Energy Charter Treaty Reform: Why withdrawal is an option

The Energy Charter Treaty (ECT) faces criticism for its outdated investment provisions and the threats it poses to the energy transition.

ISDS claims brought pursuant to the ECT by fossil fuel investors demonstrate that these threats are imminent and real. Moreover, they are likely to increase as governments take more ambitious climate action. Most recently, in 2021, the German companies RWE and Uniper each initiated arbitration proceedings against The Netherlands, challenging the Dutch government’s decision to phase out fossil fuels by 2030.

Taken together, the two investors are claiming damages of more than EUR 3.5 billion. Meanwhile, the ECT’s compatibility with EU law is uncertain following recent rulings of the CJEU, and Belgium has asked the Court to clarify whether the draft modernized ECT is compatible with the European Treaties. The request is still pending.

In parallel, the EU and its member states have since 2019 been engaged in the wider multilateral process of “modernizing” the ECT. Recognizing the urgent need for reform, the EU initially intended to align the treaty with the EU approach to international investment law and the EU’s climate objectives.

However, it is increasingly clear that these objectives will be difficult to achieve, since any amendment of the treaty’s text would require unanimity by all 56 contracting states.

To date, many non-EU contracting states remain reluctant to make significant changes, and no compromise has been reached. Given this current state of play, we examine what withdrawal could mean for the EU and its member states, along with its impact on the energy transition in general.