Abstract

The article addresses the foundation and need for modernisation of the Energy Charter Treaty (ECT) and clarifies the position and compatibility of dispute settlement mechanism in ECT under European Union law. It also highlights the conflict between the raison d’être of the ECT and the EU’s climate change commitments under the Paris Agreement on Climate Change and the newly proclaimed European Green Deal. The authors conclude the article by emphasising the need for further negotiation and deliberation over termination to address broader climate change concerns, sustainable development, national energy policies, and high-level investment protection. 

Introduction

Climate change and trade are two major uncompromised and unsettled issues of the global agenda. Moreover, both lay the fundamental conflict in the energy sector and are a part of the more extensive debate of development v/s environment. New realities of energy resources, contemporary challenges such as access to energy, and growing weight to invest and develop sustainable energy resources have made a huge hue and cry over the modernisation of the ECT. The article aims to address the “elephant in the room” in the debate over the modernisation of the ECT, the Investor-state dispute settlement (ISDS) mechanism under the ECT, and the commitments towards sustainable development.  

The ECT was concluded in 1994 as a multilateral framework for cooperation in the energy sector. It consists of fifty-four members [1], having the European Union (EU) as the only intergovernmental organisation party to this treaty. The ECT laid down the standard rules for governing trade in energy materials and products, investment protection and transit, and dispute settlement. The primary aim is to “promote energy security through the operation of more open and competitive energy markets while respecting the principles of sustainable development and sovereignty over energy resources.”  

The foundation of ECT lies in the European Energy Charter signed in 1991 that plans to integrate central and eastern European states and former Soviet countries into the western European and world energy markets. [2] The goal was to ensure a favourable environment for western companies during the transition from state socialism to a market economy and protecting companies from the menace of weak justice systems and corruption in former Soviet countries. This environment was created by allowing Investment arbitration tribunals to enforce the treaty and commercial rules set.       

The ECT derives its inspiration from international legal orders such as the idea of investment protection borrowed by established Bilateral Investment Treaties (BITs) and the North American Free Trade Agreement (NAFTA). Protocol on environmental aspects is believed to be in line with the United Nations Framework Convention on Climate Change (UNFCCC) adopted at the Rio Earth Summit in 1992. The trade provisions derive their inspiration from the GATT/WTO and added transit rules. [3]

Not so Climate Friendly? 

Critics believe that the ECT protecting fossil fuel investments, such as coal mines, oil and gas production, pipelines refineries, coal and gas power plants, obstruct the rapid energy transition to a non-fossil-based energy system. It is also important to note that the EU’s protecting investments in fossil fuels projects in the ECT is contradictory to its commitment in the 1995 Paris Agreement on Climate Change and the newly proclaimed European Green Deal (EGD) of December 2019. [4] EGD is an environmental plan directed to make Europe carbon-neutral by 2050 [5] and achieve this ambitious goal, and the EU is instigating a revision of several international agreements. 

Assessment of ISDS Mechanism under ECT 

Though ECT seeks to increase investor confidence in a sector like energy where disputes are often complex and involve substantial monetary aspects, allowing an alternative means of dispute resolution before international tribunals have invited strong criticism over the recent course of time. [6] The ISDS mechanism is under scrutiny due to concerns regarding transparency, legitimacy, impartiality, and accountability. Such suits would be heard in private non-transparent arbitration and not in public courts. [7] Allowing such mechanisms under ECT is the major criticism the treaty has invited. It allows foreign investors in oil and gas to redress against the host states under international law directly. It also permits private companies to sue the government for any loss or damages arising from private energy investment due to new legislation that further leads to “regulation chill” [8]. These mechanisms, in turn, discourage the government from aligning its regulations with the required climate targets under the Paris agreement. Examples include a €1 billion claim by Uniper against the Dutch government plan to phase out coal power by 2030 [9] and the Rockhopper’s case against Italy [10] against a ban on all new gas and oil operations near the country’s coast.   

Moreover, the compatibility of ISDS under EU law, in question, is also brought by Belgian in her request to the European Court of Justice for an opinion on the compatibility of dispute resolution system of Comprehensive Economic and Trade Agreement (CETA) under EU law. Account of the adoption of UNCITRAL rules on transparency in treaty-based investor-state arbitration in 2014 and subsequent UNCITRAL’s mandate in 2017 [11] for considering possible reform of ISDS and a court-based system led to gained momentum in ISDS debate. 

Modernisation of ECT: From a Bed of Roses to a Thorny Marriage   

A look at EU’s Proposal and Expectations from Modernisation  

The conflict between the raison d’être of the ECT and the EU’s climate change commitments has laid the foundation for the modernisation of ECT. The EU has been a leading proponent of reform both in the ECT modernisation process and UNCITRAL Working Group III. [12] The EU proposes the Commission to ensure that ECT respects states’ right to regulate while also granting high-level investment protection. It also expects reforms in investment dispute settlement provisions (under Article 26 of the ECT) to increase transparency in the proceedings and allow courts to handle disputes under ECT. [13]  

International Energy Charter of 2015 

The first efforts to nullify the difference occurred with the declaration of political intention by adopting the International Energy Charter[14] in 2015. The 2015 Charter intended to strengthen the energy cooperation among the signatories, review the changes occurring in energy markets since the 1990s and reinforce the political commitment to create a friendly investment climate. This declaration has gone beyond the traditional boundaries by bringing new countries on board from Asia, Latin America, the Middle East, and Africa while adopting a universal approach and attracting broader interest from countries worldwide.   

The Energy Charter Conference & the Second Phase  

In 2017, representatives of industry, governments, academia, United Nations Conference on Trade and Development (UNCTAD), and United Nations Commission on International Trade Law (UNCITRAL) met to discuss the protection standards under the ECT and in the Energy Charter Conference held at Ashgabat, the decision-making and governing body for the Energy Charter modernisation process embarked consultations regarding the second phase of modernisation. [15] The objective of this conference was to analyse whether specific ECT provisions need clarification or to be updated as per recent trends in the international investment policy. [16] In 2018, the conference approved the list of topics for the modernisation process. These included core provisions of ECT [17] such as the Definition of Fair and Equitable Treatment (FET), Most Favored-Nation (MFN) Clause, as well as the definition of an ‘Investment’ and the ‘Investor’ and the notion of an ‘Indirect Investment’ along with touching upon new provisions on third-party funding, security for costs, sustainable development and transparency. In 2019, Energy Charter Conference accepted the list of suggested policy options for modernisation and the “Modernisation Group” was established to initiate the formal negotiations. [18] After that, four rounds of negotiations have been conducted virtually throughout 2020 and 2021, the most recent in March 2021.  

Overview of Four Rounds of Negotiation  

The First Negotiation Round on the modernisation of the ECT held online on 6-9th July 2020, where discussions papers and initial proposals were discussed in detail while Modernisation Group took note of the positions and comments of the delegations. [19] The list of topics discussed were mainly the ‘charter’, ‘economic activity in the energy sector, and investment protection policies such as clarification of ‘most constant protection and security’ [20].  

The Second Negotiation Round held on 8-11th September aimed to “explain and clarify the proposals and find common ground for the discussion without prejudice to any delegation’s final position” [21]. The discussion was held broadly on the possible amendments to Article 7 of ECT. The amendments wished for the definition of ‘Transit’ to reflect recent developments, clarifying main principles of tariff setting for transit of energy resources, and objectives related to sustainable development, climate change, and corporate social responsibility also received due consideration. While deliberating on “Dispute Settlement,” it was acknowledged that the ECT should reflect modern trends in treaty practice, including discussions in the International Centre for Settlement of Investment Disputes (ICSID) and UNCITRAL. However, there was no consensus to discuss a reform of ISDS beyond the list of topics for modernisation. [22] 

Discussion on Pre-investment, clarification on the legal relationship between members of Regional Economic Integration Organization (REIO) under the ECT, and potential Obsolete provisions such Article 32 on transitional arrangements were the significant highlights [23] of the Third Negotiation Round held on 3-6th November 2020. [24] The 31st Statutory Meeting was held on 16 December 2020 under the Chairmanship of Azerbaijan and Energy Charter Conference took note of the Report of the Modernisation Group on Progress Made in fulfilling the Negotiations Mandate and discussed the plan for negotiations in 2021. There is a proposal that in 2021 the Modernisation Group will hold five rounds of negotiations starting from March 2021. [25] 

The text-based discussion on the definition of ‘economic activity in the energy sector was held for the first time in the Fourth Negotiation Round on 2-5th March 2021. [26] The Contracting Parties also clarified similarities and differences in their respective positions to advance negotiations to draft compromise proposals. Modernisation Group mandated the Energy Charter Secretariat and the Chair and Vice-Chairs to consider drafting draft compromise proposals during one of its next negotiation rounds, [27] where the Fifth Round shall occur from 1-4th June 2021.     

Intra-EU ECT Arbitrations and Achmea: The dilemma perseveres  

It is an undisputed reality that the Court of Justice of the European Union (CJEU) shook the ground under the EU investment law framework with its landmark decision in Achmea in March 2018. The tribunal ruled that the ISDS provision of the BIT between Netherlands and Slovakia was inconsistent with EU law. [28] The CJEU was of the view that an arbitral tribunal constituted under the BIT cannot form part of the judicial system of either of the member states under Article 267 of the Treaty on the Functioning of the European Union (TFEU). Consequently, it cannot even fall into the category of a court or tribunal “of a member state”. Furthermore, since Member States have agreed to enable investor-state disputes with the relevance of EU law, the obligation of Member States to secure legal protection under Article 19 of TFEU stands breached, as awards rendered by a tribunal are binding. Thus, they are subject to only limited review by the national courts. [29] 

However, neither the judgment nor the preliminary ruling expressed reference to whether the ECT is inconsistent with EU law or not and merely restricted its decision to BITs among the EU. This reference is essential because ECT has been the most invoked [30] as it enables intra-EU investment arbitrations, similar to intra-EU BITs. [31] The judgment has received a mixed reception since it raises an ambiguous question of whether the judgment applies to just the intra-EU BITs, i.e., BITs containing similar dispute settlement provisions (especially regarding the applicable law) all intra-EU BITs. 

In December 2020, the European Commission (Commission) contented that the ongoing negotiations concerning the modernisation of the ECT do not align with the core EU objectives and the modern standards as echoed in the EU’s reformed approach on investment protection. [32] These contentions emanated from the Commission’s interpretation of the Achmea ruling, where it stated that intra-EU investment arbitration under the ECT is contrary to EU law. It had also urged parties to relook at the EU’s stance in the UNCITRAL Working Group III on the reform of the ISDS, scrapping the entire investment arbitration system, and establishing the Multilateral Investment Court (“MIC”) to resolve all investment disputes. 

However, it is still not very clear that the scope of Achmea extends to the ECT or not. The lack of clarity emanated from the CJEU’s refusal to assess the compatibility of the ECT in the intra-EU context. It limited its ruling on the incompatibility of BITs in the intra-EU context and the difference of standpoints. With regards to whether the compatibility of EU law and the intra-EU facet of the ECT should be viewed stringently from the point of EU law or international law, [33] the Commission’s approach to terminate all the intra-EU BITs and the revised draft proposal to include an option for disputes to be resolved under the rules of the MIC under Article 26 of the ECT and to exclude the other mechanisms of dispute settlement must be understood in the context of the EU policy concerning foreign investments. [34]

Call for Modernisation or Regression?  

The Commission’s communication on the future of the ECT, if it does not stand compatible with the EU law, does not bring in clarity. This communication is quite the opposite of its position with intra-EU BITs simply because the ECT is a multilateral treaty having the EU Member States, non-EU Member States, and even the Commission as a party. [35] Moreover, the ECT is also structured on trade, transit, competition, and investment in the energy sector, unlike the intra-EU BITs concluded between two EU Member States, which relate to only investment protection and dispute resolution. The question of termination of the ECT is, therefore, not simple compared to the intra-EU BITs. It would have more significant implications on the external EU energy policy alongside foreign investments. 

So far as the other Contracting States are concerned, many have publicly expressed desirable reforms to the ECT, and most of the states favour modernisation. [36] However, there is a lack of transparency in the reforms. [37] 

Since the termination of the ECT is an unrealistic dream, an amendment to the ECT could go a long way by incorporating a disconnection clause into the ECT, which would not be applicable as between the EU Member States. [38] In order to avoid any misconceptions, the EU delegation did propose a disconnection clause that clarified that the applicable EU law rather than the ECT should govern intra-EU trade and investment relations. [39] However, the same got disappeared from the negotiation documents and failed to become a part of the final text for reasons unknown. [40]

What is the Way Forward?

Thus, considering the nature of energy investments as highly capital-intensive and long-term, investment protection is a significant factor impacting whether to invest. In its current form, the ECT poses risks to the international rule of law and the very objectives of the EU energy law and its highly ambitious goal to reach a low carbon economy by 2050. Not to forget, the uncertainty created by the Achmea ruling, the consistent trend of investment arbitration awards unanimously dismissing intra-EU jurisdictional objections leading to issues of enforcement and annulment, the increased regulatory and political risks in the certain EU Member States and their adherence to the rule of law will undoubtedly impact energy investments in the long run. 

The exclusion of the ECT to intra-EU disputes, if it has to happen, can take place by including an explicit exclusionary provision within the ECT framework. [41] However, the modernisation would require targeting specific concerns such as climate change, sustainable development, national energy policies, public and private sector investments under the European Green Deal, and a consensus on substantive rules for investment protection. Such changes will undoubtedly bring structural reform to the ISDS mechanism in catering to disputes brought under the ECT.

About the Authors

Tushar Behl, ACIArb is a Legal Consultant at the Ministry of Road Transport & Highways. He is also a Daksha Fellow.

Dikshi Arora is a 2nd year law student at Rajiv Gandhi National University of Law (RGNUL), Punjab and is an Associate Editor (Designate) at IJPIEL. 

Editorial Team 

Managing Editor: Naman Anand 

Editors-in-Chief: Akanksha Goel & Aakaansha Arya 

Senior Editor: Kanak Mishra 

Associate Editor: Dikshi Arora (Designate) 

Junior Editor: Dipali Singh

Preferred Method of Citation  

Tushar Behl and Dikshi Arora, “Modernisation of Energy Charter Treaty: Addressing the Elephant in the Room over Investment Protection v/s Sustainable Development” (IJPIEL, 7 May 2021) 

<https://ijpiel.com/index.php/2021/05/06/modernisation-of-energy-charter-treaty-addressing-the-elephant-in-the-room-over-investment-protection-v-s-sustainable-development/?et_fb=1&PageSpeed=off>

Endnotes

[1] Contracting Parties and Signatories of the Energy Charter Treaty, International Energy Charter, https://www.energychartertreaty.org/treaty/contracting-parties-and-signatories/.
[2] Patricia Nacimiento, Energy Charter Treaty, LEXOLOGY (Aug. 26, 2020), https://www.lexology.com/library/detail.aspx?g=bcd276ca-bff6-4f2d-aee0-d9a8f542c414.
[3] DG Roberto Azevedo, Azevedo seeks further cooperation with Energy Charter to support access to energy, WORLD TRADE ORGANIZATION (Apr. 17, 2015), https://www.wto.org/english/news_e/spra_e/spra55_e.htm.
[4] Frank Umbach, The Energy Charter Treaty makes the transition easier. Don’t scrap it, reform it. ENERGYPOST.EU (Jan. 12. 2021), https://energypost.eu/the-energy-charter-treaty-makes-the-transition-easier-dont-scrap-it-reform-it/.
[5] European climate law- achieving climate neutrality by 2050, European Commission, https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12108-Climate-Law.
[6] Benjamin Hourticq, How the little- known Energy Charter Treaty is holding environmental policy hostage, BILATERAL.ORG(Sep. 7, 2020), https://www.bilaterals.org/?how-the-little-known-energy.
[7] Ernesto Bonafe, The New International Energy Charter: Sustainable Energy Transition, Investment Dispute Resolution and Market Regulation,33 RSCAS 1, 6-10 (2017), https://fsr.eui.eu/wp-content/uploads/QM-AX-17-033-EN-N.pdf.
[8] The Energy Charter Treaty (ECT) Assessing its geopolitical, climate and financial impacts, 1OPENEXP (2019), https://www.euractiv.com/wp-content/uploads/sites/2/2019/09/Report-ECT.pdf.
[9] Kira Taylor, Energy Charter Treaty strikes again as Uniper sues Netherlands over coal phase-out, EURACTIV (Apr. 21, 2021), https://www.euractiv.com/section/energy/news/energy-charter-treaty-strikes-again-as-uniper-sues-netherlands-over-coal-phase-out/.
[10] Nico Hschmidt, Explainer: ECT lawsuits against climate measures,INVESTIGATE EUROPE (Feb. 22, 2021), https://www.investigate-europe.eu/en/2021/how-companies-sue-against-climate-measures/.
[11] Press release UNIS/L/250 UNCITRAL (Jul. 14, 2017), https://unis.unvienna.org/unis/en/pressrels/2017/unisl250.html.
[12] Simon Batifort, Diana Tsutieva, Eleanor Erney, ASIL DRIG: The Future of Investor -State Dispute Setlement under the Energy Charter Treaty, KLUWER ARBITRATION BLOG (Mar. 29, 2021), http://arbitrationblog.kluwerarbitration.com/2021/03/29/asil-drig-the-future-of-investor-state-dispute-settlement-under-the-energy-charter-treaty/.
[13] Ibid.
[14] Concluding document of the Ministerial(“The Hague II”), Conference on the International Energy Charter, https://www.energycharter.org/fileadmin/DocumentsMedia/Legal/IEC_Certified_Adopted_Copy.pdf.
[15] Decision of the energy charter conference,Brussels (Nov.28, 2017), https://www.energychartertreaty.org/fileadmin/DocumentsMedia/CCDECS/2017/CCDEC201723.pdf.
[16] Ibid.
[17] Decision of the energy charter conference, Brussels (Nov. 27, 2018), https://www.energychartertreaty.org/fileadmin/DocumentsMedia/CCDECS/CCDEC201821_-_NOT_Report_by_the_Chair_of_Subgroup_on_Modernisation.pdf.
[18] Decision of the energy charter conference,Brussels (Nov. 6, 2019), https://www.energychartertreaty.org/fileadmin/DocumentsMedia/CCDECS/CCDEC201910_-_STR_Modernisation_Mandate__Procedural_Issues_and_Timeline_for_Negotiations.pdf.
[19] Public Communication on the First Negotiation Round on the Modernisation of the Energy Charter Treaty, International Energy Charter (Nov. 6, 2019), https://www.energychartertreaty.org/fileadmin/DocumentsMedia/Library/Public_communication_EN1.pdf.
[20] Ibid.
[21] Public Communication on the Second Negotiation Round on the Modernisation of the Energy Charter Treaty, International Energy Charter (Sep. 08-11, 2020), https://www.energychartertreaty.org/fileadmin/DocumentsMedia/Library/Public_Communication_EN2.pdf.
[22] Ibid.
[23] Public Communication on the Third Negotiation Round on the Modernisation of the Energy Charter Treaty, International Energy Charter (Nov. 03-06, 2020), https://www.energycharter.org/fileadmin/DocumentsMedia/News/20201106_Modernisation_English.pdf.
[24] Ibid.
[25] Ibid.
[26] Public Communication on the Fourth Negotiation Round on the Modernisation of the Energy Charter Treaty,International Energy Charter (Mar. 02-05, 2021), https://www.energycharter.org/fileadmin/user_upload/Public_Communication_Web.pdf.
[27] Ibid.
[28] SlowakischeRepublik (Slovak Republic) v. Achmea, C-284/16 BV, (EU:C:2018:158).
[29] Id. at Paras 50-55.
[30] Fact Sheet on Intra-European Union Investor-State Arbitration Cases, UNCTAD, https://investmentpolicy.unctad.org/investment-dispute-settlement.
[31] The Energy Charter Treaty, art. 26.
[32] Recommendation for a Council Decision authorising the entering into negotiations on the modernisation of the Energy Charter Treaty, EU COMMISSION, Brussels (May 14, 2019),https://ec.europa.eu/transparency/regdoc/rep/1/2019/EN/COM-2019-231-F1-EN-MAIN-PART-1.PDF.
[33] C. Verburg& N. Lavranos, Recent Awards in Spanish Renewable Energy Cases, 3 European Investment Law and Arbitration Review, 197-222, 212-219 (2018).
[34] Energy Charter Treaty Modernisation: Revised Draft EU Proposal, art. 26(4)(d), EU COMMISSION, Brussels15 (2020), https://www.euractiv.com/wp-content/uploads/sites/2/2020/04/EU-Proposal-for-ECT-Modernisation-V2.pdf.
[35] Communication from the Commission to the European Parliament and the Council: Protection of intra-EU investment, EU COMMISSION, Brussels 3-4 (2018)https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52018DC0547&rid=8).
[36] Simon Batifort, ASIL DRIG: The Future of Investor-State Dispute Settlement under the Energy Charter Treaty, KLUWER ARBITRATION BLOG (Mar. 29, 2021), http://arbitrationblog.kluwerarbitration.com/2021/03/29/asil-drig-the-future-of-investor-state-dispute-settlement-under-the-energy-charter-treaty/.
[37] Id.
[38] Christophe Hillion&PanosKoutrakos(eds), Mixed Agreements Revisited: The EU and its Member States in the World, 160-186, Hart Publishing(2010).
[39] J Robert Basedow, The Achmea Judgment and the Applicability of the Energy Charter Treaty in Intra-EU Investment Arbitration, 23 JIEL, 271-292 (2020).
[40] Robert Basedow, Moldova v. Komstroy and the Future of Intra-EU Investment Arbitration under the Energy Charter Treaty: What Does the ECT’s Negotiating History Tell Us?KLUWER ARBITRATION BLOG (Apr. 24, 2021),http://arbitrationblog.kluwerarbitration.com/2021/04/24/moldova-v-komstroy-and-the-future-of-intra-eu-investment-arbitration-under-the-energy-charter-treaty-what-does-the-ects-negotiating-history-tell-us/.
[41] Maciej Bukowski, The EU’s Bittersweet Proposal to Redefine ‘economic activity’ under the Energy Charter Treaty: Expected Implications for International Arbitration, KLUWER ARBITRATION BLOG (Mar. 21, 2021),http://arbitrationblog.kluwerarbitration.com/2021/03/21/the-eus-bittersweet-proposal-to-redefine-economic-activity-under-the-energy-charter-treaty-expected-implications-for-international-arbitration/.