Prospects have brightened for green reforms to a controversial international treaty that protects fossil fuel investments, as ministers of European Union states agreed on Thursday that countries can still choose to support the reforms despite the bloc’s decision to quit the pact.
In a statement, a gathering of EU ministers called the Council of the EU said the decision “unlocked the process of modernisation of the Energy Charter Treaty (ECT) for its non-EU contracting parties”.
The compromise allows the EU as a body to withdraw from the treaty, while individual EU member states can stay in and approve the green reforms at a conference due to take place this year, if they wish.
The ECT currently allows all energy companies – including coal, oil and gas firms – to sue governments over climate and other policies they see as a threat to their current and future profits.
The proposed reforms to modernise the ECT, which are due to be voted on in November, would make it easier for ECT countries to prevent the treaty being used as a basis for lawsuits involving fossil fuel assets that are affected by green economy measures.
However, with several European countries already filing their notice to leave the ECT, it is unclear whether a sufficient number of EU states will stay in the treaty long enough to get the reforms approved. As part of today’s EU Council agreement, the EU confirmed it would leave the treaty.
Other ECT member states, including Japan and Kazakhstan, only grudgingly agreed to back the reforms under pressure from the European Commission.
For the ECT “modernisation” proposal to be adopted, none of the treaty’s member governments – now numbering 49 – must vote against it at November’s conference. Then three-quarters of ECT members need to ratify the reforms for them to take effect.
If the reforms fail, the ECT’s members across Europe and Asia will be unable to remove its protection for fossil fuel investments and – due to a 20-year sunset clause – even EU countries that have left would be exposed to lawsuits for that period.
Post-Soviet treaty
The ECT was conceived in the 1990s to boost investment flows between Western and post-Soviet countries. But its provisions to deter states from grabbing private assets have since been used by energy companies to fight back against climate policies.
In 2020, a British oil and gas company sued Slovenia over what it called “unreasonable” environmental protections”, while German energy company Uniper threatened to sue the Dutch government for €1 billion ($1.1bn) over its coal phase-out plans.
In lawsuits brought under the ECT last November, British oil company Kelsch is suing the EU, Germany and Denmark for at least 95 million euros ($102m) over a windfall tax on energy firms.
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The European Commission reacted to these and other cases by attempting to remove fossil fuels from the list of investments protected by the ECT – with the aim that it would apply only to clean energy assets.
For two years, efforts by EU negotiators were repeatedly blocked by Japan and Kazakhstan. But in June 2022, a “flexibility mechanism” was agreed that would allow ECT states to end protection for fossil fuels, as long as no other ECT state objected.
Europe divided
Despite European Commission negotiators finally winning this right, EU member countries were divided on how to apply it.
Governments like France, Spain and Luxembourg wanted to immediately end protection for fossil fuel investments but faced push-back from several Eastern European countries.
They agreed a compromise to stop protection for new fossil fuel investments but to continue it for existing investments for ten years – a decision that angered climate campaigners.
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Friends of the Earth’s Paul de Clerck said at the time it would “lock the EU in fossil fuel investment protection” for a decade.
Despite this agreement, by the time the annual ECT conference came around in November 2022, EU governments no longer unanimously backed the reforms the European Commission had negotiated, and so they were shelved.
Locking in Asian fossil fuels
The EU’s stalling on the reforms drew an angry response from then head of the ECT secretariat, Guy Lentz of Luxembourg.
In a letter to the leader of the European Parliament in February 2023, he warned that if the EU withdrew as a bloc before approving the modernisation, it would amount to “an express prohibition” for other ECT members to better align with the Paris Agreement on climate change.
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He added that failure to agree reforms would essentially allow fossil fuel companies to sue EU states for longer because of an existing 20-year sunset clause, which means energy companies can bring lawsuits against governments for two decades even after a country leaves the treaty.
EU states wanted to neutralise this sunset clause by agreeing a side deal between themselves not to apply the treaty. But Lentz said these attempts “may not provide the expected legal certainty”. Campaigners accused him of “bluffing”.
Numbers game
EU countries then continued to debate among themselves whether to stay in or leave the ECT and – if they withdrew – whether to modernise it before exiting.
Despite the ongoing talks, France, Germany and Poland officially left the ECT in December 2023. Luxembourg and Slovenia will leave in June and October 2024 respectively. Portugal, the UK, Spain and the EU will leave next year.
This debate was resolved today, with EU states’ ministers agreeing to a compromise, brokered by the Belgian government. Governments that want to can stay and support the modernisation, but the EU itself can start process of exiting right away.
Belgian energy minister Tinne Van der Straeten said her government had “worked tirelessly to break this complex deadlock and found a balance acceptable and useful to all”.
The deal essentially makes the reforms contingent on timing and EU countries’ commitment to reform.
By November, after Luxembourg and Slovenia exit, there will be 47 ECT member states, including 22 from the EU. Eleven more – including the United Kingdom and Switzerland – are in Europe but not in the EU. Nine others are in Central Asia and three in the Middle East, with Japan and Mongolia the remaining two.
E3G analyst Eunjung Lee said ECT modernisation “is still uncertain” but added “with the EU Council decision today, it is probable that the modernisation might pass, particularly if the voting takes place via correspondence”.
The ECT approved this option in October 2022. It means the conference’s chair sets a deadline by which any objections should be sent in.
“This will make things easier than voting at a conference, because unless there is a clear objection, the modernisation will be adopted”.
But even if the reform is approved, Lee said the ratification by three-quarters of countries “could take forever”.
De Clerck of Friends of the Earth agreed, saying “it is unclear if the reform would ever be ratified”.
(Reporting by Joe Lo; editing by Megan Rowling)