The Energy Charter Treaty supports investment in renewables

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The oft maligned Energy Charter Treaty is not the obstacle to renewable energy that some make it out to be, writes Tomas Vail. [pan demin / Shutterstock]

The oft maligned Energy Charter Treaty is not the obstacle to renewable energy that some make it out to be, writes Tomas Vail.

Tomas Vail is an arbitration lawyer and leader of Vail Dispute Resolution

Critiques of the ECT portray the investment mechanism of the ECT as being in conflict with a state’s ability to achieve its climate change targets.

This is a false dichotomy. Moreover, such critiques ascribe no agency to the state. They ignore the fact that states drafted, negotiated and voluntarily entered into the ECT and consented to its arbitration provisions. They ignore the fact that states can, and do, undermine their own regulatory frameworks to the detriment of both investors and climate change targets.

The contention is that states are unable to implement climate change policies because the ECT allows investors to protect their fossil fuel investments.

The inconvenient truth is that the overwhelming majority of ECT claims (approximately 60%), relate to the renewables industry, and in particular arise from a state’s failure to honour its promises to investors.

States set out regulatory schemes to attract investors to build solar power plants and wind farms, and then renege on their commitments and/or change their own laws, resulting in investors losing the value of their investments. These are solar and wind investors who have sought to help achieve a state’s climate targets, and it is the state which impedes these projects through retroactive legislative changes. This unstable regulatory framework also serves to undermine future investment in a state’s renewable energy sector.

In such cases, often the only mechanism available to investors is to bring a claim against the state under the ECT, effectively asking the state to honour the promises it has made to attract investment in its own renewables industry.

Significant efforts to modernise the ECT continue, with three negotiations rounds in late 2020 and five more rounds planned for 2021. Indeed, the renegotiation of any treaty is bound to be complex and there are legitimate concerns to address. But it is not obvious that the ECT, or the right of investors to bring claims against states, is the obstacle to renewable energy that some make it out to be.

The French position

In early February 2020, French ministers sent a letter to the European Commission which has been lauded by some ECT critics. The letter called for reform to the ECT’s arbitration mechanism to allow states to implement policies to fight climate change, and raised the possibility of withdrawal of the EU and its member states from the ECT as it asserted that modernisation of the treaty was not on track.

Coincidentally, also in early February 2020, the Paris administrative court issued its ruling in the so-called “Trial of the Century”. In December 2018 (then refiled in March 2019), four environmental NGOs filed a claim against the French government for compensation arising its inaction on climate change and the ensuing ecological harm. In its historic ruling, the court recognised the state’s “culpable failings” in the fight against global warming.

In its detailed 18-page written defence seeking to dismiss the claim, the French government, represented by the Ministry for the Ecological Transition, disputed that it had been inactive in fighting climate change. Among other arguments, it asserted that it had set itself more ambitious climate change goals than required under EU and international agreements and was achieving those goals, including by reducing greenhouse gas emissions and passing three laws in 2019-2020 on carbon neutrality, waste reduction and developing the renewable hydrogen sector.

In sum, France’s position was that it is already doing enough in terms of climate change legislation. The court disagreed.

At no point in its defence did the French government assert that the ECT’s arbitration mechanism had inhibited its ability to fight climate change. In fact, there was no mention of the ECT at all.

Finding the Right Target

It can be tempting to assert that the ECT and investment arbitration stand in the way of real energy reform, only serving to protect the interests of fossil fuel investors to the detriment of hapless states. But the reality is more complex.

States play an active role in offering investment incentives to investors, and in offering protections should those investments be harmed. To a large extent, those protections support renewables investors.

As the French example demonstrates, even though the ECT may be a compelling target in some fora, it can be a different story when it comes to actually arguing the case before a tribunal.

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