Why climate groups want Europe to quit obscure energy treaty

by Beatrice Tridimas | @bea_trid | Thomson Reuters Foundation
Tuesday, 28 June 2022 16:30 GMT

Activists from Extinction Rebellion occupy an oil tanker during a protest calling for an end to fossil fuels, in central London, Britain, April 16, 2022. REUTERS/Henry Nicholls

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Critics say newly-agreed reforms to a treaty that allows energy companies to sue states for lost profits are "greenwashing"

By Beatrice Tridimas

LONDON, June 28 (Thomson Reuters Foundation) - Ministers from more than 50 countries have finalised reforms to an international treaty that critics claim could hinder climate action by helping companies sue governments whose plans to cut emissions from fossil fuels hurt their bottom line.

Since the late 1990s, the Energy Charter Treaty (ECT) has allowed energy companies and investors to challenge national policies that could undermine their profits.

Legal claims from the fossil fuel industry are on the rise, fuelling concern that the threat of legal action could deter governments from enacting clean energy policies vital to achieving international climate goals.

At a conference in June, member countries concluded a four-year process of modernising the treaty intended to reflect evolving policy agendas to tackle global warming.

But climate groups branded the reforms "greenwashing", saying they do not align the treaty with the Paris Agreement to curb climate change - not least because they allow investment protection for fossil fuel firms for at least another decade.

Several European countries and the European Parliament are urging the European Commission to withdraw before the reforms are ratified in November.

Here we outline the key features of the ECT and how it's being used by some corporations to undermine climate action:

What is the Energy Charter Treaty, and why was it created?

The ECT is a legally binding pact signed by 52 countries - mainly in Europe, Central Asia and the Middle East - and the European Union.

It was drawn up at the fall of the Soviet Union to protect European energy firms with fossil fuel assets in ex-Soviet states.

“There was a big fear that (former Soviet Union) countries could fall back into communism and that investors would be expropriated,” said Cornelia Maarfield, senior trade and investment policy coordinator at Climate Action Network (CAN) Europe.

The ECT aims to promote energy security by protecting energy firms against risks to their investments and trade, such as having their assets seized or contracts breached.

It grants the right to challenge governments over policies that could harm investments - not just in fossil fuels but also in hydro-power, solar, wind and other clean energy sources.

Signatories are also obliged to facilitate cross-border energy flows and minimise the environmental impact of energy use, although the treaty has no binding climate targets.

Why does the ECT pose a threat to climate action?

Research from the International Institute for Sustainable Development (IISD) shows that legal claims made by fossil fuel companies challenging environmental measures are on the rise.

Most are based on contracts, but investors making claims based on international law most frequently bring them under the ECT.

Under the treaty, claims can be pursued through national courts or international arbitration channels called investor-state dispute settlement (ISDS).

The IISD has warned that putting climate pledges made at COP26 into practice could lead to a slew of lawsuits that would add to the cost of climate action and hinder its implementation.

"You know that these cases will take a long time and that there is a lot of money at stake... So some governments might delay the fossil fuel phase-out decision or not take (it) at all," said Maarfield.

A new study by Boston University, Colorado State University and Queen's University in Canada reveals that the costs of possible legal claims from oil and gas investors challenging government action to curb fossil fuels could reach $340 billion.

That could rise by another $45 billion if the 32 countries that are in the process of joining accede to the ECT.

Who is pursuing legal action under the ECT?

Today five multinational companies are suing governments for loss of earnings over green action for a total of $18 billion, four of them using ECT investor-state tribunals.

German energy companies Uniper and RWE have brought claims against the Netherlands following its decision to phase out coal, and British firm Rockhopper is challenging Italy over its ban on oil and gas exploration around the coastline.

Slovenia is also facing a claim from British company Ascent Resources over a new regulation requiring the company to undergo an environmental impact assessment before it can extract gas.

ECT officials note that about 60% of disputes under the treaty concern renewable power generation, involving things like changes to incentive schemes and regulation.

IISD researchers are concerned that future measures to stop leaks of the greenhouse gas methane from gas and oil pipelines and wells could also spark new disputes.

Most investor-state cases concerning fossil fuels have been decided in favour of the private sector.

"The way the damages are calculated leads to huge awards, which have never been seen at the national level," said Nathalie Bernasconi-Osterwalder, executive director of IISD Europe, noting damages could stretch to billions of dollars, calculated on real losses and anticipated future losses.

Rockhopper, for example, is claiming compensation of up to $350 million for both funds spent and expected profits in its case against Italy.

How is the treaty being reformed?

In 2018, ECT signatories launched a modernisation process to make the treaty compatible with the Paris Agreement, among other climate policies such as the European Green Deal.

After 15 rounds of talks, member governments reached an agreement in principle on Friday, which will now be turned into a legal text expected in August.

Climate groups have criticised the European Commission for signing up to the ECT reforms, which they argue are not in line with the European Green Deal or the Paris Agreement.

ECT signatories rejected a European Commission proposal to end protection for all future investments in fossil fuels.

Instead, negotiators agreed on a “flexibility mechanism” that allows individual countries to end investment protection for fossil fuels in their territories, in keeping with their respective climate goals.

Only the European Union and Britain have agreed to exclude fossil fuel investments from protection under the ECT, a rule that will apply after August 2023.

Existing investments will be protected until 2033 at least.

Britain, however, will continue to apply the ECT to investments in gas power plants fitted with carbon capture technologies.

The ISDS process and a sunset clause allowing countries to be sued for up to 20 years after withdrawing from the treaty remain unchanged.

The list of energy types protected by the ECT has also been expanded to include carbon capture and storage, hydrogen, biomass and biogas - which critics say increases the potential for claims.

The European Parliament and countries such as Germany, the Netherlands, Poland and Spain are pushing the European Commission to withdraw from the treaty.

France also favours withdrawal, while Italy quit in 2015, citing budget restrictions.

“The European Parliament won't ratify a greenwashed ECT - they want real changes, which the reform doesn’t deliver,” Maarfield said in a statement, urging the commission to admit that the updated ECT is "a failure" and initiate an exit.

Ministers have until November, when parties to the ECT will meet to ratify its new text, to decide to withdraw.

This article was updated on June 28, 2022, with developments from the final round of modernisation talks.

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(Reporting by Beatrice Tridimas; editing by Megan Rowling. Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers the lives of people around the world who struggle to live freely or fairly. Visit http://news.trust.org/climate)

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