A number of EU member states have announced plans to withdraw from the Energy Charter Treaty (ECT), an international agreement that was signed in 1991, which established a multilateral framework for cross-border cooperation in the energy industry. The governments of Poland, Spain, the Netherlands, and France have all done so, and in other countries, as for example in Belgium, important voices are calling to do so.
A key aspect of the treaty is that it provides investors with the ability to sue states before a private arbitration tribunal if they want to challenge state decisions over their compatibility with the ECT. It is no coincidence that the treaty was agreed right after the end of the Cold War, as it was aimed at boosting investment in the resource-rich former Soviet-satellite states. The rationale was that when investors knew that they did not need to rely on the (often corrupt) courts of countries that had not yet become full democracies but would be able to count on private arbitration panels that enjoy a very good reputation, they would be more willing to put the sizeable sums on the table that typically are required for investment in the energy sector.
Ultimately, this is not only beneficial for the emerging markets where a lot of energy investment takes place—as the ECT increases the number of investments taking place there—but also for Western European economies, where a lot of the investors are based. Leaving the ECT will deprive European energy companies of investment protection in other parts of the world. It is therefore unfortunate to witness how the Western European governments mentioned above have turned against the ECT.
An important reason for this is pressure by the green movement, which already successfully convinced mainstream politicians to reduce investment in domestic fossil fuel development—an important reason for Europe’s excessive energy dependence on Russia. This has resulted in terrible gas shortages that are causing the world’s biggest chemicals company, the German firm BASF, to declare that high energy costs are making Europe increasingly uncompetitive, causing it to decide to permanently reduce investment in Europe.
Irina Kustova, a researcher at the Centre for European Policy Studies (CEPS) think tank, has pointed out that “for the rest of this decade, investment in alternatives to Russian fossil fuels will remain vital, as does reliable and uninterrupted transit via the southern gas corridor, which is also covered by the treaty’s transit provisions.” As there is also talk of the EU as an organization leaving the ECT, she adds that such a move could enable China and Turkey to use the political vacuum left by the EU’s departure from the ECT to strengthen their presence in the South Caucasus and Central Asia. However, at least for now, a majority of EU member states prefer reform of the ECT over leaving it.
Belgium’s minister for climate, environment, sustainable development, and green deal, Zakia Khattabi, is among the fiercest opponents of the treaty, dismissing proposed reforms to it as “largely insufficient,” claiming that the treaty could never comply with EU climate objectives, and calling it a “Trojan horse” for the EU’s climate policy. She is a member of the Ecolo (Écologistes Confédérés pour l’organisation de luttes originales) party—one of Belgium’s ‘green’ parties–and is unsurprisingly hostile to a treaty that is indeed important for fossil fuel investment.
Apart from the question of whether European electorates still think it is so intelligent to abandon fossil fuels—given the economic recession which seems now certain as a result of Europe’s underinvestment in fossil fuels—greens who tend to love renewable energy investment should also think twice about opposing the ECT, because it is equally important for the renewable energy sector.
This is clear in the case of Spain, which lost a series of cases at private arbitration courts for having abruptly changed its financial support scheme in 2013 for renewable energy installations. The financial support scheme had been created in 2007. Investors, like renewable energy investor Antin, convinced the arbitrators that Spain had breached the fair and equitable treatment standard in Article 10(1) of the Energy Charter Treaty. To abandon the treaty framework is not just a bad thing for traditional energy investments, but also for renewable energy investment. Clearly, for many greens, hatred for the private sector trumps their support for renewables.
Spain is currently fiercely resisting paying the compensation imposed on it by the arbitrators, and it should be noted that the country has a rather poor track record of complying with arbitration rulings. In this vein, it finds itself in questionable company together with the likes of Russia, Argentina, and Venezuela. Last year, during the ongoing Yukos case, the Spanish government even intervened in favour of Russia, encouraging it also not to pay.
A new study on the level of compliance of states regarding the payment of investor-state investment treaty awards rendered against them reveals that Spain has so far not paid a single Investor-State Dispute Settlement (ISDS) award since the Maffezini award was issued in 2000. The country ranks second of the most delinquent respondents in the world when it comes to the refusal to pay these ISDS awards, owing a considerable $700 million to investors. It is the country that is facing the highest number of renewable energy cases by far under the ECT, as well as the country that has lost the highest number of private arbitration challenges.
At the time when the lawsuit against Spain on the basis of the ECT was initially launched, Spain was only the second Western European country to face a challenge. At that time, someone close to the groups bringing the case commented: “Spain is now in the same league as Kazakhstan and Azerbaijan when it comes to investor confidence.”
Unfortunately, not only Spain, but also parts of the European Commission and wider European machinery is turning against private arbitration. In 2018, the European Court of Justice—in its ‘Achmea’ ruling—ruled that investor-to-state arbitration in an intra-EU context was illegal. Moreover, while the European Commission department responsible for the ECT is trying to save it, arguing that the changes to the treaty are the best option for the EU, the Commission’s competition department—which is largely ignoring its task to police state aid—has actually been urging Spain not to pay compensation for its u-turn on renewable energy investment, oddly claiming that arbitration awards would constitute “state aid.”
The leftist Spanish government was the first EU government to announce that it would abandon the ECT. Interestingly, this move is unlikely to help it avoiding having to pay the compensation from the judgements against it, given that there is a clause in the ECT holding signatories subject to litigation for 20 years after they withdraw.
The whole move simply amounts to a massive own goal.