Energy Charter: How do we look at the vulnerabilities of the treaty?

The Energy Charter Treaty (ECT) seems like any other treaty — designed to ensure investment predictability and promote international cooperation.

However, it comes with a set of vulnerabilities and potential risks to the global climate agenda and the decarbonization efforts of the European economy.

Why does the Energy Charter Treaty matter?

The Energy Charter Treaty (ECT), established in 1994 and in force since 1998, is an international treaty with 53 signatories. In general, the treaty aims to:

  • Protect foreign investments in the energy sector within the territories of the signatory countries;
  • Ensure non-discriminatory conditions for trade in energy materials and energy-related equipment (aligned with WTO rules – World Trade Organization);
  • Resolve any disputes between participating countries or, in the case of investments, between investors and host states;
  • Promote energy efficiency, minimising the environmental impact of energy production and usage processes.

Essentially, the treaty seeks to safeguard investments in the energy sector from possible unpredictable and protective actions that contradict WTO norms, signed by the participating countries. This treaty was relevant during the socio-political transition period in Eastern Europe. The former socialist countries faced the challenge of utilising their national energy resources while dealing with political volatility and instability that hindered the necessary foreign investments. In this context, the ECT was designed to create a secure space for foreign investors to enter Eastern European countries.

So far, the ECT seems like any other treaty, meant to ensure investment predictability and promote international cooperation. However, it has a series of vulnerabilities that make it a potential risk to the global climate agenda and the decarbonization efforts of the European economy.

ECT and the Paris Agreement are not aligned — why does it matter?

The European Union (as well as individual states like Romania) is a signatory to both the ECT and the Paris Agreement. This means that European norms are required to adhere to both treaties, and any disparities between the texts of the two treaties need to be resolved as soon as possible.

When looking at European climate policies and energy ambitions, we can observe that these are not only aligned with the text of the Paris Agreement but are even more ambitious in certain aspects. Thus, any misalignment between the Paris Agreement and the ECT indicates a potential discrepancy with a greater number of European and national policies.

As noted by the analysis by E3G, even though the ECT’s purpose is to promote foreign investments, it has largely become a “refuge” for the interests of companies operating in the fossil fuel sector.

To discuss alignment of the treaty with the Paris Agreement, we should consider at least two minimum criteria:

1. The ECT should not protect investments that hinder the energy transition

In the first criterion, both the EU and the UK have proposed amendments to the treaty with the aim of excluding fossil fuel investments from the protection of the ECT.

This should, theoretically, ensure compliance with the first minimum requirement. However, both the EU and the UK have left an important loophole in this direction, allowing for investments in infrastructure for natural gas transport or even coal-fired power plants, as long as they indicate a possible technological solution in the future, such as using hydrogen instead of natural gas or coal.

These investments do not need to consider the net-zero commitment in this context. The use of the phrase “hydrogen-ready” allows the investment to be covered by the treaty’s text, thus preventing a complete alignment with the first criterion of the Paris Agreement.

2. The treaty should not challenge public policies necessary for achieving the energy transition

Here, the UK and the EU suggest a possible alignment of protection for fossil energy industries with the terms imposed by the Paris Agreement and supported by the International Energy Agency (IEA).

However, this alignment within the terms of the ECT is detrimental to proactive national policies. In practice, states cannot implement policies that discourage the use of fossil fuels as long as these protections provided by the ECT exist (even if they have an “expiry” timeline).

In this regard, examples from Germany and the Netherlands are important, as they faced billion-Euro litigations initiated by companies in the fossil fuel sector as a result of the ambitions (outlined in public policies) of these two states to accelerate the energy transition.

What can we actually do about this treaty?

Understanding the context, a possible solution might be to reform this treaty to align with European climate and energy objectives. Unfortunately, this solution has notable drawbacks, as highlighted by CAN Europe. These drawbacks include:

  • Lack of political support for this path – the European Parliament criticised the reform initiative as insufficient and called on the European Commission and member states to initiate a coordinated withdrawal procedure. Moreover, 7 EU member states (France, Germany, the Netherlands, Poland, Spain, Luxembourg, and Slovenia, Italy withdrew in 2016) have already declared their intention to withdraw from the treaty, which makes the idea of reforming it politically unlikely.
  • In fact, the possibility of successfully reforming the pact is very low. Reformation requires EU agreement, which needs to be unanimous (including states that have exited or intend to exit the treaty) and approved by the European Parliament (which has expressed its support for withdrawal). In this context, it’s unlikely that the EU vote would favour treaty modification.
  • Even if reformed, the ECT would remain a threat to climate policies, a conclusion supported by the French High Council for Climate. We can see, for instance, how investors have launched a series of lawsuits against measures adopted by governments in response to the recent energy crisis.

Coordinated exit — a possible good option?

Given the urgency of energy system reforms (energy transition, resolving the energy crisis, etc.), the need to regain control of the political agenda, and avoid vulnerabilities imposed by the ECT, this could be achieved through a coordinated withdrawal from the treaty.

As 65% of ECT-based litigations are intra-EU, a withdrawal of ECT members from the EU coupled with an intergovernmental understanding regarding the non-application of the ECT in bilateral EU relations could be the simplest and most efficient solution.

The EU could also open the doors for ECT signatories outside the EU to join this coordinated withdrawal, further reducing potential risks associated with withdrawal.

However, withdrawal from the ECT should not mean the absence of any governance framework, especially in Europe. In this sense, the place of the ECT could be taken by the European Energy Community through the Energy Community Treaty.

In practice, this treaty aims to expand the EU’s internal market to include countries in Southeast Europe and the Black Sea region. Given that most countries in this area are already members of this energy community, the transition from governance based on ECT to governance based on EU internal market rules seems feasible.

Global energy governance would be ensured by WTO rules (World Trade Organization) or treaties adopted based on the Paris Agreement or other treaties aligned with global climate goals.

Romania and the Energy Charter Treaty (ECT) — why it matters

At the present moment, Romania is involved in 8 disputes as a result of applying the provisions of the Energy Charter Treaty. Considering the hydrocarbon resources present in Romania, its participation in the ECT represents a vulnerability, especially in the context of ambitious energy policies at the EU and Romanian levels aimed at supporting the energy transition.

Furthermore, in the midst of the ongoing energy crisis, the government’s ability to intervene effectively and swiftly to support transition measures and protect the Romanian economy could be hindered by the ECT clauses when certain companies stand to incur losses from these measures.

Nevertheless, withdrawing from the ECT should not be interpreted as an abandonment of fairness and predictability principles in favour of efficiency and rapid intervention capabilities. The reconfiguration of bilateral and multilateral energy trade relations can be rooted in both the goals of the European energy community (of which Romania is a part as a member of the EU) and the provisions of climate agreements. Given its highly significant geographic and geopolitical position, Romania can play a pivotal role in shaping a new paradigm of regional energy cooperation, grounded in the European energy community.

Anca Șinea

Researcher at Babeș-Bolyai University and an expert in energy public policy at the Center for the Study of Democracy.

Article first published on InfoClima

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