Will Coordinated European Withdrawal be the Death Knell of the Energy Charter Treaty?

On 22 November 2022, the Energy Charter Conference (the “Conference”), the governing and decision-making body under the Energy Charter Treaty (the “ECT”), was scheduled to vote on the text of the modernised ECT at its meeting in Mongolia.  However, on the eve of the meeting, the Council of the European Union ("EU") failed to adopt a common position regarding the modernised ECT.  As a result, the European Commission requested a postponement of the vote on the modernised ECT.  The Conference granted the request and fixed April 2023 for finalisation of the discussion on the adoption of the amendments to the ECT.  The February 2023 recommendation by the European Commission services that the EU, Euratom and EU Member States carry out a coordinated withdrawal from the ECT rather than join the modernised ECT after allowing its adoption is a potential game changer for the future of the ECT.

Following Italy’s withdrawal from the ECT with effect from 2016, seven European Contracting Parties—namely, France, Germany, Luxembourg, The Netherlands, Poland, Spain and Slovenia—, have made public statements announcing their intent to withdraw from the ECT, thereby preventing the EU from adopting a common position regarding the modernised ECT. 

The inability of the Council of the EU to reach a qualified majority to adopt the modernised ECT arises out of the perceived conflict between the EU’s climate change commitments, including as part of the EU Green Deal, and the raison d’être of the ECT, i.e., to promote and protect freedom of energy transit through a combination of substantive guarantees and procedural guarantees, including the option of international arbitration between energy investors and countries hosting energy investments.  Given the ECT’s protection of cross-border investments in the energy sector, including fossil fuels, the contention is that the ECT does not meet the EU’s goal to prevent fossil fuel investors from suing ECT Contracting Parties for pursuing policies to phase out fossil fuels in line with the EU Member States’ international commitments, including the climate accords adopted at the 2015 UNFCCC Conference of Parties (“COP”) 21 in Paris (the “Paris Agreement”) and the EU Green Deal underlying the EU bloc’s efforts to decarbonise the bloc’s energy mix and to achieve climate neutrality by 2050.

Background – criticisms of the ECT

The ECT is a multilateral framework for cooperation in the energy sector.  It is the only multilateral treaty of its kind.  Concluded in 1994, it establishes common rules governing investment protection, trade in energy materials and products, transit and dispute settlement.  There are currently 53 members (including the European Union and Euratom) and 42 observers to the ECT.  The EU is the only intergovernmental organisation that is a party to the ECT.

On 24 November 2022, the European Parliament adopted a resolution, by 303 votes to 209 with 63 abstentions, calling for a coordinated withdrawal from the ECT by the EU and its Member States and for a nullification of the ECT’s 20-year “sunset clause,” discussed below (press release from the Parliament).  In a letter dated 13 February 2023, addressed to the President of the European Parliament, the ECT Secretariat clarified relevant points raised by the resolution and urged the EU and its Member States not to object to the modernised ECT prior to any potential withdrawal from the ECT (English).

Dissatisfaction with the ECT in certain EU Member States and in the European Parliament has focussed on the ECT’s investor-State dispute settlement (“ISDS”) mechanism providing eligible investors with a direct right of redress against their host countries under international law.  Critics argue that the fact that the ECT enables foreign investors in oil and gas to sue governments in private arbitration proceedings means the cash-rich fossil fuel industry can take legal action against countries passing laws aimed at reducing or eliminating the use of non-renewable sources of energy.

While it is true that the ECT is the world’s most litigated treaty, having given rise to more than 150 known arbitrations by energy investors against host countries, arbitrations related to changes in renewable energy regulations by host countries, especially Spain, have outpaced fossil fuel cases since 2012.

ECT Withdrawal Issues

A coordinated termination of the ECT will be subject to the terms of the ECT as supplemented by the international law of treaties as codified in the 1969 Vienna Convention on the Law of Treaties (“VCLT”) to which most EU Member States are parties and which reflects customary international law.  The Energy Charter Secretariat has pointed out that Article 62 of the VCLT, governing the termination of treaties, makes withdrawal only possible in case of “fundamental change of circumstances” and that international jurisprudence has held that new developments in the state of environmental knowledge and of environmental law are insufficient to meet that threshold (November 3, 2022 press release).

A “non-paper” that was recently issued by the European Commission services assesses the options for a way forward regarding the EU, Euratom and Member States’ membership in the ECT in the context of salient treaty issues.  Its text has been published by the Euractiv news outlet (published).  The non-paper, which is meant to guide the EU Member States’ discussion regarding their possible options, notes that re-negotiating the outcome of the ECT modernisation process does not appear feasible and that the adoption of the modernised ECT is dependent on European support. 

The first option, considered the most adequate one by the Commission services, is the coordinated withdrawal of the EU, Euratom and the EU Member States from the ECT.  This withdrawal option would require a decision of the EU Council adopted by qualified majority as well as the consent of the European Parliament (except that in the case of Euratom the European Parliament would simply need to be informed of Euratom’s decision to withdraw from the ECT).  Withdrawal by individual EU Member States would be subject to the applicable domestic rules.  The second option involves a withdrawal of the EU and Euratom with prior authorisation by the EU for some EU Member States to vote in favour of a modernised ECT and to remain Contracting Parties to the modernised treaty subject to conditions set for them by the EU.  This option assumes that a modernised ECT will be adopted notwithstanding the withdrawal of the EU, Euratom and other ECT Contracting Parties and that the European Parliament will consent to the special authorisation.  The third option consists of an EU Council decision allowing the adoption of the modernised ECT by the Conference, followed by the coordinated withdrawal of the EU, Euratom and EU Member States.  The non-paper acknowledges, however, that this option, while allowing for the modernised ECT to be adopted, would run counter to the withdrawal announcements already made by several EU Member States and would be disingenuous in relation to non-EU Contracting Parties.

Will the sun be setting on the ECT’s Sunset Clause?

A particular contentious issue in the modernisation and withdrawal process remains the fate of the so-called sunset clause contained in Article 47(3) of the ECT.  Pursuant to this clause, the unmodernised ECT would continue to apply to existing investments during a 20-year period that would commence upon the expiry of one year after the date of receipt of any withdrawal notification by Portugal, the ECT’s Depository.  This would result in post-withdrawal investor-State disputes being adjudicated under the unreformed rules, including in relation to existing investments in fossil fuels.

The non-paper from the European Commission services acknowledges that unilateral withdrawal of the EU and its Member States from the ECT would trigger the “sunset clause” of the ECT.  It posits that the risk of application of that clause by tribunals sitting in arbitrations based on an unreformed ECT could be mitigated by the negotiation of an inter se agreement amongst the EU, Euratom and the EU Member States, whereby they would confirm that the ECT in its entirety does not apply in intra-EU relations (the modernised ECT includes an express carve-out for intra-EU disputes in the form of a disconnecting clause).  In addition, another inter se agreement would need to be concluded with willing non-EU Contracting Parties, which the non-paper acknowledges is a challenging proposition.

While Latvia and Norway in the recent termination of their bilateral investment treaty also purported to terminate the sunset clause enshrined in that treaty, there is a dearth of State practice regarding the validity of sunset clause terminations or bypasses and the validity question ultimately will be a matter for a competent arbitral tribunal to decide in a future case brought under the ECT.

Comment

We consider that the fate of the modernised ECT, including that treaty’s 20-year sunset clause, will remain uncertain until April 2023, when the Energy Charter Conference is scheduled to finalise the discussion on the adoption of the amendments to the ECT.  It remains to be seen whether the European Commission’s recent recommendation that the EU and its Member States carry out a coordinated withdrawal from the ECT will prevent or merely postpone the adoption of the modernised ECT and whether countries such as the People’s Republic of China, which has been an Observer of the Conference since 2001, will seek to fill the void created by withdrawing European countries through an accession to a modernised ECT following its adoption. 

From an international law perspective, it would appear challenging to bypass or neutralise the ECT’s sunset clause in combination with a coordinated withdrawal from the ECT.  The object and purpose of a sunset clause in a treaty is to survive the withdrawal from the treaty by one or more treaty parties.  A coordinated unilateral withdrawal from the ECT by the EU and its Member States would likely be counterproductive to the modernisation efforts, given that those parties would still be exposed to arbitration resulting from new investor-State disputes, including in relation to existing fossil fuel investments, for a further 20 years following the effective date of any withdrawal.  Assuming the ECT’s sunset clause remains valid and binding, an outright withdrawal from the ECT may be a less environmentally-friendly solution than adoption of the modernised ECT, which includes provisions designed to mitigate environmental impact, including through an opt-out for protection of fossil fuel investments and a carve-out for intra-EU disputes.  Ironically, investments in fossil fuels would remain protected during a longer period under the ECT’s sunset clause in the event of a coordinated withdrawal from the ECT compared to the modernised ECT. Energy investors wishing to take advantage of the international law protections offered by the ECT through (re)structuring their investments so that they fall under the protective umbrella of the treaty cannot afford to await further developments regarding the ECT and must act now, including by considering alternatives to ECT-based protection.