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Deal for Modernized Energy Charter Treaty Insufficient for Ambitious Climate Action

June 27, 2022

The new "agreement in principle" for a modernized Energy Charter Treaty (ECT) falls short of pledges to make the trade and investment deal better suited to achieving international climate goals, IISD experts say.

The Energy Charter Treaty's contracting parties announced the deal on Friday, June 24, capping years of talks that were launched after mounting concerns over the ECT’s excessive use by investors in disputes and record-breaking financial awards against governments. The treaty has long been used to challenge climate action measures. IISD research shows that the ECT is the international investment agreement most commonly used by fossil fuel investors for filing legal claims under international law. 

Yet despite pledges by many ECT contracting parties that this modernization process would lead to a more climate-friendly deal, the Energy Charter Conference’s public communication on Friday indicates that the revised treaty will still leave fossil fuel investments protected for at least a decade or longer.

For instance, the European Union and the United Kingdom have agreed that fossil fuel investments that already exist in their territories will only stop benefitting from investment protections starting 10 years after the new treaty enters into force. That means that   fossil fuel investors can still file investor–state dispute settlement (ISDS) claims well into the coming decade—even as new research shows that phasing out oil and gas production and consumption must happen on a much faster timetable and that no new oil and gas fields should be developed if we are to limit global warming to 1.5°C.

"Allowing fossil fuel investors to continue to sue governments using ISDS for over 10 years from when the new agreement enters into force undermines governments' ability to address our climate crisis," said Nathalie Bernasconi-Osterwalder, Executive Director of IISD Europe and Senior Director of IISD's Economic Law and Policy program.

To date, other ECT contracting parties have not publicly indicated that they will end investor protections and ISDS for fossil fuel investments in their territories.

"We don't know yet if other ECT contracting parties will set some limits for fossil fuel investments, but even if they do, the modernized treaty will still make it hard for governments to undertake environmental measures to tackle other sustainability challenges," said Lukas Schaugg, International Law Analyst at IISD. 

Over the coming months, the deal will undergo "editorial and legal review" and, if no contracting party objects, it will be forwarded for adoption in November. Entry into force then requires at least three quarters of contracting parties to ratify, which could take months or years. 

"Until then, the existing treaty remains in place. Yet both versions will make it difficult for governments to take the steps necessary for putting the objectives of the Paris Agreement into practice," said Suzy Nikièma, IISD’s Lead, Sustainable Investment.  

Contracting parties need to acknowledge that the outcome as it stands is not fit for purpose in undertaking ambitious climate action. The modernized treaty will also continue to hamper governments' ability to adopt crucial environmental measures in other areas, such as in tackling biodiversity loss or pollution. Unless contracting parties still have the possibility and will to address these major concerns, they will have to consider withdrawal from the treaty, rather than replacing one problematic agreement with another.