Exodus from the Energy Charter Treaty demonstrates a shift in global power

A pact that might prevent European governments from adopting urgently needed climate action and that defends the interests of investors and fossil fuel companies is finally starting to be abandoned by European countries. The Energy Charter Treaty (ECT), which has been ratified by 53 European and Asian nations, was created to safeguard energy companies in former Soviet Union nations from becoming subject to excessive regulation and governmental ownership. However, the ECT is now out of date. The protection of fossil fuel investors, as well as their lawsuits against governments for millions of euros, run counter to European nations’ efforts to reduce their emissions in accordance with the 2015 Paris Climate Agreement. The treaty’s legality has also been questioned.

Therefore, the convention is being terminated by European states. France declared its intention to depart earlier this year. Following soon after were Spain, the Netherlands, Poland, Slovenia, and Germany. However, unless it is changed, it might still impede future climate action because former members are still bound by the pact 20 years after they leave. International investment treaties safeguard and support foreign investments made by businesses from one state. Currently, there are about 2,500 of these agreements in effect.

The ECT, which entered into force in 1998, has served as a legal foundation for free and competitive energy markets, creating a framework for energy cooperation throughout the whole European continent. If governments fail to uphold the investment protections outlined in the ECT, investors may file a claim for damages against the sovereign state in question through an international legal process known as investor-state dispute resolution. Investors in the energy and fossil fuel industries have been able to profit greatly thanks to the ECT. Yukos Capital, an oil business, was awarded compensation from Russia in the amount of US$20.5 million (£17.4 million) in 2021 for expropriation.

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Legal imbalance

Investment protection agreements permit investors to bring lawsuits against sovereign states, but not the other way around. The investor-state dispute settlement mechanism was first created to shield western firms’ abroad investments from legislative changes made by unreliable governments in emerging nations. Western nations consequently recognized this disparity in legal rights. However, due to the fact that nations can now be sued by investors for breaking the conditions of the ECT, Europe is increasingly the focus of international investment arbitration. Under the ECT, Spain has been involved in 45 cases and has paid out claims totaling more than €800 million (£673 million).

Following the US$1.9 billion (£1.65 billion) claim brought by Swedish energy company Vattenfall against Germany in 2009 over delays for permits to build a coal-fired power station in Hamburg, investor-state disputes in Europe became even more intense. Public campaigns against the investor-state dispute settlement process were started in response to the lawsuit.

Since then, the European Court of Justice, which ensures that EU law is applied consistently throughout the EU, has intervened twice to contest whether foreign investment arbitration is compliant with EU law. 2018 saw Slovakia’s payment of €22.1 million (£19.2 million) in restitution to Dutch investor Achmea The arbitral tribunal, according to the European Court of Justice, was “not a component of the judicial system” of any nation. They determined that an ECT-based arbitration initiated by Ukrainian power provider Komstroy against Moldova was unlawful under EU legislation three years later.


Independent arbitrators?

Under the ECT, investor claims are resolved through international arbitration. Here, unaffiliated professionals known as arbitrators render a formal judgment that settles a legal disagreement without requiring it to be heard in a national court. An effective method of resolving conflicts was once thought to be international investment arbitration. However, it has come under scrutiny recently. This is especially true for the ECT where questions have been raised about the arbitrators’ independence, impartiality, and competency.

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Most of the arbitrators who participate in ECT hearings lack expertise in public international law. But because corporate conflicts are typically resolved by arbitration, there is a sizable pool of arbitrators with an expertise in corporate law. This might skew hearings on disputes in favor of investors. In other circumstances, some of the arbitrators take on different duties. In other instances, investors have chosen arbitrators who have already advised them legally. This calls into doubt the ability of arbitrators to distinguish between different responsibilities and behave impartially.


Withdrawal symptoms

The ECT’s signatories have suggested reforming it in light of these controversies. The reform is centered on a number of important ideas. To safeguard the state against shady disputes, the definition of what constitutes an investment and an investor will be modified. The Treaty will not provide legal protection for investments in fossil fuels, and states will be able to regulate energy companies in the interest of achieving their goals for public health and the climate. Any arbitration conducted within the EU that the European Court of Justice finds to be in conflict with EU law is also to be discarded.

The proposed reforms have so far been unable to persuade nations to continue being ECT party members. The European Parliament has also pushed European nations to withdraw from agreements governing international investment disputes and establish their own framework. However, legal obstacles prevent the withdrawal of EU nations from taking effect right away. A “sunset clause” in the ECT safeguards investors’ interests for 20 years after a state withdraws. Legal protections for current and future foreign investments would be maintained if a country left the ECT in 2022, and new claims could be made up until 2042. The ECT’s future is surrounded by a lot of unknowns. But it is obvious that modernization is needed. However, the sudden flurry of withdrawals by the same nations that drafted the ECT is a sign of the overall shift in the balance of power. Investment disputes do not only affect developing nations, and developed states do not make all international rules.

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