Today the European Union gave notice of its withdrawal from the Energy Charter Treaty. There is still much to do.
The European Union officially decided in late May to withdraw from the Energy Charter Treaty (ECT), a little-known but insidious legal agreement which investors can use to sue national governments and the EU over climate policies. While welcome news to climate campaigners, the exit, which follows that of several individual countries, is not the death-knell for the treaty.
A number of countries appear committed to remaining in the ECT; indeed, the secretariat has long sought to expand its membership, with a focus on Africa, Asia and Latin America. The EU and any exiting countries will also have to navigate their withdrawal carefully, to avoid liability under the treaty’s ‘sunset clause’. And other sources of legal risk will persist through thousands of bilateral investment treaties, similarly unaligned with the 2015 Paris Agreement on cutting greenhouse-gas emissions.
Tip of the iceberg
The ECT was signed in 1994 by European countries as well as several in central Asia and Japan. It allows energy corporations to bring complaints against governments before private tribunals in a process known as investor-state dispute settlement. More than 50 ISDS cases brought under the treaty to date have been initiated by fossil-fuel companies, including cases where investors challenged bans on offshore-oil production in Italy and the phase-out of coal power in the Netherlands and Germany.
These cases were likely to be just the tip of the ISDS iceberg. In a study we published in Science in 2022, we found that the treaty provision could block, delay or increase the cost to the public of essential supply-side climate action to achieve the Paris Agreement’s goals. The ECT covers 19 per cent of the treaty-protected oil and gas projects that must remain undeveloped to keep within a 1.5C ceiling on global heating since pre-industrial times—amounting to upwards of $20 billion in legal risk. Additional risks not covered in this study would include those associated with phasing out coal power and mining, as well as other fossil-fuel infrastructure such as pipelines.
Much of the risk we assessed rests within the EU and the United Kingdom, which withdrew from the ECT in April. The EU and its member states are negotiating an agreement to nullify the sunset clause, which protects existing investments for an additional 20 years after a country withdraws. If the UK were also to join such an arrangement, the vast majority of ISDS risk associated with upstream oil and gas assets would be eliminated. An EU-UK deal on the ECT exit would seem particularly plausible if the Labour Party, which has expressed animosity towards ISDS, wins the coming general election.
Of course, it may still be possible for the UK and European countries to be sued if investors restructure their investments through countries that stay in the ECT. For example, if Switzerland remains it could become a new hub for restructured investments. This is not a remote possibility: legal firms are advising fossil-fuel corporations and others exposed to climate-policy risk to modify their corporate structure strategically to take advantage of treaty protection.
Larger threat
In deciding to leave the ECT, the EU has taken a significant step toward eliminating the risk of ISDS cases. Unfortunately, not all EU member states have indicated that they will also withdraw and non-EU parties to the ECT, which are largely low- and middle-income states, may also choose to remain. These countries are both more vulnerable to climate change and to the financial shocks of losing a major ISDS case.
Even more concerning is that other countries, including climate-vulnerable countries in Africa, are considering joining the treaty following the recruitment efforts of the ECT secretariat. Recently, it indicated that it would reach out to the Organisation of Petroleum Exporting Countries to explore further expansion.
Finally, while the ECT is significant for its broad membership, there are thousands of smaller bilateral investment treaties criss-crossing the globe with similar ISDS provisions. These could lead to a regulatory chill on climate action, as global-south governments facing significant budgetary challenges will be hesitant to risk triggering potentially massive ISDS payouts.
Challenging timeframe
Dealing with this larger threat in a timeframe allowing critical climate action is challenging. One option floated at a recent conference hosted by the Organisation for Economic Co-operation and Development would be for committed governments to work in a co-ordinated fashion to terminate their problematic investment treaties.
Given the EU’s experience with exiting the ECT and terminating intra-EU bilateral investment treaties, as well as its desire to demonstrate climate leadership, taking up the broader battle against ISDS would be a logical move. With the EU experiencing a rise of right-wing parties across the continent, however, other countries or ‘climate clubs’, such as the Beyond Oil and Gas Alliance, have an opportunity to lead too.
It is critical that the international community not lose the momentum created by the EU’s decision, because time is running short to limit global heating. As Mary Robinson, chair of the Elders and former president of Ireland, has argued, ‘aligning investment treaties with the Paris Agreement could scarcely be more urgent’.
Rachel Thrasher is a researcher with the Boston University Global Development Policy Center’s global economic governance initiative. She is author of Constraining Development: The Shrinking of Policy Space in the International Trade Regime (Anthem Press).
Kyla Tienhaara is the Canada research chair in economy and environment and an associate professor in the School of Environmental Studies and Department of Global Development Studies at Queen’s University, Kingston and a fellow of the Boston University Global Development Policy Center.