bilaterals.org | 3 July 2020
Countries serious about climate change should leave the Energy Charter Treaty, says former ECT official
Yamina Saheb is an energy and climate policy analyst. She was the Head of the Energy Efficiency Unit in the Energy Charter Treaty Secretariat between 2018 and 2019.
bilaterals.org : What is the Energy Charter Treaty (ECT) ? What are its objectives ?
Yamina Saheb : It is an investment treaty specific to the energy sector. It dates back to the 1990s and came into force in 1998. To understand it properly, we have to look back to the context of the 1990s and the demise of the Soviet Union. At that time, Western Europe was dependent on energy, and particularly on fossil fuels. Our energy resources came mainly from the Soviet Union. Therefore the treaty had three objectives. The first was to ensure Western Europe had permanent access to fossil fuels. The second was to build a European energy market and the third was to protect the investments of companies such as Total, Shell, BP, and so on, because countries emerging from the communist bloc were perceived as places without legal mechanisms to protect foreign investors.
What are the main issues around this treaty ?
First the treaty’s main focus is on fossil fuels. They speak about energy security to make it sound more reasonable, but it actually means fossil fuels. Then the treaty protects the supply of energy, and clearly states what is binding and what is not. For example, energy efficiency, i.e. demand reduction, is indeed included in the treaty, but this whole part related to the environment is not binding. I went to work in the ECT secretariat because I’m working on demand reduction and I thought that part was important. But that’s just a smokescreen. On the other hand, the protection of the energy supply, regardless of its source, is a binding element. The secretariat is trying to sell it as energy neutral but whether the source of energy comes from coal or renewables, it’s actually not the same thing, it’s not neutral. The other binding parts are those related to trade and transit, and investment protection through arbitration [also known as investor-state dispute settlement or ISDS, ed.], which is really a parallel system of justice to the justice that you and I are entitled to.
So can the treaty hamper the transition to a fossil-free society ?
In fact, the treaty protects electricity whatever the source of production, so renewables are protected, but only with regard to the production of electricity. Renewables related to heating systems are excluded from the treaty. But the problem is, carbon neutrality clearly means the end of fossil fuels. Europe, for example, should be carbon neutral by 2033, if the decline in fossil fuels consumption maintains the current course every year. This means that, by 2020, we should no longer be investing in fossil fuels. However, the modernisation of the treaty does not currently include the elimination of fossil fuels.
In relation to the ISDS, there are some very emblematic cases under this treaty, regarding fossil fuels.
Yes, take the Uniper case in the Netherlands. Companies invested in a coal-fired power station in 2016, which is after the Paris agreement. That is completely crazy. But in my opinion, they just want to put pressure on the Netherlands and negotiate a financial settlement to exit fossil fuels, as the Dutch government is currently doing with other companies. But an investment in fossil fuels in 2016 is simply a bad investment. If I make a bad investment, nobody will compensate me. But with this private arbitration mechanism, compensations can be huge, even though this money could be used by governments to invest in the jobs of tomorrow. The case of Yukos against Russia [Russia was sentenced to pay more than fifty billion euros to the company’s former shareholders, ed.] is also interesting because it happened after Russia withdrew from the treaty, as the treaty contains a survival clause that protects investments for 20 years after the exit from it. Italy was sued 11 times, including several times after withdrawing from the treaty in 2016.
And what about Spain, which has been sued 47 times ?
Spain is indeed the ECT signatory country that has been the most targeted, due to a change in policy that has lowered the financial incentives offered to companies that have invested in the renewables sector. The amount demanded by investors for the 37 cases, for which information is publicly available, is more than eight billion euros. In 2019, to put an end to this avalanche of ISDS lawsuits, the government enacted a decree that restored the original benefits for foreign investors. But the decree applies only to foreign companies, which is not fair because Spanish SMEs and individual investors do not receive similar treatment. Hence domestic investors have to pay for foreign investors because the country is trapped by the treaty. This whole policy of incentives is also questionable and I believe it was ill-conceived.
Why does the secretariat want to modernise the treaty ?
The ECT is brain-dead, so to speak. After it was signed, the World Trade Organisation (WTO) was created in 1995, and the WTO protects trade in energy, even though it does not include ISDS. Then the European Union expanded to include former communist bloc countries, and other new agreements were signed with non-EU states. So the treaty became useless. And even more so when Russia withdrew in 2009. The reserves of fossil fuels are mainly in Russia, which explains the EU’s dependency on that country. In fact, Europeans were no longer interested in this treaty and were not even coming to the meetings when I joined the secretariat.
What exactly do they want to modernise ?
The process really started in 2009 when the secretariat launched a first, rather aggressive step to extend the treaty to other countries with fossil fuel reserves. And of course, the Europeans immediately thought of Africa. There is now a partnership with the Economic Community of West African States (ECOWAS), except that the ECOWAS text excludes ISDS, which technically prevents these countries from joining the treaty. However the secretariat is working with them to prepare for their accession. On the other hand, Uganda came close to joining the treaty, but the European Union eventually blocked the expansion of the treaty until the process of modernising the text has been finalised, and some European and Ugandan NGOs have also put pressure to stop the process. Otherwise Pakistan had completed its reports for accession some ten years ago but never joined the treaty despite the efforts of the secretariat, which is the only one that still believes it could happen. According to the Secretary General, China will also ratify the treaty but in fact China is not particularly interested because it has other means of influence, in Africa for example. In the end, the expansion process has not made much progress, and only Yemen and Jordan have ratified the treaty by 2018.
What about the modernisation of the text ?
In December 2018, the signatory countries agreed on the articles of the treaty that would be open to negotiation for modernisation. There is only one article that mentions the elimination of fossil fuels. And in the European Union’s document for the modernisation, published last May, the Commission says it will make a proposal on this article later, when the discussions actually start on July 6 . In my opinion, there is no agreement among EU member states to eliminate fossil fuels. That would be nonsense. Fossil fuels should no longer be protected because it also means protecting carbon emissions.
So what do you expect from the modernisation process ?
There is absolutely nothing to expect from it. First of all, the treaty includes states in the European Economic Area that are trying to get out of fossil fuels, and other, rather poor, states that live on fossil fuels, such as Azerbaijan, Mongolia, Uzbekistan, etc. We cannot go to these countries and say to them : “Now you stop using fossil fuels !” Japan also has no intention of getting out of fossil fuels. Japan is the OECD country that has made the most investments in coal abroad. The second reason is ISDS. The European Union is putting forward a reformed model of the ISDS, the Multilateral Investment Court. No matter what one thinks of this court, the EU is in the process of moving away from the old ISDS mechanism. On the other hand, the countries of the Eurasian Economic Union have copied and pasted the ISDS of the 1990s into their agreements. Japan is also against this court and favours a debate within the United Nations, where it has the support of the United States. Japan also rebuked the EU when it included ISDS in its May proposal, because ISDS is not among the articles open for negotiation. The EU and Japan are actually the two main poles of the negotiations, and everything will depend on them. In the end, we are dealing with two completely different worlds, whether it be for energy transition or ISDS.
And what would be the most sensible alternative in relation to climate change ?
The only reasonable thing to do is to get out of the treaty. The European Commission has said that if the renegotiation does not go in its direction, it will reconsider its position. What I said to the Commission was that it was a waste of time and public money. The European states should get out of the treaty and make an agreement among themselves to cancel the survival clause so that there will be no more new ISDS cases. Otherwise it will be a real barrier to our climate policy.
Finally, some law firms have argued that energy investors could sue states under the ECT’s ISDS mechanism, because of measures put in place to fight the COVID-19 pandemic, which have had a negative impact on economic activity. Do you think this scenario is plausible ?
Yes, I do. We’re talking about large sums of money. The legal costs amount to several million euros and the compensations are also enormous, even if the investors are not guaranteed to win. I do not see any reason why investors and private law firms would be bothered. It is how they make a living.