Energy companies have been suing European governments for billions of euros to protect their fossil fuel investments in recent years via an obscure treaty adjudicated in secret arbitration courts. But that could be about to change.
France and the Netherlands announced their intention to exit the Energy Charter Treaty (ECT) last week saying it was not in line with climate goals. Italy pulled out in 2016, with Spain and Poland following in recent months. And more countries could follow, say analysts.
"You could definitely call it a revolt," said Lukas Schaugg, law analyst with the International Institute for Sustainable Development (IISD), a Canada-based think tank, of the recent exodus from the treaty. With the Netherlands having played an integral role in establishing the ECT, he called the decision to withdraw "a significant step."
With the Ukraine war-related energy crisis causing EU states to reactivate coal power plants, for example, governments needing to limit CO2 emissions want to neutralize the threat of litigation, which has been holding back climate policy.
"The war on European soil should not make us forget our climate requirements and our imperative to reduce our CO2 emissions," said French President Emmanuel Macron when announcing his country's exit from the ECT as a "strategy" to achieve climate goals.
Lawsuits pressure states to limit climate ambition
Set up in the 1990s to protect energy investments in former Soviet countries, the ECT, which has more than 50 signatories, allows investors to sue countries when energy policy changes threaten their investment.
A significant majority of the disputes have sought compensation from European Union states. And big emitters have lately targeted EU governments for phasing out fossil fuel energy in favor of renewables.
For example, German energy companies RWE and UNIPER invoked the ECT to sue the Netherlands in 2021 for several billion euros in compensation for the country's 2030 coal power phaseout policy.
Fears that governments have limited the scale of emission cuts to avoid paying compensation were borne out when the French government seemingly reversed a decision to ban oil exploration after Canadian oil company Vermilion threatened to open an ECT dispute in 2017.
The litigation threat means Germany could be next to exit the ECT, said Paul de Clerck, economic justice coordinator for environmental group Friends of the Earth Europe.
Robert Habeck, German Vice Chancellor and economy and climate minister, "has repeatedly expressed his critical position on the ECT and its possible negative effects on climate action," according to a statement from his ministry.
New treaty reforms won't solve ECT problems
According to Yamina Saheb, a lead author on the UN report documenting the latest science on the climate crisis and a former ECT employee, the litigation threat under the ECT has hamstrung climate policy to the point where the EU can "wave bye-bye to carbon neutrality targets."
Attempts to modernize the ECT by the European Commission – which has been negotiating on behalf of the 27 member states for treaty reforms – have failed to bring it in line with climate goals, say critics.
Though new investments will no longer be protected from August 2023 under the reforms, one contentious clause protects existing investments for the next 10 years.
Tribunals will also still be able to calculate payouts based on percieved future earnings. This, said Lukas Schaugg from IISD, will allow energy companies to seek massive compensation for unearned profits.
"This incentivizes recourse to arbitration over pursuing the investment itself," he said.
When the Dutch climate and energy minister Rob Jetten announced the decision to withdraw from the treaty last week, he said the European Commission reforms were insufficient to fulfill climate obligations.
"Despite many of the modernizations that are now in the negotiation outcome, we do not see how the ECT has been sufficiently aligned with the Paris Agreement," Jetten told the Dutch parliament.
Should states reform or withdraw from the ECT?
Speaking before modernizations were confirmed in June, Yamina Saheb recommended all member states withdraw from the ECT, saying it would defang a treaty that harms the energy transition.
"The ECT has a chill effect on adopting ambitious climate policies, so we won't be able to implement the Green Deal," said Saheb of the European Union's plan for carbon neutrality by 2050.
This chill is exacerbated by a "zombie" or sunset clause — which is so far still part of the modernized ECT — whereby states can be sued for another 20 years following their withdrawal from the treaty.
This loophole was exploited by UK oil company Rockhopper in 2017 when it sued the Italian government — after it had withdrawn from the ECT — for banning oil drilling on the Adriatic coast. Most of the €225 million ($224.4 million) claim, which succeeded in August of this year, was for future profits.
"That's why it's crucial there is a coordinated withdrawal of EU member states," said Paul de Clerck of Friends of the Earth. "The states can then decide amongst themselves in an additional agreement that intra-EU cases are no longer possible."
De Clerck is referring to the European Court of Justice decision in September 2021 which adjudicated that EU energy companies cannot, under EU law, sue other EU countries through the investor-state dispute settlement (ISDS) mechanism that settles ECT cases. This would neutralize around 90% of the cases being brought to the tribunal, according to de Clerck.
With EU states set to vote on the modernized treaty at an ETC conference in November, calls to abstain and then exit the ECT en masse are growing.
“The bottom line is that we are still left with a dangerous agreement that will obstruct urgent action to tackle the climate crisis for years to come," said London-headquarted climate campaigners, Client Earth, in a statement. "The EU must finally do what is necessary for the climate, and legally right: walk away."
Edited by: Jennifer Collins