EU must withdraw from Energy Charter Treaty

ClientEarth, along with over 400 civil society organisations, is calling on the EU and European member states to exit the climate-damaging Energy Charter Treaty (ECT).

The ECT presents an obstacle to EU climate action, as it allows companies to claim substantial compensation from governments over environmental policies that they see as damaging to their business – like the phase-out of coal.

At present, the treaty creates a chilling effect for ambitious government action to reach net zero targets. And although policy-makers have been trying to reform the treaty for more than a year, there is a lack of real progress.

This is why civil society and several countries are calling for withdrawal from the treaty immediately, to ensure the EU can fulfil its European Green Deal ambitions, without companies litigating against necessary policy decisions.

Here, we explain the key problems with the ECT, the stalled reforms, and why withdrawal has become the only viable solution.

What’s wrong with the ECT?

The ECT is an outdated investment treaty from the 1990s, which covers the trade and transit of energy between states and protects foreign investments in the energy sector.

It contains a controversial mechanism called the ‘Investor State Dispute Settlement’ (ISDS) mechanism. This allows foreign investors to challenge governments for changes in social or environmental laws that impact their business.

We have recently seen this mechanism used by energy giant RWE. In February, the company launched legal action against the Netherlands to claim compensation after the government agreed to a coal power phase-out by 2030.

Uniper, another energy company, is also using the ISDS mechanism against the Netherlands to seek compensation for its stranded assets. Other companies may very well follow this trend.

ClientEarth lawyer Amandine Van Den Berghe said:

“Governments should not be coming under fire for setting climate targets – they should be encouraged to do so. If companies are able to claim significant compensation for fossil-fuel phase outs, this completely undermines the energy transition.”

What happened to calls for reform?

When the ECT modernisation process first began, ClientEarth advocated for robust reforms that would protect governments against investors’ attempts to challenge climate and transition policies.

This included a letter to Vice President of the Commission Frans Timmermans, and a legal analysis showing that the EU’s proposed reforms fail to ensure investment protection will not supersede human rights and environmental obligations. ClientEarth lawyers offered recommendations for how reforms could be improved.

Unfortunately, the EU’s proposed reforms fall far short of what would be needed.

Besides the lack of ambition in the proposals, there has been stalemate in the five previous round of modernisation talks, with many states reluctant to make significant changes.

The sixth round of talks, taking place this week, will likely resolve nothing, and meaningful reform is unlikely as it would require unanimity by Contracting Parties present and voting at the meeting of the Charter Conferece.

Why is withdrawal the best solution?

Given the state of play, ClientEarth is now calling for the withdrawal of the ECT by the EU and its member states.

Our lawyers have examined the legal rules that apply for withdrawal. Since there is little chance that bold reforms will come out of the modernisation process, withdrawal can help ensure swift climate action is not rolled back.

The call to exit the treaty is also being echoed by EU member states including France and Spain. Just last week, Poland followed suit, citing legal ramifications over its net zero targets with continued investment in fossil fuels.

One concern about the withdrawal is that it triggers what is called the ‘sunset clause’ – which means foreign investors can continue to use the ISDS to challenge climate policies. To substantially reduce this risk, the EU and its member states must agree to remove the legal effects of this clause for themselves.

This would put an immediate end to fossil fuel protection among all states that withdraw. Given that 60% of cases based on the ECT are intra-EU, a coordinated EU withdrawal would reduce the risk of future lawsuits brought against climate progress.

Ultimately, the ECT is an outdated agreement that has provided cover for fossil fuel companies as they have extracted natural resources around the world for decades. If Europe wants to show leadership in ambitious new laws and regulation to tackle the climate emergency – this tool cannot be left standing.

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