In her previous article Sarah Keay-Bright said the outdated Energy Charter Treaty protects old world fossil fuel investments over the wide range of new green investments now being made. The treaty is being reviewed by its signatories this year. In a concluding article, she and Steivan Defilla warn that the terms of reference for the ECT review don’t even mention the need to align the treaty with the Paris Agreement. They say the revised ECT must place those climate goals ahead of its original purpose of simply protecting investments, and favour the newer and better investment pathways to Paris 2050 that exist today. Many multilateral development banks have already stopped or curtailed investments in carbon-emitting projects, and the ECT should follow that lead or become an obstacle to meeting our common climate goals.
This is the second part of an op-ed concerning the Energy Charter Treaty (ECT) and its alignment with the needs of the energy transition. In the previous article, published by Energy Post, it was explained that the Treaty is not neutral in its treatment of different energy resources, with some important renewable sources not being covered and with demand-side management categorically excluded. The article explained the difficulty with amending the Treaty to cover demand-side management due to the blurring and integration of sectoral boundaries. This raises the question as to whether an investment agreement dedicated to the energy sector is still appropriate, particularly given its current orientation towards fossil fuels. Indeed, it could be better to use an economy-wide International Investment Agreement (IIA) aligned with the best practices promoted by UNCTAD. If the ECT continues to exist, however, it must be aligned with the UNFCCC Paris Agreement and UN Sustainable Development Goals (SDGs). This article discusses the appropriate options for ECT reform.
The ECT is a means to an end; the final outcomes of the Paris Agreement and SDGs cannot be ignored
In reforming the ECT, it is necessary to start with the outcomes to be achieved. The Treaty is dedicated to the energy sector. The goals of the UNFCCC Paris Agreement and the UN Sustainable Development Goals, which are driving the transformation of the world’s energy systems that most countries have signed up to, have to be among the set of outcomes determining the ECT’s reform.
Neither the list of policy areas for ECT modernisation discussions nor the terms of reference for the organisational review mention the need to align the ECT with the UNFCCC Paris Agreement. Indeed this is surprising given that the EU recently committed to achieve a climate neutral Europe by 2050 and given the European Commission and EU Member States make up around half of the ECT’s membership.
Given the absence of commitment to align the Treaty with the Paris Agreement and UN SDGs, the EU is perhaps lost in its focus to address the conflict between the jurisdictional and substantive regimes of the ECT and EU law, Investor-State Dispute Settlement (ISDS) reforms and damage limitation in relation to disputes with investors. If the reforms fail to align the Treaty with a sustainable energy future, then the Treaty will simply become a much bigger white elephant than it already is.
No more protection for future investments in fossil fuels
The Treaty can no longer be neutral in its treatment of different energy resources. An international public institution simply cannot offer the benefit of investment protection to energy resources and assets that are not aligned with the outcomes and goals that most of the world’s countries have committed to.
An international public institution simply cannot offer the benefit of investment protection to energy resources and assets that are not aligned with the outcomes and goals that most of the world’s countries have committed to.
Indeed, this is the stance taken by the multilateral development banks (MDBs) who have issued a joint statement committing to align their activities with the Paris Agreement. Already some MDBs are not financing coal or any upstream oil and gas development and some use positive or negative lists to screen energy-related investments. MDBs are now collaborating to further develop joint actions. The International Institute for Sustainable Development proposes that the ECT could take a similar track by using positive, negative or NDC-related lists to determine whether or not investments can be covered by the ECT.
The ECT only protects investments once they are made. Nearly all future investments will need to be zero carbon. Fatih Birol, the executive director of the International Energy Agency (IEA), has stated that there is no room to build anything that emits CO2 emissions if average global temperature rises to 2oC, let alone the 1.5C as scientists recommend. This implies that new energy projects need to be free of greenhouse gas emissions and existing infrastructure must be cleaned up through early retirement or installing carbon capture and storage technologies. Analysis published this month in Nature Communications reinforces this message. Meanwhile fossil fuel companies continue to plan new investments and Climate Tracker exposes the tremendous investment that could be at risk if companies fail to align with the Paris Agreement goals.
[The revised ECT should] limit protection of future investments to sustainable energy resources, including electricity networks, renewable energy sources, energy storage, energy efficiency, demand-side management and zero carbon distributed energy resources
With this in mind, the most logical and effective solution would be for the ECT to limit protection of future investments to sustainable energy resources, including electricity networks, renewable energy sources, energy storage, energy efficiency, demand-side management and zero carbon distributed energy resources. Any new investments that would emit greenhouse gases, certainly including those associated with burning fossil fuels, would not be covered. Any new fossil investments would need to rely on alternatives to the ECT including contractual provisions, political risk insurance (public/private provider) or other means. The reformed ECT would cover only carbon-free new investments.
As members present and voting must be unanimous in support for Treaty amendments to be adopted, this proposal might not overcome this institutional obstacle. Countries claiming the right to limit investment protection on their territory to carbon-free investments would therefore have to withdraw from the Treaty.
At the very least, the last fossil-related investments to be protected under the ECT would be made in 2030 as the IPCC’s “Global Warming 1.5%, Summary for Policymakers” suggests all pathways aligned with 1.5oC would require more or less phasing out fossil fuels by the middle of the century. The sunset clause for any fossil fuel investments must therefore terminate by 2050.
From legal culture to cooperative culture
In September 2015, global leaders adopted the 2030 Agenda for Sustainable Development, including the 17 SDGs, their 169 targets, many of them measurable. The 2030 Agenda for Sustainable Development and SDGs substantively reference 14 other global policy documents or agreements but make no reference to investment protection or the Energy Charter Treaty, raising a question mark over its relevance to sustainable energy. Nor do they reference the World Trade Organisation (WTO) as a whole, only specific parts.
The approach of the SDG process is far removed from the mindset of the 1990s that influenced establishment of the Energy Charter process and the WTO. Compared to competing proposals of the RIO+20 cycle, the SDGs had the clear advantage of being pluri-dimensional, including the energy-relevant objectives of Sustainable Energy for All (SE4All), but leaving the more difficult questions of greenhouse gas emissions reduction to the UNFCCC. The SDGs also had the advantage of being non-economic and outcome-driven rather than rule-driven and were, therefore, not in open conflict with the WTO. Compared to simply extending the time-horizon of the Millennium Development Goals, the SDGs widened the net to include the problems of developed countries. And with respect to the outputs of the 1992 Rio Summit, the SDGs had the decisive advantage of being more clearly appreciable and measurable.
In short, the 2030 Agenda for Sustainable Development and SDGs achieved a paradigm shift from a legal culture to a cooperative culture. To better achieve its stated purpose, the Energy Charter Process needs to undertake a similar shift.
Through a well-designed Protocol, for example, incorporating clear outcome-oriented goals and mechanisms for tracking progress and facilitating implementation, the Energy Charter might be better able to achieve tangible results. Areas of focus for any such Protocol should be guided by an impact assessment of the Energy Charter process and mapping of the work of other international organisations in the field.
Review the whole Energy Charter process
The entire Energy Charter process should be evaluated, including its governance arrangements, institutions and instruments, any of which might only be achievable by amending the ECT. Such an assessment would reveal what needs to be enhanced and strengthened, replaced, streamlined, consolidated or terminated. What is crucial is that the assessment be conducted by an independent, international, credible consultancy that is able to cover the wide-ranging nature of the Energy Charter process and bridge disciplinary silos. Oversight of the assessment and reform-related discussions require high-level engagement of the Contracting Parties.
Sarah Keay-Bright is the former Head of Energy Efficiency at the Energy Charter Secretariat
Steivan Defilla is a former Director of the Energy Charter Secretariat