The European Commission proposes withdrawal from the Energy Charter Treaty

On 7 July 2023, the European Commission formally proposed a coordinated European Union withdrawal from the Energy Charter Treaty (ECT), one of the world's largest multilateral investment treaties, citing its incompatibility with the EU's enhanced climate ambitions under the European Green Deal and the Paris Agreement. This comes against the background of long-running – and to date, unsuccessful - attempts to 'modernise' the ECT, with a number of States (including EU Member States) having already announced their withdrawal from the treaty. Given the uncertainty created by these developments, existing and prospective investors in the energy sector in the EU are recommended to review their investment structures and other protections available to their investments (for example, in investment contracts).

Background

The ECT is a multilateral investment treaty, which in its own words, "provides a multilateral framework for energy cooperation that is unique under international law". The ECT was signed in December 1994 and entered into force in April 1998. There are currently 56 Signatories and Contracting Parties to the Treaty. This includes the European Union, Euratom and all EU Member States except for Italy, making it one of the most widely subscribed investment treaties of its kind.

The ECT was the product of political initiatives in the early 1990s to facilitate "mutually beneficial cooperation" to ensure that a "commonly accepted foundation was established for developing energy cooperation among the states of Eurasia". It covers all types of energy materials and products and seeks to achieve energy security and reliable cross-border energy flows, including by providing investment protection. This includes mechanisms to settle disputes between investors and the States in which they invest. Most notably, the ECT allows investors to file claims against ECT Contracting Parties before international arbitration tribunals for breach of substantive ECT obligations. As of 1 May 2023, 158 arbitration cases are known to have been brought under the ECT.

The ECT modernisation process

The ECT has been the subject of various criticisms in recent years, including claims that the treaty creates obstacles to the transition to greater use of renewable energy. Critics argue, among other things, that the investment protections offered by the ECT restrict the ability of States to regulate on climate change and energy transition issues without the risk of significant financial exposure in the form of claims under the ECT.

Negotiations to modernise the ECT began in 2019 with the aim of strengthening provisions on sustainable development, climate change and clean energy transition, whilst protecting States' right to regulate. However, the negotiations took place against the backdrop of the parallel withdrawal of a significant number of EU Member States from the ECT (as discussed below). While the European Commission initially proposed ratifying the modernised text of the ECT in October 2022, it was unable to obtain the necessary majority approval from the Council of the EU (representatives of the executive governments of the EU Member States) due to abstentions from France, Germany, the Netherlands and Spain.

The successive withdrawal of State parties from the ECT

Italy was among the first State parties to formally withdraw from the ECT, effective from 1 January 2016 (see further details of the withdrawal in our previous blogpost here). Similar announcements by other States were made in 2022 and 2023, with Portugal being the latest country joining the list of EU Member States seeking to withdraw. Spain, the Netherlands, France, Slovenia, Germany, Luxembourg, Denmark and Poland are among the Member States which have either announced their intention to withdraw or have formally submitted notices of withdrawal to the ECT Secretariat.

However, the ECT (Article 47(3)) contains what is known as a "sunset clause" which states that "[t]he provisions of [ECT] shall continue to apply to Investments made in the Area of a Contracting Party […] as of the date when that Contracting Party's withdrawal from the Treaty takes effect for a period of 20 years from such date".

At the same time as it proposed ratifying the modernised text of the ECT, the European Commission issued a Communication to the European Parliament, the Council and its Member States noting that the EU and its Member States have always considered that the ECT in its entirety does not apply intra-EU. The Commission recommended that the "a subsequent agreement between the Member States, the European Union, and EURATOM on the interpretation of the Energy Charter Treaty constitute[d] the most appropriate tool offered by international law" to, among other things, address this point and confirm that the sunset clause does not apply as between them. The Commission put forward a draft agreement to initiate a negotiation process, including the confirmation that "Article 47(3) ECT does not apply, and has never applied, to intra-EU relations". As noted below, the negotiation of an agreement on the application and interpretation of the sunset clause is likely to continue as part of the proposed co-ordinated withdrawal.

The European Commission's proposed co-ordinated withdrawal

On 7 July, the European Commission formally proposed that the EU, its Member States, and Euratom withdraw from the ECT in a "coordinated and orderly manner", citing the view that the ECT is no longer compatible with the EU's enhanced climate ambition under the European Green Deal and the Paris Agreement. The European Commission submitted legal proposals to the Council of the EU, and 'informal' discussions will now occur prior to a formal vote at the Council, where a qualified majority vote will be needed to approve the withdrawal.

As mentioned above, even when ratification of a modernised ECT was still in prospect, the European Commission had already expressed the view that the sunset clause poses a risk to the EU and the EU Member States and that the appropriate response is to adopt an instrument that is a "subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions".

Comment

The announcement on 7 July followed unsuccessful efforts by the EU to ratify the modernised text. The current proposal would appear to be the only one that would enable the EU and its Member States to act as one. However, the Energy Charter Secretary General has invited EU Member States to vote in favour of the modernised text of the ECT despite the European Commission's proposal for a coordinated withdrawal. The Secretary-General considers that the "decision of the Energy Charter Conference to modernise the ECT is not linked to a potential EU decision on its withdrawal from it". Even if a qualified majority in favour of withdrawal were achieved within the Council of the EU, the impact of withdrawal, particularly concerning the sunset clause, is likely to be a matter of controversy. In the circumstances, prospective and existing investors in the energy sector in the EU are recommended to consider carefully the structure through which their investment is made and the other protections available to their investments, such as investment contracts.

For further information on the potential impacts, please contact Hannah Ambrose, Vanessa Naish, Louise Barber or your usual HSF contact.

The authors would like to thank Csilla Cao for her assistance with this post.