Wednesday

20th Jan 2021

Analysis

The controversy behind the Energy Charter Treaty reforms

  • The ECT is regarded as protecting the fossil fuel industry - something experts say the proposed EU Commission reforms will not change (Photo: Kim Hansen)

Experts from several organisations and EU institutions say that the reform of the Energy Charter Treaty (ECT) will not enable the EU to meet the targets agreed in the Paris Agreement.

At the Paris climate conference in December 2015, 195 countries adopted the first-ever universal, legally-binding global climate deal to keep the increase in global temperature well below 2°C.

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The ECT is an international agreement that grants cross-border cooperation in the energy sector - it was signed in 1994 by nearly 50 countries, including all EU member states, plus most countries from eastern Europe, central Asia, and Japan. It legally protects foreign energy investments in each of these countries.

However, the ECT sought to expand into more countries in the Middle East, Asia, and Latin America - thus becoming a kind of World Trade Organization (WTO) of energy.

The international agreement was initially designed in the mid-1990s to provide legal protection for Western companies investing in the energy sector in countries of the former Soviet Union.

However, the EU Commission proposed in May to reform the "outdated" treaty in order to increase investments in the energy sector in a sustainable way and tackle new political and economic global challenges.

In July, the EU council gave the green light to the commission's proposal to negotiate the modernisation of the ECT.

The ECT is currently considered one of the key defences for the fossil fuel industry worldwide, according to the experts, who believe that the reform proposed by the commission will keep protecting the exploitation of such materials.

Because it doesn't make a difference between sorts of energy production, it gives the existing fossil fuel industry an important advantage. The proposed reform by the European Commission will not change that, even though the climate challenges are undeniable.

"When you look at the elements of the modernisation of ECT, the scope is the same: there will be investment protection and no distinctions between renewables and fossil fuels," warned the director of economic law of Canada-based think tank the International Institute on Sustainable Development (IISD), Nathalie Bernasconi.

"This [reform] is going to take years, but climate change is happening now," she added.

While the ECT has binding provisions for investment protection, free trade and freedom of transit of energy materials, it has only non-binding provisions for the promotion of energy efficiency and environmental protection by developing renewable and clean energies.

"The ECT is a powerful tool in hands of big oil, gas and coal companies to discourage governments from transitioning to clean energy," affirms a recently released report from the UK-based Corporate Europe Organisation (CEO).

According to CEO researcher Pia Eberhardt, "ECT is being used against governments, when governments decide to keep fossil fuels in the ground".

"How can we still protect investments that are destroying the planet?" she asked.

Speaking at an event in Brussels, the head of investment at DG trade at the EU commission and one of the leaders of the reform process, Carlo Pettinato, said the commission is "working really hard to reform the treaty".

"We should make this treaty fully-compatible with the Paris Agreement, that is why we should include provisions in line with the green economy," he added.

Internal EU disputes

The majority of ECT disputes, some 67 percent (which has rapidly increased in recent years), took place between members of the EU.

Spain is the country with the biggest number of lawsuits related to ECT, followed by Italy and the Czech Republic.

Since 2011, Spain has faced more than 40 lawsuits relating to its cuts to renewable energy subsidies - perhaps discouraging other countries for investing in this type of energy, according to CEO's researcher.

Additionally, half of the publicly-known intra-EU disputes were initiated by investors from the Netherlands, Germany, Luxembourg and the United Kingdom.

Private equity investors

In some 88 percent of the lawsuits the claimant is a private equity fund or other types of financial investors.

According to Pettinato, "90 percent of the problems [intra-EU disputes] would end if ECT rules [investor-state dispute settlement clauses] are not applied among EU member states."

Italy became the only member state to withdraw from the agreement, back in January 2016.

This means that any new investments that appear in the energy sector in Italy from 2016 on are not protected by the ECT while the 'old' investments will remain protected until twenty years later.

But despite Italy's withdrawal, a UK-based oil and gas company still sued the Italian government in 2017 because it refused to grant a concession for oil drilling in the Adriatic sea.

According to the policy advisor of the EU parliamentary committee for international trade, Chiara Miglioli, "unless clear political signals come from the EU council and the EU parliament, the likely scenario is that the negotiations on the reform will go ahead".

However, any changes to the treaty require a unanimous decision by the Energy Charter Conference - consisting of 55 members, including energy-exporting countries like Kazakhstan, Turkmenistan, and Uzbekistan.

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