08 Feb 2022

Energy Charter Treaty is not a barrier to climate change targets

Why critics are wrong and how the ECT supports renewables investment, writes Vail Dispute Resolution’s Tomas Vail

Offshore Wind Turbines Farm At sunset

ECT won't deter investment in renewable energy Shutterstock

The Energy Charter Treaty (“ECT”) has been labelled as an “obstacle to renewable energy investment” and in conflict with a state’s ability to achieve its climate targets. At worst, it’s been called “dangerous” and “a threat to democracy” by giving energy companies and foreign investors the ability to sue governments.  

The truth is that there is a long history of using arbitration to resolve disputes involving states and there is no proof that the ECT is keeping states from achieving their climate change targets. 

Criticisms of the ECT focus on its alleged interference with a state’s ability to fulfil its climate change ambitions. Importantly, as parties to the ECT, states expressly consent to allow aggrieved investors to bring arbitration claims against them. In a global context where investment in renewables is needed more than ever, these critiques fail to reflect that most ECT claims against states (approximately 60%) relate to renewables investments and arise due to states failing to honour their commitments to such investors. 

States enact schemes to attract foreign investors to build wind farms or solar power plants and then alter their domestic laws or repudiate their commitments, to the detriment of investors. Consequently, absent another solution, investors who were helping to achieve a state’s climate change goals are forced to bear the burden of such retroactive legislative amendments. Moreover, the instability of domestic regulation erodes future investment in a state’s renewable energy sector. 

In such instances, often the only recourse for investors is to pursue arbitration proceedings under the ECT. 

Arguments that the ECT is a barrier to climate change are a red herring. For example, in the December 2018 “Trial of the Century”, four environmental NGOs challenged the French government’s inaction on climate change. In its defence, the French government asserted that France exceeded the climate change goals required under EU and other international agreements. France highlighted that it reduced greenhouse gas emissions and passed three carbon neutrality laws in 2019 and 2020, engaged in waste-reduction, and developed the renewable hydrogen sector. However, the court disagreed that France was doing enough in terms of climate change legislation. 

Significantly, there was no mention in France’s defence that the ECT’s arbitration mechanism had impeded its ability to fight climate change. In fact, there was no mention of the ECT at all. While states need to do more to fight climate change, the ECT is not stopping them.

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Moreover, states themselves recognise their international law obligations to compensate investors who suffer losses due to state actions. For example, in the Vattenfall case, the German Parliament modified its legislation to discontinue nuclear power by 2022. The state’s new framework harmed Vattenfall, a Swedish state-owned company, which sought compensation for the loss of its investment via ECT arbitration. By ultimately agreeing to settle the dispute, the state implicitly recognised that investors are entitled to compensation in such circumstances. 

Whilst the ECT supports investment in renewables, this is potentially undermined by decisions such as Achmea and Komstroy. 

In Slovak Republic v. Achmea, a landmark decision issued in 2018, the European Court of Justice (ECJ) infamously announced that states must abstain from referring disputes involving EU law to tribunals outside of the EU legal system. In Moldova v. Komstroy, the ECJ continued the trend of asserting EU control over international arbitration. It declared that it had jurisdiction to clarify the meaning of the ECT because the EU is a party to the ECT and the ECJ was empowered to interpret the acts of the institutions, bodies, offices or agencies of the EU. 

It is worth noting that the EU represents one of more than 50 parties to the ECT, which includes both EU and non-EU member states. And, as an international treaty, the ECT is subject to interpretation under the Vienna Convention of the Law of Treaties’ (VCLT). However, the ECJ failed to apply or even mention the VCLT in its decision, thereby seeking to assert the supremacy of EU law over international law.

In alignment with international law, the Komstroy decision does not affect the terms of the ECT and so far no investor-state arbitration tribunals have followed the ECJ’s approach. However, these decisions aimed at weakening the application of the ECT will have the unintended effect of undermining the EU’s role in the international legal order and deterring investors from selecting arbitral seats in EU states. Moreover, providing a stable legal regime ultimately supports investment in the wind and solar industries.  

As important discussions continue regarding modernising the ECT, protections for wind and solar investors to foster further investment should be respected, as should basic principles of international law. 

London-based Tomas Vail is founder of independent disputes practice Vail Dispute Resolution

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