Concluded in the mid-1990’s among 50+ contracting parties including the EU itself, the ECT intended to integrate the energy sector in the former Soviet and other Eastern European countries into a broader European, even global, energy market. This was to be achieved by a set of rules regulating relevant trade relations between the contracting parties, beyond what was/is available under the multilateral trade agreements now part of law of the World Trade Organization, and rules on the promotion and protection of foreign investments in the energy sector. Especially the latter has proven to be highly problematic, certainly for the EU and its member states.

Energy Charter Treaty

As a typical old-generation international investment treaty, the ECT lacks safeguards for the regulatory autonomy of its parties, for their right to regulate in pursuance of legitimate policy objectives such as the environmental protection without a fear of massive legal claims by foreign investors claiming compensation for lost profits. Just like some 3000 other international investment treaties, the ECT also lacks the level of detail and precision in its substantive rules that would guarantee their consistent interpretation and application in the ad hoc dispute settlement system available under these treaties and known as investor-state dispute settlement (ISDS). ISDS itself has been severely criticized for its pro-investor bias, the fact that foreign investors are the only persons that can bring claims, for the lack of transparency, accountability, independence and impartiality of the ad hoc arbitrators (often selected from the same pool as legal counsels representing sometimes the very same investors in other cases), as well as for very high costs of the proceedings and compensation significantly outweighing the amounts actually invested. 

An additional, EU-specific, problem with the ECT (and all other investment treaties) relates to the so-called intra-EU situation, which exists when an investor from one EU member state relies on a treaty concluded between its home state and another EU member state hosting its investment. Some 200 intra-EU bilateral investment treaties (BITs) were concluded in the 1990’s and early 2000’s between the EU-15 member states and the Central and Eastern European (CEE) states before their accession to the EU. For many years, the Commission argued that ISDS contained in these treaties was incompatible with EU law upon the CEE’s accession to the EU. The Court of Justice eventually confirmed this in the famous Achmea decision of 2018 and most intra-EU BITs were subsequently terminated. The Court held the same view in respect of the ECT. However, given its multilateral nature, and the refusal of most ISDS tribunals and some domestic courts outside the EU to give effect to the Court’s decisions, the situation was – and still is – legally and politically utmost problematic. Addressing it was one of the two key triggers for the EU’s proposal to modernize the ECT, launched in 2017. The negotiations result reached in June 2022 includes a provision explicitly excluding intra-EU ISDS under the ECT, resolving the matter under this treaty in the future. 

ECT and climate change

Unfortunately, the greatest concern of the EU relating to the need to align the ECT with the Paris Agreement, sustainable development and the fight against climate change was not addressed in the negotiating result to the extent sought by the EU and its member states. This is because the modernized ECT would continue to protect investments in fossil fuel projects, frustrating – or at least raising the costs of – much needed decarbonization. Although a flexibility mechanism was agreed upon, only the EU and the UK have made use of it by opting out from the ECT application to new fossil fuels investments, with the existing fossil fuel projects protected for another 10 years (with exceptions). 

The ECT is the most litigated investment treaty in the world. Although more ECT disputes were brought by investors in renewable energy projects (for damages caused by or scaling down of subsidies), a significant proportion of ECT disputes were initiated by fossil fuel investors. These investors are particularly litigious. When looking at all investment treaties, fossil fuel investors have brought most ISDS, winning 75% of cases and receiving on average 5 times higher compensation than other claimants in ISDS. 

For some time, it has been argued that the continued application of the ECT to fossil fuel investments is likely to hamper the adoption of measures needed for achieving climate neutrality by 2050, aspired to by the EU Green Deal. This is so despite some changes of the substantive obligations contained in the modernized ECT. It is therefore not very surprising that some EU member states have decided to give up on the treaty altogether, now followed by the EU itself.

Withdrawal

A withdrawal from the ECT is not an easy decision to take because the sunset clause contained therein will legally bind the withdrawing party to the treaty for another 20 years. Nonetheless, relatively soon after the conclusion of the negotiations on the ECT modernization, and in line with the call from the European Parliament, several EU member states announced their intention to withdraw from the ECT instead of agreeing to the modernized text. Some member states (France, Germany, Poland) have followed up in the meantime and notified the ECT of their withdrawal, while others (like the Netherlands) have decided to await a coordinated action at the EU. And that is what is finally happening. With the Council decisions announced on 30 May 2024, the EU will leave the ECT while not preventing member states who wish to remain the party to the ECT, perhaps for the time being, to either approve or not prevent adoption of the modernized ECT text at the next conference of the parties. This conference, delayed in 2022 because of the EU’s difficulties, is likely to be scheduled before the end of 2024. Awaiting the legal effect of its withdrawal, the EU itself will not exercise its vote at this conference.

Despite the difficulty with the sunset clause, binding the EU to the ECT for another 20 years, the withdrawal has an important symbolic value (even though a withdrawal after the ECT modernization might have been a better option). It certainly is a clear message to fossil fuel investors. The next step for the EU and its member states is to follow suit and eliminate the protection of fossil fuels in other investment treaties to which they are party, both new and existing ones. As discussed in a previous blog post, this is not yet the case.