Why is Britain quitting 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
explainer

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?

Britain joins several EU countries quitting the Energy Charter Treaty that let energy firms sue when government carbon-cutting plans affect profits

  • 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 - Britain announced this week that it would withdraw from the Energy Charter Treaty (ECT) over its failure to align with its net zero plans.

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.

Britain said the treaty was in urgent need of reform and the failure of signatory parties to modernise it does not support its transition to clean energy.

The European Commission backtracked on its proposal to agree to reforms and instead recommended all member states jointly quit the treaty in July, after dissatisfaction with the modernisation talks prompted several EU governments to initiate withdrawal unilaterally.

Eleven countries have now announced their intention to quit the treaty.

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.

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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.

Fossil fuel companies have been awarded at least $82.2 billion dollars by states in disputes brought under ISDS since 1977, a report from International Institute for Environment and Development (IIED) and the Columbia Center on Sustainable Investment (CCSI) found.

In three separate lawsuits brought under the ECT in November last year, 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 are countries withdrawing from the ECT?

Dissatisfaction with a modernisation process that was initiated in 2018 to make it compatible with the Paris Agreement to tackle climate change has prompted states to start quitting the treaty.

Governments have been 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.

Ireland, Denmark and Portugal announced their withdrawals in 2023, after Spain, the Netherlands, Poland, France, Germany, Luxembourg and Slovenia walked out in 2022.

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

Britain's withdrawal will take effect after one year.

The European Commission has proposed 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.

At the annual ECT conference in November, discussion on reforms was delayed for the third time in a row.

Can the ECT survive?

States that quit the treaty are bound by a sunset clause that allows countries to be sued for up to 20 years after withdrawal.  

But exiting countries could agree not to apply the clause between them, reducing the threat of post-exit legal action said Cornelia Maarfield, senior trade and investment policy coordinator at Climate Action Network Europe.  

Campaigners are hoping an EU withdrawal will prompt other states to follow and could see an end to the modernisation process. 

"However, the mechanism in the ECT which made it so deadly – the investor-state dispute settlement provisions – lives on in a number of other treaties, including the pacific trade deal," said Cleodie Rickard, trade campaign manager at Global Justice Now, campaign group.

At November's conference, signatories pressed ahead with plans to expand membership of the treaty regardless of the outcome of modernisation.

This article was updated on Feb. 23 2024, with Britain’s announcement of withdrawal from the treaty.

($1 = 0.8246 pounds)

(Reporting by Beatrice Tridimas; Editing by Jon Hemming)


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