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Modernisation of the Energy Charter Treaty - Towards a Fair New Deal for All?
Modernisation of the Energy Charter Treaty - Towards a Fair New Deal for All?
Norbert Czerniak
By Norbert Czerniak
Apr 20 2022 · 7 min read

Illuminem Voices
Oil & Gas · Renewables · Energy Transition

The Energy Charter Treaty (the ECT or the Treaty) is an international agreement, the main objective of which has been to promote cross-border energy investments between East and West [1], following the end of the Cold War. On political level, the ECT had been supposed to serve as a “gateway”, providing an international legal protection for Western investments in the former Soviet area, especially in Russia [2]. This political ambition ultimately failed with the Russian withdrawal from the ECT back in 2009 [3]. Nonetheless, the way the investment-related provisions of the ECT have been formulated, has encouraged many Western investors to rely on the ECT substantive protection with regard to their investments in other Western States.

The ECT – from East-West to West-West gateway

The ECT has been invoked by many EU-based investors trying to maintain the “status quo” of their energy-related investments in other EU Member States (the so-called intra-EU disputes). Famously, a number of Western investors has sued Spain due to a gradual removal of its original subsidies offered to developers of renewable energy projects in its territory[4]. The rising number of intra-EU rather than East-West disputes has disturbed many ECT Contracting Parties, including the European Union [5]. The phenomenon has caused some EU politicians to call upon the EU to collectively withdraw from the ECT [6]. Nonetheless, it seems that the EU has – in the meantime - reviewed its policy towards the Treaty and is now actively contributing to ECT modernization efforts [7]. A possible new, “greener” version of the ECT could be agreed “in principle” as soon as this June [8].

Towards a “Greener” Energy Charter Treaty

There are at least a few approaches to “greening” the ECT [9]. The least obvious approach is an organic “greening” of the Treaty. Indeed, some scholars have pointed out that the ECT has been drafted in a way supporting its pro-renewable interpretation [10]. As a result, the current, “old” ECT text can be interpreted so as to maximize its potential for promotion of “green” investments – corresponding to according change in public policies of the ECT Contracting Parties. Moreover, what tends to be forgotten, is that the ECT does not – in strict terms – promote investments in fossil fuels. In other words – there is nothing in the Treaty that “forces” any investor or any government to invest in fossil fuel-related projects. However, the ECT does protect investments in conventional, non-green energy carriers made between the ECT entry into force and until a possible new ECT text replaces the “old” one. Does this mean that governments bound by the ECT may not decide to e.g. phase out coal in line with their new pro-climate policies? Not at all.

The ECT and Coal Phase Out – between Investors’ interests and reasonable change of public policy

What has been criticized by part of the public, is the investor-state dispute settlement mechanism anchored in the ECT [11]. This mechanism allows international investors to sue host States for change of their energy policy in a way that harms the investors’ internationally protected businesses. In one of the pending cases the German companies RWE and Uniper have invoked the ECT to challenge the Dutch government’s decision to phase out fossil fuels by 2030 [12]. Some commentators would equate institution of such ECT-based proceedings with winning a case by the investor. That might just constitute an unjustified jump to conclusions where there is at least space for debate. Indeed, international investors may sue governments that decide to phase out fossil fuels altogether. Yet, the main substance of dispute would be the way such phasing out is to be conducted [13]. One vital factor would be the time over which the given phaseout should take place. It can carefully be argued that the longer the phaseout, the less compensation – if any - could an international investor possibly be entitled to under the ECT. One could even go a step further and argue that a national policy to phase out fossil fuels over several or more years could not be effectively challenged based on the ECT; in short – a competent arbitral tribunal could find that a change of policy within the State’s right to regulate has been effected; that the implementation of the policy spans over reasonably long time; and finally – that such change of policy – taking into account the public, global efforts to mitigate climate change – should have been taken into account by any reasonable investor.

As a matter of certain simplification – the ECT protects only reasonable and well-informed international investors against abrupt and radical changes of national energy policy of a host State. By contrast, it can be argued that neither an international investor counting on maintaining “status quo” for their business activities nor one not agreeing to accept a reasonable and well-designed change of national energy policy can be successful in any ECT-based proceedings. The problem may, however, be that some States would prefer settling a case with international investors and accept even some possibly unjustified financial claims rather than wait and see an actual decision of arbitrators regarding the merits of the case [14].

Towards a Fair New Deal for All?

Rare instances of international investors trying to secure a “status quo” for their fossil fuel-based businesses can shock especially the part of the public that fairly sees fight against the climate change as a global priority. We may not, however, deprive investors of their right to defend their viewpoints before national courts or international tribunals as may be applicable. Concurrently, we may not forget that institution of ECT-based arbitral proceedings does not mean that an investor will win the case. Indeed, a number of arbitral tribunals applying the ECT has maintained the host States’ right to adjust their energy policies as they see appropriate for public purposes. In my opinion, global efforts to tackle climate change, as expressed in the 2015 Paris Agreement to give just an example, should be considered as a vital public purpose that can justify a legitimate change in national energy policies. However, governments should not be allowed to undertake radical, non-consulted policy steps causing international businesses to lose virtually all of their profitability. In this sense – again as a matter of simplicity – the now rich ECT-based jurisprudence suggests that the ECT aims to safeguard a fair balance between the justified interests of international investors and not less vital sound public policies related to the energy sector. Even so, much has changed since the original Deal was negotiated back in early 1990s. Therefore, a call for key stakeholders to review the ECT and propose its new, adjusted version within the ongoing ECT modernization efforts seems more than justified.

Future Thought Leaders is a democratic space presenting the thoughts and opinions of rising Energy & Sustainability writers, their opinions do not necessarily represent those of illuminem.

References:

1. The title of a 1994 book that contained some one of the first ever academic commentaries on the then-brand new ECT famously referred to the Treaty as an “East-West Gateway”; see T.Waelde and others, “The Energy Charter Treaty: An East-West Gateway for Investment and Trade”, 1994, Kluwer Law International.

2. For a broader explanation of the ECT background see e.g. G. Coop, “Modernisation of the Energy Charter Treaty”, 09.11.2021, ThomsonReuters, available here: Modernisation-of-the-Energy-Charter-Treaty-1.pdf (volterrafietta.com).

​3. See e.g. a commentary by M.F.Carlson, J.H.Robbins, “Russia withdrawing from the Energy Charter Treaty”, 3.09.2009, ThomsonReuters, available here: Russia withdrawing from Energy Charter Treaty | Practical Law (thomsonreuters.com).

4. For an executive summary see e.g. M. Schmidl, The Renewable Energy Saga from Charanne v. Spain to The PV Investors v. Spain: Trying to See the Wood for the Trees, 1.02.2021, Kluwer Arbitration Blog.

5. It is noteworthy that both the European Union and most of its Member States are Contracting Parties to the ECT.

6. E.S.Nicolas, MEPs urge EU to be ready to dump disputed energy treaty (euobserver.com), 23.10.2020, Euobserver.

7. The EU text proposal for the modernisation of the ECT, including an additional submission, can be accessed here: https://trade.ec.europa.eu/doclib/press/index.cfm?id=2307​ .

8. Preliminary draft schedule of planned and proposed Energy Charter Meetings and Activities for 2022 can be accessed here: CCDEC202138.pdf (energycharter.org).

9. The author has discussed various approaches to “greening” the ECT in the following webinar hosted by International Law Firm Volterra Fietta: https://www.volterrafietta.com/virtual-seminar-greening-the-treaty-the-road-to-modernising-the-energy-charter-treaty-on-26-november-2020/

​10. See e.g. N.Czerniak, “Evolutive Interpretation of Treaties - The Case of Green Hydrogen under the Energy Charter Treaty”, OGEL 2, 2021.

11. See article 26 ECT.

12. For a short commentary see: https://globalarbitrationreview.com/climate-change/netherlands-faces-first-icsid-claim-over-coal-plant-ban

​13. As such, the ECT may not block the global Clean Energy Transition. The international investors can, however, put some additional cost on governments trying to phase out fossil fuels withing a very short period of time.

14. A recent example of such behavior is the German government’s decision to settle with the Swedish Vatenfall in a case regarding acceleration of nuclear phase out in Germany rather than letting an ECT-based arbitral tribunal decide on the merits of the case: https://globalarbitrationreview.com/vattenfall-saga-end.

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Norbert Czerniak
About the author

Norbert Czerniak is a Polish lawyer as well as a PhD Candidate at the University of Bayreuth, Germany, where he has been conducting research on the Energy Charter Treaty. Norbert currently works as a freelancer and is open to new opportunities.

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