How the little-known Energy Charter Treaty is holding environmental policy hostage

Is it possible to take urgently needed action on climate change while simultaneously protecting the fossil fuel industry, the very cause of climate imbalance? Today, the 53 signatory countries of the Energy Charter Treaty (ECT), including the European Union, which has made its Green Deal (aimed at making Europe carbon neutral by 2050) a guiding policy principle for the coming years, allow energy companies to sue countries for passing laws that run counter to their economic interests.

While negotiations for modernising the treaty began in July 2020 with the stated goal of better integrating climate concerns, numerous specialists and policy makers complain that ending protections for fossil fuel investments has been left off the agenda.

The purpose of the treaty, which was created in 1994 following the collapse of the Soviet Bloc and came into effect in 1998, “was to secure energy resources in Eastern Europe,” Nicolas Roux, spokesperson for international trade and investment issues at the NGO Friends of the Earth – France (Amis de la Terre), tells Equal Times. During the turbulent period of transition from state socialism to market economy, the goal was to ensure a favourable environment for Western companies. Investment arbitration tribunals were meant to enforce the commercial rules defined by the treaty and protect companies from the risks of corruption and weak justice systems in former Soviet countries.

Today, however, by indiscriminately securing investment in all energy sources, the ECT allows the fossil fuel industry to take legal action against countries that pass laws aimed at reducing the use of these fuels, a necessary step for meeting the commitments arising from the Paris Climate Agreement.

Specifically, if investors believe that a law changes the conditions under which their investments were made and negatively impacts their economic results, they are able to bring their case before a private court where they can demand compensation for their investments, as well as for expected future earnings.

On several occasions in recent years, this system of Investor-State Dispute Settlement (ISDS) has been challenged by civil society during the negotiations of EU trade agreements such as the Transatlantic Trade and Investment Partnership (TTIP). However, the ECT continues to discreetly allow fossil fuel investors to use this weapon – and they do so without hesitation.

Multiple lawsuits before private courts

Several European countries currently face lawsuits before private courts. One such example is the Netherlands, which passed a law in December 2019 aimed at phasing out the production of coal power, the single largest source of greenhouse gases, by 2030. German energy company Uniper, which in 2016 opened a new coal plant in the Netherlands, is contesting the plan which runs counter to its economic interests. According to several NGOs, the company is seeking up to €1 billion in compensation from the Dutch government.

Will the political will to reduce greenhouse gas emissions in the Netherlands win out over the fear of financial penalties? Or will the government retreat in the face of such threats? This is what happened in France in 2017 when then-Environmental Minister Nicolas Hulot drafted a law putting an end to fossil fuel extraction on French territory. In response, Canadian oil and gas company Vermilion threatened to sue France before an arbitration tribunal if the law was not amended. A private law firm in Paris wrote a letter to the French Conseil d’État (Council of State) arguing that the “measure violates France’s international commitments as a member of the Energy Charter Treaty of 1994, which provides for the protection of investments in the energy sector”.

After the company’s lawyers made their case to the minster, and in the face of additional opposition, notably from French employers, the final law was stripped of most of its ambition.

Other European countries currently being sued or threatened with lawsuits by companies on the basis of the ECT include Germany, from which Swedish multinational Vattenfall is demanding €6.2 billion in compensation for the country’s decision to phase out nuclear power. In another example, UK-based oil and gas company Rockhopper has been suing Italy since 2017, when an arbitration tribunal ruled that the company’s claim was admissible after it was refused a concession following country’s 2015 decision to ban oil and gas projects off its coast.

Other examples include Sweden, where Australian multinational Aura is seeking compensation due to the Scandinavian country’s ban on uranium extraction, and Slovenia, which is being sued for €50 million by British oil and gas company Ascent Resources after Slovenian authorities took too long to issue an operating permit for fear of significant environmental damage due in particular to hydraulic fracturing.

ISDS: a ‘post-colonial’ and ‘anti-democratic’ tool

Governments have several options when sued in private courts: they can defend themselves in long and costly proceedings, agree to settle out of court with the investors that brought the lawsuit, agree to submit to court rulings and pay large fines, or reverse their political decisions. According to a report on the ECT by Friends of the Earth: “The fact that the treaty discourages governments from adopting such [environmental] policies and increases their cost is not yet widely known.”

According to Roux, “this treaty dates back to a golden age of neoliberalism which saw the creation of a new generation of investment agreements, beginning with NAFTA,” agreements he describes as “very obscure, born at a time when free trade was hardly questioned and when the former Soviet countries wanted to be part of the globalised economy”. While investment tribunals became the sacred pillars of freedom of private enterprise, their origins date back to a few decades prior.

“Arbitration was originally a post-colonial project, created in the 1960s to protect the assets of settlers in newly-independent countries,” explains Roux.

Their use has since become widespread. Today, these courts are composed of lawyers from specialist law firms – chosen by the parties themselves – who can expect to earn millions of euros in cases where the sums at stake are enormous. In 2009, Russia was dealt an astronomical fine of US$50 billion in the Yukos case. According to the NGO Corporate Europe Observatory (CEO), lawyers for the Russian oil and gas company earned a salary of US$82 million while the three arbitrators received a total of US$5.3 million.

For opponents of the ECT, these arbitration courts represent a truly anti-democratic tool. In an open letter written in December 2019, 278 trade unions and associations called on Members of the European Parliament, the European Commission and the member states of the ECT to withdraw from the treaty, which they call a “parallel justice system…exclusively available to foreign investors”. The authors go on to criticise the “highly secretive” nature of arbitrations, which “are riddled with conflicts of interests as arbitrators earn big money with cases and have an interest in sustaining the boom in ECT disputes”.

According to the research and campaign group CEO, countries have been ordered to pay a total of US$52 billion, US$50 billion in the Yukos case alone. These figures correspond with those available on the ECT website, though the actual amount is certainly higher. According to the website, no information is available on 55 of the 131 cases allowed for by the ECT. According to CEO, investors are currently seeking a total of US$32 billion in pending cases. And they have every reason to expect a favourable outcome: in 60 per cent of cases, rulings have been to the companies’ advantage.

A world record in investment arbitration

Today, with 131 cases brought on the basis of ECT – a world record in the area of ISDS – it’s clear that the original intent of this mechanism (protecting Western companies in former Soviet countries) has largely been surpassed. For example, 67 per cent of cases are intra-European Union disputes, in which an investor from one member state sues another member state.

Apparently conscious of this drift, which runs contrary to the notion of mutual trust between member states, the Council of the European Union, in its recommendations to the European Commission, responsible for representing the EU in negotiations, asks that “a multilateral investment tribunal be applied in the future” to a modernised treaty inspired bynegotiations currently underway in the United Nations to reform international arbitration rules. Specifically, the EU is advocating for the establishment of an international courtwith a clarification of the grounds for appeal, provisions ensuring the neutrality of judges, procedural transparency and the possibility of appealing decisions.

According to the economist Mathilde Dupré, co-director of the French economic think tank Veblen Institute, the EU remains nonetheless “firmly committed to these arbitration mechanisms”. In 2017, the Energy Charter Conference decided to modernise the treaty in order to respond to the demands of member countries that find it obsolete with regard to current investment agreements. As Dupré explains: “The EU entered renegotiations without calling for an end to ISDS.”

As for the model of arbitration championed by the EU at the UN, “there have been some improvements, but we are far from something truly fair,” says Roux. “For example, investors will remain the only parties able to bring cases before courts.” Moreover, “negotiations within the UN are moving very slowly as the countries are not really in agreement.”

Some countries are indeed very comfortable with the mechanism in its current state and hope that it will remain unchanged in the modernised ECT.

“Japan and the countries of Central Asia want things to be much less transparent,” says Roux. These countries have a vested interest in ensuring that arbitration tribunals continue to serve as a weapon for extractive companies. A significant share of the GDP of ECT member countries such as Azerbaijan, Turkmenistan, Kazakhstan, Mongolia, Uzbekistan and to a lesser extent Norway, Yemen and Albania, is based on fossil fuels. Japan is the world’s second largest investor in coal behind China.

How can the climate commitments of the Paris Agreement, including the commitment to limit temperature increases to 1.5°C, be respected when such a treaty exists? “It’s not possible,” says Yamina Saheb. An expert in energy efficiency and an author with the Intergovernmental Panel on Climate Change (IPCC), Saheb worked for the Energy Charter Treaty Secretariat, heading the energy efficiency unit from October 2018 to June 2019. Charged with studying reconciliation of the treaty with compliance with the agreement reached at COP21, she quickly concluded that it was impossible and left her post.

In a report she published in January 2020 on modernising the ECT, Saheb argues that if the treaty were to remain in place, carbon emissions protected by the ECT would by 2050 account for “more than one-third of the remaining global carbon budget for the period 2018-2050 to avoid exceeding the 1.5°C threshold,” a scenario she describes as “ecocide”.

Withdrawing from the treaty?

In an interview on the site Borderlex, ECT secretary-general Urban Rusnák describes the modernised treaty as “a complement to the Paris Agreement”. According to him, by protecting the trade and transit of renewable energy, the ECT will ensure that climate commitments are respected.

In addition to reforming ISDS, the EU’s objectives for modernising the treaty include improved articulation of “the right of countries to regulate to achieve legitimate policy objectives” and “full integration of objectives relating to the fight against climate change”. But the internal rules of negotiation within the ECT, where amendments must be adopted unanimously, including by countries largely dependent on the extractive economy, would seem to constitute a less than favourable terrain for reaching a more virtuous agreement. The fact that ending protections for fossil fuel investments is not on the negotiating table is further cause for doubt.

As Roux of Friends of the Earth puts it: “We should expect nothing from this modernisation. Decisions are being made in favour of big business, contrary to the challenges we currently face.” Saheb has no doubt that “the negotiations will fail, it’s a fool’s errand”.

Those interviewed by Equal Times recommend leaving the agreement in order to contain climate change. As Saheb puts it: “Europe cannot announce an end to fossil fuel subsidies by the European Investment Bank and pass a European Climate Law while at the same time protecting fossil fuels.” As Dupré adds: “There is nothing stopping this treaty from being terminated. A solid core of outgoing countries could sign an agreement between themselves to put an end to the sunset clause.”

As with many other bilateral agreements of this kind, this sunset clause allows the rules of the treaty to apply up to 20 years after a country has withdrawn from it. This is why Rockhopper has been able to sue Italy since 2017, even though the country withdrew from the treaty in 2015. According to Dupré, this precedent “has convinced some governments that modifying the treaty is better than leaving it”. According to Saheb, the individual withdrawal of several countries, as well as an agreement to put an end to the sunset clause, is the way forward. “It’s the only avenue that hasn’t been contested by any of the lawyers I’ve consulted.”

But “we have to act quickly,” warns Dupré. “Time is running out, investments continue and we are wasting time that could be spent achieving climate objectives.” The time from announcement to effective withdrawal from the ECT is one year. In the meantime, this agreement must be brought out of the shadows and into the light of public attention. “This treaty is managed by bureaucrats. The NGOs have to find a way to make it a political issue,” says Saheb.

“A lot of people, even within many climate-focused NGOs, don’t know about this treaty,” says Roux of Amis de la Terre. “Real educational work has to be done.”

The same is true of policymakers. “When the French Minister of the Economy says that he wants the public investment bank to stop subsidising fossil fuels, does he know that this runs contrary to the ECT?” asks Roux.

However, on 7 July – the day after negotiations for the treaty’s modernisation began – 14 MEPs denounced the ‘archaic’ treaty in a column in the French newspaper Libération, calling for the ECT to be made compatible with climate objectives or for countries to withdraw from it.

“If it becomes known, Europe will not be able to remain in the treaty, they will be forced to withdraw,” says Saheb. According to an official source within the European Commission who did not wish to comment on negotiations in progress, “a modernised and update ECT…would play an important role in global energy governance and would support the EU’s actions in achieving the objectives of the Paris Agreement”. The intentions are there, but for the time being, the way forward is far from clear. The next cycle of negotiations will take place from 8 to 11 September 2020.