost countries billions in investment lawsuits
• Reform plans fail to align treaty with EU climate policies

LONDON - The European Commission has recommended to European Union (EU) states that the bloc should coordinate a withdrawal from a controversial international energy treaty over climate concerns.

Since the late 1990s, the Energy Charter Treaty (ECT) has allowed firms and investors to sue governments whose plans to cut emissions from fossil fuels could hurt corporate profits.

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.

Last November, the treaty’s more than 50 signatory countries had been due to vote on adopting reforms to modernise the treaty in line with evolving policy agendas to tackle global warming.

But the EU was forced to request a postponement, after dissatisfaction with the proposed updates prompted seven of its member states to back out of the treaty.

At a meeting this month, the Commission proposed to member states that the whole bloc exit the treaty, prompting calls for Britain - no longer an EU country - to follow.

The Commission said an unmodernised treaty is incompatible with the EU’s climate policies and, given there is no majority to adopt the revised terms, the bloc should withdraw.

Soon after, more than 100 academics signed an open letter urging the UK government to also initiate a withdrawal.

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 planet-heating emissions, such as phasing down oil and 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.

British oil and gas company Rockhopper, for example, won more than £210 million ($253.5 million) in 2022 in an ECT lawsuit over Italy’s ban on offshore drilling which scuppered the firm’s plan for a new oilfield.

The award was far higher than the £33 million the company was said to have invested in the drilling project.

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 is the EU proposing to quit the ECT?

The European Commission has recommended a wholesale EU exit from the treaty, saying that, as it is, the charter is not in line with the EU’s investment protection or climate policies.

In June 2022, ECT signatories reached agreement to modernise the treaty, a process that was initiated in 2018 to make it compatible with the Paris Agreement to tackle climate change.

But governments were unable to vote on adopting the reforms, after the EU failed to get a majority of its member states to agree to the proposed amendments.

Those opposed - including France, Germany, the Netherlands and Spain - argued the proposed changes are not enough to align the ECT with climate policies, as they would allow fossil-fuel investments to be protected for at least another decade.

Dissatisfaction with the modernisation process has prompted states to start leaving individually.

In November, Germany, Luxembourg and Slovenia announced plans to withdraw, after Spain, the Netherlands, Poland and France walked out in October.

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

The Commission said it was not feasible to get a majority to vote on adopting the new terms and that a coordinated withdrawal was “unavoidable”, according to a document seen by Reuters.

"This is not yet the final EU decision, but this is a big step towards recognising that the problems of the ECT are intractable and the attempts to fix it have failed," said Jean Blaylock, a trade campaigner at Global Justice Now.

The Commission’s working group on energy is expected to meet again in March, after member states decide on their positions.

At least 15 EU countries would have to back withdrawal for a bloc-wide exit to go ahead - a move the European Parliament has already backed in a resolution.

Can the ECT survive?

If the EU does quit the treaty, some non-EU signatories could follow.

"(Withdrawal) drastically increases the pressure on governments outside of the EU as to why they are not taking the same action," said Blaylock, adding that Britain could agree to go along with an EU withdrawal.

If the EU leaves, it would also likely put an end to the ECT modernisation process, which was being driven by the Commission, she said.

The ECT's remaining signatories could seek new members - largely from the Global South, which Blaylock warned would be most vulnerable to investment lawsuits.

Most non-EU countries are waiting on the EU’s final position before discussing their own withdrawal, according to Cornelia Maarfield, senior trade and investment policy coordinator at Climate Action Network Europe.

“If there is a massive walkout, this would trigger a discussion on terminating the treaty as a whole,” she added.

Experts say a collapse of the ECT could even spark a wider movement to abandon other ISDS treaties.

If the ECT survives, however, states that leave could agree between them not to apply a sunset clause that allows countries to be sued for up to 20 years after withdrawal, reducing the threat of post-exit legal action, said Maarfield.

This article was updated on Feb. 10 2023, with the European Commission's recommendation to member states to withdraw as a bloc from the treaty.

($1 = 0.8246 pounds)

(Reporting by Beatrice Tridimas; Editing by Megan Rowling)