At a time of accelerating climate breakdown and heightened energy security concerns, there’s a great need to defuse costly arbitration claims under the 1994 Energy Charter Treaty (ECT) – which, it’s argued, constrains the energy transition. Yet resolution remains elusive.

The ECT is a binding international agreement that establishes ‘a multilateral framework for cross-border cooperation in the energy industry’. Crucially, it enables foreign investors to bring action against host governments through international arbitration tribunals where they’ve reason to believe their commercial interests could be adversely affected by energy policy and incentive changes implemented in breach of the international obligations of the host state under an investment agreement in force.

Italy was first to exit the ECT, in 2016, yet still faces costly ISDS actions. Since then, despite prolonged negotiations that achieved consensus on modest reforms, France, Germany and Poland have notified their withdrawal and will exit by the end of 2023, while Luxembourg will leave by 2024, explains Ignacio Arróniz Velasco, Senior Policy Advisor on EU Climate Foreign Policy at think tank E3G. Denmark, the Netherlands, Portugal, Slovenia and Spain are preparing to leave and Ireland has said it would support joint withdrawal at EU level. Some countries are still in favour of staying while others are watching before deciding. The UK government, strongly supportive of reform and continued membership, said in September that it would consider withdrawal if modernisation isn’t agreed in November as an unreformed treaty could threaten its clean energy transition.

For many EU Member States, reforms are simply too little, too late and follow long-standing opposition by the EU and individual countries to the growing use of ISDS arbitration by foreign investors looking to overturn both national and EU legislation, notably through Article 26 of the ECT.

Philippe Raybaud, Chair of the IBA Power Law Committee and a partner at Jeantet in Paris, explains that, firstly, the ECT is ‘not in line with the CO2 emissions reduction objectives. Second, it does not allow ECT signatories flexibility in renewable energy support mechanisms’, which need to be regularly updated.

Lukas Schaugg is an international law analyst at the International Institute for Sustainable Development. He highlights the risk to timelines under the Paris Agreement and to flexibility for renewable policy as issues for the ECT, and also points to the need for policy flexibility for experimental technologies such as hydrogen.

In a September 2022 briefing, E3G also stated that the proposed modernised ECT is still ‘a very tall barrier to climate action’, noting that ‘carveouts from the new ECT proposed by the EU and the UK are not compatible with the Paris Agreement’. It added that exceptions would ‘create massive loopholes that investors and ECT tribunals can abuse to extend protections to investments incompatible with net zero, such as unabated gas plants, LNG [liquefied natural gas] ports and gas pipelines’.

E3G’s report also expressed concern that the delay in removing investment protections for new fossil fuel production ‘may lead to frontloading the current investment pipeline’, as appears to be happening already in the UK’s North Sea waters. It considers ‘the EU and UK will not reclaim enough policy space to ensure an orderly and just transition to a decarbonised power system […] Their available policy toolbox will continue to be strongly limited by the risk of ECT litigation until the mid-2030s’.

A tidy, coordinated withdrawal is now far from assured, while support for reforms has drained away as many EU Member States have lost patience with negotiations and look to exit speedily. Deadlock over ECT reforms ‘has obviously been a bit of an embarrassment for the Commission’, says Schaugg, with a non-paper on options, which was leaked in February, pointing to internal discussion over its formal position. The three options included collective withdrawal without reforms; partial withdrawal with some EU Member States remaining in the ECT; or all agreeing to reforms and then withdrawing. Discussions are continuing, but the European Commission now firmly advocates collective withdrawal without reform. Yet Member States such as France and Spain are now thought likely to be more flexible towards partial withdrawal without reform.

The Commission’s non-paper stressed that, without reforms, remaining in the ECT is ‘not in line with the EU policy on investment protection or the EU Green Deal [and is] neither legally nor politically sustainable’. It suggested collective withdrawal without reform as the preferred option, in parallel with an inter se agreement confirming non-application of ECT investor protection provisions between EU Member States to neutralise most arbitration claims. The option of collective withdrawal after reforms, set out in a Commission proposal in July, could arguably have helped resolve several issues but failed to get adequate support for modernisation. The Commission confirmed in June that under these circumstances, ‘we consider that the EU, Euratom and Member States should carry out a coordinated withdrawal from the ECT’.

Withdrawal by only some Member States is fraught with legal and policy risk, requiring authorisation under Article 2(1) of the Treaty on the Functioning of the EU, and those remaining to approve reforms in a specified period. There are risks to the integrity of the EU’s legal and policy framework, and it would struggle to get backing from the European Parliament. Under the Swedish Presidency this idea gained traction, according to Arróniz Velasco, but it’s ‘procedurally heavy […] not a very clean choice’.

Meanwhile, Raybaud believes that a coordinated exit could work. ‘My understanding is that a bloc-wide collective withdrawal of the EU Member States would give the majority required to repel the 20-year sunset clause.’ Yet, while this could happen, ‘the most likely [scenario now] is that EU Member States will withdraw individually with a domino effect’.

The ECT Secretary-General, Guy Lentz, argued in February that leaving the treaty without reform leaves the EU open to arbitration claims for longer and also to legal uncertainty. He also stressed that without EU pressure, non-EU parties face carbon lock-in. Yet whatever the merits of these claims, the EU’s plans for collective withdrawal are being rapidly overtaken by events.

Neither the European Commission nor the Energy Charter Secretariat responded to Global Insight’s request to update their comments made earlier in the year.

Image credit: Ignacio Ferrándiz/AdobeStock.com

The UK Home Secretary, Suella Braverman, has reiterated her desire to leave what she calls the ‘politicised’ European Court of Human Rights (ECtHR), which implements the European Convention on Human Rights (ECHR). Given the ECtHR has the power to overturn domestic policy if it breaches the fundamental human rights outlined in the ECHR, Braverman and some other government ministers see it as a threat to the UK government’s sovereignty, particularly in regard to immigration policy.

For example, the government’s controversial policy of sending asylum seekers to Rwanda was set back by the ECtHR’s use of Rule 39 injunctions, while in deciding against the government in a case concerning the Rwanda policy in June, the UK Court of Appeal drew upon the ECHR. ‘In ruling that the Rwanda policy was unlawful, the [UK] Court of Appeal found that sending any asylum seeker to Rwanda would constitute a breach of Article 3 of the [ECHR], which prohibits torture, inhuman or degrading treatment or punishment’, explains Mark Guthrie, a human rights lawyer and a consultant at Red Lion Chambers in London. The case will now go before the UK’s Supreme Court.

The threat to withdraw is extremely dangerous, and the implications would be profound and far-reaching, says Roberta Haslam, an immigration partner at Bindmans in London. The UK currently has no alternative codified legislation enshrining human rights law in the UK, with the discussion of a proposed ‘bill of rights’ on hold. ‘Those living in and entering the UK would be left without the protections offered by the ECHR, an internationally recognised and respected Convention, and oversight by an international court’, explains Haslam.

To depart from the ECHR would isolate the UK on the international stage, at a time when leaving the EU has already undermined the country in this respect, she says. ‘It would undermine the UK’s role on international human rights issues and would also risk destabilising the UK, with the ECHR playing a fundamental part of the Good Friday Agreement and the Northern Ireland Protocol.’ 

There would be a substantial impact on both lawyers and their clients, with the former left without key tools to protect their clients’ fundamental rights and freedoms. Haslam explains that the rights affected concern everyone and aren’t solely related to immigration and asylum. ‘The ECHR was established to promote freedom, democracy and human rights, and provides far ranging rights including on freedom of speech, expression, to education and to fair trial’, she says. 

If the UK were to leave the ECHR, lawyers would still have other tools to rely on, such as habeas corpus, the Magna Carta, the UN Convention on the Rights of the Child and other international conventions and treaties, to seek to protect and enforce their clients’ rights. ‘However’, explains Haslam, ‘the toolkit […] would be much depleted.’

What’s more, lawyers and their clients wouldn’t be able to plead the ECHR’s articles across all practice areas – from family law to town planning. This would limit their ability to challenge the government, says Rubin Italia, a solicitor at Stokoe Partnership Solicitors in the UK. ‘A significant part of the ECHR has been used in public law challenges against the government with a great deal of success’, he explains.

Italia highlights that more countries are now engaging with the ECHR and following it correctly. In no other jurisdictions are ministers suggesting their country might leave. Yet, believes Italia, it’s highly unlikely that the UK will actually depart. ‘There would be a significant backlash from businesses and corporations’, he says.

Randazzo adds that a UK withdrawal could threaten the EU–UK Trade and Cooperation Agreement (TCA), which governs the relationship between the two jurisdictions post-Brexit. ‘TCA contains an obligation imposed on both parties to continue their commitment to human rights. A “serious and substantial” failure to fulfil this obligation might lead to the suspension or termination of the Agreement by the other party’, he explains. 

Further, it’s a requirement of membership of the Council of Europe that member states are parties to the ECHR. A UK departing the ECHR would have to leave the Council, joining Belarus and Russia as the only other European states who aren’t members. ‘Neither is a democracy nor uphold the rule of law’, says Guthrie. ‘They would be the UK‘s bedfellows were it to leave the Council of Europe. The UK would lose all moral authority to promote and protect human rights globally.’ 

Image credit: European Court of Human Rights, Strasbourg, by dbrnjhrj - stock.adobe.com