EU’s exit from embattled fossil fuel-loving treaty in the home stretch: New dawn breaking over 20-year sunset clause

The final push toward withdrawal the European Union (EU) has taken to severe its Energy Charter Treaty (ECT) ties in a year is perceived as the right path to unleashing its green agenda. There is still a potential catch – the EU’s escape route from the treaty will need mechanisms to override and render the sunset clause ineffective before crossing the threshold to ensure the ECT’s 20-year protection of existing energy investments will not hinder its climate action.

The power of fossil fuels is not waning on the global energy scene if anything, many analysts claim that these sources of supply are here to stay for the foreseeable future. Given the oil and gas industry’s penchant for trumpeting its role in keeping the world’s energy mix safe, love letters to the fossil fuel machinery are still common. There are, however, those who do not buy into this spiel, thus, the fight to pivot away from coal, oil, and gas and embrace renewables and other green sources rages on, gaining more traction as time goes by.

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Many now believe the time has come for the sun to set on the Energy Charter Treaty, which enshrines protections for energy investors, primarily fossil fuel ones, that make use of its investor-state dispute settlement (ISDS) mechanism to sue governments for billions over climate policies hampering coal, oil, and gas projects. This multilateral agreement entered into force in 1998 and entails, amongst other things, provisions on investment protection, dispute settlement, transit, and trade in the energy sector.

With this at the forefront, the European Commission submitted a proposal in July 2023 for a Council decision on the withdrawal of the EU from the Energy Charter Treaty, together with a similar proposal for the European Atomic Energy Community (EAEC or Euratom), as it considered the ECT to no longer be compatible with climate goals under the European Green Deal and the Paris Agreement, predominantly due to concerns over its offer of a lifeline to coal, oil, and gas with no end in sight for fossil fuel investments.

Once March 2024 rolled in, the Commission proposed two draft Council decisions on the position to be taken on behalf of the EU and Euratom, respectively, in the relevant meeting of the energy charter conference, and for the remaining member states to greenlight or not to oppose the modernized Energy Charter Treaty. The formal adoption of these decisions came on May 30, 2024.

On June 27, the European Union took what is seen as the final and formal step of calling it quits, with the President of the Council, as represented by the Belgian presidency and acting on behalf of the EU, giving written notification to the depositary of the Energy Charter Treaty of the withdrawal, which will take effect one year after the depositary has received the notification.

Tinne Van der Straeten, Belgian Minister for Energy, highlighted: “Thanks to the political compromise found between member states, known as the Belgian roadmap, the European Union and Euratom will be leaving the Energy Charter Treaty in one year’s time, while remaining member states will be able to  support the modernised reaty. This reflects the quintessence of work within the Council; being able to achieve balanced solutions through constructive negotiation and compromise.”

Therefore, the decisions from May 2024, which are linked as they form the two pillars of a political compromise known as the Belgian roadmap that broke the stalemate over the Energy Charter Treaty within the EU, gave the Council the final go-ahead for the European Union and Euratom to leave the ECT and simultaneously left the door wide open for the remaining member states to spruce the treaty up and make room for energy transition goals and net zero aspirations.

Paul de Clerck, Economic Justice Expert at Friends of the Earth Europe, welcomed the EU’s decision to quit the ECT by saying: “The EU’s decision to exit the Energy Charter Treaty sends a powerful message: to fight climate change, we must urgently transition away from fossil fuels and ensure a European gas phase-out.

“But permitting member states to remain part of the ECT is a compromise that will undermine this progress. We urge all countries to break free from the Treaty, severe ties with the fossil industry, and end the practice of secret ISDS corporate courts embedded in many other trade and investment deals.”

With its research showing that €350 billion worth of oil, gas, and coal projects are protected under the treaty in Europe alone, Friends of the Earth, alongside many other climate activists, sees the ECT as a major stumbling block to taking a firm stand and action on the climate and environmental crisis.

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The EU sought a coordinated withdrawal from the Energy Charter Treaty to counteract and neutralize the operation of the ECT’s sunset clause, as such a clause would extend the protection of existing energy investments for another 20 years after the withdrawal became effective, which was previously pinpointed as the major roadblock to leaving the treaty.

The coordinated EU withdrawal is deemed by some as a loophole of sorts that will throw a curveball anticipated to counterweigh the ECT’s sunset clause by employing an internal, known as an inter se, agreement, which will enable the European Union to make it clear that the treaty and its accompanying sunset clause does not and never did apply within the EU and its member states, which was used in past and ongoing arbitrations.

All hopes seem to rest on the inter se agreement to tackle the legal pitfalls and threats stemming from the sunset clause that gives energy investors ammunition to sue EU member states for taking climate action throughout those 20 years. As the remaining member states will have the tools at their disposal to support the revamping of the ECT, this raises the question of whether an inter se agreement is the avenue that can be pursued to stop legal action.

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Will the brunt of international responsibility for implementing normative acts fall on the EU or its member states that stay in the ECT following withdrawal? A scenario encompassing situations when a home/host country or both are still within the ECT could potentially bring more ISDS cases within the EU.

In light of the ISDS tribunals’ actions so far and the gray area arising from the lack of detailed clarification on the distribution of competence around investment within the ECT due to it being put in place before such matters were ironed out at the EU level, the legal implications are bound to be enveloped in uncertainty and keep being hard to predict if a group of member states keeps seats at the ECT table.

This also exposes these EU member states to the financial risks of being embroidered in ISDS cases that could trigger huge payouts in settlement.

Belgium sheds more light on the solution to sunset clause woes by explaining that 26 member states agreed at the General Affairs Council on June 25 that the European Union would sign an ECT inter se declaration, which complements an inter se agreement, giving effect to the Komstroy judgment of the European Court of Justice regarding the non-applicability of ECT arbitration provisions intra-EU. The following day, these member states and the EU inked the declaration.

“The agreement and the declaration ensure the effective implementation of the Court of Justice’s Komstroy ruling, which follows that the Energy Charter Treaty must be interpreted to mean that it does not apply to disputes between a member state and an investor from another member state over an investment made by that investor in the former,” emphasized the Belgian Ministry of Foreign Affairs.

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While negotiations on an inter se agreement took place over the past two years, the purpose of the declaration is that it has immediate effect, unlike the agreement, whose ratification process takes longer. Nevertheless, both are deemed important to protect member states, the EU, and Euratom when dealing with intra-EU arbitration proceedings and enforcement actions against third-country courts.

“This new agreement addresses a significant part of the risks still posed by the ECT, but more action is needed to prevent all fossil fuel arbitrations under the treaty in the future,” noted Suzy Nikièma, Director, Sustainable Investment at the International Institute for Sustainable Development (IISD). 

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Twelve countries, including the UK, Germany, France, the Netherlands, and Ireland, have opted to pull out and quit the treaty in the aftermath of a corporate tribunal ordering the Italian government to pay more than £210 million in 2022 to Britain’s Rockhopper as compensation for an offshore oil drilling ban.

Lukas Schaugg, Policy Advisor at IISD, underscored: “Granting 20 more years of legal privileges to fossil fuel investors is fundamentally incompatible with climate mitigation. With the new agreement, the EU sends a strong signal to tribunals: ISDS claims within the EU under the ECT lack a legal basis. States should now take this as a precedent for wider steps to prevent such claims among all ECT contracting parties.”

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The EU recently greenlighted its 14th package of sanctions against Russia, which among other things, entails energy-related measures such as prohibition on providing goods, technology, or services to LNG projects under construction to limit the future expansion of the country’s LNG capacities; prohibition on the transshipment of Russian LNG through EU ports which comes with a nine-month wind-down; and prohibition on the import of the country’s LNG into specific terminals not connected to the EU gas pipeline network.

Within the maritime arena, the EU has included a prohibition on port access and services for listed vessels, placing 27 ships on this list for their contribution to Russian warfare in various sectors such as the transport of military equipment for Russia and the transport of stolen Ukrainian grain, participation in the dark fleet transporting Russian oil while conducting so-called deceptive shipping practices, and support in the development of the country’s energy sector, for instance through the transport of LNG infrastructure components or LNG transshipment.

There are also anti-circumvention measures, which are expected to curb Russia’s ability to evade sanctions, putting pressure on EU companies to undertake their best efforts to ensure that their subsidiaries in third countries do not participate in any activities undermining EU sanctions.

Ever since the Russia-Ukraine crisis reignited into relentless hostilities in February 2022, after a respite of sorts was put in place in 2014, many different global players have tried to play the role of peacemaker over the past 854 days, however, such attempts have not borne fruit so far.

Proponents of sanctions as a way to put pressure on Russia to agree to a peace agreement with Ukraine argue that their effects grow over time, eroding Russia’s economy. They use Gazprom’s first annual loss in over two decades, which was calculated at a staggering 629 billion roubles (around $7 billion) for 2023, as an example of the effectiveness of such sanctions.

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