ClientEarth’s lawyers have written to the Vice President of the European Commission calling for a more ambitious reform of the Energy Charter Treaty (ECT). The ongoing modernisation process of this outdated investment treaty is a unique opportunity to promote the clean energy transition. But the changes proposed by the Commission fall short of making the ECT fit for purpose. We’re calling for more ambitious changes.
What is the Energy Charter Treaty?
The Energy Charter Treaty (ECT) is an international investment agreement, to which both the EU and its Member States are party (Italy left in 2016). It was designed by the EU in the 1990s in the post Cold War era and signed in 1994. The treaty covers the trade and transit of energy between states and protects foreign investments in the energy sector.
The ECT contains a controversial mechanism called the ‘Investor State Dispute Settlement’ (ISDS) mechanism. This mechanism allows foreign investors to challenge governments and claim huge compensation for changes in social or environmental policies and laws that impact their business – for example, if a government decides to phase-out coal.
ISDS cases can lead to large damages, in the hundreds of millions or billions of euros, the type of damages that would not be possible under national law. As a result, the mere threat of legal action through the ISDS can discourage or delay governments’ plans to shift to a low-carbon economy.
Time for reform
“This process should be used to transform the ECT into a positive force for the fight against climate change and the clean energy transition.”
In response to the growing legal and political concerns, the Energy Charter Secretariat proposed the modernisation of the ECT. After having obtained a mandate from the Council in May 2019, the European Commission proposed to reform the treaty in order to bring it in line with EU’s new investment standards, and with the objectives of the Paris Agreement.
ClientEarth’s Trade and Environment lawyer Amandine Van Den Berghe explains: “The reform of the Energy Charter Treaty is a unique opportunity to match the EU’s climate objectives with international investment policies. This process should be used to transform the ECT into a positive force for the fight against climate change and the clean energy transition.”
“The Energy Charter Treaty reform is not ambitious enough”
The Commission’s draft proposal, however, does not provide sufficient guarantees to protect governments against investors’ attempts to challenge climate and transition policies.
Amandine continues: “Right now, the Commission’s proposal to reform the ECT is clearly not ambitious enough. The cosmetic changes proposed by the EU will not amount to ‘modernisation’ and will fall far short of making the ECT fit for purpose. Without more significant changes, it will jeopardise the achievement of the EU’s and its member states’ climate action objectives.”
“If the Commission is serious about its plan of making the EU climate-neutral by 2050, the Commission must put the fight against climate change and energy transition at the heart its investment policy.”
We’re taking action
In a letter sent to Vice President of the European Commission Frans Timmermans, ClientEarth’s lawyers and the International Institute for Sustainable Development are calling for the reform to go further.
In a legal analysis sent along with the letter, our lawyers have highlighted the flaws of the proposal, which does not prevent ISDS claims over public interest measures and fails to ensure investment protection does not come at the expense of human rights and environmental obligations.
Our lawyers have also asked to allow states to differentiate between low-carbon and carbon-intensive investments. In doing so, states would be able to grant beneficial treatment to investors in renewable energies and shift investment away from fossil fuels.