This opinion piece by Think Sustainable Europe Executive Directors was first published on Euractiv on March 10, 2022 and is reprinted with permission. The commentary is co-signed by members of the Think Sustainable Europe network. The full list of signatories is both in the authors' list above and again at the end with their full affiliations.

The world has changed drastically in a matter of days, and in Europe, these changes are set to reshape the entire nature and ethos of the European project.

As Russia’s invasion of Ukraine continues to take a heavy toll, the heads of state and government gathering in Versailles today and tomorrow (10-11 March) will need to take actions that support Ukraine while also shoring up the bloc’s own strategic autonomy from Moscow.

The European Green Deal will be crucial for the success of this strategy.

The lasting impact of emergency decisions on the European Green Deal

Firstly, EU leaders are facing emergency decisions that stand to have lasting effects on the implementation of the Green Deal, especially when it comes to energy policy.

There is now a far greater need for the bloc to decarbonise its energy systems and reduce its reliance on imported oil and gas from Russia.

However, making this shift happen in the immediate future presents enormous risks. Short-term measures, such as finding alternative fossil fuel suppliers and products that can fulfil immediate energy needs, might create detrimental lock-in effects.

In this context, the call by European Commission President Ursula von der Leyen to accelerate the decarbonisation of the energy system is highly welcome.

To make Europe more independent and resilient, it will be key to proceed with Fit for 55 negotiations, accelerate industrial transformation, retain a focus on medium and long-term strategies and have clear phase-out clauses for emergency measures that might go against Europe’s carbon neutrality.

Green strategic autonomy embedded in the Green Deal objectives

The Green Deal was not originally conceived as a peace- and security-building instrument. But the growing consensus in Europe around the need to achieve a green strategic autonomy for Europe requires ending our dependence on foreign fossil fuels and increasing security of supply for green energy.

Such a change in direction will have major implications on several files, from the Fit for 55 package to the EU Sustainable Finance Taxonomy, and from the Circular Economy Action Plan to the Farm to Fork Strategy.

Having an evidence-based debate on what constitutes green strategic autonomy will be essential to prevent vested interests from capturing the debate to their advantage, as demonstrated by the current controversy on food security.

The need for a common energy strategy

The principled stance to heavily criticise Russia and welcome refugees that all Visegrad countries took on the invasion despite the vulnerability of their energy system could signal a shift in the traditional divide between East and West on energy issues.

It is now becoming very clear that national energy choices are no longer a mere domestic issue, leading to calls for much greater unity around Europe’s energy strategy, that would go beyond the Energy Union, with associated policy and funding instruments and a much greater emphasis on renewable energy, green energy storage, solidarity and demand-management as a key axis for energy security and decarbonisation.

The solidarity challenge

In the context of the Fit for 55 legislative package, heated debates have already been taking place between key stakeholders on intra- and inter-country equity challenges posed by its potential impact on consumer prices.

With the influx of refugees and the unequal and differentiated impact that a cut-off from Russian supplies will have on member states, the solidarity challenge will resurface at the centre stage of the debates.

Discussions ranging from the sharing of funds for new green investments to the design of the Social Climate Fund need to lead to much greater solidarity between countries and citizens of Europe.

Engaging citizens and companies

As policy choices will have almost immediate effects on the price of essential goods and services, governments will be faced with the need to engage with citizens and corporations.

Community ownership of green energy, energy efficiency and reducing energy demand (especially conventional fossil fuels) should be promoted amongst consumers.

This means having the courage to discuss the issue of sufficiency, a concept from which policymakers have so far shied away. A European-wide Green Deal Communication campaign focused on grassroots engagement is needed more than ever.

Promoting global cooperation

As the EU looks to build its strategic autonomy, what the bloc itself looks like is set to change. But these changes must not lead to Europe closing itself off from the wider world.

This is a moment for building deeper relationships with the Global South, particularly Africa, rather than allowing for further fragmentation between world regions. A stronger Green Deal diplomatic effort focused on cooperation can pave the way for these relationships to grow and deepen.

When they meet today and tomorrow, EU heads of state will need to make very tough decisions, many of which might redefine the European project.

Let’s make sure that the new European Union that will emerge fully contributes to European and global peacebuilding by accelerating its own green transition.

*While this editorial was being published, the European Commission proposed an outline of a plan to make Europe independent from Russian fossil fuels well before 2030 and a reduction of gas imports by 2/3 by the end of the year.

Signatories:

Céline Charveriat, Executive Director, Institute for European Environmental Policy (IEEP) 

Camilla Bausch, Scientific & Executive Director, Ecologic Institute

Sébastien Treyer, Executive Director, Institute for Sustainable Development and International Relations (IDDRI)

Måns Nilsson, Executive Director, Stockholm Environment Institute (SEI)

Alexander Müller, Managing Director, TMG – Töpfer Müller Gaßner Gmb

Nathalie Bernasconi-Osterwalder, Executive Director, IISD Europe

María José Sanz Sánchez, Scientific Director, Basque Centre for Climate Change (BC3)

Ioli Christopoulou, Policy Director, The Green Tank

Katarzyna Zwolak, Executive Director, WiseEuropa

Vít Dostál, Executive Director, AMO

Martina Méhes, Managing and Policy Director, EnergiaKlub

Raimondo Orsini, Director, Sustainable Development Foundation

As the month of February began, news of a new investor–state arbitration targeting a recent Dutch climate law brought back to the fore one of the Energy Charter Treaty’s (ECT) biggest problems: the prospect that foreign investors can use the treaty to target climate-focused regulations and legislation. The arbitration request comes just weeks before ECT negotiators prepare to reconvene online for their next round of "modernization" talks.

The request for arbitration was submitted by RWE, a coal power company headquartered in Germany, against the Dutch government. It cites the lack of compensation for the "disruption" caused by the country’s 2019 law requiring the phase-out of coal power by 2030.

The company says that the move will lead to hefty losses, making a coal-power plant that it built in the Netherlands six years ago unable to turn a profit from 2030 onward. Dutch officials, for their part, say that companies like RWE have a decade to adapt their power plant accordingly.

The RWE case itself has provided yet another reminder of one of the ECT’s core drafting flaws: that, in its current form, it provides legal protection to nearly all types of energy investments, regardless of their environmental and climate impacts. Combined with many of the ECT’s other provisions, such as its clause on fair and equitable treatment, the treaty has the potential to levy a harsh blow to governments seeking to move toward carbon neutrality.

Economic activities

The treaty’s contracting parties are currently debating what "economic activities" should benefit from investment protection under a modernized EC—and whether to exclude certain types of economic activities, such as those that relate to coal, natural gas, petroleum, and petroleum products.

The existing ECT text defines economic activities as those "concerning the exploration, extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing, or sale of Energy Materials and Products except those included in Annex NI, or concerning the distribution of heat to multiple premises."

The energy materials and products featured in the above-mentioned annex are "oils and other products of the distillation of high temperature coal tar" and some other "similar" products, along with wood charcoal, fuelwood, and wood waste. Aside from those exclusions, the scope of the terms "economic activity" and "energy materials and products" is currently left wide open.

This is yet another reminder of one of the ECT’s core drafting flaws: that, in its current form, it provides legal protection to nearly all types of energy investments, regardless of their climate impacts.

In practice, this has meant that foreign investors can pursue arbitration against states that take measures to phase out their coal-fired or petroleum-fuelled plants, as the RWE case demonstrates. This has fuelled concern that the ECT will be a deterrent to governments seeking to develop increasingly robust regulations and laws to support climate action.

For example, the Netherlands, along with the European Union’s (EU) other member states, updated its climate law 2 years ago to bring it in line with the bloc’s climate and energy framework for the year 2030, which sets out the target of slashing greenhouse gas emissions by 40% from 1990 levels from this year to the end of the decade.

This EU-wide objective could increase significantly in ambition, pending the results of negotiations among the EU institutions for a Green New Deal and a new 2030 Climate Target Plan. This means that that Dutch legislators and their counterparts in other EU member states may soon be looking at further climate regulations or laws. The European Commission (EC) has proposed that its 40% target be upgraded to 55%, arguing that doing so will put the 27-member union in a better position to become carbon-neutral by mid-century.

These legislative and regulatory efforts are key components for the EU’s Nationally Determined Contribution (NDC) under the United Nations’ Paris Agreement, which sets out how governments will work to slash greenhouse gas emissions. These NDCs are also meant to become more ambitious over time to meet the Paris Agreement’s objective of limiting global temperature increases to 1.5°C above pre-industrial levels.

Sources familiar with the ECT talks note that, within the EU itself, there has been an intense debate underway among the bloc’s member states over whether to pursue an even more ambitious approach to how to define the term "economic activities," relative to what the EC is currently considering.

Many EU parliamentarians have indicated that they would not support an ECT that protects fossil fuel investments.

Under discussion has been how to phrase the exclusion of the treaty’s application to particular fossil fuel investments. Various options on the table consider the length of time for phasing out protection for certain plants that produce electricity from both renewable and fossil fuel sources, so long as the plants meet certain limits on the level of carbon dioxide produced relative to the fossil fuel inputs. These discussions have reportedly not led to a consensus outcome, leaving the EC’s negotiating position unchanged.

This debate has also spilled over into the public domain. Claude Turmes, Luxembourg’s Energy Minister, sent a letter on February 5 to EU Executive Vice President Frans Timmermans and European Commissioner for Energy Kadri Simson urging the bloc to take a stronger collective stance on ending the ECT’s protection of fossil fuel investments. He warned that failure to do so could have devastating implications for national policy space when it comes to taking ambitious climate action.

"Any exception or attempt to slow down to the termination of fossil fuels investment protection under the ECT will limit EU governments to take decisions in the direction of energy transition and reduction of CO2 emissions (and in the same time, the right to define their own energy mix)," said Turmes, according to a copy of the letter published by Euractiv.

On February 13, Teresa Ribera, Spain’s Vice President and Minister for the Ecological Transition and the Demographic Challenge, shared on Twitter that Madrid is ready to abandon the ECT, should the modernized version not align with the UN’s Paris Agreement. This sentiment has been expressed directly to the EC, she confirmed.

Should the modernized ECT not be well suited to climate action, withdrawal is a position that has been publicly supported by many EU parliamentarians, many of whom have separately indicated that they would not support an ECT that protects fossil fuel investments.

Under the ECT’s current language, should a state withdraw, then the treaty’s provisions will continue to apply to investments made before withdrawal for a 20-year period. Experts such as Tania Voon have noted that termination by multiple parties, including an agreement that drastically shortens that survival clause, could be a viable alternative.

The year ahead

Negotiations to modernize the ECT formally kicked off in December 2019, with three rounds held to date and a fourth planned for March 2–5, 2021. Subsequent negotiating rounds are currently slated for June, July, September, and November.

While a December 2020 progress report on the negotiations provides brief updates on each overarching topic under consideration, public details on the content of negotiating proposals remain scant. The EU has made its own ECT proposal public, but this is the exception rather than the rule among the ECT contracting parties. The information currently available from the Energy Charter Conference gives a very limited window into some of the textual haggling that is already underway.

Media reports indicate that the real horse trading will take place throughout 2021, making this year the one to watch. Some of the negotiating fault lines are already becoming apparent, as shown by the EU’s own internal deliberations over how to approach the topic of economic activities with the other contracting parties. Before the formal negotiations kicked off, Japan indicated that it did not see a need for changing the existing ECT text at all, though it has set out where the treaty could be revised should modernization efforts move forward.

As negotiators prepare to reconvene over Zoom in early March, they should consider how this modernized agreement will stack up against the Paris Agreement, along with some of the legal options that have been proposed in response. For example, the Treaty on Sustainable Investment for Climate Change Adaptation and Mitigation, an IISD-led project that was one of the winners of the Stockholm Treaty Lab’s 2018 prize, would give states a legal framework for encouraging “sustainable investments” and for eliminating and phasing out “unsustainable investments.” It would have them submit schedules listing what investments they consider to qualify under each category.

Over 25 years since the ECT took effect in the aftermath of the Cold War, the scope and scale of the climate challenge have become far more visible, as has the treaty’s many failings. A modernized ECT must rectify these flaws; otherwise, contracting parties must be ready to walk away from the accord entirely.

This article builds on our previous work and reporting on ECT and represents the first installment in our new ECT Watch series, where we track the developments in ECT negotiations and unpack what they mean for sustainable development and climate change.

The year 2020 was dominated by the COVID-19 pandemic and its impacts, along with various moments of friction between major economic powers on a host of policy issues. However, despite these challenges, we saw governments show their ability to come together on shared priorities. A notable example was the announcement from the European Union (EU) and China on December 30, 2020, that they had reached a deal "in principle" for a Comprehensive Agreement on Investment (CAI).

The announcement from the world’s two largest economies did not come as a total surprise. Negotiations for this CAI had been ongoing for 7 years, and the leaders of both sides have long indicated their desire to conclude the negotiations before the end of 2020. However, given the timing amidst a pandemic and strong statements on both sides in favour of ambitious climate action and building back better, one would expect a strong sustainable development lens at the centre of the undertaking, rethinking, and redesigning of traditional approaches to economic liberalization.

The CAI draft text was released by the European Commission on Friday, January 22, following multiple requests from policy-makers, policy influencers, and the wider public, many of whom have asked whether the deal actually yields the benefits that both sides promise. The release of the text allows for a preliminary analysis of where this sustainable development lens has been applied—and where more might be done.

Market access: How much is gained?

The European Commission boasts that the CAI will give EU investors an "unprecedented level of access" to China, citing broad liberalization commitments following a "negative list" approach. In investment treaty negotiations, a negative list means that all sectors are included, except those that are specifically named otherwise.

The EU also highlighted market access commitments in the manufacturing and services sectors. However, the detailed schedules and annexes have not been publicly released, making it difficult to say how much these commitments go beyond what China has already pledged to provide through its recent domestic reforms in regulating foreign investment.

Prior to 2020, foreign investments in China were regulated by a set of fragmented and long-outdated laws, which critics said were no longer serving the needs of China’s economy in an era where its economic structure and foreign direct investment landscape were changing significantly. At the same time, the international community had also expressed mounting concerns over the need for a more open business environment in China. As a result, China adopted its unified Foreign Investment Law (FIL) in 2019, which came into effect in January 2020.

They fail to prioritize sustainable investments by not including references to tools such as the EU’s Taxonomy for Sustainable Activities or China’s Green Bond Endorsed Project Catalogue. The labour provisions seem even weaker, as the text does not create any new obligations.

The new FIL takes a pre-establishment negative listing approach similar to the draft CAI provisions. This means that, unless the foreign investors and their investments fall within the sectors listed in the negative list, the FIL commits to national treatment and equal protections in their establishment and operation in China (Article 4). The same law also establishes a flexible framework where experimental policies can be carried out, and the scope of opening up can be further expanded (Article 13). In this context, the draft CAI seems to provide limited advances relative to the levels of access that EU investors already have in the Chinese market.

Moreover, China already has bilateral investment agreements in force with all but one EU member state, specifically Ireland. All of these bilateral deals have investment protection and investment dispute settlement provisions, with two sections left for further negotiation under the CAI. The delay in concluding these sections is presumably because Brussels and Beijing are awaiting the outcome of the investor–state dispute settlement reform talks taking place at the United Nations Commission on International Trade Law (UNCITRAL).

This may also explain why the draft CAI expressly reaffirms the coexistence of the existing bilateral investment treaties between China and EU member states (Section VI, Article 15). This marks a notable difference from the approach the EU took when it entered similar agreements with countries such as Canada or Vietnam, which supplanted older bilateral treaties that Canada and Vietnam had with individual EU member states.

On the other hand, in addition to the EU’s commitments that would advance the facilitation and liberalization of Chinese investment in the EU, China also praised the provisions of the draft CAI for providing "Chinese business with more transparent and predictable business and legal environment[s]." This may refer to the Regulatory Framework section (Section III), where parties agreed to make all investment-related laws and regulations publicly available in a timely manner. Parties also agreed to allow stakeholders opportunities to comment on these laws and regulations, establish contact points to respond to investors’ enquiries, and streamline standard-setting and administrative procedures.

These are all among the "possible elements of investment facilitation" that China circulated in mid-2017 among World Trade Organization members in the months leading up to the launch of structured discussions in December 2017 for a proposed multilateral framework on investment facilitation. This framework is currently under negotiation among 106 of the organization’s 164 members.

Many of these commitments can also be found in Chapter II of China’s Foreign Investment Law. Meanwhile, the European Commission also claims that these "are rules and principles already embedded in EU law."

Environment and labour provisions: Room for improvement

Another section highlighted by both Brussels and Beijing is Section IV (Investment and Sustainable Development). The EU claims that this part "includes all of the key elements of the EU approach to sustainable development." China also considers this part as indicative of the "high-level quality" of the agreement. However, the text does not seem to support this high level of satisfaction.

For example, although the text recognizes the importance of enhancing the contribution of investments to the environment and to combating climate change, the parties only commit to facilitating and encouraging investment in environmentally or climate-friendly goods and services generally. In so doing, they fail to prioritize sustainable investments by not including references to tools such as the EU’s Taxonomy for Sustainable Activities or China’s Green Bond Endorsed Project Catalogue, which can provide valuable clarity as to which goods and services are most effective in achieving environmental and climate objectives.

The labour provisions seem to be even weaker, as the draft text does not appear to create any new obligations. Even with a commitment to pursue the ratification of unratified fundamental International Labour Organization (ILO) Conventions, the CAI allows parties to make "efforts on its own initiative."

In 2017, the European Commission published a Sustainability Impact Assessment report to assess how the CAI can affect sustainability issues in the EU and China. Among other recommendations, the report says that the CAI should include provisions that:

• Retain adequate policy space to protect human rights (Recommendation 6)
   
• Address private actors’ potential abuse of human rights (Recommendation 7)
   
• Encourage compliance with international labour, environmental, and human rights standards by EU and Chinese investors (Recommendation 12)
   
• Encourage the parties to create a monitoring mechanism focusing on company behaviours (Recommendation 14)

The CAI agreement, in principle, is still subject to further technical and legal work, which could mean some revisions to the existing text. New developments may also emerge in the implementation phase once the agreement enters into force. However, failing to incorporate those recommendations means that the deal will be a missed opportunity for both parties to maximize investments in sustainable development, especially in a time where sustainable and resilient recovery is among the top priorities of governments around the world.

The author would like to thank Nathalie Bernasconi-Osterwalder and Sofia Baliño for their valuable comments on earlier drafts.