The European Union (EU) has officially packed its bags and closed the door on the Energy Charter Treaty (ECT). On 27 June 2024, the EU notified the secretariat to the ECT of its withdrawal marking the culmination of years of political debates, landmark court decisions, and pronounced uncertainty. Parallel to the notification, the EU cemented its stance by adopting an inter-se agreement, declaring that intra-EU arbitral dispute settlement cannot, and never could, be based on Article 26 of the ECT.
This declaration echoes the sentiment of the EU Commission, which has consistently rejected the legality of inter-EU investor-State dispute settlement (ISDS) arbitration. It also aligns with the Court of Justice of the European Union’s (CJEU) ground-breaking rulings in the Achmea and Komstroy cases. In light of the legal and political developments over the past few years, the EU’s withdrawal and its inter-se agreement hardly come as a surprise.
This post will provide a brief overview of how we arrived at this point and encourage a forward-looking discussion on the future of investment protection in the EU. What comes next?
Regulatory Chill and Modernisation of the ECT
The ECT is a binding multilateral agreement from 1994, with around fifty contracting parties, including the EU and its member States. It was negotiated in the 1990’s as part of an effort to promote cooperation with the Eastern Bloc. In addition to the EU, the signatories primarily include Eastern European and Central Asian countries. According to Article 2 of the ECT, the treaty’s purpose is to ‘promote long-term cooperation in the energy field’.
The ECT is an international investment agreement that has seen the highest number of ISDS cases globally. By December 2023, a total of 162 publicly known cases had been launched under the treaty. The vast majority of these have been intra-EU disputes, where an EU-based company has taken legal action against another member State. Many of these cases have been initiated by actors in the fossil fuel industry, with some disputes arising from environmental measures imposed by host States. One notable example is the 2017 dispute between Italy and English oil company Rockhopper, which brought negative attention to the ECT. Rockhopper claimed that Italy’s denial of a—one it was entitled to under Italian law—constituted an indirect expropriation of its investment. The tribunal agreed, and awarded Rockhopper 190 million Euro in damages, plus interest.
Several of these cases and the deals negotiated under the treaty have sparked public and political outrage. The ECT has been pinned as a tool for oil companies to protect their interests at the expense of climate-friendly investments and environmental protection laws. It is estimated that investments into fossil infrastructure of a valued at 345 billion Euros are protected by the ECT’s provisions. If every contracting parties with plans to phase out fossil fuels or achieve climate neutrality over the coming years were required to compensate their foreign fossil fuel investors, the costs would be astronomical.
The provisions in international investment agreements most closely related to the regulatory space of host States, particularly their ability to implement environmental regulations, are the fair and equitable treatment (FET) standard and the provision on expropriation. Both contain elements relevant to regulations made for public purposes. Under the FET standard, the principles of stability and legitimate expectations are often invoked by investors to challenge public-interest measures taken by host States. Meanwhile, the provision on indirect expropriation requires tribunals to draw a line between prohibited expropriatory measures and acceptable public-purpose regulations. In reviewing ECT cases where a breach was found 38 out of the 47 cases involved violations of the FET standard.
There are also cases where disputes were settled through negotiations, under the looming threat of arbitration. In 2015, the German government found themselves being sued by the Swedish company Vattenfall over its decision to discontinue nuclear power operations. The parties later reached a settlement, with Germany agreeing to pay approximately 2.6 billion Euro. Germany reached a similar settlement with the Czech energy company Leag, amounting to around 1.7 billion Euro. German energy companies Uniper and RWE filed claims against the Netherlands under the ECT, challenging the country’s plan to phase out coal by 2030. Both companies have since withdrawn their claims, with Uniper doing so after striking a deal with the German government.
The threat of ISDS cases is closely connected to one of the problems within the current investment protection framework: the risk of regulatory chill. Regulatory chill refers to the theory assumes that the mere threat of legal action from foreign investors can deter governments from implementing measures that aim at inter alia environmental protection. In a 2022 report, the UN Intergovernmental Panel for Climate Change (IPCC) specifically identified regulatory chill as a barrier to achieving climate goals. As one author put it:
‘[i]n the context of the fossil fuel industry, a host State is likely to find itself facing the impossibility of simultaneously meeting its obligations under the Paris Agreement and its obligations to protect fossil fuel investments’.
Estimates suggest that the value of stranded upstream investments in the oil and gas sector, made between 2016-2050, ranges between 3-7 trillion USD, depending on when and how States start begin to implement policies to curb the sector. However, the fossil fuel industry has no intention of backing down without a fight. A study by the International Institute for Sustainable Development (IISD) shows that 231 ISDS cases have been launched globally by actors in the fossil fuel industry, most of them related to the early stages of exploration. This makes it the most litigious of all industry sectors.
In response to these concerns, there has been a paradigm shift, signalling a new era of modernisation of international investment agreements. Both UNCTAD and the OECD have encourage States to renegotiate their bilateral investment treaties, offering resources and recommendations on how to make these agreements more transparent, effective and modern. The ongoing modernisation negotiations for the ECT are part of this global trend toward reform.
In 2017—although the idea first surfaced in 2010—the EU initiated a process to modernise the ECT to better align with its modern investment policy and the EU Green Deal. According to the EU’s investment policy, the EU should promote high environmental standards and safeguard the regulatory space of both home- and host countries. In June 2022, the European Parliament adopted a resolution emphasising that all policy areas, including investment policies, must be designed to contribute to the fight against climate change and environmental degradation.
After years of negotiations, progress on the modernised ECT culminated in June 2022 with a proposal for a revised treaty. The plan was to adopt a new agreement in November 2022, followed by ratification by all contracting parties. However, this did not materialise, as the modernised agreement lacked sufficient support in the European Parliament. Instead of endorsing a revised ECT, the Parliament passed a resolution imploring the Commission to prepare a coordinated exit from the ECT.
On 7 July 2023, the EU Commission adopted a decision, recommending the Council to prepare for a coordinated withdrawal from the ECT. In the interim, about a dozen EU member States declared their individual intentions to withdraw from the ECT. At last, in June 2024, the EU agreed on a formal exit and an inter-se agreement to prevent any future intra-EU ISDS proceedings. However, individual member States remain free to stay in the ECT and participate in the ongoing modernisation process.
What comes next?
Now, researchers must look to the future, and the state of legal investment protection in the EU. The EU Parliament justified its decision to leave the ECT with the aim of aligning investment law more closely with sustainable development goals. They sought to remove the limitations imposed by the ECT’s restrictions. However, in the same resolution, the EU Parliament highlighted the ‘lack of consistency between some member States positions on the ECT and their bilateral investment treaties (BITs) which still protect fossil fuel investments and outdated provisions contrary to EU objectives and values’. This points to the fact that many BITs signed by member States include the same provisions as the ECT.
This raises the question: does leaving the ECT actually impact the regulatory space and reduce the threat of investor-State arbitration, or will the ECT’s standards simply be replaced by the same protective provisions in the BITs that continue to bind member States in their relations with third parties?
Uncertainty also surrounds the situation within the EU itself. In 2020, EU member States cancelled their internal bilateral investment treaties in 2020, following debates about their incompatibility with EU law. Since then, the legal framework for investment protection within the Union is whatever is provided under EU law. Protection for foreign direct investment as an autonomous concept comes from public international law. In contrast, specific protection for direct investments is not explicitly regulated under EU law. Instead, protection is fragmented, found in various regulations. Upon closer analysis, it is possible that EU law offers similar protection standards to those in the ECT. Provisions protecting investors are embedded in the fundamental rights, the principle of the rule of law, and the four freedoms of the internal market. Whether investors can rely on these provisions in the same way they could under the ECT remains to be seen. While the battle over the ECT may be nearing its end in the EU, the challenge of ensuring a balanced level of investment protection while prioritising the green transition is far from over.
Sofia Gierow holds an LL.M. from Wolfson College, University of Cambridge, and has previously published on the Energy Charter Treaty and EU law. She also holds an LL.M. in Swedish Law from Lund University.