Published November 26, 2024
By Hélionor De Anzizu, Senior Attorney for the Environmental Health Program at the Center for International Environmental Law.
This is part one of a two-part analysis that unpacks the EU and UK’s shift away from the Energy Charter Treaty (ECT), focusing on the Treaty’s misalignment with climate goals and the ongoing challenges related to fossil fuel investments.
After much deliberation, on May 30, 2024, the EU made a bold move by officially withdrawing from the Energy Charter Treaty (ECT), a multilateral agreement that, for years, has protected fossil fuel investments at the expense of climate action. Following the UK’s similar announcement on February 22, 2024, this moment signals a crucial step toward aligning energy policy with international climate goals. But as we celebrate this victory, the road ahead remains marked by challenges.
Since its inception nearly 30 years ago and as climate crises escalate, the Treaty’s core provisions have been a critical obstacle to the pressing need to reduce reliance on fossil fuels and transition to renewable energy sources. The EU and UK’s historic steps reflect a growing realization that international agreements — once designed in part to develop foreign investments in extractive industries and secure energy markets — may now hinder critical climate goals. Following years of attempted reforms, the EU and UK concluded that the ECT’s protections for fossil fuel investments were fundamentally incompatible with the urgency of tackling climate change and decarbonizing the global energy landscape.
Understanding the ECT
The ECT was signed in 1994 to promote energy security and cooperation — at a time when energy markets were focused on open access and security investment. Like other investment agreements, the ECT provided protection benefits to foreign investments in the energy sector, which arguably promoted, accelerated, and maintained the stability of the fossil fuel industries. Until recently, the ECT had over 50 Signatories, including the EU and the European Atomic Energy Community.
Today, however, the unprecedented and accelerating global climate crisis calls for urgent government action to curb its main driver: the production and use of fossil fuels — oil, gas, and coal — which generate the overwhelming majority of greenhouse gas emissions fueling the crisis. The protections included in investment treaties are increasingly at odds with the existing and necessary timelines to decarbonize the energy sector and meet climate obligations, underscoring the need for reforms.
One of the main challenges with the ECT is that it effectively protects fossil fuel investments against government actions aimed at phasing out fossil fuels. For instance, if a country moves to ban coal plants or restrict new oil exploration, the ECT enables investors to file claims for compensation. This protects and inadvertently bolsters fossil fuel development at a time when reducing reliance on fossil fuels is essential to addressing climate change.
The investor-State dispute settlement (ISDS) mechanism embedded in a large majority of these international investment agreements has also become notorious for issuing large arbitral awards in favor of investors in the fossil fuel sector. These awards have the potential to strain State budgets allocated for climate mitigation or even create a regulatory chilling effect on domestic measures. The mere threat of such awards — as well as the cost of defending against an arbitration claim — has become a powerful disincentive for States to undertake policy measures that could adversely affect foreign investors.
In this context, Denmark and New Zealand admitted that the threat of investor-State lawsuits hindered their climate policy ambitions at the UN Climate Conference COP26. Additionally, a 2023 survey by the Organization of Economic Co-operation and Development (OECD) found that a significant majority of governments (78 percent) believed it was very important to align investment treaty-related finance flows with Article 2.1(c) of the Paris Agreement.
Why the EU and UK Decided to Withdraw
For years, both the EU and UK, alongside other ECT Members, attempted to reform the ECT to align it with the urgent need to support the transition to low-carbon energy sources. Starting in 2018, the EU and its Member States led an initiative to modernize the ECT’s provisions. The modernization aimed to align the Treaty with modern energy policies, including strengthening support for renewable energy investments. This effort led to four years of complex negotiations, spanning 15 rounds of multilateral negotiations, culminating in an Agreement in Principle in 2022. However, despite the considerable effort, the proposal to adopt the new text failed due to its continued misalignment with climate goals.
According to the French High Council on Climate — an independent body assessing France’s progress on climate goals — succinctly captured the issue, noting that “[t]he main obstacle posed by the ECT, even in a modernized version, is the incompatibility between the timetables for decarbonization of the energy sector with the safeguards stipulated in the Treaty” and the fact that “[n]one of the possible outcomes of the fifteenth round of negotiations on the ECT modernization agreement will enable signatory parties to commit to a trajectory that would decarbonize their respective energy industries by 2030, in line with the Paris Agreement targets.” Therefore, at the EU level, a “coordinated withdrawal from the ECT by [EU Member States] and the EU, combined with canceling out the “sunset clause”, appear[ed] to be the least risky option in terms of meeting domestic, European and international climate commitments.”
In other words, the ECT’s protections for fossil fuel investments continue to delay the energy transition, contradicting the Paris Agreement’s requirements to limit global warming to 1.5°C. Ultimately, with no path forward to meaningful reform, the EU and UK saw withdrawal as the most viable way to uphold their climate commitments.
The Role of European States in Leading the Climate Action Shift
Several EU Member States played pivotal roles in advancing the ECT withdrawal. Countries such as Denmark, France, Spain, Germany, Ireland, Luxembourg, the Netherlands, Poland, Portugal, and Slovenia mobilized to withdraw from the ECT, leading to multiple intra-EU discussions and, ultimately, the announcement of the EU’s withdrawal from the Treaty. The coordinated withdrawal from the ECT marks the culmination of these efforts and showcases the determination of European countries to lead by example in international climate policy. However, two key issues remain:
- The application of the sunset clause
- The remaining Members of the ECT, whether or not they are under a modernized form
To address the first, the withdrawal process from the ECT is governed by Article 47 of the Treaty, which includes the “sunset clause.” This provision stipulates that, even after withdrawal, the ECT’s protections continue to apply to existing investments “for a period of 20 years from such date.” This extended protection for fossil fuel investments would be at odds with the decarbonization plans needed to meet the obligations of the Paris Agreement.
Also, the question of what to do with the remaining ECT Parties and the thousands of agreements with similar provisions remains. Time is ticking; at the UN Climate Conference COP28 in 2023 in Dubai, 198 States called for a transition away from fossil fuels and a tripling of renewable energy by 2030. In recent years, there has been an increasing number of investor–State arbitrations concerning climate change-related measures, such as the denial of permits for new fossil fuel extraction or exploration projects or the phaseout of existing fossil fuel-based electricity generation. As States implement new measures to reduce their reliance on fossil fuels, international investment agreements keep benefiting this industry.
The Broader Implications for International Climate Goals
The EU and UK’s decisions to withdraw from the ECT send a powerful message to the global community: international treaties must prioritize climate goals over fossil fuel protections. As it stands, the ECT is emblematic of a broader issue within international energy agreements, which often prioritize investment stability at the expense of necessary environmental action. For climate goals to take precedence, these agreements must evolve to prevent fossil fuel protections from derailing global decarbonization efforts.
By leaving the ECT, the EU and UK are signaling that they will no longer support treaties that hinder meaningful climate progress. These withdrawals could catalyze similar actions in other countries, pushing for a reevaluation of treaties that hinder climate commitments. The EU and UK’s moves underscore the need for international agreements that align investment flows with climate priorities, creating a pathway to reduce reliance on fossil fuels and support renewable energy investments.
Read part two of this analysis at: Beyond EU and UK’s Exit from ECT: Addressing the Sunset Clause and Fossil Fuel Investment Challenges