What is the Energy Charter Treaty and why is it so controversial?

The closed-door arbitration system of the Energy Charter Treaty is under increasing criticism from EU member states. - Copyright Andrew Milligan/AP

By Jorge Liboreiro

Published on 26/10/2022 - 15:07•Updated 15:31

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The ECT establishes a system of private arbitration that can result in multimillion euro compensations for fossil fuel companies.

An obscure international agreement dating back to the post-Cold War era is being openly contested by a growing number of European countries, almost 30 years after its signature.

France, Spain, Poland and the Netherlands have announced plans to withdraw from the Energy Charter Treaty (ECT), arguing the accord runs counter to their climate goals. Belgium and Germany are reportedly considering a similar move.

"We have decided to withdraw from the Energy Charter Treaty, first because it's in line with the positions we've taken, notably the Paris Accord and what it implies," French President Emmanuel Macron said last week.

A controversial treaty

Signed in Lisbon in December 1994, the ECT was designed to promote cross-border cooperation in the energy sector between the two sides of the Iron Curtain.

The treaty offered extra guarantees to Western investors that were looking to do business in former Soviet states, which were then transitioning towards a model of market capitalism and had plenty of fossil resources awaiting exploitation.

Under the ECT, investors were protected against discriminatory access, expropriation, nationalisation, breaches of contract and other unexpected circumstances that could impact their profit expectations.

The agreement grew over time and today has 53 signatories, including the European Union.

Major energy exporters, like the United States, Saudi Arabia and Russia, are not bound by the deal.

The treaty's provisions cover the main commercial aspects of trade in energy goods (both raw materials and refined products), investment, transit and efficiency.

Notably, the ECT establishes a private system of arbitration through which investors and companies can sue countries and claim compensation over policy changes that threaten their business ventures and revenues.

As an international agreement, the rulings from this arbitration are legally binding.

This very system is at the core of the growing controversy.

Multimillion euro lawsuits

Using this dispute settlement, corporations that operate oil fields, gas pipelines and coal-fired power plants can launch legal cases against states that pass legislation to fight climate change and curb CO2 emissions.

The value of fossil fuel infrastructure in the EU, the UK and Switzerland protected by the treaty is estimated to be worth €344.6 billion, according to the magazine Investigate Europe.

In 2021, the Netherlands was struck by two different lawsuits from German energy companies claiming compensation over the country's phase-out of coal power.

Such cases have fuelled criticism against the ECT from both governments and climate activists, who worry net-zero goals can become the target of multimillion euro lawsuits.

This risks "creating a catastrophic chilling effect for governments that want to take necessary steps to curb dangerous global heating but fear reprisals by industry," environmental charity ClientEarth has said.

The European Court of Justice has ruled the treaty's closed-door private arbitration violates EU law and must not be used to settle disputes between member states.

Investigate Europe estimates 74% of ECT cases involve an EU investor against an EU country.

"To leave as a bloc would be a very strong statement," Dutch Energy Minister Rob Jetten said this week.

In a bid to stop a massive withdrawal from the treaty, the European Commission has negotiated a series of amendments to the text, including an immediate end to intra-EU lawsuits.

The changes need to be unanimously approved by all 53 signatories during a meeting in November.

Making matters more complicated is the ECT's notoriously long sunset clause. Even when a country exits the treaty, it remains vulnerable to litigation for 20 years.

In 2016, Italy became the first EU country to quit the agreement but, six years later, it was still ordered to pay €190 million – plus interests – in compensation to Rockhopper Exploration, a UK-based oil and gas company.

The lawsuit centred on Italy's decision to block oil drilling within 12 miles of the Adriatic Coast, a prohibition that scuppered Rockhopper's plans to invest €33 million in an oilfield project.

The vast difference between the project's cost and the compensation is supposed to reflect the company's expected loss of profits.

The Commission is pushing to limit the sunset clause to 10 years for existing contracts and just nine months for new investments – but this tweak will apply only those who stay in the ECT.

Watch the video above to learn more about the Energy Charter Treaty.

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