Sunset on the ECT’s modernisation?

Introduction

Following years of negotiation, agreement in principle on the modernisation of Energy Charter Treaty was finally reached last June and the Treaty’s member states were due to vote on the revised text in November. However, following announcements from seven EU member states that they intended to withdraw from the ECT completely and complaints that the reforms did not go far enough to promote the energy transition, EU states failed to reach a majority to approve the modernisation proposal and the vote has been postponed to April 2023. Just a few days later, the European Parliament passed a resolution for a coordinated exit of the EU from the ECT. With the EU and its member states making up a significant proportion of the signatories to the Treaty, the prospects for its modernisation and indeed its entire future look uncertain.

EU withdrawal

In recent months, Germany, France, Spain, the Netherlands, Poland, Slovenia and Luxembourg have all informed the European Commission that they intend to withdraw from the ECT. Following Italy’s withdrawal in 2016, this represents a withdrawal of approximately 30% of all EU member states. As a result, the European Council has failed to reach the qualified majority in favour of the proposed amendments. The European Parliament has also passed a resolution urging the European Commission to initiate an immediate coordinated exit and called on the Council to support such a proposal.

For the withdrawing states, it seems that the modernisation process has not gone far enough to align the ECT with the energy transition and the goals of the United Nations Framework Convention on Climate Change and the Paris Agreement. The ECT has been criticised by numerous EU member states, as well as climate activists, for being an obstacle to the energy transition. This European Parliament has stated that “neither the EU nor its Member States can stay party to the current ECT because of its incompatibility with EU law and EU policy”, in particular the objective to become climate neutral by 2050. On that basis, the European Parliament sees a coordinated exit as the best option, indicating that EU member states should align to ensure a strong position when entering into the withdrawal negotiations.

Future role of withdrawing states

While it remains to be seen whether the withdrawing states will participate in the postponed vote on the ECT modernisation, it may be in their best interests to continue to engage in the modernisation process to seek to limit any negative effects arising as a result of the ECT’s sunset rule. Under the current withdrawal or sunset rule, existing investments enjoy legal protection for 20 years after a Contracting State’s withdrawal as opposed to 10 years in the draft modernised text. In the recent Rockhopper case, for example, Italy was found liable for €190 million in damages and compensation to the British-Italian oil and gas company, Rockhopper after it was banned from drilling in the offshore Ombrina Mare oil field following a change in policy by the Italian government, despite proceedings being brought after Italy’s withdrawal from the treaty. 

The European Parliament has also suggested that all EU member states ratify a draft agreement from the European Commission that investor-state dispute settlement (including under the ECT) cannot be used for intra-EU disputes. An equivalent provision was included in the draft modernised ECT preventing claims between investors and states in regional economic integration organisations (like the EU) and follows the September 2021 ruling of the Court of Justice of the European Union in Komstroy v Moldova (Case C-741/19) that intra-EU investment arbitration proceedings under the ECT are incompatible with EU law.

Future of the ECT

The future of the ECT is uncertain. The treaty has become controversial in recent years for protecting fossil fuel investments and stifling regulation to net zero. The proposed withdrawal by the EU has delayed the modernisation process intended to make the ECT ‘greener’. Whilst, negotiations between the ECT’s Contracting States are expected to continue and a vote on the modernised treaty to go ahead in April, unanimity is required for it to be implemented. In the meantime, the current ECT remains in force and it remains to be seen whether any more countries will announce their withdrawal.