The Energy Charter Treaty is a binding agreement signed in 1991 to govern the way its signatories dealt with cross-border investments in the energy industry. Initially imagined as a way to assure Western energy companies that their investments in post-Soviet bloc countries wouldn’t be expropriated, it now applies to national policy in 53 countries spanning Europe, Asia, and the Middle East. As such, a big part of the agreement involves discouraging national governments from implementing policies that suddenly render companies’ infrastructure and investments unprofitable or outright illegal. The worry, for those concerned about climate change, is that this could make attempts to transition fully off fossil fuels almost impossible.
“What the treaty protects are investments in supply side, no matter the source of energy, or how harmful,” said Yamina Saheb, a lead author with the Intergovernmental Panel on Climate Change’s forthcoming report and former head of the Energy Efficiency Unit of the ECT International Secretariat. While the ECT also has provisions for energy efficiency, those are non-binding—unlike its protections for energy investments. “Becoming carbon neutral means that the time of fossil fuels is over, which means that we can no longer protect investments in them. This treaty is not aligned with the Paris Agreement,” she added. The Paris Agreement itself, unlike the ECT, has few tools to enforce its goals.
Effectively, the ECT says that if Country A, for example, suddenly outlawed coal mining, wiping out the value of coal reserves and creating what are known as stranded assets, a coal company from Country B (whose reserves were just “stranded”) has the right to sue for damages. Under the ECT, this triggers what’s known as the Investor State Dispute Settlement (ISDS) process. Like a similar ISDS regime created by the North American Free Trade Agreement (NAFTA), the ECT’s ISDS process allows investors to bring complaints against sovereign governments whose actions pose a threat to their profits. ECT’s ISDS process has been invoked more often than those created by any other treaty. According to data compiled by the UN Conference on Trade and Development, 128 complaints have been made under the ECT, 102 of which were filed in the last decade. NAFTA is second, having been invoked a comparatively modest 67 times. If the ECT isn’t overhauled and fossil fuels aren’t phased out in the coming decades, according to a report Saheb prepared in January, the total number of fossil fuel assets protected by the ECT could grow to $2.4 trillion.
In 2017, former French Environment Minister Nicolas Hulot backed a measure that would have phased out fossil fuel extraction in the country by 2040, and banned new drilling permits and renewals. After the Canadian company Vermillon threatened to bring an ECT complaint, the law was watered down, allowing drilling companies to continue renewing their permits through 2040. A Dutch company called Uniper has threatened to seek $1.1 billion from the Netherlands over its pledge to phase out coal out of its power sector by 2030. Germany is now being sued by the Swedish multinational Vattenfall for $6.9 billion over the country’s nuclear phase-out, following its previous complaint over regulation of a coal-fired power plant it owned. After Italy moved to ban offshore drilling, following years of local protests, the UK-based oil company Rockhopper claimed it was owed $350 million in compensation.
The EU this week is debating “modernizing” the ECT to bring it in line with the Paris Agreement. The European Commission has proposed changes to exclude intra-EU claims—roughly two-thirds of the complaints that have been brought under the ECT—through its “outdated” ISDS process. Such disputes, they argue, are already covered by the EU’s own trade and commerce provisions. Notably, eliminating claims within the bloc would still preserve European companies’ ability to bring complaints against governments outside the EU, though the Commission does state that it hopes to “reform” the ECT’s ISDS process overall, and “ensure the ECT better reflects climate change and clean energy transition goals.”
Joining calls by Friends of the Earth Europe and some 260 other civil society organizations, other lawmakers are now pushing for bigger changes—and even for leaving the ECT entirely. On Tuesday, 13 members of the European Parliament wrote that the ISDS process needs to be “scrapped or fundamentally reformed and limited.” Should those talks fail, they recommend their colleagues “develop pathways to jointly withdraw from the Energy Charter Treaty in case negotiations fail.” EU member states withdrawing en masse, advocates reason, would give them enough leverage to negotiate out of the survivor clause that allows investors to continue suing state signatories for 20 years after they depart. It could also deal a crushing blow to the budget of the ECT Secretariat, the lions’ share of which is provided by European countries, and eliminate a major barrier to getting the world off of fossil fuels.
In addition to the 53 full members of the ECT, several countries are waiting in the wings to “accede” to the treaty through its formal processes, and make themselves subject to its investor rights provisions. For the last several years, the ECT Secretariat has pushed to get more African countries signed up, in particular, with a push for Latin American and Asian nations to join as well.
The pitch to governments for joining the ECT—made in seminars and conferences organized by the Secretariat—rests on membership being attractive to foreign investors, particularly in nations whose energy sectors are underdeveloped. There’s no empirical evidence proving that’s the case, Cecilia Olivet, project coordinator for Trade and Investment at the Transnational Institute (TNI) and the co-author of an exhaustive 2018 report on the ECT, told me. Yet with more wealth having fled the Global South during the current pandemic than in any year on record, and many places still lacking reliable electricity, it could be an attractive offer. Representatives from the Secretariat, she adds, have “mainly been talking to energy ministries,” who have expertise in the energy sector specifically but “have no awareness of the dangers of investor treaties because it’s normally the ministers of trade or finance ministers who deal with those.” As a result, governments have jumped to sign the 2015 Energy Charter, a non-binding document that, Olivet said, is “very much the first step to the accession line.” As of now, new accessions are on hold pending the results of the modernization process begun in 2018, which involves reaching a consensus among all the ECT’s signatories.
Thanks to the sweeping language of the treaty, even individual shareholders in energy companies are eligible to bring complaints under the ECT’s ISDS process for damages. In addition to the final payouts, the states being sued have to pay out an average of $4.9 million in legal fees incurred by the process, according to a Global Arbitration Review study, but fees can be much higher. The investor bringing the complaint gets to decide where the arbitration is held. The World Bank’s International Centre for Settlement of of Investment Disputes is a popular choice, but Chambers of Commerce and other bodies can host, as well. Just a handful of law firms worldwide have the expertise to navigate arbitration proceedings, with teams of lawyers often making $3,000 per head per hour in cases that can stretch on for years. Losing an ISDS case could devastate countries already facing budget stress amidst the pandemic—particularly low and middle-income nations in the Global South already under financial duress.
“Companies tend to use these treaties to threaten governments. They self-censor for fear of having to then spend millions or billions” in a complaint process, said Olivet. “Even if the lawsuit doesn’t materialize in the end, it is a clear example that fossil fuel investors will use it to defend the status quo. The clock is ticking on the climate crisis. Clearly this is a treaty that protects fossil fuel companies and in this current context it shouldn’t exist.” Currently, as Germany moves toward closing its coal plants, the country is paying coal operations billions of dollars so that they don’t bring cases under the ECT; if smaller countries have to pay those sums, a phase-out could be financially impossible.
The U.S. is not a member of the ECT. But U.S. companies with business abroad often engage in what’s called “treaty shopping,” incorporating in places with favorable trade laws. A wholly-owned, Netherlands-incorporated subsidiary of the U.S. energy company NextEra won a case against Spain under the ECT over the former right-wing government’s nixing of a feed-in tariff for solar energy. Among the first policies enacted by the Socialist Workers Party (PSOE) government when it took office was to reverse their predecessor’s anti-solar policies. Still, the resolution of the case means Spain will now have to pay $329 million. Spain has been subject to the most complaints of any ECT signatory, having been forced to pay around $1.1 billion for the 16 of 48 total complaints brought against it that were resolved in favor of investors. 28 still unresolved claims could run up a total bill of $8.1 billion.
NextEra’s case further highlights changing dynamics in ECT cases. While for the first ten years complaints were almost universally brought by fossil fuel companies, the last decade has seen a rise in the number of complaints about countries’ changes in renewable energy legislation, joining those related to fossil fuels. Often, Olivet says, those bringing the complaints on behalf of renewable energy companies “are mainly financial investors that also have investments in fossil fuels,” and ample resources to navigate arbitration. The assets management giants State Street, Vanguard and Blackrock, respectively, are NextEra’s largest shareholder. In all, 53 percent of all ECT claims have been filed by private equity investors or other financial interests.
Those tracking negotiations aren’t optimistic that efforts to modernize the ECT will succeed. Even if there is some agreement reached at the EU, any sort of modernization is contingent on consensus from all signatories, including a number of fossil fuel producing governments—including Japan—that aren’t likely to sign on. Then there’s the persistent “misfunctioning” of the treaty’s Secretariat, as detailed in a damning report leaked last summer. Prepared by ECT assistant secretary general Masami Nakata, the report highlighted “unprofessional and non-transparent selection of officials” and questionable dismissals of senior staff by ECT secretary-general Urban Rusnák, who started in his current role in 2012. The only upside of that is that it’s made the ECT harder to defend. “If the modernization process fails, I don’t see a future for the Treaty,” Rusnák said in a recent interview. That could be welcome news for the planet.
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