Energy Charter Treaty begins to unravel as EU states exit – but risks remain

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Spain, the Netherlands, Poland and France. The list of governments that announced their intention to break with the controversial Energy Charter Treaty has grown rapidly in recent months. In announcements last week, Slovenia and Germany were the latest to signal they too will leave the agreement. Other EU states could soon follow suit. Even after the exits, though, the charter could continue to block the energy transition plans of states for decades to come.

Until a few years ago, hardly anyone except for a handful of experts had any idea what was behind the Energy Charter Treaty. The agreement, signed in 1994, was once supposed to secure investments by EU companies in former Soviet states. Today, however, EU companies use the treaty primarily to sue EU states if they feel they are being treated “unfairly“. The German energy company RWE recently used the charter to sue the Netherlands for €1.4 billion because the country brought forward its coal phase-out.

Investigate Europe calculated for the first time last year that the treaty protects at least €344.6 billion worth of fossil infrastructure in Europe. The mere threat of a lawsuit is enough to make governments rethink their phase-out plans. Shortly after France announced a few years ago that it wanted to completely ban the extraction of fossil fuels, the minister responsible received a letter. In it, the oil company Vermilion openly threatened a charter lawsuit. The final version of the law would allow oil production until 2040.

Despite the exit, risks remain. Energy firms can still use the charter to sue soon-to-be former signatories like Germany and France in arbitration courts, thus further weakening their already mediocre climate efforts. Article 47 of the treaty is to blame, because in it the charter founders stipulated that the treaty would remain in force for another 20 years after the phase-out. Italy, the first EU state to leave in 2016, was recently ordered by an ECT tribunal to pay British oil company Rockhopper €240 million over a decision to ban oil exploration off the Italian coast in 2015.

But despite this contract clause, EU states could form a pact together making it harder for European energy companies to sue them over potential oil, coal or gas exits. With a so-called inter-se agreement, they could agree that EU investors could no longer sue EU states. The effect would be huge: in two out of three energy charter cases, European investors sue the EU.

The EU Commission had already in early October drafted such an agreement and presented it to member states. But instead of pushing ahead with the common European pact, EU staff persisted in campaigning to remain in the ECT – without success. 

On Tuesday this week, the EU states wanted to decide whether they will agree to the modernised version at the annual Energy Charter Conference at the end of November. But the decision has been postponed for the time being. In view of the recent announcements by several governments to leave the treaty, European approval seems unlikely.

Now the Commission must act swiftly, together with the member states, to finally banish the influence of energy companies on necessary climate measures. The end of the Energy Charter Treaty can only be the beginning.