Germany prepares withdrawal from Energy Charter Treaty

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The Energy Charter Treaty is a little-known investment protection agreement. In the early 1990s, all EU states, including Germany, signed the treaty to protect investments in the former Soviet states. Today, there are 55 ECT signatories, mainly nations in Europe and Asia. But as research by Investigate Europe last year showed, the agreement has several problems.

The treaty is unilateral, only companies can sue states. Moreover, its wording is vague and investors can sue if they feel they are being treated “unfairly”. According to research by Investigate Europe, the treaty protects fossil infrastructure worth €344.6 billion in Europe alone. In recent years, investors have used the treaty to intimidate EU states and demand billions of euros in compensation. The French government, for example, preemptively weakened a climate law that was supposed to ban the extraction of fossil fuels. The German energy company RWE recently sued the Netherlands for €1.4 billion because the country brought forward its coal phase-out.

For the past five years, the EU Commission has been working to reform the treaty. Completed in June this year, the Commission hailed the modernisation agreement as a success, claiming that it has “fulfilled its mandate” and “brought the ECT into line with the Paris Agreement and [the EU’s] environmental objectives”. But many member states see it differently.

“The mandate to the European Commission was to bring the Energy Charter Treaty in line with the Paris Climate Agreement,” Dutch Energy Minister Rob Jetten told parliament in The Hague on Tuesday. Despite much progress in the negotiations, Jetten said the agreement was “not sufficiently in line” with the Paris Agreement and he announced the Netherlands would leave the agreement.

Politico reported last week that Spain would withdraw from the Energy Charter Treaty. In Poland, the government introduced a bill in August to “terminate the Energy Charter Treaty”. One of the reasons given for its move was that an exit from the treaty “has the potential to significantly reduce the financial burden on the state”. In early October, 418 of the 460 members of the Polish parliament voted in favour of the bill. The country’s Senate now has to pass the bill.

In addition to Poland, Spain, the Netherlands and now potentially Germany, other member states could leave the Energy Charter Treaty in the near future. In Brussels, EU member states are coordinating their approach in the Council’s Energy Working Group. According to the notes of a diplomat present, a French representative expressed at the beginning of October that France “does not consider the results of the modernisation to be sufficient”. This concerned above all “the adaptation to the Paris Agreement”. In the worst case, existing investments in fossil fuels would continue to be protected until 2040.

But even if several member states now withdraw from the treaty, they will not get rid of the Energy Charter Treaty so easily. The authors of the treaty made provisions for this eventuality. In Article 47, they stipulated that if a state leaves, the “provisions of this Treaty shall continue to apply for a period of 20 years”. For example, the British oil company Rockhopper sued Italy for banning oil drilling in the wake of the climate crisis. Italy was the first EU country to leave the treaty in 2016. Nevertheless, arbitrators ruled in August this year that Italy must compensate Rockhopper with €190 million plus interest. The company had only invested €25 million in its drilling.

At the beginning of November, EU Member States will discuss the modernisation outcome again in the Council’s Energy Working Group. The Contracting Parties must then vote on the modernisation at the Annual Energy Charter Conference on 22 November. For this to be adopted, all ECT signatories must agree. Afterwards, the new treaty text must be implemented into national law. In the EU, member states must also approve the treaty in the Council and Parliament. Then critical member states could still delay or even block the modernised treaty. This is because the parliaments of the member states must also approve a reform.