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Abstract<\/span><\/strong><\/p>\n\n\n\n The Energy Charter Treaty (the \u201cECT\u201d and\/or the \u201cTreaty\u201d) has been under intense\ncriticism for over a decade now, and the Energy Charter Secretariat\u2019s modernisation efforts\nunfortunately could not result in a consensus to address the concerns deriving from the practical\ndifficulties in application of the ECT. This Article analyses the three most raised objections\nagainst the ECT in view of the relevant regulatory framework of the European Union (the \u201cEU\u201d)\nand its environmental targets and proposes solutions to address the concerns stemming from\nthese objections. Three key issues examined in this Article are (i) the ECT\u2019s incompatibility with\nthe EU law, (ii) the legal protection it provides to fossil fuel investments, and (iii) the signatory\nstates\u2019 reluctance to enact progressive climate legislation due to the prospect of costly legal action\nunder the Treaty. This Article argues for the revival of the ECT through comprehensive reforms\nthat preserve the uniform interpretation and application of the EU law, prioritise sustainable\ninvestments over environmentally hazardous ones, and preserve regulatory spaces of signatory\nstates allowing them to pursue ambitious energy and environmental policies. <\/span><\/p>\n Keywords: <\/strong>Energy Charter Treaty, modernisation, renewable energy investments, fossil\nfuel investments, Paris Agreement, climate change, The Court of Justice of European Union, EU\nlaw, investment arbitration.<\/em> <\/span><\/p>\n\n\n\n A. Introduction<\/span><\/strong><\/p>\n\n\n\n Signed in 1994 with the objective of creating a welcoming atmosphere for cross-border\nenergy activities, the ECT is the only international legal mechanism that is customised to the\nunique requirements of energy generating, trading, and transit operations. To achieve this goal,\nthe Treaty\u2019s signatories take on three key commitments: safeguarding foreign energy investments\nagainst non-commercial risks; facilitating and maintaining the security of international energy\ntransit flows; and, last but not least, reducing the adverse ecological and climate effects of all\nenergy-related activities. Its provisions cover a wide range of energy resources, applying from\nsolar, wind, and hydropower-based energy generation facilities to nuclear and fossil fuel\ninvestments<\/a>.<\/span><\/p>\n\n\n\n Despite looking good on paper, the abovementioned characteristics of the ECT have been\na source of long-standing political and academic controversies. The ECT has been surrounded by\nsevere criticism for almost two decades for conflicting the EU law, defying the objectives of the\n2015 Paris Agreement by unduly protecting carbon-intensive investments, and posing an obstacle\nin the path of transition to clean energy.<\/span><\/p>\n\n\n\n The discussions surrounding the ECT attracted even greater attention when close to 150\nmembers of European and national parliaments requested the provisions that protect fossil fuel\ninvestments be removed from the ECT in September 2020, emphasizing the importance of\nphasing-out fossil fuels and alignment with the Paris Agreement. The parliamentary members\nalso appealed<\/a> to the EU Member States to jointly withdraw from the Treaty unless a thorough\nmodernization is achieved. Multiplied by the effects of Achmea<\/a><\/em> and Komstroy<\/a><\/em> judgments, the\ndemand for reform has grown even further.<\/span><\/p>\n\n\n\n The negotiations for the modernization of the ECT<\/a> were carried out against this\nbackground, but only to result in significant dissatisfaction. The final text of the modernized\nECT reflecting the Agreement<\/a> in Principle reached on 24 June 2022<\/a> was published on 13\nSeptember 2022, shortly before the European Parliament\u2019s resolution outlining the deficits of the\nmodernized text and call for a coordinated withdrawal from the ECT by the EU<\/a> and its Member\nStates. The European Parliament even proposed a way to neutralize the ECT\u2019s trouble-making\nsunset clause: a reciprocal revocation by an agreement of all withdrawing EU\/non-EU parties.<\/a><\/span><\/p>\n\n\n\n In addition to the European Parliament, the disappointment caused by the modernized\nECT which was formed after long-continued efforts provoked negative reactions from several EU\nMember States, which announced their intention to withdraw, citing the modernized ECT\u2019s lack\nof compliance with the Paris Agreement and the EU law<\/a>. While the Russian Federation and the\nItalian Republic remain within the scope of the sunset clause, France, Germany, and Poland have\nnotified Portugal, the Depositary of the Energy Charter Treaty<\/a>, of their withdrawal from the\nTreaty and Spain<\/a>,\n the Netherlands<\/a>, Slovenia<\/a>, and Luxembourg<\/a> have announced their\nintention to exit without making an official written notification.<\/span><\/p>\n\n\n\n This Article makes no attempt to speculate on the reasons behind the present ECT\nabandonment movement, nor does it seek to refute the criticisms against the ECT. Instead, it\nfocuses on understanding and recognizing the ECT\u2019s shortcomings and offering adequate\nsolutions. Arguing for the revival of the ECT, the Authors of this Article are of the opinion that a\nthroughout revision of the Treaty is the best course of action to continue the possibility of bringing disputes arising from the energy projects in the host States to an independent and\nneutral arbitration forum and that withdrawal from the Treaty, whether unilateral or coordinated,\nis no cure to the problems the current ECT raises and is criticized for.<\/span><\/p>\n\n\n\n B. The Energy Charter Treaty\u2019s Shortcomings and Proposed Solutions<\/span><\/strong><\/p>\n\n\n\n The ECT has been under fire from all sides since the Russian Federation left in 2009. It is\nnow commonplace to say of Russia\u2019s withdrawal that it has reduced the ECT to a mere intra-EU\ntreaty, rendering it weak and irrelevant in view of its incompatibility with the autonomy of the EU\nlaw. Had been designed to contribute to the sustainable development of the earth, the ECT is\nnow accused of guarding fossil fuel investments in a world committed to combatting the threat of\nclimate change. Critics further suggest that the blame for the slow transition to renewable energy\nlies with the Treaty, which is abused by big fossil energy companies to discourage governments\nfrom enacting progressive legislation. Among others, these issues are widely regarded to be the\nECT\u2019s main setbacks that triggered Italy\u2019s exit in 2016 and acted as the driving force behind the\nmore recent withdrawal of seven additional European states. This chapter will analyse these flaws\nof the ECT and how to effectively address them to revive the Treaty.<\/span><\/p>\n\n\n\n 1. The Criticism on the Incompatibility of the ECT With the EU Law<\/span><\/strong><\/p>\n\n\n\n On 21 September 2021, the Court of Justice of the European Union (the \u201cCJEU\u201d), with its\nwell-known Komstroy <\/em>Judgement, held that Article 26 of the ECT (dispute resolution provision of\nthe ECT), is incompatible with the EU Law. In its Komstroy Judgement<\/a>, the CJEU has determined\nthat although the establishment of a court under an international agreement which is responsible\nfor the interpretation of its provisions and whose decisions are binding on the EU institutions,\nincluding the CJEU, is not in principle incompatible with the EU law, the exercise of the EU\u2019s\ncompetence in international matters cannot extend to permitting, in an international agreement, a\nprovision according to which a dispute between an investor of one EU Member State and\nanother EU Member State concerning the EU law may be removed from the judicial system of\nthe EU such that the full effectiveness of that law is not guaranteed.<\/span><\/p>\n\n\n\n The CJEU has further stressed in its Komstroy<\/em> Judgement that although the ECT may\nrequire Member States to comply with the arbitral mechanisms for which it provides in their\nrelations with investors from third States who are also Contracting Parties to that treaty as\nregards investments made by the latter in those Member States, preservation of the autonomy\nand the particular nature of the EU law precludes the same obligations under the ECT from being imposed on Member States as between themselves. Due to the foregoing reasons, the\nCJEU concluded that Article 26(2)(c) of the ECT must be interpreted as not applicable to\ndisputes between an EU Member State and an investor of another EU Member State in relation\nwith an investment made by the latter in the first EU Member State<\/a>.<\/span><\/p>\n\n\n\n However, despite this milestone judgement of the CJEU<\/a>, many investment arbitration\ntribunals hearing the disputes between an EU Member State investor and another EU Member\nState continued to hold that Article 26 of the ECT is applicable to intra-EU disputes. To this\nday there are no fewer than 31 arbitration awards holding, in one way or another, that Article 26\nof the ECT applies intra-EU. For instance, on 10 June 2022, an ICSID Annulment Committee\nin RREEF Infrastructure (G.P.) Limited and RREEF Pan-European<\/a> Infrastructure Two Lux S.A.R.L. v.\nKingdom of Spain<\/em> dismissed an attempt by Spain to annul the award rendered in 2019 within the\nscope of the ECT. The Annulment Committee held that<\/a> the CJEU could not unilaterally amend\nthe plain text of a multilateral treaty and that, in any event, ICSID \u201chas no national juridical seat\u201d\nand thus is not bound by the EU law.<\/span><\/p>\n\n\n\n In view of the foregoing, the jurisdictional fight between the CJEU and the investment\narbitration tribunals hearing intra-EU investment disputes based on the ECT seems to continue.\nOn the other hand, the Authors of this Article are in the view that a collective withdrawal of the\nEU Member States from the ECT would not be the right legal action, since it is a reality that the\nECT is the sole and only international legal instrument in the field of energy providing extensive\nlegal protection to the investors which is not limited with the EU law but also contains well-\nknown standards in international investment law such as fair and equitable treatment, full\nprotection and security, most favoured nation treatment and the protections against\ndiscrimination and unlawful expropriation. Hence, instead of making the ECT inoperable for the\nEU Member States through a complete withdrawal, creating a new dispute resolution mechanism\nwithin the ECT for intra-EU disputes could be more practical and beneficial. By doing so, the\ninvestors based in the EU Member States may continue to enjoy the extensive investment\nprotections prescribed under the ECT with respect to their investments made in the non-EU\nContracting States, while the Contracting States may sustain the favourable investment\nenvironment in their territories and remain attractive to foreign energy investors.<\/span><\/p>\n\n\n\n The new mechanism can be realized by establishment of a specific European investment\narbitration centre under the auspices of the CJEU which will consider the EU law together with\ninternational investment law while hearing an ECT dispute between an investor based in an EU\nMember State and another EU Member State. On the other hand, another option may be inserting a specific provision into Article 26 of the ECT which specifically prescribes that in cases\nwhere both the investor\u2019s home state and the host state are EU Member States, the arbitral\ntribunal shall be under the obligation to primarily consider the EU law in terms of protection\ninvestments. These possible amendments may mitigate the concerns of the CJEU mentioned in\nits Komstroy<\/em> Judgement as it will prevent the arbitral tribunals from dispensing from the judicial\nsystem of the EU and the full effectiveness of that law can be guaranteed.<\/span><\/p>\n\n\n\n 2. The Criticism on the Legal Protections for Fossil Fuel Investments Under the\nECT<\/span><\/strong><\/p>\n\n\n\n Safeguarding fossil fuel investments is by far the most repeated criticism against the ECT.\nWhile the threat of ECT claims against Italy over renewable energy was counted among the most\ninfluential reasons for its decision to exit<\/a>, a majority of European states now appear to be\ncomplaining about the exact opposite<\/a>.<\/span><\/p>\n\n\n\n The main reason why the modernised ECT fell short of expectations is its failure to\nexclude fossil fuel investments of big oil, gas, and coal companies from the scope of protection.\nWhile the ECT covers carbon-intensive energy activities, when one dives deeper down to the\npremises of this criticism, shortcomings and contradictions of this argument also show up. The\nECT is neutral in protecting all energy investments, including fossil fuels, renewables, and nuclear,\nas Dr Urban Rusn\u00e1k pointed out during his term as the Secretary General of the Energy Charter\nSecretariat<\/a>, and the modernised version preserves this neutrality. The modernised ECT does not\nrule out fossil fuel activities but introduces provisions which enable the signatory states to omit\ncertain energy activities from its scope. In other words, had the modernised ECT been adopted,\nthe Contracting Parties would be able to identify fossil fuel investments of their choice as not\nbeing \u201ceconomic activity in the energy sector<\/a>\u201d for the purposes of Part III of the Treaty and the\nprotection of existing fossil fuel investments would be limited to a period of approximately 10\nyears, rather than the current sunset clause\u2019s 20 years.<\/span><\/p>\n\n\n\n Furthermore, arbitration records and research reports suggest that the ECT provides the\ngreatest protection to renewable energy investors. As statistical data compiled by the Energy\nCharter Secretary on investment arbitration cases under the ECT reveal, to date, 59% of all ECT-\nbased investment arbitration cases have concerned the generation of renewable energy, while oil\nand gas investments have accounted for only 27% and coal investments for 7%. The statistics\nalso indicate<\/a> that small or medium-sized enterprises and individual investors have enjoyed more protection from the ECT by bringing 63% of all investment cases, as compared to large oil, gas,\nand coal corporations, multinational holdings, banks, and investment funds.<\/span><\/p>\n\n\n\n Moreover, according to the Stockholm-based think tank<\/a> Climate Change Counsel\u2019s study\nexamining the ECT, climate change, and clean energy transition in light of 64 (of the 75 known)\narbitral awards rendered before August 2021, only 10 fossil fuel investment arbitrations have seen\narbitral tribunals assume jurisdiction and rule for investors, whereas the figure for awards finding\nin favour of renewable energy investors was twice as high.<\/span><\/p>\n\n\n\n Also, the ECT has been the most invoked treaty by 2023 for renewable investment\nprotection<\/a>, providing the legal basis for 70% of all claims related to renewables according to a\nreport by the World Bank published in April 2023. Given that 23 out of 27 Member States of\nthe EU have signed in May 2020 the agreement for the termination of Bilateral Investment\nTreaties<\/a> between them, the ECT has remained the only treaty between the EU Member States\nproviding protection to renewable energy investments.<\/span><\/p>\n\n\n\n While it is true that the modernisation process failed to satisfy the EU Member States\u2019\nexpectations by not entirely leaving fossil fuel investments out of its scope, the ECT provides the\nonly treaty-based international protection mechanism to renewable energy investors. Considering\nthe modernised ECT allows the signatory states to exclude carbon-intensive investments from its\nscope and proposes to limit the protection period for existing fossil fuel investments, exiting\nfrom the ECT contradicts the stated purpose of withdrawing states by leaving small and medium-\nsized renewable energy enterprises unprotected while preserving a 20-year protection period for\nbig oil, gas, and coal corporations. Furthermore, the proposed revisions to the ECT could be an\nincentive for big corporations to phase out carbon-intensive investments and shift to green\nenergy, and the signatory states could use the revised ECT to help them reach the goals of the\nParis Agreement, which does not provide any promotion or protection to foreign renewable\ninvestors and wants for the support of a bilateral or multilateral investment treaty<\/a>.<\/span><\/p>\n\n\n\n However, there is not much doubt that the ECT has potential for further improvement. In\nview of the EU\u2019s worldwide objectives of contributing to the sustainable development of the\nearth, protection of human rights and fundamental freedoms, and the development of\ninternational law<\/a>, certain aspects of the ECT remain to be in need of revision. A rather\nfundamental revision the ECT still requires is redressing the balance between investors, states,\nand third parties in investment arbitration. To this end, recognizing the right of host states to\nbring counterclaims against investors that do not comply with local regulations, public policies, and environmental measures should be the first step. Secondly, the investor-state dispute\nresolution mechanism provided for by the ECT needs to involve domestic courts and regulatory\nauthorities in the determination of matters related to domestic law. Lastly, affected third parties\nshould be granted full and effective rights to participate in the arbitration process beyond amicus\ncuriae<\/a>.<\/span><\/p>\n\n\n\n Another comprehensive revision to the ECT should be adopted for the effective and\nconcrete promotion of responsible investments which do not cause social or environmental\ndamage and worsen climate change. In addition to the possibility of exclusion of fossil fuel\ninvestments<\/a>, such revisions should include differentiating the protection standards applicable to\nlow-carbon and carbon-intensive investments, obligating investors not to cause environmental\ndamage and tribunals to take any non-compliance into account for the determination of\ncompensation, and restricting the use of technologies producing high carbon emissions as well as\npromoting the employment of carbon-neutral practices.<\/span><\/p>\n\n\n\n Implementing the aforementioned revisions will undoubtedly assist the EU Member States\nin fulfilling the objectives outlined in the EU Treaties, as well as providing significant support for\nreaching the climate targets set by the Paris Agreement through initiatives that further encourage\nthe effective use of renewable energy resources. These modifications will also address the EU\nMember States\u2019 criticisms levelled against the ECT, preserving its survival as the only treaty\nsafeguarding renewable energy investments in the EU.<\/span><\/p>\n\n\n\n 3. The Criticism on the Threat of Arbitration Under the ECT Preventing the\nGovernments From Enacting Progressive Climate Legislation<\/span><\/strong><\/p>\n\n\n\n Arbitration under Article 26 of the ECT is undoubtedly the most valuable instrument in\nthe hands of mistreated energy investors seeking redress against host states. Despite being\nencouraged to be brought legitimately as it is a rather expensive procedure, arbitration under the\nECT is, more often than not, vulnerable to being exploited by energy corporations or perceived\nas a risk by governments.<\/span><\/p>\n\n\n\n As Climate Change Counsel\u2019s study suggests<\/a>, the history of arbitrations related to\nrenewable energy incentive schemes may have a chilling effect and be a deterrent for\ngovernments attempting to implement progressive energy legislation. Supporting this suggestion\nare two distinct arbitrations brought by Sweden\u2019s state-owned power company, Vattenfall, against\nGermany, which was alleged to have prejudiced the former twice, first by refusing to issue environmental permits for a coal-fired power plant<\/a> and then by choosing to accelerate the\nphase-out of nuclear energy. The coal-energy power plant<\/a> dispute was settled after Germany\nawarded controversial permits<\/a>, and the one over nuclear was discontinued when Germany\nagreed to pay \u20ac1.4 billion in damages<\/a>.<\/span><\/p>\n\n\n\n The criticism that fossil fuel investors abuse the ECT to challenge clean energy transition,\nregulatory measures, and phase-outs of controversial types of energy is only reinforced by recent\nRWE<\/a> and (now withdrawn) Uniper claims in two ICSID arbitrations against the Netherlands\nover its decision to discontinue to allow coal power activities.<\/span><\/p>\n\n\n\n Although we are not aware of any arbitral award made under the ECT that grants\ncompensation to a fossil fuel investor for damages prompted by regulatory measures aiming at\npromoting environmentally responsible low-carbon energy production activities, the fact that\nrendering such awards is unprecedented does not preclude tribunals from doing so in the future\nand certainly does not allay the \u201cregulatory chill<\/a>\u201d and governments\u2019 concerns.<\/span><\/p>\n\n\n\n Seemingly in an effort to overcome the signatories\u2019 reluctances, the modernised ECT adds\na new article that reads: \u201cThe Contracting Parties reaffirm the right<\/a> to regulate within their territories to\nachieve legitimate policy objectives, such as the protection of the environment, including climate change mitigation\nand adaptation, protection of public health, safety or public morals.\u201d<\/em> Despite how well intended it may be\nto uphold states\u2019 right to regulate, the proposed article falls short of mitigating the concerns as\nthe Contracting Parties need assurance to confidently rely on rather than a reconfirmation of a\nsoft policy preference.<\/span><\/p>\n\n\n\n Similarly ineffective is an attempt to withdraw from the ECT, be it individual or collectively\nby the EU Member States, given that the ECT\u2019s so-called sunset clause<\/a> prevents the withdrawing\nstates from dodging the threat of investment arbitration for 20 years unless it is jointly terminated\nby the EU and the EU Member States, as well as all non-EU signatories.<\/span><\/p>\n\n\n\n As the above reveals, reforming the ECT is not an option but a necessity. The modernised\nECT should preserve regulatory space and the signatory states\u2019 right to regulate by restricting\ninvestment protection standards and encouraging regulatory measures aiming at the promotion\nof sustainable energy activities. Needless to say, these revisions need to be stated explicitly as\nmandatory provisions, rather than mere suggestions, to successfully ease governments\u2019 concerns\nabout costly legal actions.<\/span><\/p>\n\n\n\n