Modernizing the Energy Charter Treaty - EU wants to stop investment protection for fossil fuels

For almost two year now the Energy Charter Treaty (ECT) is under revision and negotiations shall finish in 2021. The EU now ratched up its position on the reform of the ECT during recent negotiation rounds. The aim of the EU is to try to stop fossil fuel companies suing states over climate action. This shall, according to a leaked document, be pursuit by fundamental changes to the investment chapter and to the Investor State Dispute Settlement MEchanism of the ECT (ISDS). While earlier positions of the EU already pointed towards that direction, a new European Comission proposal for ECT reform now concretizes that coal, oil and gas investments shall be removed from the list of energy investments protected under the treaty. If approved, this change would come into force in ten years time.

So far there have been two rounds of negotiations over a new text between the EU and the Energy Charter Treaty and a  third round of negotiations is running until 6 November 2020. Then a further round is already planned for February or March 2021. It is within this context that the new EU document surfaced.So far the EU`s efforts in the previous negotiation rounds focussed specifically on those parts of the ECT dealing with energy investments and dispute settlement, with the aim to `clean´ both and bring them, as far as possible, into line with the new and more critical position on Investor-State Dispute Settlement that the EU has come to adapt over the past 3 years.

One year ago, in October 2019, the European Commission made its position on the reform of the Energy Charter Treaty, the only multinational energy treaty that is in force since 1994, clear to the Energy Charter Secretariat. In the position document on policy options for the modernization, the European Union first outlined its general ideas for the modernization. According to this document, the EU wants to reform the ECT ISDS mechanism to bring it in line with the European idea of an Investment Court System (ICS). In particular, the EU wants to create a multilateral Investment Court System to then make sure it also applies to the ECT. On fossil fuel investments, however, the document was rather unspecific, merely stating that the modernized ECT shall reflect climate change and clean energy transition goals. This latter part has now been sharpened and made more explicit. One year later, on monday 26 October 2020, Energy Commissioner Kadri Simpson, explicitly stated in front of the European Parliament that the EU wishes to amend the ECT to only protect those investments contributing to a climate-neutral energy system to make the ECT a tool for the energy transition.

On the same day the European Commission`s new position surfaced in a leaked document. According to this document the provisions of part III ECT (investment protection) shall not apply to materials listed in Annex EM I to the ECT under the heading `Coal, Natural Gas, Petroleum and Petroleum Products´. This shall also apply to electrical energy derived from these materials.

However, there is an exception as Part III ECT shall apply until 31 December 2030 to the production of Electrical energy produced from Petroleum gases and other gaseous hvdrocarbons through power plants and infrastructure enabling the use of renewable and lowcarbon gases and emitting less than 550 g of CO2 of fossil fuel origin per kV/h of electricity in relation to such investments. In cases where such investments replace existing investments the terms shall be prolonged until   until 3l December 2040. 

For gas pipelines, investment protection under Part III ECT shall also apply until  3l December 2040  provided that the pipelines are able to transport renewable and low-carbon gases as well as hydrogen. 

Leaving aside these exceptions, the general rule shall be that ten years after the entry into force or provisional application of the new ECT all investment protection for the remaining other fossil fuels such as coal, natural gas, petroleum and products as well as electricity derived from it shall cease. 

According to news reports the position of the EU is met with reservations by industry nations like Japan and Poland, but also by environmental NGOs like Friends of the Earth, for either being too strict or too lenient. What seems to be sure, however, is that the new proposals have been submitted to late to be considered during the current round of negotiations and will therefore most likely only be discussed in depth next year.