The writers are lawyers at Hogan Lovells

The Energy Charter Treaty (ECT) has faced significant criticism for its apparent outdated investment protection provisions and the alleged threat that poses to the energy transition. This has caused a number of withdrawals from the treaty, including the EU, some of its member states such as Germany and France, as well as the UK.

A repeated refrain in these withdrawal announcements is that the ECT — which was devised more than 30 years ago to protect energy projects from interference — threatens net-zero ambitions by potentially causing a regulatory chill. That is, it allegedly stops governments and the EU from pursuing energy-transition laws. Withdrawing parties to the treaty claim that continuing as a party to the ECT may harm their ability to transition away from fossil fuels for fear of facing significant lawsuits by fossil fuels investors.

But all is not what it seems. ECT withdrawals may be headline-grabbing as a means of stressing environmental credentials, but outright withdrawal may not be the greenest option available.

Halving half-life

The ECT protects the investments in the energy sector of investors from one ECT party that are located in the territory of another ECT party. If the latter engages in conduct that is contrary to the ECT’s standards — such as the requirement to accord investments fair and equitable treatment, and to not unlawfully expropriate investments — the investor may bring a claim against them before an international tribunal. 

A party found in breach of the ECT can be ordered to pay damages to the investor, but it is extremely unlikely that the tribunal could require regulatory changes.

Notably, when a party withdraws from the ECT, its protections for existing investments do not end immediately. A so-called ‘sunset clause’ ensures these investments are protected for 20 years after withdrawal takes effect. It means that withdrawing will not — at least for existing investments — protect a party from claims for a significant period of time. If these parties envisage regulating against fossil fuels during this period, they undermine the argument that ECT protections imposed such a chill on clean energy rulemaking that withdrawal was the only option.

By contrast, the proposed modernised text of the ECT, which has been worked on since 2020 but stalled as a result of numerous withdrawals, aimed to have a stronger focus on promoting renewable energy. It would include a carve-out of fossil fuels from ECT protections after the revised treaty had been in force for 10 years. In other words, by agreeing to modernise the ECT, rather than withdrawing, parties could have halved the time for which fossil fuel protections would be protected.

More on the Energy Charter Treaty:

• Is this the end for the Energy Charter Treaty?
• Realigning investment treaties for climate resilience
• Spain promises the sun and reaps the whirlwind

Dirty disputes? 

The ECT’s protections are energy-source agnostic. They apply to investments in conventional energy, but also nuclear energy and electricity-producing renewable projects. The majority of ECT cases to date have related to investments in renewables, not fossil fuels. For example, Spain has faced multiple claims by investors after rolling back its incentives for renewable energy projects. 

In assessing the threat of possible legal claims by the fossil fuel industry under continued ECT membership, there also is the question of how significant the industry’s foreign investment is within ECT parties. Taking the UK, for example, a recent study found that 44% of the UK’s North Sea oil and gas licences were held by domestic investors. Fewer than than 15% of the licences are held by investors from current or recently withdrawn members of the ECT.

Risks of short-termism

The energy transition requires significant investment in renewables. These projects are heavily regulated, capital-intensive and have long-term profit horizons. New investments, including those involving withdrawn parties and which cannot benefit from the sunset clause, are needed. Cases under the ECT have already demonstrated that the renewable energy sector can be subjected to measures that lead investors to seek protection under the ECT. 

At a time when commitment to net zero can waver as a result of short-term political strategy — clean energy policies being rolled back once they become politically unpopular, for example — renewables investors likely would be receptive to, and ultimately benefit from, long-term protections set out in a modernised ECT. Withdrawal from the ECT means that those new investors in renewable energy are missing out on that chance. 

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