The ECT’s modern makeover unveiled

Key takeaway

Amidst criticism that it is outdated and “anti-climate”, and after lengthy negotiations, a makeover of the Energy Charter Treaty (ECT) was announced on 24 June 2022. Agreement in principle has been reached by contracting states to: adopt a flexible mechanism to phase out protection of fossil fuel investments, reiterate states’ right to regulate to protect the environment, prohibit intra-EU claims and align the ECT with the clean energy transition and the Paris Agreement. However, the flexibility around the proposed “green” provisions, particularly in relation to the phase out of fossil fuels, may leave critics of the ECT unsatisfied. Speculation remains that some member states may exit the treaty even with the reforms and, in any event, ratification of the modernised Treaty will require approval by three quarters of its members. The ECT’s future remains uncertain.

Background

After numerous rounds of highly political negotiations, the Energy Charter Conference announced on 24 June 2022, that ‘tentative agreement’ had been reached in principle on the modernisation of the ECT among all 53 contracting parties. 

(Read our article on the modernisation process here).

Key changes

We will not know full details of the modernised text until late 2022 at the earliest. However, it is clear from the Energy Charter Conference’s announcement that the changes encompass some of the key aims of the EU’s proposal: reflecting energy transition goals and contributing to the achievement of the objectives of the Paris Agreement.

The major changes are:

• The extension of treaty protection to new forms of energy and energy related technology, including hydrogen and CCUS.
• Investments in new fossil fuel projects will be excluded from the substantive protections of the treaty (e.g. fair and equitable treatment, protection against discriminatory measures and freedom from expropriation)in the EU and UK territories. Subject to some limited exceptions, legal protection for new projects will expire in August 2023. Existing investments will only enjoy legal protection for ten years after the relevant provisions of the ECT are ratified, as opposed to 20 years under the current withdrawal or sunset rule. A flexibility mechanism will allow other contracting parties to opt into the regime agreed by the EU and UK.
• A formal mechanism will be introduced to allow contracting parties to review the flexibility mechanism and the list of energy materials and products that fall under the ECT’s protection and update or amend to keep pace with scientific and technological advances. 
• An investor from a contracting party that is part of a regional economic integration organisation (REIO) such as the EU will not be permitted to bring an investor-State dispute settlement claim against a contracting party that is a member of the same REIO, helping to achieve the EU’s objective of eliminating intra-EU investor state dispute settlement. This follows the European Court of Justice’s (ECJ’s) ruling in the Achmea case and subsequent judgments which have held that investor-state arbitration provisions in bilateral investment treaties between EU member states are incompatible with EU law. This effectively means that intra-EU investments will no longer be protected by the Treaty as EU investors will not be able to bring claims against other EU states for breaches of the Treaty.  
• Only investors with substantive economic interests will enjoy the ECT’s protection and not ‘mailbox’ companies.
• States recommit to labour principles agreeing not to make policy decisions that lower their standards for the purposes of attracting investment – a “non-regression” clause.
• States commit to carrying out Environmental Impact Assessments.
• Additional provisions in relation to transparency and corporate social responsibility.
• Amended dispute resolution procedures, including increased transparency of proceedings and protection for States against frivolous claims.

Future of the ECT

The modernised treaty still faces significant obstacles before it is adopted. So far, only an agreement in principle has been reached. The next stage is for the draft text to undergo an editorial and legal review before it is communicated to the contracting parties by August 2022 for adoption by the Energy Charter Conference in November 2022. The modernised treaty must then be approved by the EU Council and the European Parliament and if ratified by 75% of the contracting parties. This could take years to achieve. 

Given the flexibility of the “green” changes to the ECT, it remains to be seen whether the modernised ECT goes far enough to allay the concerns of the ECT’s critics. 

• France, Germany, the Netherlands, Poland and Spain have all previously called for the EU Commission to consider a coordinated withdrawal of the EU from the ECT. Shortly before the EU Commission’s announcement that agreement had been reached on the modernised ECT, for example, Spain called for the EU to withdraw from the ECT on the grounds that it is not compatible with energy transition. Spain has famously been the target of numerous claims related to the revocation of renewable energy incentives and has been ordered to pay millions in damages to investors. The criticism by some States (a number of whom are facing a claim in the European Court of Human Rights that their ECT membership violates the European Convention on Human Rights and is inconsistent with the Paris Agreement) could mean that we see contracting parties opt for withdrawal over modernisation.
• Climate activists have also responded negatively to the announcement, with Friends of the Earth tweeting that the modernised ECT is “a #climate disaster” that will “lock the EU into #fossilfuel investment protection for at least another decade” and ClientEarth calling for the European Parliament and EU member states to refer the lawfulness of the ECT to the ECJ.

Whilst this announcement marks the end of a lengthy negotiation process, there is a still a long road ahead before a modernised ECT comes into force and, in the meantime, the existing text and its protections remain in place.