This article contributes to SYGs:
SYG 7: Affordable, Reliable, Sustainable Energy
SYG 9: Action against climate change

Introduction:
The ongoing war waged by Russia combined with accelerating impacts of the climate crisis has revealed the urgent need for a swift energy transition. Rapid policy changes are essential in this politically and environmentally volatile context. However, there are treaties in place that continue to delay this progress by protecting the investments of companies in fossil fuels and transferring the costs of the energy transition from the private sector to the public, from companies to taxpayers. One such treaty is the Energy Charter Treaty (ECT).
The Energy Charter Treaty is an investment treaty that protects the investments of foreign energy companies against national policy changes. A remnant of the post-Cold War context, it was developed in the 1990’s to encourage investments and multilateral cooperation within the energy sector. The treaty has 53 signatories, including the European Union (EU). In today’s world, where rapid change is required in order to address the climate crisis, the treaty is a major obstacle to both climate action and democracy. It is incompatible with the Paris agreement and the European Green Deal. This piece explores the threats posed by the treaty, including its dispute settlement mechanism, the regulatory chill effect it causes, and its conflicts with EU law. The latter part of this article discusses the possible ways out of these obstacles.
The ISDS mechanism
A key element of the Energy Charter Treaty is its investor-state dispute settlement (ISDS) mechanism. It allows companies to sue governments for massive damages, given that their investments are being threatened by public policies. This mechanism is one-sided, in that it allows companies to sue states but not vice versa. In recent years, this has often translated into fossil fuel companies suing governments for passing progressive climate legislation. This way, these companies are able to transfer the burden of their unsustainable investments onto taxpayers.
A recent study by Tienhaara et al. has found that stopping new fossil fuel investments that are not in line with the Paris 1,5 degree target could lead to a total of 340 billion dollars in arbitration claims under the ECT. The ECT also protects the most assets out of all investment treaties. For instance, the fossil fuel company Uniper has sued the Netherlands’ government for its coal phase-out law. After announcing the aim to phase out coal by 2030, the company filed a claim under the ECT. The reasoning was that the new law threatened its assets due to the forced shut-down of a coal-plant opened as late as 2016.
Regulatory chill effect
Beyond enabling corporations to abuse the ISDS mechanism for massive compensations, legal cases like this can act as a threat to states and hence discourage effective climate/ environmental policy. This is known as the regulatory chill hypothesis: the idea that governments may not enact necessary policy due to concerns about ISDS.
Even the most recent IPCC report recognizes the dangers the ECT poses for climate action:
"A large number of bilateral and multilateral agreements, including the 1994 Energy Charter Treaty, include provisions for using a system of investor-state dispute settlement (ISDS) designed to protect the interests of investors in energy projects from national policies that could lead their assets to be stranded. Numerous scholars have pointed to ISDS being able to be used by fossil-fuel companies to block national legislation aimed at phasing out the use of their assets (Bos and Gupta 2019; Tienhaara 2018).”
According to recent studies, there is already evidence of the regulatory chill effect taking place due to the claims filed under the ECT. For instance, in 2017 the Canadian company Vermilion threatened the French government with an ISDS case due to its fossil fuel phase-out plan. As a result, the proposed phase-out law was weakened. Similar things have occurred in Denmark and New Zealand. The dangers of the ECT are therefore very real, having already led to weakening climate legislation. It is likely that there will be a growing number of similar cases as the energy transition requires rapid policy changes, and these will inevitably threaten the unsustainable and irresponsible investments of energy companies in fossil fuels.
A threat to EU law
Beyond its effect of weakening climate policy, the ISDS mechanism is also undemocratic and lacking in transparency. The claims are handled by a tribunal of three private arbitrators, without the involvement of the relevant national courts. These arbitrations occur behind closed doors and lack transparency. Furthermore, the mechanism has been ruled to be in conflict with EU legislation. In 2021 the European Court of Justice ruled that using the mechanism between two EU state parties threatens the independence of the court. The use of private arbitrators raises the possibility of disregarding the court’s rulings.
Could the ECT be brought into line with climate ambitions?
If this treaty is indeed so dangerous, what can be done about it? The modernization process of the treaty has been ongoing for two years already. Unfortunately, it is unlikely that these negotiations will bear any fruit.
In order for the ECT to be brought in line with the Paris agreement and the European Green Deal, fossil fuels would have to be excluded from the protection offered by the treaty. In addition, the ISDS mechanism would have to be drastically changed or removed altogether. While the European Commission has suggested changes to the ISDS mechanism, these do not address the most significant issues: the regulatory chill effect and the ability to surpass national legal systems. Furthermore, any changes proposed require unanimous approval from Contracting Parties, which has not materialized even for the proposed, insufficient changes.
Can states withdraw from the treaty?
Since the modernisation process does not appear promising, the only option left is to withdraw from the treaty. Spain, for instance, has already publicly called for withdrawal from the treaty ahead of the finalisation of the modernisation talks. "At a time when accelerating a clean energy transition has become more urgent than ever, it is time that the EU and its member states initiate a coordinated withdrawal from the ECT,” Deputy Prime Minister Teresa Ribera said.
However, this has not been made simple, either. The treaty includes a so-called ‘sunset clause’, which continues to protect existing investments 20 years after withdrawal. Therefore the withdrawal process must include an agreement between the EU and its member states to remove the legal effects of this clause.
Conclusions
Despite the risks it poses to climate action and the much-needed green transition, the ECT remains relatively unknown. Therefore the first step in addressing the threats it poses must be raising awareness. Both citizens and policymakers must be aware of the treaty, as withdrawing from it requires a unified response within the EU. The second step is to take concrete action against the treaty, in the form of demonstrations, initiatives and demands to policymakers at both national and EU levels.
As the modernization talks are drawing to a close by the end of July, it is important to critically evaluate and draw public attention to the results. Whether or not an agreement is reached by Contracting Parties, it is absolutely essential for the realisation of the green transition that EU states withdraw from the treaty and follow the example recently set by Spain. It is also crucial to ensure that the sunset clause is not implemented in the withdrawal process. If nothing is done about the treaty, we will continue to protect the unsustainable investments of corporations at the cost of our planet.
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