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Freshfields Sustainability

| 4 minutes read

The Energy Charter Treaty: first rounds of negotiations to modernise the ECT take place

Over 130 claims have been brought by investors under the Energy Charter Treaty (ECT) since its inception in the 1990s, making it the most frequently invoked international investment agreement in investor-state dispute settlement (ISDS), but also the focus of significant scrutiny, and increasingly, the subject of calls for reform. The first formal rounds of negotiations to modernise the ECT were held via video conference between 6 – 9 July 2020.

On 27 May 2020, the European Commission released its latest proposals for the modernisation, ranging from a more stringent “Fair and Equitable Treatment” standard, and a ban on punitive damages, to provisions aimed at bolstering a state’s right to regulate to protect the environment and combat climate change, while encouraging a sustainable investment environment.

The stakes for modernisation would appear to be high: Secretary General of the ECT, Urban Rusnak noted in a recent interview that “if the modernisation process fails, I don’t see a future for the treaty”, a situation he feels would “seriously hamper the ability of the world to meet the Paris climate targets.”

The Energy Charter Treaty

The ECT is a multilateral agreement for trade and investment in the energy sector. It was signed in December 1994, and entered into force in April 1998. There are currently 53 contracting parties to the ECT, including the European Union, and various other states predominantly across Europe and Asia.

Part III of the ECT contains investment protections for energy sector investments. One of the ECT’s key features is that it provides a mechanism for foreign investors to enforce claims directly against contracting states, through international arbitration.

Claims under the ECT

The ECT has come under sustained criticism in recent years - many argue that in its current form, it can serve to stifle the ability of states to move towards cleaner sources of energy as well as to pass laws and regulations intended to advance environmental objectives, due to the threat of investor-led claims.

Governments and environmental groups have pointed to cases such as Vattenfall v Germany, a highly politicised arbitration brought by a Swedish investor in response to Germany’s decision to phase out nuclear power, and more recently Uniper’s threat to sue the Dutch government under the ECT as a result of its plans to phase out coal power by 2030, as exemplifying the negative impact of the ECT on the ability of state parties to meet climate change targets such as under the Paris Agreement.

On the other hand, as can be seen from the graphic below, a significant proportion of claims invoking the ECT have in fact been brought by investors in the green energy / renewables sector. Spain, Italy, the Czech Republic and other states have faced a number of claims brought by investors in recent years in relation to the revocation of ‘green subsidies’ aimed at incentivising investment in renewable energy. That said, although ostensibly the ECT has provided green investors with a mechanism to hold states accountable for going back on promises designed to promote energy transition, the sheer magnitude of these claims has led to increased scrutiny (and mistrust) of the system of ISDS on the part of institutions like the European Commission.

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The Commission’s draft text: a new focus on the right to regulate 

On 15 July 2019, the European Commission (the Commission) was authorised by the Council of Europe to enter into negotiations on behalf of the European Union to amend the ECT.

The Commission’s latest text proposal published on 27 May 2020 proposes a number of revisions to the investment protection and promotion chapter focused on combatting climate change and emphasising the right of contracting parties to take legitimate measures in pursuit of that policy objective. The key proposed changes include:

  • A new article reaffirming the right of contracting parties to regulate to achieve legitimate policy objectives such as the protection of the environment, including (expressly) to combat climate change.

  • New language aimed at preventing the recent slew of claims under the ECT based on changes to renewable subsidy regimes, stating that a decision by a contracting party not to issue, renew, or maintain a subsidy will not breach the ECT in the absence of any specific assurance given under law or contract.

  • A new expropriation annex clarifying that non-discriminatory measures designed and applied to protect legitimate policy objectives, such as the protection of the environment and combatting climate change, will not constitute indirect expropriation , unless manifestly excessive.

In addition, the Commission’s text seeks to achieve a re-balancing of foreign investment protection and sustainable development and clean energy objectives, through:

  • reaffirming commitments made by ECT contracting parties under various multilateral environmental agreements and International Labour Organisation conventions;

  • emphasising the importance of promoting responsible business practices in contributing to sustainable development (by reference to, amongst other things, the OECD Guidelines for multinational enterprises and UN Guiding Principles);

  • reaffirming commitments to clean energy transition to combat climate change, including explicitly recognising the urgency of pursuing the ultimate objectives of the UN Framework Convention on Climate Change and the Paris Agreement; and

  • ensuring that each contracting party enacts legislation which requires an Environmental Impact Assessment (EIA) is carried out before granting authorisation for energy projects, and that such EIAs would assess the potential impact of the project on human health, land, soil, air and climate, as well as biodiversity and cultural heritage.

Next steps 

This proposal by the European Commission is the most recent in a series of moves by States seeking to grapple with the intersection of international investment law, and obligations to regulate to achieve environmental policy objectives, including the termination or renegotiation of bilateral investment treaties, or even the withdrawal of certain states (such as Italy) from multilateral treaties such as the ECT.

It remains to be seen what traction this text proposal will gain amongst the ECT’s contracting parties. Further formal talks are due to take place in September 2020.


sustainability, international law, climate change, energy and natural resources, human rights