Withdrawal from the Energy Charter Treaty: the Ostrich Effect?

This article focuses on the sunset clause of the Energy Charter Treaty (ECT). The ECT is a multilateral investor‐state arbitration treaty which allows for the use of investor‐state dispute settlement (ISDS) tribunals to arbitrate challenges arising from shifts in energy policy that lead to a loss in profits for relevant energy companies. The treaty has become controversial as climate activists have alleged it is slowing down efforts to transition away from fossil fuels. Withdrawal from the ECT does not necessarily solve the alleged issues as the treaty contains a sunset clause, allowing for the provisions of the ECT to remain in force for 20 years post withdrawal. This article seeks to analyse various mechanisms and strategies for neutralising the sunset clause as part of a wider effort to ensure the ECT does not interfere with the phasing out of fossil fuels. It will be argued that such neutralisation should be possible through the use of Article 62 of the Vienna Convention on the Law of Treaties (VCLT), on the basis that there has been a fundamental change in circumstances since the inception of the treaty. This use of the rebus sic stantibus doctrine can be justified on the basis that a swift and substantial transition away from fossil fuels is now required to ensure states can meet their obligations under the Paris Agreement. This article will also explore alternatives to an Article 62 VCLT argument (i.e. a fundamental change in circumstances) that could nonetheless achieve the primary goal of ensuring that states are not bound to a pro fossil‐fuel treaty. Examples of alternatives include the insertion of a climate carve‐out to remove protections from investments that hinder climate action or the use of the defence of necessity in future ECT arbitration cases to argue that the state should not remain bound to the sunset clause. Regardless of whichever scenario is pursued by states, the article seeks to highlight that any and all efforts must be made to neutralise the sunset clause to ensure there is no interference with necessary efforts to pursue climate action.

Following a wave of announcements from major EU Member States withdrawing or considering withdrawing from the Energy Charter Treaty (ECT), the European Commission decided to recommend a coordinated withdrawal of the EU and its Member States from the ECT. The European Commission also backs the adoption of a ‘subsequent agreement on the interpretation of the ECT’ between the EU and its Member States that would ‘clarify’ that the ECT and its sunset clause do not apply intra-EU. The sunset clause contained in Article 47(3) of the ECT has been described as a major hurdle in States’ attempt to exit the ECT. However, under an international treaty law analysis, strong arguments confirm the availability of an agreement between a subset of ECT Contracting Parties that would exclude the application of the ECT and its sunset clause in their relations inter se—including the envisaged EU agreement—as a suitable and effective alternative to modernisation of the ECT. Not only does this appear as the most desirable outcome in view of the continuing protection of fossil fuels under the modernised ECT, but such an agreement would also be firmly grounded in public international law.

The multilateral Energy Charter Treaty was concluded in the early 1990’s with the purpose of stimulating trade and investment in the energy sector between Western European countries and the countries of Eastern Europe and the former Soviet Union. To that end, rules were established regarding trade, investment, and the transit of energy. This dissertation examines the role that the treaty can play in the current energy transition, by analyzing how it can contribute to the facilitation of investments in the renewable energy sector. The main emphasis in this dissertation is on the investment chapter, which is in practice frequently invoked by renewable energy investors. By reference to economic theories and the business practice in the renewable energy sector, this dissertation comes up with various recommendations that could be considered in the recently initiated modernization process of the treaty. Since the investment chapter is analyzed against the wider background of international economic law, the recommendations conform to contemporary policy tendencies, as preferred by the Energy Charter Conference during the modernization process. Amongst the recommendations is that rules regarding investment protection are of great importance in the renewable energy sector, as practice already demonstrates, but that these should be accompanied by rules concerning investment promotion. Ideally, these rules would be concluded in the context of a broader agreement that also regulates trade, in both goods and services, since investment and trade in the renewable energy sector are closely interrelated.

The idea of foreign investments in nuclear energy sector is relatively new. Foreign investors were for a long time denied an opportunity to invest in the sector which was considered to be too sensitive for reasons of safety and security. Together with the change of an attitude towards foreign private investment in this area a possibility of disputes between foreign investors and the host State also emerged. The Energy Charter Treaty represents the only currently existing comprehensive legal instrument of multilateral character which specifically provides for protection of foreign investments in the energy sector against non-commercial risks and establishes a mechanism for resolution of investment disputes. The article contains a review of the cases of HEP v. Slovenia and AMTO v. Ukraine, the only two arbitrations that have arisen so far under the ECT from disputes concerning foreign investments in the nuclear sector. Their analysis shows that the involvement of State in this sector is indispensable but it should be exercised with respect for rights of investors protected by international law. Regulatory measures introduced by the State to protect certain important interest, such as public health, safety, security or the environment, may be perceived by the investor as having equivalent effect to expropriation. Regulatory uncertainty is considered to be one of the main deterrents to investment in new nuclear plants.

The European Union (EU) and its Member States have taken steps to eliminate intra-EU investment arbitration and the applicability of the sunset clause in intra-EU relations under the Energy Charter Treaty (ECT) through a declaration and a treaty. However, it is uncertain whether either the declaration or the treaty will have the intended effect. The declaration cannot be qualified as an authentic interpretation under Article 31(3)(a) Vienna Convention on the Law of Treaties (VCLT), although it is of a different nature than the 2019 Achmea declarations. It could potentially qualify as an inter se agreement under Article 41 VCLT. The envisaged treaty certainly constitutes an inter se agreement. However, it is doubtful whether either the declaration or the inter se treaty meet the substantive requirements of Article 41(1) VCLT. Although neither Article 16 ECT nor Article 46 ECT explicitly prohibit inter se agreements, arbitral tribunals may find that the removal of intra-EU arbitration and the sunset clause are incompatible with the effective execution of the object and purpose of the ECT as a whole under Article 41(1)(b)(ii) VCLT. However, the inter se removal of Articles 2, 16 and 46 ECT would mitigate this argument. In addition, the notification requirement of Article 41(2) VCLT must be respected.

The subject of this master thesis are the “Foreign direct investments and renewable energy sources: legal analysis of current developments”. The topic is focused on the effects brought by incentivizing long-term investments in the energy sector and the possible ‘scenarios’ that could follow as an outcome. In the introduction, the aim is to describe how the renewable energy sector usually depends on large, upfront investments, which take long period of time until the invested amount is returned. Given the substantial initial capital investment required, many countries (particularly those in the European Union) have enacted schemes, such as feed-in tariffs or other special rates, to encourage long-term investment. Investors in the renewable energy sector have a strong interest in the stability of this regulatory regime and every investor strongly values the continuity of any incentive schemes for renewable energy over the period of expected recovery. The paper also closely observes the impact and the meaning of protection from unwarranted government policy changes that could amount to expropriation or even to a denial of fair and equitable treatment. An important milestone and the key to assurance of the future investors is the Energy Charter Treaty (ECT), originally concluded in the aftermath of the Cold War, with a purpose to integrate the former Soviet Union's resource-rich energy sectors into the European market. The role of the Treaty is briefly discussed as the ECT provides an international legal framework for energy cooperation, particularly in Europe. Since the past decade saw a significantly increased level of investment, including foreign investment as a result of international initiatives on the development of alternative energy sources, a significant number of countries have implemented government subsidies and support schemes to encourage investment in renewable energy. These measures were designed to encourage renewable resources usage and to gradually decrease the continued use of fossil fuels. The fact that companies are deciding to invest in RES definitely has a positive impact and surely is in line with the global measures and efforts to fight the global warming and the climate change, but this also has negative effects. As the number of RES investments arises, the number of disputes under the ECT arises as well and the thesis analyses several relevant cases against EU countries. Before concluding, the paper focuses on the changing role of the ECT derived from the recently arisen disputes and how this could impact the future of RES investments. The author finishes strong, by describing the bigger picture and gives her own input regarding the future of the topic.

On 24 June 2022, the Contracting Parties of the Energy Charter Treaty (ECT) finalized discussions on the modernization of the treaty. After fifteen rounds of negotiations, an agreement in principle was reached to be adopted by the Energy Charter Conference on 22 November 2022 in Ulaanbaatar, Mongolia.1 The ECT, adopted in 1994, establishes a legal framework that aims to promote international cooperation in the energy sector.2 It has a membership of 53 countries primarily from Europe and Central Asia, as well as the European Union (EU) and the European Atomic Energy Community. In recent years, the ECT attracted widespread public attention due to its impact on states’ environmental and climate policies. Particularly, the treaty’s provisions on investment protection, with investor-to-state dispute settlement (ISDS) at the centre, allow foreign investors in the energy sector to challenge adverse state action before international arbitration and claim compensation for measures affecting their business activities. Fossil fuel investors have increasingly used the ECT to challenge environmental and climate measures, such as phasing out coal-fired power generation, banning offshore oil drilling in coastal areas, and prohibiting gas fracking projects. Such cases have fuelled concerns regarding the abilities of governments to roll-out large-scale climate action. The Intergovernmental Panel on Climate Change (IPCC) has warned that international investment agreements (IIAs) like the ECT could ‘be used by fossil-fuel companies to block national legislation aimed at phasing out the use of their assets’.3 With some of these damage claims running into billions of euros, the ECT enables fossil fuel investors to offload the costs and risks associated with their affected assets onto society at large in the face of necessary climate action. This would go, in the words of the editorial board of the Financial Times, against the ‘heart of the capitalist social contract’ and the ‘ability of markets to deal adequately with the challenge of climate change’.4

This chapter explores the Energy Charter Treaty (ECT) and states' right to regulate. The stability of a host state's regulatory framework is of prime importance for foreign investors, particularly in the energy sector. Changes in the host state's regulatory framework (for example, the reduction or removal of subsidies, or imposition or increase of taxes) can cause harm to the investment. Looking at concluded ECT cases, this chapter analyzes how tribunals have balanced states' substantive obligations to foreign investors under the ECT against their sovereign right to regulate within their own territory. In this context, the chapter touches upon recent cases in the renewable energy sector and discusses the extent to which investment protection under the ECT may lead to a so-called ‘regulatory chill’.

The article notes that investments in solar energy have already led to a number of arbitration cases related to the subsequent change in investment incentives. The so-called Solar Cases, initiated by investors under the Energy Charter Treaty (ECT) against Kingdom Spain, Italy and the Czech Republic, focused on the question of whether states could adjust incentives (subsidies and feed-in tariffs) to the detriment of investors after these investors relied on these subsidies to make their investments. Following the results of these arbitration proceedings, the European Union in 2019 decided to revise the text of the ECT. Eight rounds of negotiations were held during 2020 and 2021, the last of which took place in November 2021. Many believe that the reform of the existing treaty has taken too long. In February 2021, France sent a letter to the European Commission on the need for a coordinated EU exit from the ECT. Against this background, Italy’s withdrawal from the ECT on January 1, 2016, as well as Russia’s withdrawal of the signature on the treaty in 2018, are actions that determine the inevitable collapse of the ECT in the very near future. This article is devoted to the study of the causes and legal consequences of these events. Since Russia’s withdrawal from the ECT has already been the subject of study by many Russian and foreign scholars, the author focused their attention on the study of Italian arbitration disputes based on the ECT provisions, as well as on the study of foreign doctrine on this issue.

The European Union (EU) is a venerable institution. Today’s EU is the result of continuing development, becoming both wider and deeper over more than half a century. And yet the EU cannot live in isolation. The EU imports vast quantities of energy from third states and is also both a significant exporter and a significant importer of capital investment. It is, therefore, not surprising that numerous investment protection treaties exist, both between EU member states inter se and between EU member states and third states.The Energy Charter Treaty (ECT) was intended to foster energy exchanges in the Eurasian context, particularly between the developed economies of Western Europe and Japan and the emerging economies of the former CIS. The ECT contains extensive investment protection provisions and is a mixed agreement to which the European Communities and their 27 member states are parties, alongside 24 non-EU members. The present article is intended to review the implications of this in relation to the key area of investment protection. In several respects, the competence exercised by EU institutions in this area is undergoing expansion. The key question is whether this must inevitably lead to conflict between EU and other institutions which to a large extent share common objectives, or whether, with moderation and mutual understanding, an accommodation is possible.

Comprehensive functional data analysis of China’s dynamic energy security index

The Energy Charter Treaty (ECT) in its Part III which regulates standards of protection guaranteed to foreign investors by the ECT States members, together with the Article 24 of the ECT, constitutes a kind of autonomous investment treatment within the ECT. The ECT provides for a very broad spectrum of standards of protection: fair and equitable treatment; most constant protection and security; prohibition of unreasonable or discriminatory measures; „umbrella clause”; national treatment; most favoured-nation standard and effective means to assert the claims. It can be said that at the time of its drafting the ECT enclosed all standards of protection as recognized in BITs and NAFTA. There have been more than 100 publicly known investment arbitration cases where the ECT was invoked, more than 30 of which concluded by arbitral awards. This comprehensive arbitral practice strongly influences the practice applying other IIAs and vice versa.

THE INFLUENCE OF THE ENERGY CHARTER TREATY ON THE EUROPEAN ENERGY MARKET

The landscape of investment arbitration has shifted dramatically, with Europe — and the Energy Charter Treaty (ECT) — playing important roles in that transition. As the number of investment treaty arbitrations continues to mount, the ECT remains the most frequently invoked investment agreement with over 100 publicly known arbitrations filed to date. This chapter begins with some brief remarks on the genesis of the ECT. Each subsequent section focuses on a different aspect of the Treaty’s investment-related features, including the definitions of ‘Investor’ and ‘Investment’ in Article 1 of the ECT; the denial of benefits provision in Article 17(1), the Treaty’s substantive investment protections in Part III; and the dispute resolution mechanisms in Articles 26 and 27. Where useful, the chapter compares the Treaty’s text with analogous provisions in other investment agreements and addresses relevant arbitral decisions under the ECT.

This article provides a critical assessment of the ‘modernisation’ process of the Energy Charter Treaty (ECT). First, the research frames the ECT reform as a means for resolving the clash between the treaty and climate action, that cannot be effectively managed through conflicts rules. Consequently, the text of the ‘modernised’ ECT is analysed, with particular attention to the ‘flexibility mechanism’ for the optional progressive carve out of fossil-fuel investments, which is supposed to represent the key tool to make the ECT climate-friendly. The research shows that even this mechanism would ensure fossil-fuel investments protection at the crucial stage of energy transition. Therefore, the hypothesis of a withdrawal of the EU and its Member States is considered. Before mentioning the potential legal hurdles of this strategy, the research aims at understanding its impact on the political economy of investment law. Hence, the ‘geopolitical’ and ‘neoliberal’ drivers of the treaty are analysed through the notion of ‘institutional project’. Notwithstanding the unclear legal consequences of withdrawal, its symbolic value goes far beyond the ECT alone, certifying an unprecedented setback in the project of investment law.