An international treaty used by polluting energy companies to claim compensation from governments who thwart their investments was ruled incompatible with EU law by the Court of Justice of the European Union on Thursday (2 September).
The Energy Charter Treaty allows companies to sue foreign countries over decisions that affect their energy investments. Recently, it has been leveraged against countries like the Netherlands over its coal phase out.
But on Thursday Europe’s top court ruled that the treaty cannot be used in lawsuits between EU countries because the process undermines the role of EU courts.
The ruling puts into question the legality of ongoing claims, like those against the Netherlands.
“Legally it’s the end of the Energy Charter Treaty,” ClientEarth lawyer Amandine Van Den Berghe told EURACTIV.
According to the Court, “the preservation of the autonomy and specific character of EU law precludes the Energy Charter Treaty from being able to impose the same obligations on the Member States among themselves.”
Under the treaty, companies can attempt to claim millions of euros in compensation at the expense of taxpayers through a private arbitration mechanism called an investor-state dispute settlement (ISDS).
But a 2018 ruling found that the ISDS process was incompatible with EU law. And today’s ruling confirmed that the 2018 decision also applies to claims filed under the Energy Charter Treaty, which “must be interpreted as not applicable to disputes between a Member State and an investor from another Member State concerning an investment made by the latter in the first Member State”.
Environmental campaigners applauded the ruling. “Given the scale of the climate crisis, it’s not only abhorrent that EU companies have used the Energy Charter Treaty to claim compensation, but it’s now confirmed that it’s also illegal,” said Van Den Berghe.
Implementing the decision will be more complex though, she added. It will be up to EU countries to defend themselves using this decision, with countries like the Netherlands now having more firepower in contesting the claims.
A treaty from another century
The Energy Charter Treaty was signed in 1994 to promote energy security in the former Soviet Union. It is now going through a reform process among its 53 signatories.
In 2019, EU countries gave the European Commission a mandate to revise the treaty, saying it must reinstate Europe’s “right to regulate” in areas like climate change and workers’ rights.
The ECT has become a nuisance for countries like the Netherlands, which have started implementing a coal phase out. 81% of investments protected by the ECT are intra-EU investments, so preventing intra-EU lawsuits could dramatically slash the number of cases.
But Climate Action Network Europe, an NGO, warns that this is not a whole fix as it would not impact claims by companies outside of the EU.
European countries like France and Spain have been pushing to leave the treaty. This would at least stop new infrastructure from being protected by the agreement, but a 20-year sunset clause means any investments made during the period of the agreement could still be the subject of a claim.
To get around this, all EU countries could agree to neutralise the sunset clause between themselves, slashing the number of cases that could arise.
Both Sweden and Belgium have also referred questions about the treaty’s legality to the Court. There is also the unasked question of whether claims made by companies in non-EU countries against member states are acceptable under EU law, according to Climate Action Network Europe.
[Edited by Frédéric Simon]