The Energy Charter Treaty: an obstacle to the energy transition

Little is said about the Energy Charter Treaty (ECT). And despite the opacity that surrounds it, it is one of the international agreements that affects us most and that can most obstruct the energy transition.

The ECT is a multilateral agreement that protects investments in the energy sector, especially those that major investors allocate to fossil fuels—coal, oil and gas—along the entire chain, including extraction, supply and transport infrastructure.

The Treaty was adopted in the 1990s, initially comprising all the European countries, although it later spread to Japan, Australia, Turkey, and other Asian nations. To understand the original reasoning behind the ECT, we must go back to a time when the fight against climate change was by no means a priority on the European or international agendas. The world had not yet defined the need to put an end to carbon dioxide emissions from fossil fuel combustion. On the contrary, what concerned an energy-dependent Europe was how to secure oil and gas supplies after the OPEC crisis in the 1970s, when crude oil prices rose sharply. Gas from Algeria and Eastern Europe, and oil supplies were strengthened through pipelines and major transportation infrastructure.

The ECT was in principle a mechanism to guarantee and defend energy supplies, and to protect the investments made there. But it has become a perverse tool when used to preserve the future profits of the big investment groups.

That was the case in Italy: when the government banned further exploration in the Adriatic, it was taken to court by UK Rockhopper Exploration because it was denied permission to drill. The suit is for damages of €350 million, seven times the investment made. Or the case of Hungary, sued for regulating the price of electricity; the state was not fined, but had to pay €15 million in legal fees.

What is of still greater concern is the fact that the ECT includes a survival clause that allows lawsuits to be filed up to 20 years after a country has left the treaty. It is rightly known as the “zombie clause.”

The last straw is the Investor-State Dispute Settlement mechanism, or ISDS, which establishes private arbitral tribunals to resolve disputes, in which ordinary justice does not intervene. However, the ISDS is a one-way instrument. Investors may sue states for damages, but states cannot sue investors. These ad-hoc courts meet behind closed doors and awards are final. What is more, 25 arbitrators have adjudicated half of the cases. Not surprisingly, there have been 131 known lawsuits—there may be more, they are not always made public—in which governments have paid $52 billion in damages. 60% of the decisions of these courts favour investors. One example: Spain has lost every single case.

Spain is the EU member state that has been sued most, with 47 known litigations arising from legislative changes in 2008 and 2014 subsidizing renewable energy. So far it has had to pay €1 billion, but damages could come to as much as €8 billion. The Government of Spain signed the Treaty secretly and with no public debate.

Today we can say that the ECT is a deterrent for governments to take effective measures in climate issues. It shields subsidies for polluting fuels, it prevents affordable electricity prices, and diverts public money that is needed to fund the Energy Transition.

The ECT is obsolete, as acknowledged by the European Union itself. It goes against current challenges and climate goals that we are committed to achieving. It must be completely reformed or abandoned.

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