Brussels tables EU-wide exit from controversial Energy Charter Treaty

The proposed legislation, unveiled on Friday afternoon after days of speculation, would see the European Union and its member states leave the controversial treaty at the same time, avoiding the chaos of having individual countries going their own way.

Germany, France, Spain, the Netherlands and Poland were among those who had previously announced their intention to pull out in a unilateral fashion, following in the steps of Italy, which left the convention back in 2016.

“The outdated Energy Charter Treaty is not aligned with our EU Climate Law and our commitments under the Paris Agreement,” said Frans Timmermans, the European Commission’s executive vice-president in charge of the Green Deal.

“It’s time for Europe to withdraw from this Treaty, and to put all of our focus on building an efficient and competitive energy system that promotes and protects renewable energy investments.”

Signed in 1994, the Energy Charter Treaty (ECT) was originally intended to protect Western investors who were seeking to do business in former Soviet states but feared being the target of discriminatory access, expropriation, nationalisation and other unexpected circumstances.

As a legal shield, the ECT set up a behind-the-scenes system of arbitration that private companies could use to sue governments and claim compensation over policy changes that might threaten their investment projects and profit expectations.

Over time, this arbitration system became increasingly at odds with the fight against the climate crisis, which required countries to introduce far-reaching plans to curb CO2 emissions and phase out fossil fuels.

Corporations that operate oil fields, gas pipelines and coal-fired power plants saw in the ECT a way to challenge these green policies and began filing lawsuits against governments to ask for damages.

The fines issued by the panel are legally binding and can easily reach nine digits, as the Netherlands, Italy and Spain have all experienced in recent years.

The succession of million-worth legal cases between investors and states gradually fuelled calls for an EU-wide withdrawal, an option that the European Commission initially opposed, arguing the bloc should instead work to modernise the convention and address its most detrimental aspects.

But the effort to update the ECT collapsed last November after a small group of member states refused to approve the Commission’s proposal. The failure prompted the executive to U-turn and recommend a collective exit, which was made official on Friday upon publication of the legislative texts.

The departure, which will also affect the European Atomic Energy Community, Euratom, needs to obtain the consent of the European Parliament and then be ratified by member states with a qualified majority vote, widely expected to be secured.

Following the joint exit, the ECT’s membership will be slashed by half, from 56 to 28 signatories. Major energy exporters like the United States, Russia and Saudi Arabia have never been party to the text.

“This is a unique opportunity for the EU to speak with one voice and to remove a major obstacle to realising its climate targets,” Lukas Schaugg, a law analyst at the International Institute for Sustainable Development (IISD), said in a statement.

Amandine Van Den Berghe, a lawyer at ClientEarth, said the coordinated exit would liberate member states from the “chilling effect” caused by the ECT’s arbitration system and the “fear of reprisals from the fossil fuel industry.”

“The European Commission has seen sense,” Van Den Berghe said.

The saga, however, is far from over: ECT signatories remain bound by a 20-year sunset clause, meaning they could still be hit by a lawsuit long after cutting ties with the treaty.

As part of the coordinated exit, the Commission intends to propose a separate piece of legislation to prevent EU-based companies from filing claims against member states. The legality of these intra-EU actions, which represent over 75% of all ECT litigation, has been directly challenged by the European Court of Justice.

According to a 2021 study by Investigate Europe, the value of fossil fuel infrastructure protected by the treaty is estimated to be worth €344.6 billion across the EU, the UK and Switzerland.