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Energy Charter Treaty modernisation stalls following abstentions from EU States

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Yesterday, 22 November 2022, the Energy Charter Conference postponed the adoption of the modernised Energy Charter Treaty (the ECT). This follows EU States failing to agree on the revised text on 18 November 2022 and a large number of EU States signalling their intent to withdraw from the treaty over the past couple of months.

EU and investor-State dispute settlement

The relationship between international investment arbitration and Europe has become increasingly contentious.

The judgment of the Court of Justice of the European Union (CJEU) in Slovak Republic v Achmea B.V., determined that an arbitration clause in an international investment treaty between two EU States is incompatible with EU law. The CJEU broadened the scope of its decision in Achmea in its decision in Republic of Moldova v Komstroy by declaring that even the ECT could not be used to arbitrate intra-EU investment disputes.

In addition to the jurisprudence of the CJEU, in May 2020, all EU States (except Austria, Ireland, Finland and Sweden) signed an agreement terminating intra-EU bilateral investment treaties. However, the termination agreement expressly excluded intra-EU disputes under the ECT, which is a multilateral treaty primarily designed to protect investments in the energy sector, from its scope.

Climate change obligations in investment disputes 

Critics of the ECT have identified its impact on a State’s power to regulate to meet climate change obligations as especially problematic. Under the 2015 Paris Agreement, States have committed to limit the global average temperature to below 2 degrees Celsius, above pre-industrial levels. To implement this goal, States can adopt policies of positive or negative incentives. Investors have brought claims under the ECT consequent to both types of policies.

In relation to positive incentives, several claims have been brought against Spain, Italy, Czech Republic and, more recently, Romania, following their introduction of generous schemes to attract investment to their renewable energy sectors. The schemes were surprisingly successful for the investors at the cost of these States. This created a unique situation where the success of a climate change policy became unaffordable for States, thereby creating a situation of economic disequilibrium. 

Similarly, an increasing number of disputes are arising out of energy transition policies. Many States have undertaken initiatives to reduce their reliance on fossil fuels with the eventual aim of phasing them out. These initiatives haves transformed fossil fuel investments into stranded assets, leading to further claims from investors. 

Recent ECT developments: backlash despite modernisation

Conscious of the criticisms of the ECT, the Energy Charter Conference embarked on negotiations to modernise it. After five years, the Conference reached an agreement in principle on 24 June 2022. A key focus of the modernisation process was to address the desire of States to combat climate change.

This post does not detail the agreement in principle. However, in overview, the new framework makes significant changes in an attempt to address climate change. For instance, under the modernised framework contracting parties can phase out the protections accorded to fossil fuels gradually. Separately, the new framework addresses concerns of intra-EU disputes by excluding the treaty’s application among parties that are members of the same Regional Economic Integration Organisation, such as the EU.

The modernised text of the ECT met with increased criticism, which has led to a deluge of EU States withdrawing from the treaty. Since the agreement in principle in June 2022, Poland, Spain, France, Belgium, Slovenia, Germany, Luxembourg and the Netherlands have declared their intention to withdraw from the ECT. With the exception of Poland, they have explicitly identified the lack of alignment between the modernised ECT and the Paris Agreement as a reason for their withdrawal.

For a majority of withdrawing States, the withdrawal appears to be a political gesture reflecting their commitment to fight climate change. However, the fact that an increasing number of States are facing claims consequent to their climate change policies cannot be discounted as a reason motivating their withdrawal. It is uncertain whether more EU States will signify their intent to withdraw from the ECT.

Moreover, yesterday, in the latest development, the Energy Charter Conference has postponed the adoption of the modernised ECT. The Conference now expects to meet at an ad hoc meeting in April 2023 to finalise the discussion on the adoption of the amendments to the ECT. This decision follows the meeting of ambassadors of EU States on 18 November 2022, where, reportedly, members failed to agree on the modernised text after France, Germany, Spain and the Netherlands (all States that have recently purported to withdraw from the ECT) chose to abstain.

If the States that have withdrawn wish to escape the ECT, this is unlikely to be achieved. Under the existing ECT, withdrawal becomes effective after a one-year notice period. Following withdrawal, the sunset clause is triggered, which provides protection to investments made prior to the withdrawal for another 20 years. Equally, tribunals have rejected the intra-EU objection to jurisdiction in all but one publicly available investment dispute.

Thus, investors in the energy sector are likely to enjoy ECT protections in some form for the foreseeable future.