Why the energy charter treaty is a threat to the global transition effort

In April, a report by the Unit­ed Nations’ Inter­gov­ern­men­tal Pan­el on Cli­mate Change (IPCC) warned that inter­na­tion­al trade agree­ments could obstruct gov­ern­ment-led decar­bon­i­sa­tion projects. 

It cit­ed the ener­gy char­ter treaty (ECT) – a legal­ly bind­ing pact pro­tect­ing invest­ments in activ­i­ties such as oil and gas extrac­tion, coal min­ing and petro­le­um refin­ing – as the most egre­gious case, large­ly because sev­er­al claims brought under the ECT had been “set­tled in favour of for­eign investors” at the expense of “much-need­ed cli­mate action”. 

The 1994 treaty, which took effect in 1998, has 53 sig­na­to­ries, includ­ing the UK and the EU. Its orig­i­nal pur­pose was to pro­tect west­ern firms that were invest­ing in new­ly inde­pen­dent for­mer Sovi­et states, but the ECT’s reach has broad­ened to include coun­tries such as Cyprus, Jor­dan and Yemen. 

“Its main goal was to pro­mote ener­gy secu­ri­ty where investors were unsure about going into new places, because there was a chance of hav­ing their assets expro­pri­at­ed or nation­alised,” says Rachel Thrash­er, a researcher at the Boston Uni­ver­si­ty Glob­al Devel­op­ment Pol­i­cy Cen­ter.

Aside from its “neo-colo­nial his­tor­i­cal con­text”, as Audrey Chan­g­oe, trade cam­paign­er at Friends of the Earth Europe, puts it, the biggest prob­lem with the treaty is a mech­a­nism called the investor-state dis­pute set­tle­ment (ISDS) sys­tem. This allows ener­gy firms to sue for­eign gov­ern­ments pri­vate­ly in courts of arbi­tra­tion. 

“It’s done behind closed doors,” she says. “Doc­u­ments aren’t pub­licly acces­si­ble and many of the arbi­tra­tors are cor­po­rate lawyers, even though a lot of tax­pay­ers’ mon­ey is at stake. This is a huge prob­lem for trans­paren­cy and democ­ra­cy.”

Cli­mate was nei­ther high on the glob­al polit­i­cal agen­da nor espe­cial­ly rel­e­vant to the ECT in the mid-1990s, but that has changed in recent years. When the Sloven­ian gov­ern­ment required British ener­gy firm Ascent Resources to con­duct an envi­ron­men­tal impact assess­ment to obtain a frack­ing licence, for instance, the com­pa­ny refused and brought a €120m (£103m) com­pen­sa­tion claim under the ISDS in 2020. Ear­ly this year, Slove­nia appeared ready to back down to allow small-scale frack­ing, though instead insti­gat­ed a full ban on the prac­tice in May. Ascent Resources imme­di­ate­ly filed a Notice of Arbi­tra­tion to Slove­nia, claim­ing mil­lions of tax­pay­ers’ mon­ey in dam­ages under the ECT, to pres­sure Slove­nia to reverse its deci­sion. A state’s weak­en­ing of envi­ron­men­tal law in fear of hav­ing to pay out big sums is an exam­ple of what’s become known as ‘reg­u­la­to­ry chill’.

Claims brought under the ISDS can go into bil­lions, which is mon­ey that could be used for the green ener­gy tran­si­tion. After the Dutch gov­ern­ment revealed its plans to close all coal-fired pow­er plants in the Nether­lands by 2030. Ger­man ener­gy firms RWE and Uniper issued law­suits in 2020 for €1.4bn and €1bn respec­tive­ly to com­pen­sate them for their impend­ing loss of busi­ness there.

Chan­g­oe notes that gov­ern­ments are “phas­ing out fos­sil fuels because of pres­sure from civ­il soci­ety. Dutch cit­i­zens had actu­al­ly sued their own gov­ern­ment in 2015 for fail­ing to pro­tect them from the cli­mate cri­sis. This is a demo­c­ra­t­ic process that big fos­sil-fuel com­pa­nies are seek­ing to under­mine.”

The British government’s expo­sure to ECT lit­i­ga­tion risk is also sig­nif­i­cant. Accord­ing to research by Thrash­er and her col­leagues at Boston as part of work pub­lished in Sci­ence, if West­min­ster were to can­cel all projects that don’t fit the Inter­na­tion­al Ener­gy Agency’s path­way to net zero, it would ren­der the UK liable for poten­tial ECT com­pen­sa­tion claims totalling £9.4bn.

The mere threat of such lit­i­ga­tion can often lead to reg­u­la­to­ry chill. In 2017, for instance, Cana­di­an firm Ver­mil­ion Ener­gy indi­cat­ed that it would sue the French gov­ern­ment if it went through with its pro­pos­als to end oil and gas extrac­tion by 2040. Sub­se­quent­ly, France’s envi­ron­ment min­is­ter, Nico­las Hulot, watered down his plans con­sid­er­ably. He resigned in frus­tra­tion the fol­low­ing year, com­plain­ing that cor­po­rate inter­ests had too much pow­er over envi­ron­men­tal pol­i­cy-mak­ing.

Thrash­er notes that some law firms are even advis­ing clients to restruc­ture their busi­ness­es in such a way that enti­tles them to use the ISDS sys­tem. This prac­tice can’t real­is­ti­cal­ly be viewed as in the spir­it of the treaty and it “feels under­hand­ed”, she says.

The prob­lem of ISDS lia­bil­i­ty is com­pound­ed by the pres­ence of a so-called sun­set clause, which allows firms to con­tin­ue fil­ing claims against any gov­ern­ment that leaves the treaty for up to two decades there­after. This means that a coun­try can­not expect to walk away unscathed. For instance, Italy dropped the ECT in 2016 and banned gas drilling along its coast­line, yet the coun­try was still sued by UK firm Rock­hop­per Explo­ration a year lat­er. 

The Euro­pean Com­mis­sion is work­ing to mod­ernise the ECT and align it with the UN’s Paris accord on cli­mate change, but Chan­g­oe doesn’t hold out much hope of a sat­is­fac­to­ry solu­tion. Any reforms must be approved unan­i­mous­ly – and some mem­ber states still want to pro­tect the fos­sil-fuel indus­try. Bear­ing in mind that the sun­set clause could be neu­tralised if coun­tries decide to drop the treaty en masse, she believes that the best solu­tion could be for gov­ern­ments to with­draw from it at the same time. 

Chan­g­oe is con­cerned that the ECT sec­re­tari­at is seek­ing new mem­bers and try­ing to bring oil-pro­duc­ing coun­tries from the glob­al south – includ­ing Bangladesh, Colom­bia and Nige­ria – into the fold. That out­come, she pre­dicts, would “lock devel­op­ing coun­tries into this fos­sil-fuel spi­ral again”.

Thrash­er points out that the poor­est sig­na­to­ries don’t often get sued, as it’s not usu­al­ly worth the effort. “It’s the mid­dle-income coun­tries that get sued more, accord­ing to the data on ISDS dis­putes,” she says. “They lose about half of the time, while high­er-income coun­tries lose about a quar­ter of the time.”

When it comes to reform­ing the treaty, Thrash­er says that leg­is­la­tors could ensure that envi­ron­men­tal con­cerns take prece­dence over ECT claims or even remove the ISDS, which she describes as “a depar­ture from what’s usu­al­ly allowed in inter­na­tion­al law”.

Ulti­mate­ly, oth­er forces may play a part in deter­ring com­pa­nies from suing coun­tries that are try­ing to decar­bonise. Giv­en the explo­sion of inter­est in ESG prin­ci­ples among the invest­ment com­mu­ni­ty and the wider world, might the risk of bad pub­lic­i­ty be enough to make the more far-sight­ed firms think twice? 

“If pub­lic opin­ion forces them to behave bet­ter and has a chill­ing effect on their bring­ing these kinds of cas­es”, Thrash­er says, “that would be a favourable out­come.”