[Analysis] Why EU is finally ready to quit the Energy Charter Treaty

The commission’s legal text advocates for a “coordinated withdrawal” of the EU and Euratom from the ECT. It also includes a withdrawal of its previous proposals to ratify the ECT modernisation — because there was no majority of EU member states to agree on the updated text.

But certain countries may want to remain parties to this multilateral agreement, mainly due to geopolitical reasons.

As the EU takes this significant step to exit the ECT, EUobserver dives deeper into the core questions surrounding what critics dub the ‘ecocide treaty’ and the reasons behind the commission’s proposal.

Why has the ECT become so controversial?

The Energy Charter Treaty, which was designed in the 1990s to promote energy cooperation and investment in fossil fuels in the former Soviet states, has been raising concerns over its incompatibility with EU law and the 2015 Paris Agreement.

Critics argue that the ECT hinders climate action and discourage governments from implementing renewable energy policies due to the threat of costly and lengthy investor-state disputes.

The Netherlands, for example, was sued in 2021 by the German companies RWE and Uniper over the Dutch coal phase-out law.

In total, the ECT has triggered 158 corporate claims by investors against ECT signatories, including EU member states. Spain faces 51 arbitration claims by international investors, followed by Italy (14), Romania (8) and Bulgaria (7).

The majority of claims against Spain, totalling over €9bn, concern renewable energy and are linked to the reduction of government subsidies for solar installations in 2012. Critics argue that the government’s refusal to pay these awards undermines investments in renewables in the country.

Nevertheless, Investigate Europe estimates that the treaty protects some €344.6bn worth of fossil-fuel infrastructure across Europe.

Why has the EU tried to modernise the treaty?

In 2018, the EU advocated for the modernisation of the contentious ECT, leading to negotiations between 2019 and 2022 aimed at aligning the treaty with EU law and international climate commitments.

The complex withdrawal process and the treaty’s sunset clause, which protects existing investments for up to 20 years after the withdrawal, has been one the main arguments used by the commission to first try to reform the agreement.

Italy, for example, withdrew from the ECT in 2016 — but it is still involved in an arbitration case over banning oil and gas project exploration in the Adriatic Sea.

Despite three years of intense negotiations, the EU executive has now acknowledged that the modernised treaty, as it stands, is not in line with the EU’s investment policy and EU’s energy and climate goals.

Yet, the modernised text reduced the treaty’s sunset clause from 20 to 10 years — excluding new fossil fuel-related investments from investment protection.

“During the modernisation process, we have warned many many countries that it was not the best idea to leave the treaty now with the sunset close of 20 years and that it would be wiser to wait for the modernisation to be adopted,” the ECT secretary general Guy Lentz told EUobsever.

Another controversy surrounding the modernisation of the ECT is its ratification procedure — because that requires unanimity. There are currently 56 signatories, including both the EU and Euratom.

“It would be a pity if, after three years of work, this treaty is not modernised,” said Lentz, pointing out that countries which are withdrawing are expected to abstain in the ratification vote.

He argued that this treaty would have been “a very powerful tool” for the EU to export renewable energy to African countries, although the EU’s withdrawal from the ECT now leaves the door open for China.

Nevertheless, experts and MEPs say that the timeline foreseen in the modernised text is still at odds with the commitment to limit global temperature rises to 1.5 degrees.

Additionally, the ECT triggered concerns over its compatibility with EU law over the ECT’s most controversial mechanism — the investor-state dispute settlement (ISDS).

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In 2021, the EU Court of Justice clarified that ISDS provisions are not applicable in the case of intra-EU disputes and cannot be implemented by national courts in the EU. This does not mean that investors are not protected in the EU.

The commission is expected to issue a clarification regarding the ISDS.

“To avoid any ambiguity, there will be a confirmation that the Energy Charter Treaty has never, does not, and will not, apply intra-EU, that the treaty cannot serve as a basis for arbitration proceedings, and that the sunset clause does not apply to intra-EU disputes,” a commission spokesperson said.

Which EU countries want to leave and stay?

In 2016, Italy was the first EU country to withdraw from the ECT.

France, Germany, Poland and Luxembourg have already officially notified their intention to withdraw from the ECT. Other countries including the Netherlands, Slovenia, France, and Spain also said they will leave the ECT.

Lentz said that the withdrawal of France, Poland and Germany has already reduced the ECT budget by 60 percent for upcoming years.

However, not everyone seems to be on board with the withdrawal idea. Cyprus, Greece and the Visegrad countries (bar Poland) want to remain part of the treaty, according to different sources close to the matter.

Meanwhile, the intentions of some EU countries remain unclear.

“Given the decision to unilaterally leave by some member states, Malta is still assessing whether to leave or not the ECT,” a Maltese official told EUobserver.

The protection of investments in some Visegrad countries is a very “sensitive issue” in the context of the war in Ukraine, said Lentz.

“I don’t see these countries taking this decision [to leave the ECT]” any time soon, he added.

What are the next steps?

The commission proposal will now be examined by the European Parliament and EU member states. The file will fall under the new Spanish presidency, and the first informal discussion could take place during the meeting of energy ministers next week.

The council would need to adopt the proposal by a qualified majority vote. Afterwards, MEPs will have to give it the final green light.

The commission will have to notify the Energy Charter Treaty about the withdrawal of the EU as a party. Euratom will have to do the same. But every country will also have to notify its own withdrawal because this is a national competence.

It remains unclear what happens if the EU agrees to a joint withdrawal and then EU countries refuse to notify the ECT about their withdrawal. Nevertheless, this will not be in line with EU law and the commission could take EU member states to court.

In a November 2022 resolution, the European parliament urge the coordinated withdrawal of the treaty “to limit the negative effects of the sunset clause and to effectively prevent intra-EU dispute”.