A contrarian view: leaving Energy Charter Treaty is bad

Spain and France in particular have been urging the commission, who until recently preferred to try to reform the ECT, to exit from the treaty, but also the Netherlands, Poland and Germany were keen to pursue this path.

The reasoning behind the EU commission's push is that the ECT would clash with the EU's goal to reduce the use of fossil fuels.

However, the treaty does not only protect investment in fossil fuels. It equally protects investment in renewables. In fact, this is a major reason why the Spanish government is on the forefront of urging the EU to abandon the treaty.

Back in 2007, the Spanish government came up with a financial support scheme for renewable energy investment, which it drastically trimmed between 2012 and 2014, after both the 2008 financial crisis and the Spanish sovereign debt crisis had eroded the financial firepower of the Spanish government.

Scrapping subsidies for the future is something that any supporter of free market orthodoxy should cheer, but that is not the same as defaulting on all kinds of contractual promises.

The investors took Spain to court, using the ECT, and obtained victory after victory. Amongst many cases, in 2018, Spain was condemned to pay a €101m arbitration award, on the basis of a violation of the ECT.

So far, the Spanish government has refused to comply with even a single of the court orders, which is of course not unrelated to the government's current financial situation, which is far from rosy. Spain is being sued for an estimated total of $9.5bn [€8.99bn]. That amounts to a considerable 0.7 percent of Spain's gross domestic product.

Spanish example

When it comes to respecting arbitration court orders, Spain is doing about as poorly as the likes of Argentina, Venezuela and Russia, currently still owing not less than $700m [€663m], according to one estimate.

In sum, perhaps it is a bit rich to oppose the ECT treaty on the basis that it would endanger the fight against climate change, as Spanish ecological transition minister Teresa Ribera has claimed, whereby she added that there had been "no improvements" to the treaty during the negotiations to reform it. Notably, a 'sunset clause' in the ECT leaves signatories open to lawsuits for 20 years after exiting the treaty, so Spain's efforts to use the exit to try to escape having to pay up will be in vain no matter what.

Separately, given how Switzerland will not abandon the treaty and that the UK appears to be fine with the changes agreed to it, the EU's move may erode the competitiveness of European industry further, on top of the very high energy cost and increasing American protectionism.

The episode is really yet more evidence of how the commission is abandoning its role as a guardian of fair and free competition in the EU, which is recently also witnessed by its proposals to water down EU state-aid rules, to allow more EU protectionism in response to the US protectionism of the "inflation reduction act".

In an bid to support Spain against the renewable energy investors, the commission is now attempting to redefine the compensation Spain has been ordered to pay by the arbitration courts as illegal "state aid", with the excuse that the Spanish government had not properly notified the commission about the arrangement back in 2007. At the end of January, the UK High Court even blocked the commission from intervening in a court case between Spain and one of the investors.

Behind this all is also a growing underlying hostility against private arbitration in EU judicial circles, with the highest court of the EU, the Court of Justice in Luxembourg, ruling in 2018 in its "Achmea" decision that investor-to-state arbitration in an intra-EU context was illegal and should be limited to disputes with non-EU member states.

The latter is now being used by the Spanish state as an argument to fend off investors keen to see their contracts respected.

Fundamentally, this goes beyond the question of our energy mix, whether one thinks private arbiters have a place in international investment or even as to how strict state aid rules should be. At the core, this relates to the rule of law and respect for agreements made.

At the EU level, there is justified concern about the erosion of the rule of law in member states. If EU policy makers do no longer care for the rule of law out of principle, they should care out of concern for the signal this sends to those keen to invest in the EU.