A Little-Known EU Investor Dispute Treaty Could Kill The Paris Climate Agreement

In 1991, as the Soviet sphere disintegrated, many questions were being asked about how to integrate the newly-independent countries with the Western world. One of the biggest concerns was over energy.

The energy systems of the former Communist countries were badly in need of investment. But given their histories of nationalization and sudden top-down policy changes, Western investors were reticent about making investments in a sector of such critical interest to governments.

Enter the Energy Charter Treaty. The pact, signed in 1991 and taking effect in 1998, governed the cross-border energy investments between the countries of the European Union and former Soviet states such as Kazakhstan and Georgia. It dealt with a variety of issues, but perhaps the most impactful was investor dispute settlement.

The mechanism protects investors against sudden regulatory changes that might cancel the energy projects they’ve invested in.

Sounds simple enough. But since then, the treaty has morphed into something almost unrecognisable. Russia has since pulled out of the treaty, and the investor dispute settlement mechanism is being mostly used within Western Europe - having nothing to do with the post-communist world.

Today, 67% of investor lawsuits under the treaty are brought by an investor from one European Union country against the government of another EU country. Investors in Germany, Luxembourg, the Netherlands and the UK make up 60% of the 150 investors currently involved in claims. The rate of lawsuits using the ECT has also skyrocketed in the last decade. 75 investor lawsuits were filed in the last five years, compared to just 19 during the first ten years of the agreement (1998-2008).

The treaty’s reach may be about to shift further. The ICT’s secretariat is in talks with African, Asian and Latin American countries to expand its jurisdiction to new continents - in a bid to increase the level of inward investment in energy projects there by providing investor certainty. But critics say this is just going to spread a system that is preventing countries from phasing out fossil fuels.

Locking in coal, oil and gas

On Wednesday, a coalition of environmental and transparency NGOs held a press conference in Brussels recommending that the European Union and its member states pull out of the treaty. They say it is preventing countries from putting in policies to phase out fossil fuels in order to meet the targets of the Paris climate agreement - because they risk being sued by fossil fuel companies if they do so.

The point was made at the press conference by Yamina Saheb, herself a former head of the energy efficiency unit at the Energy Charter’s own secretariat, and also an expert with the Intergovernmental Panel on Climate Change (IPCC). “The EU’s goal to reach carbon neutrality will require regulatory changes. But each time we change the regulations, we would risk being sued.”

In other words, the regulatory changes necessary to meet the Paris Agreement goals will be impossible as long as this treaty is in effect.

But even if the EU and its member states were to pull out of the treaty now, a “survival clause” means that companies could continue suing countries for changing their energy regulations for 20 years. This was recently put to the test in Italy, which became the first European country to withdraw from the treaty in 2016. Readying changes to its feed-in tariff structure for solar power, Italy wanted to avoid the fate of Spain which is currently being inundated with lawsuits over changes to its solar program. But Rome has still been the subject of ECT lawsuits since then, using the clause.

The European Commission, the EU’s executive branch, has acknowledged that the treaty is not functioning as intended and is outdated. But they say scrapping the treaty would cause more problems than it solves. Instead they want to reform the treaty, and put forward a proposal to do so earlier this year.

Carlo Pettinato, head of investment policy at the Commission’s trade unit, says the proposed reform “explicitly says the treaty must be Paris Agreement compatible and include provisions on climate change”.

“I don’t disagree, there are several problems with the treaty as it stands,” he said. The reform would make two critical changes - recognising reaching the Paris Agreement goals as legitimate reasons for regulatory change, and redefining the meaning of an ‘investor’ so it will be less easy to launch lawsuits.

Because of the “survival clause”, it is better to reform the treaty than to withdraw, he argued, because the terms of the existing treaty would continue to exist for 20 years. Under a reform, however, the changes to the treaty’s investor protection would take immediate effect.

Revoke or reform?

But given that changing the treaty would require the unanimous consent of all 52 member countries, many are sceptical that reform can really be accomplished. The European Union has even been unable to get agreement among its own 28 member states about changing its own rules to make it impossible for EU investors to sue EU governments under the treaty.

“If there’s so much opposition, this is going to take years,” said Nathalie Bernasconi-Osterwalder, a lawyer with the International Institute on Sustainable Development, at the event. “Climate change is happening now. What are we going to do in the mean time?”

In the end it will be up to EU countries whether to push for the withdrawal or reform route.

Claude Turmes, Luxembourg’s energy minister, said at the event that he wants to give the Commission some time to pursue the reform negotiations. But he does not think governments should wait forever.

“I would give it a few months,” he said, after which withdrawal would be “an option worth seriously considering”.

He added that the EU should be able to push through these changes, because it contributes about 2/3 of the treaty’s budget. “Let’s be clear: we have the money, we have the diplomatic influence, we have the firepower to do this. Our problem is that we are not bold enough and often we are not united enough,” he said.

Turmes said he would put the issue on the agenda of a meeting of EU national energy ministers on 24 September. He said he wants to see the incoming Commission president Ursula von der Leyen, who takes office on 1 November, to deal with the issue as part of her European Green New Deal package, expected to be launched at the end of this year.