A treaty established in the 1990s after the end of the Cold War to protect Western Europe’s fossil fuel industry expansion into the former Soviet Union countries has now become a goldmine for fossil fuel companies as well as lawyers and investors with vested interests in holding back the zero carbon revolution.

The Energy Charter Treaty enables foreign investors to sue national governments through the international trade investor-state dispute settlement system (ICDS) for policy changes that disadvantage their investments. 

It’s now the most invoked piece of legislation anywhere in the world, used by fossil fuel companies to protect their investments. Many of these lawsuits remain secret or have only scant information in the public domain.

It is currently being used against the EU in support of the completion of Russian-owned Gazprom’s 1700km €5.8 billion (AUD$9.35 billion) controversial Nord Stream 2 gas pipeline from Russia to Germany.

Nord Stream 2 reinforces EU dependency on Russian gas supplies, threatens the EU internal market and is not in line with EU energy policy or its strategic interests. What’s more, the EU deplores Russia’s policy of using its energy resources as a political tool to exert political pressure on its end-consumers, and therefore has passed a resolution saying that it needs to be stopped.

But this is being challenged under the ECT, going directly against the grain of the EU’s European Energy Union, which is about diversifying its energy resources, and against a new directive stipulating that no new projects should be implemented without a prior legal assessment of their legal conformity with EU law and with the agreed political priorities.

“The ECT is today the most litigated investment agreement in the world”

But if you think that’s bad, it’s just the tip of the iceberg: the ECT is today the most litigated investment agreement in the world. There are no fewer than 121 investment notified disputes. Investors sue, and if they win states pay up – with taxpayers’ money. Over US$51.2 billion (AUD$73.9 billion) has been paid out so far.

Some of these companies engaged in litigation don’t even really exist; they are what is known as “letterbox” companies, often used for tax evasion and money-laundering. 

Some of them are claiming for the loss of future profits, such as oil company Rockhopper which is suing Italy. 

Some of them are owned by extremely wealthy individuals, who are suing for over $1 billion. Two-thirds are cases involving countries within the EU.

It’s a scandal.

The treaty is expanding its territory

Because it has been so successful for them, the ECT Secretariat together with the arbitration industry, has an aggressive expansion process – particularly encouraging Asian and African countries to sign up. They seek to persuade these resource-rich countries that it’s in their interests to do so.

The real motive is the they are “eager to gain access to the rich energy resources in the global South and to expand their own power and profit opportunities”. All the above facts come from last year’s report from Corporate Europe Observatory (CEO) and the Transnational Institute (TNI).

They say, “the ECT is a powerful tool in the hands of big oil, gas, and coal companies to discourage governments from transitioning to clean energy”. 

Kyla Tienhaara and Christian Downie of the Australian National University, who have analysed the evidence, say that “states should approach accession to the ECT with caution and consider other mechanisms to reduce risk for renewable energy investors” because of the lack of evidence that the ECT has a positive impact on flows of investment in any sector, including the renewable energy sector, and because of the risk that ISDS could be used by the fossil fuel industry to impede a clean energy transition. 

The EU is trying, weakly, to reform the treaty

Currently there is a process underway in the EU to reform the ECT. An optimist might think that this was an ideal opportunity to rectify all its faults.

However, former ECT staff (including the former director of the Energy Charter Secretariat) are among those who are saying that the reform process is totally inadequate, and they question whether the treaty should even exist any more because it is a threat to decarbonisation and does not support investment in renewable energy.

NGOs are concerned about the effect of “regulatory chill”, that is to say governments failing to bring in much needed climate and energy policies due to the threat of legal action.  

The ECT is one of thousands of International Investment Agreements (IIAs) in force today, and which belong to the previous world; most of them need to be reformed, replaced or terminated.

The UN Conference for Trade and Development (UNCTAD), which places sustainable development at the heart of its agenda, is leading an international effort to reform these IIAs.

Any reforms to the ECT and similar pieces of legislation need to empower nation states’ rights to regulate to protect society, the environment, and to achieve the goals of the Paris Agreement and the sustainable development goals.

The problem with the ECT is that it relies on a defined list of fuels that omits several important sustainable energy sources. It does attempt to protect demand-side investments (energy efficiency) but it’s ineffective because countries must notify each investment to the Energy Charter Secretariat and there is no channel to enable this. 

The terms of reference for the EU’s ECT review don’t even mention the need to align the treaty with the Paris Agreement.

The review merely asks for “better alignment of the ECT to sustainable development, including climate change and clean energy transition goals should be reflected, to the extent that these do not expand the scope of the ECT to carry out actions that are already dealt with in other fora” which falls well short of what is required.

The ECT is not just failing to facilitate a clean energy transition, it is actively impeding it. Reform needs to be as ambitious as possible, or the EU’s hope of meeting its Paris Agreement targets will not be met.

David Thorpe is the author of the books The ‘One Planet’ Life and the new ‘One Planet’ Cities.

Join the Conversation


Your email address will not be published.