The Ukraine war taught Europe—and many other countries—the dangers of continued reliance on volatile oil and gas markets. In 2022, governments rolled out budget-crushing subsidies to the tune of USD 204 billion in the European Union (USD 1.66 trillion globally). While these vast sums helped soften the immediate shock, they addressed only the symptoms of the problem. The exposure to market volatility remained, and in many countries, subsidies were difficult to reverse when prices came down.

As energy prices surge again, governments are under renewed pressure to provide relief. The challenge is how to do so without repeating past mistakes. A new round of subsidies is certainly not the answer.  

The answer is not to make fossil fuels artificially cheap, but to support the people feeling the pressure.

 

The issue with fossil fuel subsidies is not only their cost. They also fail the long-term test of energy security. Rather than shielding economies from energy price shocks, they entrench dependence on fuels, the prices for which are based on volatile international markets. By keeping oil and gas artificially cheap, subsidies discourage investment in diverse, affordable, and domestically produced energy sources. True energy security comes from reducing that dependence, not subsidizing it. If governments roll out new subsidies now, they will only guarantee that the next price shock will repeat the pain.

So what should governments do when households are struggling with rising energy bills?

The answer is not to make fossil fuels artificially cheap, but to support the people feeling the pressure.

“Blanket” support measures disproportionately benefit richer households and energy-intensive industries. When governments reduce fuel prices for everyone, the largest subsidies automatically flow to those with the highest consumption patterns—people who own larger homes and drive multiple vehicles or energy-intensive industrial processes. In middle-income countries, the top earning 20% of the population receives 11 times the level of subsidies compared to the lowest.

Targeted support works differently. Instead of lowering fuel prices across the entire economy, governments can focus assistance on households that are struggling to pay their bills.

This time around, Europe should focus on targeted, effective, and sustainable forms of support to people and industries, helping break the costly cycle of fossil fuel dependence while building a more secure and resilient energy system.

 

Some governments have already taken this approach. The United Kingdom’s Cost of Living Payments, introduced during the 2022–2024 energy and inflation crisis, offered direct cash payments. Similarly, Germany’s reformed Wohngeld expanded the housing allowance program, increasing support for lower-income households and adding a component to reflect rising heating costs. By using these types of means-tested programs, governments can protect people’s purchasing power through direct transfers while still encouraging energy efficiency and a switch to clean alternatives.  

At the same time, public financial support to electrification, such as electric vehicles and heat pumps, can help households decouple their energy bills from volatile international markets. As more energy demand shifts to electricity generated domestically from renewable sources, exposure to global oil and gas price shocks declines, strengthening energy security over time.  

The 2022 energy price hike was met with hundreds of billions in fossil fuel subsidies. While several countries saw demonstrations for price relief, there were also demonstrations against the allocation of so much public funds for fossil fuels. Within a year, 12 countries led by the Netherlands launched the Coalition on Phasing Out Fossil Fuel Incentives Including Subsidies, or COFFIS, to start shifting away from costly fossil fuel support. Lessons learned from these countries in how to effectively remove subsidies now need to be applied to avoid creating new ones.  

This time around, Europe should focus on targeted, effective, and sustainable forms of support to people and industries, helping break the costly cycle of fossil fuel dependence while building a more secure and resilient energy system. 

The Energy Charter Conference officially adopted the “modernized” Energy Charter Treaty (ECT) at its 35th meeting on December 3, 2024, concluding a negotiation process that has run for several years. The ECT is a plurilateral treaty on investment, trade, and transit in the energy sector drawing criticism for its investor–state dispute settlement (ISDS) mechanism that allows fossil fuel investors to sue states in international arbitration over new climate policies.

The adoption of the reform follows decisions to withdraw from the European Union (EU), European Atomic Energy Community, Germany, France, Spain, Poland, the Netherlands, Luxemburg, Portugal, Slovenia, and the United Kingdom (Italy already withdrew in 2016). Importantly, the modernization does not hinder states that have not yet withdrawn from the ECT from doing so, and this remains the most viable option from a legal and policy standpoint. Some countries, including Ireland and Denmark, have announced such an intention. Additionally, withdrawing states are also exploring interpretative declarations and bespoke inter se agreements to neutralize the so-called sunset clause, which grants existing fossil fuel investments additional protection for 20 years following states’ withdrawal from the treaty. 

What does the modernization do?

The adopted modernization includes amendments to the treaty, updates to annexes, and procedural changes, such as designating the Energy Charter Secretariat as the interim depositary of the treaty, after Portugal’s withdrawal taking effect in February 2025. Key elements reflect a 2022 agreement on modernizing the ECT, which included proposals on a provision underlining states’ right to regulate and an optional carveout of fossil fuel investments from ISDS protection.

IISD analyzed this agreement at the time, finding that, even if reformed as per the proposals, the ECT would still obstruct governments’ climate policies—and that withdrawal combined with a neutralization of the sunset clause remained the most viable option. The numerous withdrawing states apparently shared this assessment.

When will the modernization enter into force?

The amendments now adopted will provisionally apply from September 3, 2025, unless a party opts out by March 3, 2025, and will fully enter into force after ratification by three quarters of the states that remain ECT contracting parties. Pending entry into force, investors with existing and new fossil fuel investments can continue to bring controversial investor–state arbitration claims against states that remain party to the treaty. 

Why will the ECT continue to be in tension with EU law?

According to the Court of Justice of the European Union, the ECT must be interpreted to mean that it does not apply to investor–state disputes between EU member states.

Earlier this year, 26 EU member states also signed a declaration to express their common understanding that the ECT does not and should never have served as a basis for arbitrations within the EU. Those steps notwithstanding, EU investors continue to sue EU member states in arbitration.

The proposed reform contains a clause that clarifies this common understanding of the EU member states—an element missing from the old version. This was a key element prompting the Council of the EU to oblige remaining EU member states “not to prevent the adoption” of the “modernization” of the ECT at last week’s Energy Charter Conference.

But adoption does not necessarily mean that the matter is resolved. Several member states could face constraints relating to domestic constitutional law, hindering them from provisionally applying the treaty—as previous experiences with trade and investment treaties like the Comprehensive Economic and Trade Agreement demonstrate.

This means that some states might be forced to opt out of the provisional application before March 3, 2025. In this case, member states will remain bound by the unreformed treaty until at least three quarters of all contracting parties, including them, have ratified, accepted, or approved the reform. This milestone is likely to take years.

Why won't the modernization deliver for the climate?

The result may well be that several member states continue to be bound for years to come by a treaty that EU investors—including many fossil fuel investors—use to sue other EU member states in violation of EU law. Addressing this dilemma will be a main challenge for the incoming European Commission.

In addition, once entered into force, the modernization will also have specific implications for non-EU states that are contracting parties to the ECT and who have not used the fossil fuel carveout mechanisms, as well as for any developing countries that could join the treaty in the future if the efforts to expand its membership are revived. 

November 19, 2024, Baku — Europe’s demand for gas is contributing to expansion of liquid natural gas (LNG) projects in Mozambique, Nigeria, and Senegal. This favours the interests of European oil and gas companies over those of African countries, a new report shows.

The companies, which include UK-based BP, France’s TotalEnergies, and Italy’s Eni, stand to benefit from near-term revenues, finds the report A Precarious Pursuit by the International Institute for Sustainable Development (IISD). Under their contracts, African governments are often expected to wait until the mid-2030s or 2040s for significant returns.

These delays could prove economically disastrous to the African nations involved. LNG demand may have already peaked in Europe, and will likely decline globally from 2030, according to the International Energy Agency, and the EU Agency for the Cooperation of Energy Regulators.

“Europe clamping down on fossil fuels at home while expanding gas exploration and LNG terminals in Africa is problematic,” said Bathandwa Vazi, Policy Advisor at IISD and one of the paper's co-authors.

She added: “The highly competitive LNG markets seen since 2022 are now forecast to give way to a supply glut, with falling prices, tighter margins, and lower profits for exporters. This price risk is being shouldered by countries least equipped to deal with it.”

European governments should work with African nations to expand access to renewable energy and green jobs, not lock them into extractive sectors with high carbon emissions, report authors say.

Richard Bridle, a senior policy advisor at IISD, said: “Europe’s support for LNG infrastructure in Africa is not the product of mutually respectful enterprise. It locks African nations into unstable fossil fuel-based economies, when they could be leapfrogging to clean energy and green jobs.

“At the ‘finance COP’, European governments must deliver the support African countries need to move beyond fossil fuels and harness their abundant renewable resources.”

LNG development in Africa intensified following Russia’s invasion of Ukraine in February 2022, as Europe sought to diversify supplies away from Russian gas.

For sub-Saharan economies, the potential to benefit from European gas demand may have been overstated, the research cautions. As global net-zero targets proliferate and the price of renewable energy falls, long-term LNG demand is uncertain. Meanwhile new projects are set to deliver a glut of LNG supplies later this decade, depressing prices.

The relatively high cost of LNG production in Africa makes African producers particularly vulnerable to market volatility, as lower global prices could make these projects unprofitable.

Media Contacts:

Bathandwa Vazi, Policy Advisor, Energy (Cape Town) – [email protected]

Richard Bridle, Senior Policy Advisor, Energy (Europe) – [email protected]

Vance Culbert, Senior Policy Advisor, Energy (Baku) – [email protected]

Megan Darby, Senior Communications Officer, Energy (Baku) – [email protected]

June 27, 2024 – Yesterday, 26 European Union (EU) member states signed a declaration and endorsed an agreement on the interpretation and application of the Energy Charter Treaty (ECT), according to a press release published by the Belgian Ministry of Foreign Affairs. The agreement will be published in the Official Journal of the EU shortly, as stated in the release. This is an important step to prevent legacy arbitration claims under the treaty, but more remains to be done.

The new agreement—concluded between the EU, Euratom, and their member states—clarifies the common understanding that the ECT and its investor-state dispute settlement (ISDS) mechanism does not and never did apply within the EU. The treaty has drawn growing criticism from EU member states in recent years as it was used by intra-EU investors to circumvent domestic courts in violation of EU law and to challenge member states’ energy transition policies through ISDS. With more than 160 cases to date, it is the investment treaty that has generated the highest number of ISDS claims.

“This new agreement addresses a significant part of the risks still posed by the ECT, but more action is needed to prevent all fossil fuel arbitrations under the treaty in the future,” says Suzy Nikièma, Director, Sustainable Investment at the International Institute for Sustainable Development (IISD). 

Following a failed attempt to reform the ECT, the EU, Euratom, Germany, France, Spain, Portugal, the Netherlands, Luxembourg, Denmark, Poland, Slovenia, Ireland, and the United Kingdom have decided to leave the treaty. These states generally justified their withdrawal with claims that the reform proposal fell short of their expectations and failed to allow for a decarbonization of the energy sector in line with the timetable warranted by the Paris Agreement. 

However, the treaty contains a so-called survival clause that will continue to allow a wide range of fossil fuel companies and other investors with existing investments to sue states for a period of 20 years after their withdrawal. These are investors from the EU with investments in ECT countries other than the EU (outward), or investors from ECT countries other than the EU with investments in the EU (inward). 

“Granting 20 more years of legal privileges to fossil fuel investors is fundamentally incompatible with climate mitigation. With the new agreement, the EU sends a strong signal to tribunals: ISDS claims within the EU under the ECT lack a legal basis. States should now take this as a precedent for wider steps to prevent such claims among all ECT contracting parties,” says Lukas Schaugg, policy advisor at IISD.

The EU and other non-EU contracting parties of the ECT can minimize the impact of this unusual, far-reaching clause through a further agreement modifying the ECT. Lawyers at IISD and ClientEarth have demonstrated that such an agreement is a viable solution under public international law and model text options will be published shortly. 

April 24 – The European Parliament has today voted to adopt the Corporate Sustainability Due Diligence Directive (CSDDD), following months of negotiations between the European Union (EU) institutions and member states.

“Ensuring that corporations take responsibility for preventing and managing the environmental, labour, and human rights impacts of their supply chains is key to global sustainable development efforts. The adoption of the CSDDD is a step in the right direction”, Suzy H. Nikièma, Director of Investment at the International Institute for Sustainable Development (IISD) said.

“However, the watered-down nature of the final directive compared to the original proposal is concerning. Now, only companies with more than 1,000 employees and a net turnover of over EUR 450 million EUR annually are within the scope of the rules, compared to 250 employees and a net turnover of EUR 40 million as the threshold for high-impact sectors in the original text.

Due diligence initiatives, such as the CSDDD, will only truly deliver their promised sustainability benefits if they address the unique needs of the suppliers in the countries where most of these requirements will be applied. If we get the implementation right, due diligence regulations should help generate genuine responsible investment in developing countries.

European policy-makers must now focus on providing the technical support and resources necessary for local suppliers in developing countries to comply, which includes making sure that the large international companies in scope of the CSDDD take their share of the responsibility for this crucial work.”

Media Contacts

Suzy H. Nikièma, Director of Investment, IISD: [email protected]
Isaak Bowers, Communications Officer, Investment, IISD: [email protected]