Hailing from the aftermath of the Cold War, the Energy Charter Treaty (ECT) is now actively preventing climate action. It was originally intended to encourage international energy investments in former Soviet states. Ratified in the mid-1990s, it has signatories across Europe, the Middle East and Asia, including the UK.
Its intention to de-risk energy investments is also its major flaw today, as many of its signatories take rapid climate action. Much of the treaty has been superseded by World Trade Organization (WTO) regulations. But the part that remains active, known as ‘investor-state dispute settlement’ (ISDS), allows foreign companies to sue governments for decisions that affect the profitability of their investments. Effectively, this allows corporations to remove themselves from the domestic legal system of whichever country they bring litigation against and, instead, seek settlement through secretive tribunals.
One shocking tale reveals the problem. Rockhopper, a UK oil and gas firm, was recently awarded £210 million in compensation, paid by the Italian taxpayer, after Italy banned offshore drilling. This was a windfall of £180 million for the firm, as it had only invested £30 million upfront. Rockhopper has stated it will now plough this capital into more oil drilling off the Falkland Islands.
The treaty blocks climate action
In the context of the global climate change response, the ECT has become the main mechanism for oil and gas companies to mitigate their losses, as countries phase out dirty fossil fuels. The fossil fuel industry has used the ECT more than any other sector, challenging a whole host of policies but, most importantly, those intended to protect the climate and the environment.
The Intergovernmental Panel on Climate Change (IPCC) has stated clearly that the ECT is blocking climate action. This happens directly, as a result of the eye-watering compensation claimed by fossil fuel companies at taxpayers’ expense – there is no cap on the compensation that can be sought – and indirectly, through ‘regulatory chill’, where the threat of litigation forces governments to back away from legislating on fossil fuel phase out.
The French High Council for Climate and the Dutch and German governments have all publicly concluded that even proposed reforms to the treaty would not make it compatible with the Paris climate agreement.
Modernisation has failed
An Energy Charter Conference last November failed to agree a way forward to modernise the treaty. This came at the end of a year of significant blows, with several signatories, including Germany, France, the Netherlands and Spain, announcing they would withdraw, citing continued inconsistency with the Paris agreement and their domestic commitments to meet it.
Just before the conference, the European Parliament adopted a resolution calling on the European Commission to initiate a co-ordinated withdrawal from the treaty. And just this week, the European Commission has announced its support for a co-ordinated withdrawal, citing the failure of the modernisation process.
Having failed in November, the conference is rescheduled for this April, but it is unlikely that this delay will lead to an agreement. Proposals can only be approved by a majority of ECT signatories. The EU refuses to be a hostage to the threat of litigation and, with its member states, it has a veto-proof majority. The UK won’t be able to force through reforms on its own.
What’s more, the proposed reforms would only make things worse, expanding the treaty’s damaging litigation tool to controversial energy technologies, like biomass, increasing the litigation risk for the UK and further limiting the government’s options for action on climate.
Ministers have already publicly acknowledged that the current treaty is no longer fit for purpose. In June, Greg Hands, then the energy minister, said: “The UK cannot support an outdated treaty which holds back investment in clean energy and puts British taxpayers at increased risk from costly legal challenges”.
Now that reform talks have failed, the only good option is withdrawal.
Doing nothing will strand the UK in a risky position
If we publicly state our intention to withdraw and increase engagement with like-minded international partners, we could significantly strengthen our position in decision making on the future of the ECT, including what happens after withdrawal. This would allow the UK to help shape what’s known as an ‘inter se’ agreement with other withdrawing countries, to neutralise the treaty’s sunset clause, where former parties remain exposed to the risk of litigation following departure.
Essentially, co-ordinated withdrawal is an opportunity for departing signatories to agree they will not apply the sunset clause to each other. The larger this group is, the more meaningful the inter se agreement. It is essential the UK is not left outside this process.
In the wake of the recent Net zero review, which found big gaps in action, and the approval of a new Cumbrian coal mine, the British public are right to be sceptical about government claims of climate leadership.
The Net zero review called for a clearer set of climate and environmental principles to be set out this year, to underpin the government’s approach to trade deals. As part of this, co-ordinated withdrawal from the ECT would give the government the chance to clearly and publicly reject it as inconsistent with its Paris Agreement promises and net zero goal.
Doing nothing will strand the UK in the treaty. It will make us a ‘bad actor’ internationally and risk billions of taxpayers’ money, a situation the UK government has already said it cannot support. Do we really want to be seen as a safe haven for fossil fuel companies to sue other countries for pursuing legitimate climate policies?
Ahead of the April conference, now’s the time for the government to take ownership of this process, demonstrate that it will lead on tackling climate change and join a co-ordinated withdrawal from this outdated and dangerous treaty.
