February 2021

The Energy Charter Treaty

Credit: Alexia Barakou

Europe has to cut almost all greenhouse gas emissions by 2050. That is going to be hard enough. But the little-known Energy Charter Treaty could become a massive threat to the EU and its member states in trying to achieve their climate targets. With this treaty, the contracting parties (including all EU member states except Italy) guarantee foreign investors far-reaching rights. If, in the Energy investor's opinion, a government has violated the principle of "fair and equitable treatment," they can sue states before international arbitration courts for billions of Euros in compensation. The treaty was signed in the 1990s to offer protection for Western companies investing in energy initiatives in former Soviet states, as many of these were deemed risky for potential investors. But today it is mainly used by European companies to sue European states. In the years to come, the threat of ECT lawsuits could prevent states from adopting ambitious climate policies – or put plainly: this is already happening.

How does the Energy Charter Treaty work?

Alexia Barakou & Reporters’ United, Greece, for Investigate Europe

Our investigation shows that:

The fossil infrastructure protected by the Energy Charter Treaty in the EU, Great Britain and Switzerland is worth €344.6 billion. This is more than twice the total annual budget of the EU and corresponds to 660 euros per resident.
Three-quarters of the protected fossil infrastructure are gas and oil fields (€126 bn) and pipelines (€148 bn).
Since investors can sue not only for the value of their infrastructure but also for lost profit expectations, the actual sum of possible compensation claims could be even much higher.
To water down climate laws, companies don’t even have to sue. The mere fact that they can sue can be enough to influence climate measures. Sometimes companies even openly threaten governments.
Although the Energy Charter Treaty was once intended to protect investments in states with uncertain legal situations, 74 per cent of the Energy Charter cases are now lawsuits brought by EU investors against EU states.

EU states are divided on how to deal with the Energy Charter Treaty – even if the commission has officially found a common position for a modernization push by mid-February. France and Spain had even argued for a withdrawal – and this option remains.
Even with a common EU line, it is unclear whether the Energy Charter Treaty could be ever modernized. This decision requires unanimity and Japan has already announced that it will block any changes.
Leaving isn’t easy either: states can be sued up to 20 years after leaving. After Italy left the ECT in 2016, the British oil company Rockhopper sued in 2017 against the ban on producing oil and gas near the coast, claiming lost investment and future profits of 275 million US dollars. A verdict is expected to be reached in spring 2021.
The system of arbitration tribunals are a closed club of arbitrators that act in multiple roles in a system that allows them practically unlimited fees (paid by public money)
Lawyers are calling the system “a Russian roulette”, a “historical mistake”, or refer to the changing roles in arbitration as a potential conflict of interest
Leading personnel of the Energy Charter Secretariat (the administration of the treaty), has close ties to the fossil fuel industry
In December 2019, the ECT members decided there would be a “temporary pause on issuing invitations to accede to the ECT” – due to the discussion about modernising the treaty. But the ECT core budget for 2021 – based on the member states contributions – still provides nearly half a million Euros to the consolidation, expansion and outreach policy. Three African countries are in the ratification process, and ten others are in different stages of the process to eventually join. They are running a high risk to get sued as soon as they are added to the treaty, critics say.