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The Energy Charter Treaty

Author: Mark Kissack

Published: 15 Mar 2023

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What is the ECT and why are countries abandoning it?

There is an urgent need to decarbonize the global energy sector to reduce the impacts of climate change. The need to eliminate the reliance on Russian gas after the Ukraine war has reinforced the requirement to reduce fossil fuel use. Many governments around the world are helping the energy transition through measures supporting the growth of renewable energies. For instance, The United States will invest $400 billion in supporting energy security and tackling climate change through the Inflation Reduction Act. The EU Green Deal involves €270 billion similarly being invested.

There has been one little known obstacle to reducing our reliance on fossil fuels – the Energy Charter Treaty (ECT). The Treaty was established in 1994 following the fall of the Soviet Union. Its aim was to protect the investments of western countries investing in the energy infrastructure of the newly formed countries from nationalisation or excessive regulation. The Treaty covers all aspects of commercial energy activities, including trade, transit, investments and energy efficiency.

The ECT has been used by fossil fuel companies to protect their interests. For instance, in 2009 Swedish energy firm Vattenfall made a claim for $1.9 billion against Germany for delays in permits to operate a coal-fired power plant in Hamburg. Under the Treaty, fossil fuel companies can sue countries for the premature closing of fossil fuel plants. The Treaty is the most litigated investment deal in the world.

The ECT is clearly an obstacle to countries wishing to reduce their dependence on fossil fuels. Consequently, in 2022, France announced that it was leaving the Treaty, followed by Spain, the Netherlands, Poland, Slovenia and Germany. At the time, the EU was proposing to reform the Treaty. However, on 7 February 2023, the EU, in a U-turn, announced that it would be withdrawing from the ECT. Former members are bound by the Treaty for 20 years after leaving. The Treaty could still be used to delay the adoption of renewable energies.

Countries around the world are providing much support to decarbonise the energy sector. However, the Energy Charter Treaty could still act as a major obstacle to reducing our dependence on fossil fuels.

*The views expressed are the author’s and not ICAEW’s.