How the Energy Charter Treaty derails climate action

Blog by Audrey Changoe, Trade and Investment Campaigner at Friends of the Earth Europe – first published by Business & Human Right Resource Centre

Corporate power undermining climate pledges

Ahead of the UN COP26 in Glasgow, countries are stepping up their climate ambitions.

But an obscure treaty European governments have created themselves, called the Energy Charter Treaty, could massively undermine their climate pledges. This will delay climate action, with huge consequences for environmental rights.

The Energy Charter Treaty (ECT) allows energy companies to bypass domestic courts and sue governments before secretive international investor-state dispute settlement (ISDS) courts for billions of dollars if governments policies threaten their profits, even if those policies are designed to protect human rights, the environment or the climate.

ISDS was developed within the political context of decolonisation in the late 1950s as a neo-colonial project pushed by Shell and other oil firms to maintain their control of the Global South’s natural resources.

The ECT was similarly created in 1991 to protect the investments of European companies, like Shell and BP, in former Soviet countries rich in fossil fuel reserves. The Treaty now has more than 50 countries signed up, including almost all European states and the European Union itself.

Showcase examples of the damaging implications of the ECT include claims filed by German coal giants RWE and Uniper this year for billions of euros against the Dutch government for phasing out coal power plants. Two UK-based oil and gas companies, Rockhopper and Ascent Resources, have filed claims for hundreds of millions of euros against the governments of Italy and Slovenia respectively, in response to measures restricting new oil drilling and fracking.

The ECT is also being used against countries to prevent states from countering energy poverty and making electricity affordable for citizens. For example, Bulgaria and Hungary were sued for hundreds of millions of euros when they took steps to lower electricity costs for consumers.

Overall, hundreds of billions of euros in taxpayers’ money could be redirected from climate action to corporate coffers. An analysis by Investigate Europe calculates that – if they pursue tougher climate policies – the EU, UK and Switzerland could be forced via the ECT to pay out €345 billion of public money to fossil fuel companies in the coming years.

The mere threat of an ECT claim by a company can result in governments withdrawing or watering down policy measures out of concern about costs of defending their policy in arbitration – so-called ‘regulatory chill’. For instance, oil and gas company Vermilion threatened to sue France under the ECT over a proposed law to end fossil fuel extraction on French territory, which was then significantly weakened by the French government.

Despite its controversy, the Energy Charter Treaty is being silently pushed to countries in the Global South by the Energy Charter Secretariat, the hidden force behind the ECT expansion. Many more countries in Africa, Asia and Latin America are currently in the process of joining the Treaty. This could potentially exacerbate the inequalities between rich countries and countries in the Global South which are already facing up to the severe impacts of climate change, such as Bangladesh – which has applied to accede. Nigeria, the largest oil producer in Africa, is also acceding to the ECT. Membership would add to the decades of environmental pollution, destruction of ecosystems, human rights violations and loss of local livelihoods already caused by multinational oil companies in the country. The rights of Nigerian communities on the front line of climate change have already been undermined by Shell using ISDS. Not surprisingly, Shell is part of the Energy Charter Treaty’s Industry Advisory Panel.

The ECT is currently undergoing a modernisation process. However, negotiations are doomed to fail as any modification of the Treaty requires the unanimous approval of its membership. Oil and gas producing countries have already expressed their unwillingness to reform the Treaty, and fundamental ISDS reform is not even on the agenda. Leaked diplomatic cables have revealed negotiations are deadlocked.

What’s next?

A ruling by the EU Court of Justice last September confirmed that using the Treaty’s ISDS mechanism for intra-EU investment disputes is not compatible with EU law. Although this is an important signal to companies, it will not be sufficient to stop future intra-EU cases, as ISDS tribunals have so far ignored CJEU rulings.

Therefore, the best solution would be for EU countries to withdraw from the ECT with a joint agreement to neutralise the clause which allows investors to continue to bring ISDS claims related to existing investments for another 20 years after withdrawal. France, Poland and Spain are already asking for the Commission to prepare an exit strategy. An EU exit would also discourage new countries from joining up.

Across Europe a major #ExitECT campaign, promoted by a broad coalition of civil society organisations, is putting governments under pressure to pull out from the Energy Charter Treaty. A petition launched by the coalition has gathered more than one million signatures from EU citizens. It sends a clear message to political decision-makers ahead of COP26: stop climate-wrecking corporations from obstructing a clean and just energy transition.