EU paves way to quit international accord on energy investments

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The EU is working on plans to pull out of a controversial energy investment accord, in a sign of the growing backlash against a pact blamed for protecting the fossil fuel sector.

Several EU countries have already announced they would leave the 30-year-old Energy Charter Treaty, with the European Commission set to propose on Friday that the entire bloc follow suit, according to three people with knowledge of the plans.

The ECT is in force in more than 50 countries and has resulted in shareholders of fossil fuel companies claiming billions from governments over investments they argue have been undermined by the energy transition.

In 2022, the Italian government was ordered to pay €190mn to the UK oil and gas company Rockhopper over a ban covering an oilfield off Abruzzo on Italy’s coast, while German company RWE sued the Dutch government for €1.4bn in 2021 due to new rules to phase out coal.

The EU is the treaty’s largest signatory, with member states also members of the ECT in their own right. But eight EU countries, including France, the Netherlands and Spain, have already said they will withdraw and the European parliament has voted against staying in the treaty. All argue that the deal runs counter to the bloc’s climate commitments.

The ECT also protects investors in renewable energy, however. The Spanish government is fighting the payout of 21 claims from solar power investors who claim they lost around $70bn when Spain changed its policy on feed-in tariffs in 2012.

They are challenging Madrid for around $9.5bn, though the final payout is likely to be closer to $2.2bn, according to lawyers on the case.

The ECT was originally established in the wake of the fall of the Soviet Union to protect western energy-sector investments in battered eastern bloc economies.

Like other such treaties, it was conceived as a way to encourage foreign investment by acting as an insurance mechanism in the event that a pipeline or power plant was, for example, seized by a rogue government.

ECT cases and awards for damages are often secret and details hard to come by, but at least 157 energy groups, banks or investors have sought to sue governments for more than €40bn since the treaty’s inception.

Like the post-second world war Bretton Woods accord, which sparked the creation of the World Bank and IMF, green policy experts argue that the ECT no longer makes sense as the world battles climate change.

When they were signed decades ago, these investment agreements “took no account of the state’s right to regulate to protect the environment and human rights,” said Anja Ipp, co-founder of the Stockholm-based Climate Change Counsel think-tank.

A process to bring the treaty in line with decarbonisation targets went through 15 rounds of negotiation but failed last year as a succession of European countries announced plans to leave the pact.

Yet states that leave the ECT will remain bound by its “sunset clause” that ties signatories to its rules for 20 years.

Those that support the treaty say that some EU countries are posturing and ignoring the ECT’s real benefits.

“There is a spin that . . . this is just about the EU’s ability to fight climate change,” said James Langley, partner at law firm Dentons. At the heart of the effort, however, it was “at least as much a sovereignty issue . . . [as] those states’ desire to legislate without being sued”, he said.

Data provided by the ECT’s secretariat shows that the majority of countries that have decided to withdraw from the treaty have the highest number of claimants.

A modernised treaty would no longer protect these investors, a senior official who used to work on the ECT said, as it would nullify the intra-EU claims. “If governments go for modernisation, they will lose this [protection].”

Not all countries want to leave the pact. Jean-Christophe Fueg, head of international affairs at the Swiss energy ministry, said investors based in his country “value the ECT”. “Waiving one’s own investment-protection rights by withdrawing makes little sense,” he said

If an EU withdrawal goes ahead, it is likely that the treaty will fall apart. “I think the ECT will implode [and because of that] the most unfair thing in this walkout is that they will not allow the countries that are willing to modernise to work on it,” the former official said.

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