Uncertain Climate Impact and Several Open Questions
An analysis of the proposed reform of the Energy Charter Treaty
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In the European Union and United Kingdom, fossil fuel investors will have at least 10 years of continued protection for existing fossil fuel investments under the modernized ECT. This is at odds with the required speed of fossil fuel phase-out to limit global warming to 1.5°C.
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Despite earlier talk of a "flexibility mechanism" to exclude fossil fuel investment protection, the leaked agreement for the modernized ECT does not give contracting parties greater flexibility to make such carve-outs after the vote at the Energy Charter Conference on November 22, 2022.
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The modernized ECT leaves in place broad investment protection standards with limited carve-outs. The revised substantive provisions (fair and equitable treatment, indirect expropriation) remain broad, and new exceptions and carve-outs to protect states' policy space are insufficient.
This report provides a detailed legal analysis of selected key aspects of the agreement in principle on the modernization of the ECT concluded on June 24, 2022, and subsequently leaked on Politico in September.
Our analysis confirms that while the Energy Charter Treaty’s contracting parties have addressed some of the existing treaty’s flaws, the reforms do not go far enough to make the treaty fit for supporting the energy transition or global climate action goals. The modernization also fails to address some of the key challenges that host states face when regulating in the public interest, including when taking action to tackle the climate crisis.
Ultimately, the reforms remain too modest, too untested, and too piecemeal to resolve many of the current treaty’s flaws and ensure that the modernized treaty will not stand in the way of governments’ ability to pursue ambitious climate mitigation measures.
Our analysis considers, among other facets:
- What the fossil fuel carve-outs for the EU and United Kingdom mean in practice, and what protections fossil fuel investors from other contracting parties will continue to have.
- The lack of any greater flexibility for contracting parties to make carve-outs for fossil fuel investment protection after the November vote of the Energy Charter Conference, relative to the existing treaty.
- The extended scope of the treaty to cover new energy materials and carbon capture and storage technologies, and what this means for states’ flexibility when regulating new energy technologies.
- The modernized treaty’s investment protection standards and what they mean for shielding public policy.
- The lack of systemic reform of investor-state dispute settlement, compensation standards, and valuation techniques.
- The implications of the modernized ECT’s 20-year survival clause, which remains intact from the original treaty.
- Various aspects of the reforms that leave open crucial legal questions or fail to reflect recent treaty practice in the European Union.
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