Reforms to the Energy Charter Treaty : what you need to know

On 24 June 2022, the 53 signatory states to the Energy Charter Treaty reached an “agreement in principle” to the Treaty’s amendment and modernisation.[1]

The Treaty was originally signed in 1994 (and entered force in 1998), with the aim of providing a multilateral framework for energy cooperation, while respecting the principles of sustainable development and sovereignty over energy resources. It focuses on four key areas:  the protection of foreign investments, non-discriminatory conditions for trade in energy materials, the resolution of disputes between states and investors and the promotion of energy efficiency.

However, the Treaty has long been criticised for being outdated and for failing to align with its own sustainability objectives, sparking calls for reform. Several EU countries face costly legal challenges under the Treaty over reducing their reliance on fossil fuels and growing their renewable industries. For example, German energy companies are suing the Dutch government for over EUR 3.6bn due its decision to phase out coal by 2023.

Following two years of 15 negotiating rounds contracting states have agreed to:

• Restrict the scope of the definition of ‘investment’, (excluding some types of debt instruments, for example).
• Restrict the definition of ‘investor’, such that they will need to establish substantial business activities in the state in which they are incorporated as a precondition to claiming investment protections under the Treaty. This may effectively exclude special purpose vehicles or shell companies from the Treaty’s scope of covered investor protections.
• Expand the scope of protected investments to include energy transition projects (such as carbon capture, utilisation and storage (CCUS), biomass and hydrogen products).
• Include a novel ‘flexibility mechanism’ that allows states to exclude investment protection for fossil fuels in their territories, in order to align with those states’ domestic energy security and climate goals. For example, the European Union (‘EU’) and the UK have opted to carve-out fossil fuel related investments from investment protection under the Treaty, including for existing investments after 10 years from the Treaty’s entry into force.
• Include a review mechanism that will allow the signatories to review the list of protected investments and the flexibility mechanism every five years.
• Clarify the definition of ‘fair and equitable treatment’, including a non-exclusive list of circumstances under which a violation of an investor’s legitimate expectations are deemed to have occurred.
• Clarify what constitutes ‘direct expropriation’ under the Treaty. For example, the text will ensure that non-discriminatory measures that are consistent with protecting legitimate policy objectives (including public health, safety, and environmental objectives) will not constitute ‘indirect expropriation’. This affirms governments’ regulatory autonomy and further limits the scope of protection for investors under the Treaty.
• Exclude the possibility of bringing investor-state dispute settlement (‘ISDS’) claims for disputes where both parties are part of the same regional economic integration organisation (for example, the EU). This appears to reaffirm the decisions of EU courts that intra-EU ISDS actions are contrary to EU law (such as the Achmea case[2]).
• Clarify that the Treaty’s most-favoured-nation treatment clause shall not extend to dispute settlement procedures in other international agreements, and other international agreements do not constitute ‘treatment’ under the modernised Treaty.
• Provide for greater transparency in dispute resolution procedures.
• Include a new provision that dismisses claims, submitted under the Treaty, that result from investment restructuring activities undertaken solely for the purpose of submitting those claims.

In general, these changes aim to limit the scope of investment protections for emissions-intensive activities whilst ensuring legal protections for foreign investment in green technologies. The agreed changes have not, however, escaped scrutiny. Some critics, continue to argue that the amended Treaty could still protect existing fossil fuel investments, including coal, for another 10 years in the UK and EU,[3] or longer in other contracting states. Others have criticised the inclusion of CCUS, biomass and hydrogen products within the expanded definition of protected investments due to sustainability concerns over these technologies and energy sources.[4]

The Treaty text will be communicated to states on 22 August 2022, for potential adoption on 22 November 2022. After this, the provisions will only enter into force 90 days after 75% of states have ratified the amendments, which could take years. The “agreement in principle” is a significant step forward in bringing the existing framework into the 21st century. However, it remains to be seen whether a sufficient number of Treaty states will ratify the amendments, how long that may take, and indeed whether the amended Treaty will achieve its stated aims.

[1]CCDEC202210.pdf (energycharter.org)

[2]CURIA - List of results (europa.eu)

[3]8 reasons why the Energy Charter Treaty reform process is doomed to failure - CAN Europe

[4]ClientEarth