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Energy Charter Treaty: Is there a way out for the European Green Deal? - Selin Kumbaracı

The Energy Charter Treaty (ECT) was adopted in 1994 and entered into force in 1998. It was designed to foster investments in the energy sector and assist former Soviet-bloc countries, following the USSR's collapse, in rebuilding. It does so through how it protects investments in natural resources in former Soviet states by allowing private companies to institute legal proceedings against governments in cases where legislation enacted damage the current value or future potential profits of investments. Furthermore, these lawsuits are settled in private arbitration hearings, not in public courts. Opponents argue this process is not transparent and that even the threat of such a lawsuit can get in the way of governments introducing environmental legislation that would be in the public interest.

At the moment, there is debate on the future of the ECT, with some arguing for its modernization and others opposing the entire purpose of the Treaty. The European Union particularly has a key stake in the ECT due to its implications for the European Green Deal and the broader Paris Agreement. All EU Member States, except for Italy, are members of the Treaty, and the EU itself is also a member in its own right; thus, the issues at hand are matters of concern for the entirety of the bloc.

Due to the investment protection measures in the ECT, the plans the EU is developing to move away from fossil fuels seem to be at risk of becoming grounds for litigation by fossil fuel companies. Indeed, one can see an example of this in the way in which the German energy company Uniper, which opened a new coal plant in the Netherlands in 2016, is threatening to sue the Dutch government, under the ECT, for its 2019 law on phasing out coal by 2030 and is allegedly demanding €1 billion as compensation.

In response to these concerns on whether the ECT can obstruct the implementation of the Green Deal, the European Commission—the EU executive, in other words—has been given the mandate to renegotiate the Treaty by the EU Member States. They have particularly said that the EU needs to regain its' right to regulate' when it comes to climate change.

Nonetheless, it seems that this renegotiation process will be anything but easy. The biggest challenge can perhaps be attributed to procedural issues: any ECT changes require unanimity among the more than 50 countries party to the Treaty. This unanimity will be difficult to reach given the composition of the Treaty's membership. Countries earning substantial amounts of income from fossil fuels, such as Azerbaijan, Turkmenistan, and Kazakhstan, are also parties. According to leaked documents, Japan seems to be blocking many of the changes the EU would like to bring, for instance, concerning modifications that would safeguard low carbon investments instead of fossil fuels.

Additionally, some challenge how meaningful it is for the EU to modernize the Treaty. One such argument is that such efforts are inherently redundant due to how investment will (arguably) naturally shift toward renewables due to their price-competitiveness against fossil fuels. As stated by Alan Riley, a senior fellow at the Atlantic Council, "why should the Commission be spending precious political capital on persuading other states to remove fossil fuels from the ECT when the market will do that job in any event?"

Furthermore, as many environmental groups have, others propose that the EU simply withdraw from the Treaty. However, this is not as quick a solution as it may seem. Withdrawing from the ECT automatically brings into effect a sunset clause, wherein investors would still be able to bring lawsuits against governments for 20 more years.

Due to the challenges above the EU is facing, it now seems to be looking for a solution with the Court of Justice of the EU (CJEU). Belgium put forward a request for the CJEU to rule on whether or not the investment protection stipulations in the Treaty are even legal under EU law. This is not so far-fetched of an idea, given that in 2018 the CJEU ruled that investor-state dispute treaties signed between two EU Member States are illegal since the protections provided by EU law on this matter are sufficient as well as because of how such agreements undermine the legal system of the EU, with their bypassing of public courts.

Even if the Court were to rule that the ECT is illegal, this would only apply to the Treaty's applicability amongst the EU Member States—a company incorporated in an ECT-member country, but not in the EU, would still be able to sue EU governments.

The solution perhaps lies in a different path. There is a collective withdrawal of EU countries from the Treaty but with an agreement to keep their companies from instituting legal proceedings, based on the ECT, against one another.

If countries in the European Free Trade Association (EFTA)—namely, Iceland, Liechtenstein, Norway, and Switzerland—were to join in on such an agreement, that would potentially protect about 80% of foreign investment in the EU energy sector from legal action that could arise due to climate action legislation.

While the exact way out of this situation for the EU is not clear at the moment, the political will to move ahead with climate policy seems to be weathering this latest storm.


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