Reformed Energy Charter Treaty: A boon or bane for EU’s climate ambitions?

The modernised treaty, which provides legal protection to the fossil fuel sector, has given the industry 10 years to transition; but Spain, France want EU to completely exit the treaty as it hinders climate action 

The past few weeks have been busy for the European Parliament with members debating and bringing the bloc’s climate laws into force. Following the passage of laws regarding the revision of the EU’s emissions trading system (ETS) and Carbon Border Adjustment Mechanism (CBAM) last week, this week saw yet more laws codified, including the setting up of a multi-billion Euro fund. But while the European Parliament has been making good progress, a 28-year old treaty protecting high-carbon investments has been a thorn on the side.

An attempt to modernise the 1994 Energy Charter Treaty (ECT) achieved some degree of success this month. A fresh deal now removes any legal protection for new fossil fuel projects in the UK and EU. 

A summary of the agreement revealed that the deal sets a deadline of August 15, 2023 to remove legal protection with “limited exceptions”. Existing investments will cease to have legal protection “after 10 years from the entry into force of the relevant provisions,” according to the summary. This 10-year transition period, however, has been met with criticism from environmentalists who believe a complete exit from the treaty is the only way for the EU to meet its climate objectives.  

What is the ECT?

In the early 1990s, when the world was just reeling from the Cold War, governments saw an opportunity to thaw any remaining ice by encouraging cooperation between nations on dynamic sectors such as energy, in particular the fossil fuel industry—Soviet Union and Eastern Europe being major hubs. 

The treaty, signed in 1994, includes fifty-three signatories. Its main provisions include protection of foreign investments, upholding non-discriminatory conditions for energy trade, dispute resolution, and promoting energy efficiency. 

How does it interfere with the EU’s climate goals? 

The ECT primarily focuses on the fossil fuel industry, which at the time of treaty signing was booming. Since then, climate change has increasingly made its presence felt, signalling the end is near for fossil fuel use, thereby making the ECT “outdated”. The most problematic provision in the ECT, however, is the way its “investor-state dispute settlement” (ISDS) works.

This mechanism gives the fossil fuel industry the power to sue governments for compensation in case any climate action or policy hinders their business. A study by the Institute of Sustainable Development (IISD) found the average amount awarded in such cases was more than $600 million, which is almost five times the amount awarded in non-fossil fuel cases. The study declared the fossil fuel sector to be the most litigious under the ISDS mechanism, accounting for 20% of all known cases. 

Last year, the Court of Justice of the European Union said polluters in the EU would not be able to use this mechanism to sue governments. The court’s decision, however, does not include non-EU investors, who still have the power to go down the arbitration route to claim compensation.  

A modernised ECT: Climate forward or backward? 

As per the revised treaty, while fossil fuel industries will cease to get any protection after 10 years, synthetic fuels such as biomass, hydrogen and biogas—which come under the renewable energy category—will continue to remain protected. These fuels still emit some amount of CO2. Their continued protection under the ECT, therefore, would be detrimental to the climate, activists say. A complete exit from the ECT, therefore, is the only way to protect EU’s climate laws and action, they argue. 

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