Why EU calls to pull out of the Energy Charter Treaty

London: The European Parliament is calling for the whole bloc to exit a controversial international energy treaty over climate concerns, in a move that casts doubt on the future of the agreement.

Since the late 1990s, the Energy Charter Treaty (ECT) has allowed energy firms and investors to sue governments whose plans to cut emissions from fossil fuels could hurt corporate profits.

Its critics say the threat of legal action under the ECT could deter governments from enacting clean energy policies vital to achieving international climate goals.

At a conference in late November, the treaty’s signatory countries were due to vote on adopting reforms to modernise the treaty in line with evolving policy agendas to tackle global warming.

But the European Union (EU) was forced to request a postponement, after dissatisfaction with the proposed reforms prompted seven of its member states to back out of the treaty since October.

The European Parliament on Thursday voted to ask the European Commission to coordinate a withdrawal of all EU member states from the ECT.

Here are some of the key features of the ECT and how it is being used by some corporations to undermine government climate policies:

What is the energy charter treaty, and why was it created?

The ECT is a legally binding pact signed by 52 countries - mainly in Europe, Central Asia and the Middle East - as well as the EU.

It was drawn up at the fall of the Soviet Union to protect European energy firms with fossil fuel assets in ex-Soviet states.

The ECT aims to promote energy security by protecting energy firms against risks to their investments and trade, such as having their assets seized or contracts breached.

It grants the right to challenge governments over policies that could harm investments - not just in fossil fuels but also in hydropower, solar, wind and other clean energy sources.

Why does the ECT pose a threat to climate action?

Legal claims made by fossil fuel companies challenging environmental measures are on the rise, according to the International Institute for Sustainable Development.

Experts warn that the risk of legal action could cause governments to delay policies to reduce planet-heating emissions, such as phasing down oil and gas production.

ECT claims can be pursued through international arbitration channels called investor-state dispute settlement (ISDS), where it is common for the private sector to be awarded large payouts.

British oil and gas company Rockhopper this year won more than £210 million ($255 million) in an ECT lawsuit over Italy’s ban on offshore drilling which scuppered the firm’s plan for a new oilfield.

The award was far higher than the £33 million the company was said to have invested in the drilling project.

At the COP27 climate summit in Egypt this month, more than 380 civil society groups urged governments to put an end to agreements based on the ISDS process.

"It is scandalous that an African country can still be sued by a foreign corporation for trying to protect the climate," said Dipti Bhatnagar of Friends of the Earth International, a green group calling for change.

"The (ISDS) mechanism lets corporations steal the funds we so urgently need to tackle the impacts of climate change and pursue a just energy transition in Africa," she added.

A study by Boston University, Colorado State University and Queen's University in Canada found that the cost of potential legal claims from oil and gas investors challenging government action to curb fossil fuels could reach $340 billion.

How is the treaty being reformed?

In June 2022, ECT signatories reached an agreement to modernise the treaty, a process that was initiated in 2018 to make it compatible with the Paris Agreement to tackle climate change.

Negotiators agreed on a “flexibility mechanism” that allows individual countries to end investment protection for fossil fuels in their territories, in keeping with their respective climate goals.

But only the EU and Britain have so far agreed to exclude fossil-fuel investments from protection under the ECT.

Governments were unable to vote on adopting the reforms at a conference in November, after the EU failed to get a majority of its member states to agree to the proposed amendments.

Those opposed - including France, Germany, the Netherlands and Spain - argue the proposed changes are not enough to align the ECT with climate policies, as they would allow fossil-fuel investments to be protected for at least another decade.

The ISDS process and a sunset clause allowing countries to be sued for up to 20 years after withdrawing from the treaty would remain unchanged.

The list of energy types protected by the ECT, meanwhile, has been expanded to include carbon capture and storage, hydrogen, biomass and biogas - which critics say increases the potential for legal claims.

Discussion on adopting the reforms has been postponed until April 2023, while the EU decides on its position. Signatories must agree unanimously on the new terms before they can be ratified.

What are the EU's options?

The European Parliament adopted a resolution this week urging the Commission to officially propose a withdrawal of all EU member states from the ECT.

Growing dissatisfaction with the modernisation process has already prompted states to start leaving individually.

In November, Germany, Luxembourg and Slovenia announced plans to withdraw, after Spain, the Netherlands, Poland and France walked out in October.

Italy was the first EU country to quit the treaty in 2015, citing budget restrictions.

“The only option going forward is to come up with plans for a coordinated withdrawal,” said Jean Blaylock, a trade campaigner at Global Justice Now.

Can the ECT survive?

If the EU does quit, Britain, Switzerland and Balkan states seeking EU membership are expected to follow suit.

“If there is a massive walkout, this would trigger a discussion on terminating the treaty as a whole,” said Cornelia Maarfield, senior trade and investment policy coordinator at Climate Action Network Europe.

States that leave could also jointly agree not to apply the sunset clause between them, reducing the threat of post-exit legal action, said Maarfield.

Experts say a collapse of the ECT could trigger a wider movement to abandon other ISDS treaties.

But Blaylock noted that, if the ECT survives, remaining states could seek new members - mostly from the Global South, which she warned would be most vulnerable to investment lawsuits.