Last Thursday we published this critique of the Energy Charter Treaty (ECT). Created in the 1990s, the ECT was designed to protect cross-border energy investments from political risk. Critics now say it is being used to protect fossil fuel investments in a world committed to phasing them out. Today, Andrei Belyi of energy consulting firm Balesene OU and Adjunct Professor in Energy Law and Policy at the University of Eastern Finland, who was named in the article, responds directly to the criticisms in the article and elsewhere in the energy media. He explains it’s the only cross-border treaty that protects energy investments, and that includes green ones. Some fossil fuel investments reduce emissions, like coal-to-gas and efficiency solutions. Some compensation payouts can fund necessary phase-out transitions within companies, for example compensation for workers in coal mining and investments into economic diversification. There’s more. The ECT certainly needs updating, and the way to do it is with a dialogue that concentrates on the facts and the realities, says Belyi.
Last Thursday (September 17th) an enthusiastic article entitled ‘Energy Charter Treaty: reform will only happen when energy ministers get involved’, published here in Energy Post broadly described the state of mind surrounding this all-embracing multilateral regime for energy investment, transit and trade.
The author has accurately claimed that the Treaty is under fire from some ‘members of the European Parliament, and NGOs’, and extensively quotes appeals to adapt the Energy Charter to the concerns of the climate emergency. Those who follow the subject can easily remember that a group of MEPs very recently appealed the EU to withdraw from the Treaty unless a substantial modernisation of the Energy Charter process is achieved.
The main accusation
With a direct reference to the letter signed by a cross-party group of MEPs, last week’s article spells out quite explicitly that ‘a leading issue for those campaigning for reform is ending legal protection for fossil fuel investments.’ Adding to that, the article quotes an earlier statement from June 2018 that ‘governments can be dissuaded from enacting progressive climate legislation due to the prospect of costly legal action initiated under the terms of the treaty.’
However, the numerous statements and appeals made by campaigners and political representatives don’t always reflect the complex reality at hand. At least four points may need to be remembered while addressing the issue of the multilateral energy regime.
Firstly, a large part of the intra-EU legal cases that have occurred under the ECT auspices are about promotion of renewable energies since the Energy Charter remains the only multilateral mechanism providing investment protection to energy products, equipment and material. Regulatory regimes in EU member states do not always maintain a high standard for promoting alternative energies. Scholarly literature in energy law points out to numerous ‘solar claims’ which followed a series of measures taken by EU states that later withdrew incentives and benefits to the carbon-free energies.
The Energy Charter remains the only multilateral Treaty offering a multilateral framework for a fair and equitable treatment of energy investments, including investments into new technologies. In recent years, energy lawyers have often observed that the Treaty claims relating to the renewable energy sector are likely to be asserted.
Secondly, it has been argued before that investments into fossil fuels are not always incompatible with the climate neutrality objectives, particularly beyond the EU. If international investment in Central Asia, the Caucasus and Turkey (non-EU members of the Energy Charter Conference) included solutions reducing energy losses and promoting energy-efficient supply schemes, coal-to-gas conversion and more efficient upstream development by reducing flaring of gas condensate, this would contribute to a relatively fast reduction in greenhouse gases in the short term.
Next, a third point emphasises that fossil fuel companies operating in the EU may legitimately expect compensations related to the phase out of carbon-intensive activities. For instance, compensations may facilitate, either directly or indirectly, a company’s commitments to invest into environmental and social governance, such as compensations for workers in coal mining, investments into economic diversification within a company, etc).
…EU withdrawal would still leave them liable for 20 years
Finally, if the EU withdrew from the Treaty unilaterally, the EU and its member states wouldn’t avoid the issue of compensations to investors. The ECT contains the so-called ‘sun-set’ clause which allows international investors to sue states – as well as the EU – twenty years after the termination of Energy Charter membership. Given this provision, a unilateral withdrawal from the Treaty becomes nonsensical in terms of avoiding compensations.
We all agree, the ECT needs updating
Yet, the Treaty text needs to be modernised and, therefore, the European Commission tabled a proposal to update the ECT to the level of new generation of investment protection, to render the Treaty compatible with the need to prioritise carbon-neutral technologies, and, therefore, to renew the list of areas covered by provisions of the investment protection.
However, negotiations of a multilateral agreement remain a complex process, requiring consensus and compromises between contracting parties. Particularly, multilateralism in protecting investments has usually faced headwinds. Already back in 1998, ECT contracting parties attempted in vain a Supplementary Agreement on investment protection. Hence, the main challenge faced nowadays by the negotiators is to avoid repeating some of previous failures to improve the Energy Charter text.
…but we must focus on the facts
On the basis of this background, it would be right to cast light on these discussions, and to reinforce a dialogue between policy-makers, industries and expert communities on the subject of international energy governance. However, recent mass-media coverage of the Energy Charter process has rather resembled a pensée unique with persistently misleading statements.
Among others, some articles mistakenly assume a legal possibility for the EU to cancel the sunset clause at the EU level, visibly misunderstanding the fact that the ECT investment protection is a matter of international law not European law.
Probably by ignoring growing numbers of ‘solar cases’ defending investments into renewables, some observers surprisingly claimed that ‘the implementation of the progressive concepts of prosumers and citizen energy communities introduced by the renewables and internal market directives will be challenged by the ECT provisions’. Even last week’s article in Energy Post, briefly discussed above, assumes that the investor-state arbitration is incompatible with the democratic principle.
Contrary to this claim, this longtime practice has secured companies against any risk of bias at any national level. Interests of states can’t be ignored either as arbitral decisions are usually based on consensus, implying also a consent of the representative of a state being under the arbitral case. Investors only seldom get the full compensation they initially claimed, whereas states have confirmed their rights over natural resources mostly through the very same arbitration practice.
Whereas numerous vocal anti-ECT assumptions have received wide coverage, no outlet has inter alia referred to an in-depth analysis about the ECT framework by Andris Piebalgs from the most renowned EU energy think tank Florence School of Regulation, and former EU Commissioner for Energy. According to his policy paper the ECT provides stable, transparent and fair conditions to mobilise the investment needed for the sustainable energy transition.
In order to redirect the debate from misleading assumptions back to a genuinely expert discussion, an online conference entitled ‘the Energy Charter Treaty: Is it still fit for purpose and how could it be improved?’ took place last week. To my surprise, the afore-mentioned article in Energy Post described the event as ‘the pushback’ organised by ‘elite-global law firm Volterra Fietta’. This semantic may rather allude to a juxtaposition between pro-states campaigners and pro-ECT ‘elites’. However, law firms involved in arbitration – such as Volterra Fietta – often happen to represents states at arbitral tribunals.
The objective of the debate merely aimed at bringing together expert perspectives on the complex process of international energy governance and to revive expert discussion on the topic without unnecessary political slogans. This was achieved as all the presentations and the questions from the audience were focused on concrete legal and policy issues surrounding the Energy Charter, the EU’s proposals for modernisation, and the headwinds and caveats we all need to resolve.
Andrei Belyi is founder of energy consulting firm Balesene OU (Tallinn, Estonia) and Adjunct Professor in Energy Law and Policy at the Centre for Climate Change, Energy and Environmental Law at the University of Eastern Finland