These days, it is hard to find anyone arguing with a straight face that the Energy Charter Treaty (ECT) has been a good thing for the climate. It is variously described as a “relic”, a “dirty energy club” or a “climate roadblock” in the service of greedy companies. However, those same voices decrying it have now been put in the awkward position of having to defend it, and are begging countries like France, Spain, Poland, Italy and the Netherlands to reverse their withdrawal decisions.

The treaty was devised in the early 1990s at the end of the Cold War to give investors confidence in the new democracies in eastern Europe, whose previous Communist governments had a habit of suddenly nationalising industries or cancelling projects. The treaty empowers investors to transcend domestic courts and sue their host nations for policy changes that threaten their investments via special international tribunals. However, it has morphed into something far beyond its original intention, and is now being used by companies to sue the 52 member governments for energy policy changes that have been taken for climate reasons.

Climate activists call for the EU to exit the Energy Charter Treaty in July 2021. (Photo by Dursun Aydemir/Anadolu Agency via Getty Images)

The treaty has become the most-used treaty in investor-state dispute settlement (ISDS), leading to record-breaking awards of damages that have cost governments millions of dollars, according to the International Institute for Sustainable Development. One notable example has been the Netherlands being sued by energy companies RWE and Uniper under the ECT over its plans to take coal power plants offline. Legal claims by oil and gas investors against states imposing laws to limit fossil fuel activities could reach a total cost of $340bn for governments – more than the $321bn spent globally on public climate finance in 2020 – according to research published in the journal Science in May 2022. Worse than the actual lawsuits is the so-called “regulatory chill”, where governments back off phasing out fossil fuels because they are afraid of being sued.

Reform attempt

Given all of that, it might seem that pulling out of the treaty is an easy decision for governments – but there is a catch: even after a country pulls out, it is subject to being sued under the treaty for a further 20 years. It may seem like lunacy now, but when it was devised in the 1990s it was thought this was the only way to ensure countries would not pull out just so they would not get sued for changing decisions on major investments.

For this reason, the European Commission has said it would be much more constructive to reform the treaty than end it. It has engaged in months of negotiations to modernise it, and finally reached an agreement with the other parties this summer whereby EU countries would get an exemption to the normal rules and be allowed to phase out fossil fuel investments over the next ten years, and after 2033 they could no longer be sued. That result was far less than what had been aimed for. A group of countries led by Japan fiercely resisted changes that would have shielded investment decisions made for climate reasons. Climate campaign groups have deemed the reform negotiations a failure and are calling for countries to cut and run.

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“It is unbelievable the EU agreed to lock in fossil protection for at least another decade,” says Cornelia Maarfield, trade and investment policy expert at the NGO Climate Action Network Europe. “This means countries will continue to spend taxpayers’ money in compensating fossil fuel companies rather than fighting climate change and moving to a renewable energy system. Adopting the reform would also come with a reckless expansion of the treaty to hydrogen, biomass and other energy materials, exposing us to even greater risks of uncapped compensation claims in future.”

However, the Commission is warning that staying in the reformed treaty is a better option than leaving it, since the ‘sunset clause’ keeps countries liable for 20 years if they leave, while the reform makes them liable for half that time if they stay. The Commission told Brussels media that all EU countries endorsed the outcome of the reform negotiations in June, and the EU executive appears to have been caught off guard by the sudden exodus that has taken place over the last two weeks, with France, Spain, Poland and the Netherlands all announcing their intention to leave. Germany and Belgium have said they are considering it.

“We are critical of the result achieved on a number of points,” said Dutch energy and climate policy minister Rob Jetten when announcing the country’s withdrawal on 18 October. “The treaty continues to offer too much protection to the fossil fuel industry.”

Maarfield argues there is another way to get out of the sunset clause – countries can withdraw jointly and conclude a separate agreement, in which they exclude ISDS cases among one another. “In particular, if implemented in a large group of countries, this solution means that existing fossil investments would cease to be protected immediately, rather than continue to enjoy this protection for ten or more years.”

“In any case, a mass walkout from the ECT is likely to trigger a discussion about terminating the agreement altogether,” she adds. With no treaty, there can be no lawsuits.

Parting shot

Behind the scenes, the Commission is pleading with EU member states that have announced their intention to leave to at least stay and ratify the reforms first at the next meeting of the 52 member countries in Mongolia on 22 November. "If by November, we don't adopt the modernisation, the result is simply the status quo," a Commission official told the European Parliament last week. For that they were blasted by MEPs from the left. "Exiting this obsolete treaty is the only way,” said Spanish MEP Sira Rego. “We need to be out so that economic interests stop imposing their agenda on a planet that cannot withstand the constant exploitation of its resources, exploitation that only aggravates the eco-social crisis."

Climate campaigners are calling for the quitting countries to stay for the vote but to rebel against the Commission’s instructions and vote no. “The decision of Spain, Poland, France and the Netherlands to leave the Energy Charter Treaty is good news but it won't be enough,” says Paul de Clerck, trade campaigner at Friends of the Earth Europe. “These countries now need to vote down the reform proposal in the upcoming EU Council meeting and at the Energy Charter Treaty Conference in November to ensure a coordinated withdrawal of the EU and all its member states.” Only a mass exit by EU countries, he warns, can kill the treaty for good. Voting for the reform risks giving it legitimacy and prolonging its existence to continue doing harm well into the future.

Governments will have a number of decisions to take over the next 20 days. First, should they stay or should they go? And second, should they accept or reject the Commission’s negotiated reforms? Although this has been building as an issue for several years, pulling the trigger now while Europe is reeling from energy insecurity as a result of the Ukraine War is giving some second thoughts. Guy Lentz, the Energy Charter Treaty’s secretary-general, recently warned that leaving now could annoy key energy suppliers such as Azerbaijan right at the time when the EU needs them as alternatives to Russia. He also warned that China, which has been trying to join the treaty for some time but has been blocked by the EU, would be free to take it over if the EU left.

It is a catch-22 for today’s politicians, who are stuck with a poison chalice inherited from their predecessors three decades ago. If they leave, they are stuck with legal liability for decisions to reduce emissions. If they stay, they are also stuck with liability, although for less time under a reformed treaty. It is an unenviable decision to have to make.