The struggle to abolish the little-known energy charter treaty

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The transmission tower next to the gas-fired power plant operated by Uniper SE in Ilchen, Germany, Wednesday, July 7, 2021.

Michaela Handrek-Rehle | Bloomberg | Getty Images

LONDON-The Energy Charter Treaty is not widely known, but there are concerns that the impact of this international agreement alone would be enough to undermine the hope of keeping global warming within 1.5 degrees Celsius.

ECT includes a highly controversial legal mechanism that allows foreign energy companies to sue the government for climate actions that may harm future profits.

These “company court” cases, sometimes referred to as investor-state dispute resolution, are highly confidential, occur outside the national legal system, and usually result in greater financial rewards than the company anticipates.

As we all know, five fossil fuel companies have sought more than $18 billion in compensation from the government for changes in energy policy, most of which were obtained through ECT.

For example, Germany’s RWE and Uniper are suing the Netherlands for the coal phase-out plan, while the British Rockhopper is suing Italy for banning offshore drilling.

Countries must not only withdraw from the treaty, but they must also destroy it when they withdraw.

Julia Steinberg

Ecological economist, professor at the University of Lausanne

A Uniper spokesperson told CNBC: “The Dutch government has announced its intention to close the last batch of coal-fired power plants by 2030 without compensation.

“Uniper firmly believes that it would be illegal to shut down our power plant in the Plains of Maas after only 15 years of operation without adequate compensation.”

RWE stated that it “clearly supports the energy transition in the Netherlands. In principle, it also supports legal-related measures to reduce carbon dioxide, but believes that compensation is necessary.”

Rockhopper did not respond to a request for comment.

In the next few years, the number of these corporate courts is expected to soar, and activists worry that this trend will become a handbrake for plans to transition from fossil fuels.

At the same time, governments that are prepared to take measures to deal with the climate crisis may face huge fines.

“The Energy Charter Treaty is a real trap for all countries,” Yamina Saheb, an energy expert and former employee of the ECT secretariat who became the whistleblower, told CNBC over the phone.

Saheb resigned from her position in the Secretariat in June 2019 because she believed that ECT could not be aligned with the goals of the landmark Paris Agreement. She said that because many member states rely heavily on fossil fuel revenues, any attempt to reform or modernize the treaty will eventually be rejected.

Thick smoke and water vapor are emitted from the cooling tower of the Weisweiler lignite power plant of RWE Power AG in Germany.

Horst Galuschka | Photo League | Getty Images

“If we withdraw, we can protect ourselves, we can start implementing climate neutral goals, and we can end the push to extend the treaty to other developing countries,” Saheb said.

“I think the only way out is to terminate this treaty,” she added. “Either we kill the treaty, or the treaty kills us.”

When CNBC contacted the ECT secretariat, it was unable to respond immediately.

The treaty stated that its basic goal is to “strengthen the rule of law for energy issues by creating a level playing field with rules” to help mitigate energy-related investment and trade-related risks.

Who is involved and how does it work?

ECT is a unique multilateral framework applicable to more than 50 countries (mainly in Europe and Central Asia), including the European Union, the United Kingdom, and Japan. It is currently seeking to expand to new signatories, especially in Africa, Asia and Latin America.

ECT was signed in 1994 to help protect Western companies that invested in the countries of the former Soviet Union in the post-Cold War era. It also aims to help overcome economic disagreements by ensuring that Western funds flow in the east through binding investment protection.

Since then, it has been severely criticized by more than 200 climate leaders and scientists as the “main obstacle” to avoiding climate disasters.

On October 7, 2021, torrential rains caused flooding in Dhaka, Bangladesh, and dozens of people were walking in the water.

Sumit Ahmed | Eyepix Group | Barcroft Media | Getty Images

“I think the treaty itself might be enough to kill 1.5 [degrees Celsius],” Julia Steinberg, an ecological economist and professor at the University of Lausanne, told CNBC.

“I know that 1.5 is a very strict goal, and there are many things that can break it, but this is because it can basically save the fossil fuel industry… from what they should be risking – and committing honestly – The financial collapse facing investment is in harmful technology.”

The company court hearings filed through ECT are conducted privately, and investors are not obliged to acknowledge the existence of the case, let alone disclose the compensation they seek.

According to the analysis of 130 known claims by the think tank OpenExp, the average cost of investor-state dispute settlement cases is estimated to be approximately 110 million euros ($123.9 million), while the average cost of arbitration and legal fees is considered to be approximately 4.5 million euros .

International environmental law experts say that even the threat of legal proceedings is considered very effective in curbing domestic climate action—fossil fuel companies are keenly aware of this.

This is because it may be difficult for the government to allocate resources to individual issues when considering other priorities. As the budgets of the countries involved have become smaller, the threat of legal proceedings has also become greater.

It is worth noting that an award in favor of the state will not result in zero costs for taxpayers, because the defendant country must pay legal and arbitration fees.

Steinberg said: “Countries must not only withdraw from the treaty, but they must also destroy it when they withdraw.” “This is something an EU-sized unit can do.”

When CNBC contacted the EU spokesperson, he did not immediately comment.

The European Union completed the eighth round of negotiations to modernize the ECT earlier this month, and the ninth round of negotiations is scheduled to be held on December 13.

If the European Union’s modernization efforts do not comply with the Paris Agreement, France, Spain, and Luxembourg have all proposed options to withdraw.

What happens if the country withdraws?

Italy withdrew from ECT in 2016, but is currently being sued for the 20-year “sunset clause”, which means it will be bound by the treaty before 2036.

According to the treaty, approximately 60% of cases occurred within the European Union, of which Spain and Italy are considered the most prosecuted countries. Saheb said that since most of these cases occurred within the European Union, a coordinated exit may trigger a domino effect, and countries such as Switzerland, Norway and Liechtenstein may follow suit.

If the EU collectively withdraws from the treaty, member states can agree to cancel the legal effect of the sunset clause on their own.

“The sunset clause is much longer than many sunset clauses in other treaties, but it is completely inconsistent with the notion that laws and regulations need to evolve with the changing reality of climate change and the changing needs of protecting the environment and human rights,” Nikki Reisch International Environmental Law The director of the Center’s Climate and Energy Program told CNBC.

“There is a very strong reason that the application or enforcement of the sunset clause violates other principles of international law,” she added.

On February 22, 2021, in Wicezceze, Poland, the PM2.5 dust concentration level reached 198 ug/m3, and a convertible full of coal was enveloped in smoke. According to a report issued by the European Environment Agency (EEA), the air in Central and Eastern European countries is the worst in the European Union.

Omar Max | Getty Images News | Getty Images

The European Court of Justice ruled in early September that EU energy companies can no longer use the treaty to sue EU governments. The decision greatly limits the scope of future EU internal cases and puts the legitimacy of some ongoing multi-billion-euro litigation into question.

“We haven’t gotten out of the predicament,” Lai Shi said. She said the ruling is an important step in weakening tools designed to protect fossil fuel investors, but it will not exclude arbitration cases for investors who live outside the EU.

“We cannot allow our ability to deal with the greatest crisis humanity has ever faced, so to speak, to become a hostage to the interests of investors,” Lai Shi said.

“I think this is just another reminder of the need to eliminate the legal structures and fictions that we created that really locked us in the fossil fuel dependency era of the past.”


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