The Energy Charter Treaty: A Real Threat to Climate Action Plans

It has been more than five years since 196 countries have promised to take serious actions to prevent climate change by signing the Paris Agreement. However, all these objectives are under the threat of an outdated treaty, namely, the Energy Charter Treaty (ECT). The ECT is an international agreement that established a multilateral framework for energy cooperation in the energy industry, unique under international law, and is considered the foundation of an intergovernmental organization, namely the Energy Charter Conference.^[1] The ECT was signed in 1994, aimed to integrate the former Soviet Union countries' energy industries into a global framework, which currently have 53 signatories, including the European Union and the European Atomic Energy Community (Euratom). The raison d’être of the ECT was to prepare a ground in which the energy cooperation can flourish by enhancing energy security under the free market principles, i.e., competitive energy markets, while respecting the sustainable development and sovereignty over energy resources as an integral part of this cooperation.^[2] However, many experts argue that the ECT constituency's contribution to energy security in the EU became limited with Russia's withdrawal from the ECT from 2009 onwards; and thus, the raison d’être of the ECT became obsolete.^[3]

As one of four broad areas of the ECT, namely, energy transit, energy efficiency, investment, and investor-state dispute settlement (ISDS), ISDS is a significant part of the ECT. The ECT sets out the provisions for the dispute settlement in Article 26 and 27, while the former article specifically expresses provisions for resolving a dispute between two contracting states, the latter lays out the grounds for the resolution of such disputes between a participating state and an investor, through diplomatic channels and ad-hoc tribunals. For instance, such disputes emerge between those industries that depend on fossil fuels and countries that aim to limit greenhouse gas emissions in line with the Paris Agreement and the European Green Deal.

From the perspective of the European Union's goals, specifically in its endeavor to become climate-neutral EU by 2050, ISDS poses a threat to this target. The ECT protects foreign investments in greenhouse gas emissions (GHG) in signatory countries through its ISDS mechanisms and multiplies the cost of the transition to such a climate-neutral union.^[4] By 2050, GHG's protected by the ECT, if fossil fuels are not phased-out, would be equivalent to one-third of the remaining global carbon budget for 2018- 2050.^[5] Alongside its impediments before the green transition of the EU, the Union also shoulder the financial burden of the ECT's continuation, and it is more than the investment needed to finance the European Green Deal. Thus, the ISDS mechanism's protection of the foreign investments in fossil fuels is expected to cost trillions of Euros of taxpayer money, if not phased-out from the ECT's binding provisions. However, phasing-out fossil fuels from the protection of the ECT is very hard to achieve since such change requires unanimity of the signatories; therefore, many expect that the industries are relying on the fossil fuels to be reluctant to such changes, given their capital investment proportions in fossil fuels compared to renewable energies.^[6]

Figure 1: Oil and Gas Industry Capital Investments in 2019^[7]

The ECT, therefore, is integral to the green transition of the European Union, and such obsolete agreement poses a threat to the actualization of this transition as it protects the foreign investors with ISDS mechanisms. The EU recognizes the European Green Deal and the ECT's incompatibility, and they consider two options: modernization of the ECT and withdrawal from the ECT altogether, as indicated by the European Commission, on 2 December 2020.^[8] However, such unilateral withdrawal of the ECT signatories, most of whom are EU member states, would trigger the famous “sunset clause” in the ECT, which enables the ECT to continue to apply to existing investments during the post-withdrawal 20-year period. The sunset clause implies that the investors would enjoy the protection of their investments under the ECT for another 20 years.^[9] Thus, the sunset clause remains one of the biggest threats before the EU's transition to the climate-neutral EU, as the EU itself is a part of the ECT and has legal obligations to the ECT. Therefore, considering that the ISDS mechanism and the sunset clause impose limitations on the European Green Deal as discussed above, the ECT is not consistent with the European Green Deal, EU climate law, and European Investment Bank's energy lending policy.^[10]

The Modernization Process

The year 2020 was a crucial year for the modernization process of the Energy Charter Treaty, and the next three scheduled rounds for 2021 will determine the future of the ECT. Before outlining the ongoing discussions, it is necessary to provide some information on how the modernization process started.

In 2009, the modernization process started with the withdrawal of Russia from the ECT. The following year, they adopted a road map to keep up with the modern world's developments. A strategy group was set “to examine the possible options regarding the modernization of the Energy Charter Process.”^[11] Following the Energy Charter Conference in that year, a Policy on Consolidation Expansion and Outreach (CONEXO) was adopted to consolidate the ECT among its signatories. In addition, it was aimed to attract key energy parties by promoting the ECT across the globe. The main target was the parties with the status of observers of the Energy Charter Conference. Thus, four countries (Afghanistan, Montenegro, Jordan, and Yemen) joined the ECT. 

In 2019, ECT signatories decided to consult with representatives from observer countries and industries about the modernization's potential scope. As a result of two consultations, they have agreed on 25 modernizations topics to discuss further. These 25 topics were mainly chosen to prevent the wide interpretations of the arbitral tribunals” ECT provisions. It was expected to receive policy options from different parties to amend or clarify the ECT provisions. However, 40 percent of the ECT constituency was not active in this process, as only Albania, Azerbaijan, the EU, Georgia, Japan, Kazakhstan, Luxembourg, Switzerland, and Turkey proposed policy options.    

According to the decision of the Energy Charter Conference, “Turkey believes that it is time to review some of the current ECT provisions based on her experience on the implementation of the ECT Treaty and the current developments both in the energy sector and the investment treaty law.”^[12] It is stated that Turkey has been following the developments that international organizations such as OECD and UNCITRAL have started. These developments include reform studies and debates to reform the whole ISDS system due to the complaints on the reliability of the whole system and the unbalanced structure of the ECT. However, there was no criticism on climate change, clean energy transition goals, or the achievement of the Paris Agreement's objectives in the general comments while the EU proposed a reflection on climate change in the Modernized ECT. Only in the third topic, namely, the definition of economic activity in the energy sector, Turkey proposed “to modify the related article (Article 1(5)), to adapt the Treaty to the Energy Transition/Decarbonization Processes and Contracting Parties’ Climate Change Commitments to and therefore cover new investments trends and new technologies in the definition of economic activity in the energy sector.”

While the amendments to the ECT require unanimity, many countries do not believe that the ECT needs to be reformed. For instance, Japan proposed to keep the provisions without any change. Therefore, it has been agreed that three negotiations round would take place in 2020 to have an open discussion on the topics proposed for modernization and to ascertain initial impressions of the delegation's positions.

Figure 2: Contribution of the ECT Signatories to the 25 Identified Modernization Topics^[13]

In 2020, three negotiations took place with a participation of 37 signatories out of 57. In the meantime, several campaigns and calls were directed to the EU to examine better the provisions on investment protection that are not in line with the Paris Agreement. The main concern was the protection of fossil fuels by the ECT, which prevents the signatories from implementing the energy transition policies in line with the climate change goals and the Paris Agreement. Following the Energy Charter Conference on 18 December 2020, five more negotiations round were planned for 2021. The fifth round will occur between 1-4 June 2021, following the meeting that was concluded on the 5th of March.^[14]

In sum, the ECT is a threat to achieving the Paris Agreement and the European Green Deal's objectives. The possibility of reaching an agreement by the deadline seems unrealistic due to the signatories’ unwillingness to amend the ECT. While governments raise their climate ambitions, they ignore the ECT and its modernization process, which does not promise to make the ECT environmentally friendly. Therefore, it will not prevent parties from filing a suit against the government policies implemented to protect the climate. Bringing this issue into focus is crucial for the future of the next generation. The clock is ticking, and there is no time to waste.