Euractiv | 18 December 2024
Commission must stop Energy Charter Treaty hijacking EU climate policy
by Lukas Schaugg
Lukas Schaugg is policy advisor with NGO IISD.
Following the European Parliament’s approval of the von der Leyen Commission II, Maroš Šefčovič is now responsible for the bloc’s Trade and Economic Security, Interinstitutional Relations, and Transparency.
One of the most urgent issues in Šefčovič’s in-tray is addressing the legacy of the Energy Charter Treaty (ECT)—and the more than 1,100 outdated bilateral investment treaties (BITs) between EU member states and third countries.
Having introduced the European Green Deal in 2019, von der Leyen has restated her commitment to making the EU a global leader on climate change and the first climate-neutral continent.
With the 1.5°C goal slipping further out of reach and Donald Trump’s US election win, the EU’s climate leadership is more critical than ever. However, the risk of fossil fuel investors filing arbitration claims against the EU and its member states, based on the ECT’s ‘sunset clause’ and the EU BITs, directly threatens these ambitions.
To disarm this threat, Šefčovič should advance binding agreements to neutralize the ECT’s sunset clause both within the EU and with the UK and other third states.
Fossil fuel investors suing EU member states’ energy transition
The ECT and BITs allow fossil fuel investors to sue EU member states before international arbitral tribunals to challenge climate mitigation measures. This legal mechanism—known as investor-state dispute settlement (ISDS)—is increasingly weaponized by the industry.
Circumventing domestic courts, investors have used the ECT to launch more ISDS claims than under any other investment treaty. ExxonMobil is suing the Netherlands over an early shutdown of gas production. Ascent Resources is challenging Slovenia’s fracking ban and environmental impact assessment requirements. Refinery group Klesch is suing Denmark, Germany, and the EU over a windfall profit tax.
And Rockhopper recently monetized a EUR 250-million arbitral award after a tribunal deemed Italy’s offshore oil drilling ban unlawful expropriation—more than six times the amount Rockhopper invested. Granting fossil fuel companies privileged access to ISDS is fundamentally incompatible with the EU’s climate ambitions.
Binding EU deal to neutralize ECT’s sunset clause
In response, ten EU member states and the UK have already decided to leave the ECT. In June, the EU and Euratom also notified their withdrawal.
However, withdrawal is not the end of the story. The ECT contains a sunset clause that protects existing investments among its contracting parties for 20 years, even after a country withdraws.
The EU and 26 of its member states have signed a declaration asserting that the ECT’s ISDS mechanism never applied between the member states. This is a positive first step, but to properly rule out new claims under the sunset clause, the EU should complement the declaration with a formal legal agreement among the member states.
While there appears to be support for such an agreement from the capitals, for legal and political reasons this process must be led by the Commission.
To address similar risks in EU relations with third countries, the Commission should spearhead negotiations of an additional agreement to neutralize the sunset clause with the UK and other third states. The European Economic and Social Committee (EESC) has recommended this step and recent signs from London also suggest an opening.
In his European Parliament hearing, Šefčovič indicated a willingness to consider inter se agreements to limit the ECT’s legacy risks but conceded that this was “a new topic” for him. He will need to get up to speed as fast as possible.
The Commission’s responsibility also includes the 1,100 BITs involving EU member states, which could trigger over USD 340 billion in ISDS claims against climate action.
In parallel, the EU should support UN reforms on how arbitral tribunals calculate investor compensation. In many claims, including Rockhoppers against Italy, tribunals award investors payouts far exceeding the amounts invested—based on profits investors would have earned in a world not constrained by the climate crisis.
Von der Leyen legacy at play
Delivery on the EU’s lofty energy transition and climate leadership goals will be critical to von der Leyen’s legacy. Tackling ISDS, one of the fossil fuel industry’s most powerful tools for undermining the energy transition, will be a defining piece in that effort.
Freeing up regulatory space to steer investment toward renewables and ensuring fossil fuel companies can no longer hijack climate policy will be crucial for securing a climate-resilient Europe.
