Coordinated European Withdrawal from the Energy Charter Treaty — A Step Back for the Clean Energy Transition

As I reported in my earlier post, the Contracting Parties to the Energy Charter Treaty (“ECT” or “Treaty”) failed to modernize the ECT in November 2022. Subsequently, on 7 July 2023, the European Commission (“EC”) presented its formal proposals for a coordinated withdrawal from the ECT by the European Union (“EU”), its Member States, and Euratom, citing the Treaty’s incompatibility with the EU’s climate targets under the European Green Deal and the Paris Agreement. The EC’s legal proposals are now being sent to the Council of the EU for a qualified majority vote that is necessary for their approval.

In addition to the EC’s withdrawal proposals, several individual Contracting Parties to the ECT have announced their decision to withdraw from the Treaty. These countries include Portugal, Spain, Slovenia, Denmark, Poland, Luxemburg, France, Germany and the Netherlands. The following countries have already formally submitted their withdrawal notices to the ECT’s Depository, Portugal:

• Luxembourg with effect from 21 June 2024
• France with effect from 8 December 2023
• Germany with effect from 21 December 2023
• Poland with effect from 21 December 2023.

As mentioned earlier here and here, the current — unmodernized — ECT contains a 20-year sunset clause in Article 47(3), which extends the protections of the ECT to qualified investors, including fossil fuel companies, for 20 years after the respective Contracting Party’s withdrawal from the Treaty goes into effect.

The legal proposals of the EC explicitly acknowledge that the ECT contains a 20-year sunset clause in Article 47(3) and admit the validity of the clause as far as it concerns non-intra-EU disputes. The EC, however, opines that the sunset clause has never applied and will not apply to the disputes between the EU Member States, i.e. the intra-EU disputes. It further reiterates its call for a subsequent agreement between the EU, Euratom, and EU Member States, clarifying that intra-EU disputes are excluded from the ECT’s scope.

Notably, the majority of international arbitral tribunals in publicly disclosed disputes under the ECT have rejected jurisdictional challenges based on the argument that the Treaty does not apply to intra-EU disputes. The first (and so far the only) tribunal that upheld the argument was a Stockholm-seated tribunal in Green Power v. Spain. On 16 June 2022, the tribunal unanimously found that it did not have jurisdiction to hear two Danish investors’ claims against Spain on the basis that the intra-EU ECT arbitration was incompatible with EU law, as the Court of Justice of the European Union found in its Achmea, Komstroy, and PL Holdings judgments. The reasoning of the tribunal in Green Power appears to have been influenced by the fact that the arbitration was seated in a EU Member State, Sweden. The seat of arbitration in future ECT disputes therefore should be carefully considered by the parties, particularly in any intra-EU arbitrations.

As a result of the failure to modernize the ECT and the current exodus from the existing Treaty, qualified fossil fuel companies — as well as qualified renewable energy investors — benefit from the 20-year sunset clause protection period. The number of fossil fuel companies challenging climate change legislation is expected to increase in the coming years, which some fear would create a chilling effect for the plans to transition away from fossil fuels towards renewable sources by the EU and its Member States.

Despite this recent move by the EC towards a coordinated withdrawal from the ECT, the Energy Charter’s Secretary-General Guy Lentz has invited the EU Member States to nonetheless vote in favor of a modernized ECT. In his 11 July 2023 Statement, Guy Lentz expressed his regret with respect to the recent move by the EC and opined that a solid and reliable legal environment was a prerequisite for mobilizing much-needed private sector investments in clean energy sources. At the same time, Secretary-General considered that “decision of Energy Charter Conference to modernize ECT [was] not linked to potential EU decision on its withdrawal from it”. Accordingly, Mr. Lentz believed that EU Council could adopt both, a decision to withdraw from the ECT and a decision to vote in favor of the modernized text. The Secretary-General thus maintained hope that a modernized ECT could be adopted through vote both by states wishing to remain bound by the Treaty and by entities that have decided to withdraw.

In conclusion, while withdrawal of the EU, Euratom, and individual Member States from the ECT is seen by some opponents of the ECT as a step towards aligning EU policies with the current climate goals, many fossil fuel investors may consider it a victory for their industry. The 20-year sunset clause for the existing investments could hinder progress towards transitioning away from fossil fuels and achieving global climate action goals. It remains to be seen how this issue is addressed in the future ECT negotiations. At the same time, according to the Energy Charter’s Secretary-General there is still hope that a modernized ECT could be adopted by the remaining Contracting Parties to the ECT and those states and entities that have decided to withdraw.

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