OpenExp | 28 February 2020
Modernisation of the Energy Charter Treaty
The ECT is a multilateral investment agreement solely dedicated to protecting foreign investments in energy supply through binding provisions. By January 2020, the Treaty has been ratified by 53 countries and the European Union/ Euratom. The ECT “raison d’être” became obsolete in 2009 with the withdrawal of Russia from its provisional application. Under the ECT regime, foreign investors can sue host States through arbitration tribunals, typically, composed of party-appointed private lawyers. Host States are legally bound to accept proceedings of these tribunals. However, in case foreign investors fail in meeting their contractual obligations, the host State is not protected by the ECT regime. The one-sided protection of the ECT regime made the Treaty an attractive tool to foreign investors. Nevertheless, the ECT failed in meeting its policy objectives. Contracting Parties launched, in 2009, a modernisation process to resuscitate the Treaty. Negotiations of the policy options to “modernise” the Treaty will take place during 2020.
The “modernisation” of the Energy Charter Treaty (ECT) is unlikely to lead to a fossil fuel-free and a climate friendly Treaty. In fact, despite being in an era of climate emergency, Contracting Parties active in the ECT modernisation did not propose to phase-out the binding protection of foreign investments in fossil fuels. The continuation, until 2050, of the binding protection of foreign investments in fossil fuels would end up with stranded fossil fuels assets amounting to €2.15 trillion. This is more than double the estimated investment needed to finance the European Green Deal in the next ten years. Crucially, the continuation of the binding protection of foreign investments in fossil fuels will potentially increase the cumulative carbon emissions protected by the ECT regime from at least 87 Gt by the end of 2019 to at least 216 Gt by the end of 2050. This is equivalent to more than one-third of the remaining global carbon budget to limit planet’’s warming to 1.5°C by the end of the century. The binding protection of carbon emissions qualifies the ECT for an “ecocide” Treaty given the scientific evidence available about the contribution of carbon emissions to the expected ecological disaster.
The continuation of the Investor-State- Dispute-Settlement (ISDS) mechanism under the ECT regime will, almost certainly, increase the cost of the energy transition for taxpayers in ECT signatories. The ISDS mechanism under the ECT regime is likely to continue in the “modernised” Treaty. Contracting Parties active in the modernisation of the ECT did not propose to end the use of arbitration tribunals for dispute settlement between foreign investors and host States. Ending, by 2020, all fossil fuels contracts protected by the ECT, since its entry into force, would potentially cost taxpayers €523.5 billion. The continuation of ISDS mechanism to protect fossil fuels, until 2050, under the ECT regime would potentially increase this cost to €1.3 trillion out of which 42% should be paid by EU taxpayers. This is slightly above the estimated investment needed to finance the European Green Deal over the next ten years. In the absence of provisions to end the ISDS mechanism under the ECT regime, investors will invest more in making their “regulatory chill” strategies highly effective. The “right to regulate” and other “safeguards” proposed by Contracting Parties are unlikely to limit the exploitation of investors and arbitrators of the ambiguities embedded in the ECT binding provisions.
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Read also: Presention on the modernisation of the Energy Charter Treaty (pdf)