Excerpts from an interview:

What role does the Energy Charter Treaty play with regard to climate targets of the EU and its member states?

The EU and member states have committed to reducing their greenhouse gas emissions significantly. A big share of the emissions comes from the energy sector where still more than 70% is derived from fossil sources. If the EU and member states want to reduce these emissions, they have to reduce fossil fuel use. The Energy Charter Treaty is an obstacle to a rapid coal, gas and oil phase-out because it protects investments in fossil fuels. 

The Energy Charter Treaty has been described as an “axe to climate action”. What makes the Treaty so dangerous?

The Energy Charter Treaty is a powerful tool for fossil fuel companies to obstruct the transition because it protects fossil fuel investments. When a state decides to phase-out fossil fuels, energy firms can file claims for compensation. This is a barrier for states that want to fulfil their climate targets, as they have to be afraid of being sued. We see this now in the Netherlands, where following the Dutch coal phase-out, the operator of a coal-fired power station, RWE, is suing the government for 1.4 billion Euro in compensation.

Sometimes it is enough for a company to just threaten a state.

Yes, sometimes a threat of being sued under the ECT is enough to dissuade governments from taking climate action. The ECT allows investors to sue states in arbitration tribunals. This can create what is called ‘regulatory chill’. Meaning, because they fear legal consequences, a government waters down climate legislation, postpones it or abandons it completely. Therefore, already the existence of the Energy Charter Treaty is a powerful tool for investors.

Less than a handful of these threats are known. Do they really exist?

Finding out about these threats is extremely difficult because neither the company nor the government makes this public. Though there are some exceptions, where we have afterwards been able to learn about a threat. For instance, in 2017 the French government worked on a law to ban the extraction of fossil fuels on French soil. During this process, the fossil company Vermilion sent a letter threatening with an arbitration case. The law was subsequently watered down.

Is the EU risking a fossil lock-in with its membership in the Energy Charter Treaty?

The ECT will make it hard for some countries to phase-out fossil fuels. Currently, we are seeing that companies are starting to target coal phase-outs. In the Netherlands, companies have threatened and now sued the government under the ECT. In Germany, the government has asked coal operators to sign an agreement that they will not sue the state under the Energy Charter Treaty for its coal phase-out. In return, the German government will pay compensation worth billions without an arbitration case. The same could happen once governments decide to phase-out gas. As long as the Energy Charter Treaty exists, fossil fuel companies will use it wherever states force them to change their business models.

But should companies not be compensated if they are no longer allowed to use their assets?

Of course, in some circumstances compensation is due to companies or individuals that lose out because of political decisions. However, national laws also provide the basis for compensation. For instance, energy companies sued the German state after it passed legislation to accelerate the nuclear exit in 2011. The German Constitutional Court decided that these companies had to be compensated. Vattenfall was part of this lawsuit but in parallel they are also suing Germany via the ECT, claiming €6.1 billion. They simply try to see whether they can get more money using the parallel legal system that the ECT provides to foreign companies.  

Under the ECT, companies can be compensated. How does this compensation differ from the compensation that companies could claim in front of national courts?

Contrary to national courts, arbitration tribunals can award investors compensation not only for the money they have actually lost but also for prospective future profits that they may or may not have made. The Energy Charter Treaty goes far beyond the legal protection investors have under national law and offers foreign investors access to a parallel justice system to enforce these rights.

Defenders of the Energy Charter Treaty are now promoting the idea that it could also safeguard renewables in the future.

Of course, we want to see huge investments in the renewable sector. However, there is no proof that investment agreements like the ECT lead to more investments. But there is a lot of evidence that the ECT is hindering governments to regulate the energy sector in the public interest. It has a number of flaws, which will not be changed in the on-going modernisation process.

When the ECT is neither needed to protect fossils nor renewables, and if the EU, therefore, leaves the treaty, it could still be sued for 20 years under the so-called “sunset clause”. Is there no easy way out?

Unfortunately, there is no easy way to solve this problem once and for all. But there is a way to mitigate the problem posed by the sunset clause. If the European Union, the member states and neighbouring countries such as Switzerland and the United Kingdom would jointly withdraw from the treaty, they could cancel the sunset clause amongst one another. Then it would no longer be possible for investors from the EU to sue EU states. RWE could no longer sue the Netherlands. That would significantly mitigate the danger that the ECT poses.

Read more about our investigation into the Energy Charter Treaty.