It’s the deal that could torpedo the Green Deal.
The post-Cold War Energy Charter Treaty was designed to boost investment in infrastructure like coal plants and pipelines and help rebuild former Soviet-bloc countries.
Now it is coming back to bite the EU’s effort to quickly phase out carbon-emitting utilities and reach net zero emissions by 2050. What’s worse, the EU could be trapped in the agreement for 20 years.
Ministers and other representatives from the deal’s 54 signatory countries met Wednesday and Thursday in a videoconference — but there were no breakthroughs, culminating a year in which the EU pushed fruitlessly for changes to the deal to strip out protections for fossil fuels.
The deal is a “major obstacle to implementation of the Paris Agreement and the European Green Deal,” said an open letter signed by hundreds of scientists and climate leaders, including former European Commissioner for Climate Action Connie Hedegaard and economist Thomas Piketty. They urged all member countries to disband the treaty.
The core problem for EU countries is that the treaty allows private companies to sue governments for damages if the value or future profits of private investments is hurt by new legislation. Those suits are heard in private arbitration hearings, not public courts.
“It is scandalous that we still have investment protection agreements between EU countries. Studies show that investment treaties are not drivers of investment,” said the European Parliament’s trade committee chair Bernd Lange.
Instead, Lange said, companies wanted such tribunals because “businesses can use such agreements to pressure states not to increase environmental and social protections.”
A law to shut down coal-fired power plants, for example, can be attacked as an indirect expropriation under the treaty and cost a government billions of euros, according to lawyers and parliamentarians. It’s a threat analysts suspect may have bolstered coal power company compensation claims as they negotiated behind closed doors with the German government over its 2038 shutdown of the industry.
The European Commission recognizes the problem but says there is no easy way out, as withdrawing from the treaty will trigger a sunset clause under which investors can still sue governments for another 20 years.
Hunting for a loophole
That’s why Brussels is seeking to renegotiate the agreement, rather than terminate it.
In response to an October 12 question submitted by nearly 50 parliamentarians, the EU’s trade chief Valdis Dombrovskis wrote that negotiating changes to the treaty would be the preferred solution. But, he added, if the EU failed in its attempt to align the treaty with the Paris Agreement “within a reasonable timeframe, the Commission may consider proposing other options, including the withdrawal from the ECT.” Spain’s Deputy Prime Minister Teresa Ribera tweeted her agreement on Tuesday.
But changing the deal requires unanimity.
“Why would countries like Azerbaijan, Turkmenistan, Kazakhstan, Mongolia and Uzbekistan who make income from fossil fuels agree on the phase-out of fossil fuels?” asked Yamina Saheb, an energy policy expert who formerly worked for the ECT secretariat.
In a leaked draft of the treaty’s annual report, the deal’s non-EU members show no sign they are ready to give up on the treaty’s key investor protection clause. Japan has explicitly blocked an EU effort to tweak the deal so that it protects low carbon investments, but not fossil fuels.
Brussels is now hoping for backing from the Court of Justice of the EU.
Earlier this month, Belgium asked the CJEU to rule on behalf of the bloc whether investment protection clauses in the Energy Charter Treaty are legal under EU law.
While the EU has signed dozens of such investor-state dispute agreements with outside countries, the CJEU in 2018 ruled that such treaties were illegal if they were struck between two EU members. The court argued EU law offered sufficient protections for investors, while circumventing public courts undermined the EU’s legal system.
Lawyers now hope the court will stick to the same logic and strike down the Energy Charter’s application between EU members. But that would still leave a loophole for utilities to sue governments if they are incorporated in a non-EU country that is also a member of the Energy Charter Treaty.
If the court upholds the ECT, another solution would be for all EU countries to withdraw collectively and make a deal between themselves that they won’t allow their companies to use the ECT against each other. If EFTA countries — Switzerland, Norway, Liechtenstein and Iceland — join them, Saheb estimates that 80 percent of foreign investment in the EU energy sector would be prevented from filing lawsuits against climate policy.
Amandine Van den Berghe, a lawyer with the NGO ClientEarth, said this approach was “legally feasible.” EU countries signed a similar deal in May when they ended intra-EU bilateral investment treaties.
The European Commission did not respond when asked whether it was considering this approach.
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