The European Union on Friday moved to pull the plug on the bloc’s membership in the Energy Charter Treaty (ECT) — an investor protection pact that’s seen as hampering decarbonization efforts.
Brussels had led a push to reform the treaty and make it more difficult for fossil fuel companies to sue over changes in policy like banning offshore drilling or coal phaseouts that affect their investments. But that effort stalled and eight EU countries — Denmark, France, Germany, Luxembourg, the Netherlands, Poland, Slovenia and Spain — threatened to quit.
“Keeping an unmodernised Energy Charter Treaty is not a viable option for the EU,” Energy Commissioner Kadri Simson said in a statement. “The Treaty in its current form is not in line with the EU’s investment policy or our energy and climate goals.”
The Commission said it “is also withdrawing its previous proposal to ratify the modernised Treaty, which did not gather the required majority among Member States.”
The three-decade-old ECT is the world’s most-used investment treaty. It was originally designed to protect energy investments in post-communist countries; Investigate Europe estimates €344.6 billion of investments are protected under the ECT.
But the pact has turned into a straitjacket for countries seeking to decarbonize, as they can be hit with hefty lawsuits from firms claiming damages for lost profits. Some 158 ECT signatories have faced lawsuits since 2001, with a surge in cases starting in 2015 following the Paris climate agreement that committed countries to faster efforts to cut greenhouse gas emissions.
In one example, German energy companies RWE and Uniper sued the Netherlands in 2021 for €2.4 billion for passing a climate law that banned coal-fired power plants after 2030 — a lawsuit that galvanized public opinion against the ECT.
“This is the right decision … because an exit from the ECT is not only good for the climate, but also for the budgets of the European member states,” said Ludwig Essig, who advises on trade policy at the Munich Environmental Institute.
The EU tried to reform the treaty by ending protection for fossil fuels, but several ECT signatories in Central and Eastern Asia rejected a deeper overhaul of the text. Countries like Switzerland and Japan also made clear they have no intention of leaving it.
Checking out but not leaving
But leaving the pact isn’t easy.
The treaty has a sunset clause allowing lawsuits to be filed for 20 years after a member leaves.
Italy, which left the treaty in 2015, was hit in 2022 with a €190 million payment to U.K. fossil fuel company Rockhopper over a ban on Mediterranean oil drilling.
If EU countries leave together, that lowers the risk of governments being sued by companies based in other member countries — which forms the bulk of investments covered by the treaty — but they still face the possibility of lawsuits from countries still in the ECT, said Cornelia Maarfield, a senior trade and investment policy coordinator at green alliance CAN Europe.
It’s still unclear if all 27 member countries will jump together, as Cyprus and some countries in Central Europe like Hungary and Slovakia aren’t keen on quitting.
A coordinated exit would be a “unique opportunity for the EU to speak with one voice and to remove a major obstacle to realizing its climate targets,” said Lukas Schaugg from the International Institute for Sustainable Development.
Getting out won’t be swift.
The Commission proposal has to be backed by a qualified majority of member countries. The European Parliament has already pressed to leave. Then it will still take a year for the departure to become official due to the notification that has to be sent to the ECT’s secretariat.
The future of the treaty is now up in the air, and it could be undermined by the EU walkout.
However, Johannes Tropper, a law researcher at the University of Vienna, felt that the ECT could limp along without the bloc.
“There will at least be some states that might still want to rely on the treaty, including Kazakhstan, Japan, Switzerland,” he said. “I don’t think it will disappear.”
