The shield to fossil investments cracks after the departure of Spain and France from the Energy Charter Treaty

The abandonment of France and Spain from the Energy Charter Treaty cracks an international treaty that protects investments in fossil fuels against the climate transition in the midst of the energy crisis

The shield on fossil fuel investments is cracking. The abandonment of Spain, France and the Netherlands from the Energy Charter Treaty weakens an international treaty that protects investments in fossil fuels against the climate transition in the midst of the energy crisis.

Spain was the first major EU country to announce the departure. It was on October 12, when it was published by Politico, where Vice President Teresa Ribera said that the process of modernizing the ECT to reduce protections for fossil fuel projects had not meant “any improvement.”

The treaty was born in 1994 to protect investments in energy infrastructure in post-Soviet countries, granting broad protections to investors against public intervention, protections that have been used in recent years to sue countries for policies favorable to the climate transition, such as the phasing out of coal power and restrictions on oil extraction.

When the modernisation round concluded in mid-June, Ribera declared the agreement “disappointing”, adding: “The modernised Treaty will continue to hamper the ambition of climate policies, protect fossil investments and question the right to regulate of the EU and its member states.”

In the letter dated September 27, which has just been known, and sent to the European Commission by Ribera, the Minister of Foreign Affairs, José Manuel Albares, and the Minister of Industry, Reyes, Maroto, explain the arguments for the departure of Spain: “The result of the process of modernization of the ECT has been considerably insufficient. The modernised ECT has failed to successfully align with the goals of the Paris Agreement and the European Green Deal to deliver on our strong commitment to achieve climate neutrality by 2050. We also consider insufficient the progress made from the point of view of defending the integrity and primacy of the Community legal order and its application in all Member States, as the Court of Justice of the European Union has stated on several occasions.”

The Spanish Government warns of its withdrawal from the Treaty, but points out that it would be progressive and asks to find solutions that satisfy all countries: “Consequently, we inform you that Spain will initiate the procedure to make effective the withdrawal of the Treaty on the Energy Charter and the Protocol of the Energy Charter on Energy Efficiency and Related Environmental Aspects. We continue to believe that a coordinated withdrawal of the EU and its Member States would be the best option for the whole EU, so we remain open to working with the Commission and Member States in our common interest. With regard to the Conference of the Parties on 22 November, Spain cannot support the modernized treaty for reasons of coherence, since we will be immersed in that procedure. Despite this, and given that our withdrawal will not be immediate, it is not our intention to jeopardise the interests of the rest of the Member States, so we ask you to work together in the best way.
a way to satisfy the interests of all parties involved”.

“The amended text proposes minor changes to the Investor-state dispute settlement (ISDS) provisions,” explains Lucía Bárcena of the Transnational Institute: “However, the treaty will continue to protect investments in fossil fuels until 10 years after the entry into force of the agreement (this could be in 2033 or more, depending on when the ratification process ends), which is incompatible with the climate emergency. The treaty includes the protection of new energy investments, including hydrogen, biomass and biogas and other renewable energies. This increases the risk of new ISDS cases. It is not clear what new investments will not be protected after the entry into force, i.e. pipelines, gas-fired power plants and hydrogen investments. The ISDS mechanism remains unchanged. It is unclear how ratification of the agreement will proceed (whether each country has to sign or whether there will be a silent procedure meaning that, unless a Contracting Party objects, it will be counted as an affirmative vote).”

Reforming the deal to remove fossil fuel protections has been a priority for the European Union. The treaty has a sunset clause that means any country that leaves will remain subject to litigation for 20 years.

Last May, Spain again lost one lawsuit under the ECT, bringing to 52 the lost claims and compensation exceeding one billion euros, according to calculations by the Transnational Institute. Lucía Bárcena states that “the ECT has become a legal nightmare for Spain, where arbitration claims have already cost more than a billion euros of taxpayers’ money to award investments and pay lawyers and arbitrators. These demands only divert significant public resources from environmentally and socially important areas. Spain should have followed Italy’s example a long time ago.”

Marta García Pallarés, activist of Ecologists in Action and member of the Spanish Campaign Against Trade and Investment Treaties, says: “We are at an extremely critical moment and we need ambitious measures, the exit of the ECT is one of them and we celebrate it. It is now crucial that more countries follow the path initiated by Spain; it is simply shameful that EU countries go to COP 27 in Egypt promising to reduce emissions, while continuing in a treaty that in Europe alone protects fossil infrastructure worth more than €340 billion.”

Brussels ‘takes note’

“We note the announcement by several Member States of their intention to withdraw from the Energy Charter Treaty,” explains a spokeswoman for the EU executive: “The European Commission remains of the opinion that the result of the modernisation process we carried out in June is fully in line with the climate and energy transition objectives, as well as investment protection rules. And this is of particular importance in the current context in which we will have a greater wave of investments in green energy. The modernization of the treaty addresses concerns that were raised regarding the right of governments to regulate for environmental and climate purposes. And, in addition, it allows parties to exclude new investments in fossil fuels from protection.”

But, in addition, the European Commission recalls the conditions of the Treaty, with obligations that include countries that are going to leave: “And we must be very clear about the alternative scenario. Any country that withdraws from the ECT is subject to a 20-year sunset clause, meaning that the country must continue to apply the old provisions to existing investments made by investors from other contracting parties for two decades. This is one of the main reasons why the Commission, together with the Member States, opted for modernisation in the first place because, in fact, failure to do so results in a worse outcome in the event of withdrawal. More claims could still be made from existing investors, including fossil fuel investors. More importantly, new investments in renewables would not be protected by modernised investment rules for those Member States that decide to withdraw from the ECT.”

This year, two German companies sued the Netherlands over its phase-out of coal. The treaty may also create the so-called “regulatory chill” effect, where countries are discouraged from changing their laws so that they are not sued. But even if countries choose to leave the treaty, they can still be sued up to 20 years after they have left the organization.

The reform process, led by the European Commission, sought to end fossil fuel protection. But resistance from Japan, Kazakhstan and other members has prevented them from fully achieving their goal: they won a concession that allows them to stop protecting fossil fuel projects within 10 years. For other treaty members of 53 countries, business as usual will continue.

The Commission is now trying to sell it as a victory for EU members to give final approval. But several EU countries are leaving.

On October 21, French President Emmanuel Macron announced that his country would withdraw from the investment pact because it did not align with the Paris Agreement on climate change.

The French decision followed announcements by Poland, Spain and the Netherlands that they were withdrawing from the Treaty. Those countries are now moving for the EU as a whole to leave the treaty. Germany is considering it and Belgium’s climate minister, Zakia Khattabi, also called for her country’s exit, calling the treaty a “Trojan horse” that puts European climate policy in check.

Source: El Diario