30 years to abandon an energy treaty harmful to the European transition

The withdrawal of member states from the Energy Charter Treaty has been approved, deemed too protective towards companies that invest in fossil fuels.

• The EU Council of Ministers has approved the withdrawal of member countries from the Energy Charter Treaty, considered an obsolete and protective instrument towards companies that invest in fossil fuels.
• Thanks to the treaty, in fact, private companies could sue states committed to developing and adopting laws to combat climate change.

The Council of Ministers of the European Union approved the withdrawal of EU member states from the international Energy Charter Treaty (Energy Charter Treaty), considered too protective towards investments in fossil fuels and from which many countries, including France, had already announced several times their intention to exit.

In July, the European Commission proposed that the EU, together with its member states and Euratom (the European Civil Nuclear Organisation), "withdraw in a coordinated and orderly manner" from a treaty deemed "incompatible with climate ambitions of Europe”, writes the site Eunews.

Thus, the ministers of the European Union meeting in Brussels they approved the proposal:now the definitive green light from MEPs is needed.Another jointly adopted proposal, however, leaves open the possibility for states that so wish to approve the “modernization” of the treaty at a future conference of the organization and to remain members of the amended treaty (a request made in particular by Hungary and Cyprus ).

What is the Energy charter treaty

The Energy Charter Treaty (ECT) was signed in 1994 in Lisbon with the aim of promoting cross-border cooperation in the energy sector, in particular between the two fronts of the "Iron Curtain" (the border line that has divided Europe into two separate zones of political influence, since the end of the Second World War to the end of the Cold War).The treaty was created to offer more guarantees to Western companies that wanted to invest in the former states of the galaxy of Soviet influence, which were then transitioning to a model of market capitalism and had many fossil resources waiting to be exploited.Under the aegis of the ECT, investors could operate protected from the risk of expropriations, nationalizations, breaches of contracts and all unforeseen circumstances that could have an impact on profit prospects.

But unlike expectations, the ECT became soon a private arbitration system, with legally binding sentences:by appealing to the instruments provided for by the treaty to resolve disputes, in fact, the companies that managed fossil fuel deposits and power plants could initiate legal action against states increasingly committed to developing and adopting laws to combat climate change and reduce CO2 emissions.

In fact, the greatest criticality of the Charter lies in the dispute resolution clause regarding investments and the state (ISDS or Investor-State-Dispute-Settlement).As anticipated, in fact, this clause protects companies' investments from national policies theoretically harmful to their interests, allowing them access to private arbitration.Policies such as those related to energy decarbonisation.In other words, multinationals that have invested in fossil energy production, in Eastern as well as Western Europe, can sue governments for lost profits in the event of new regulations or laws that favor the ecological transition.

Countries that leave the treaty can still face litigation for 20 years

In front of a growing number of disputes, Europeans initially sought to modernize the text to avoid opportunistic claims and phase out fossil fuels.However, in the absence of a quick compromise, by the end of 2022, almost a dozen EU countries (France, Spain, the Netherlands, Germany, Luxembourg, Poland, etc.) have decided to withdraw from the ECT.Outside the EU, the UK announced its withdrawal on 22 February.

However, those who abandon the ECT are still subject to the “survival clause”, which protects fossil fuel plants covered by the treaty for several years after a signatory country withdraws.Without a reform approved at the institutional level (the vote of the MEPs is still missing), the countries that abandon the treaty they can suffer litigation for another 20 years.It's the fault of the "sunset clause".

It is an example is the case of Italy, which despite having effectively abandoned the treaty in 2016, was ordered to pay compensation of around 200 million euros to the oil company Rockhopper in 2022 for refusing an offshore drilling permit.