On 30 May 2024, the European Council adopted decisions enabling the European Union (“EU”) to denounce (the proper international law term for ‘withdraw from’) the Energy Charter Treaty (“ECT”). In adopting its decisions, the European Council cited concerns about deadlocks over efforts to bring the ECT into alignment with the climate change and sustainable development goals. Of course, this was not the real reason for the EU’s abandonment of a critical post-COMECON treaty that it had created three decades ago.
Background
The European Energy Charter declaration was signed in 1991, against the backdrop of the end of the Cold War and the fall of the Berlin Wall. The ECT followed in 1994 and came into force in 1998. It is a multilateral treaty. Although its terms do not have a geographical focus, and its norms could be applied to any State in the world that signed up to it, it was initially designed to provide legal structure and economic predictability essentially to integrate the supply of energy resources located in the Former Soviet Union with the energy markets of Western Europe. As of today, the ECT’s membership encompasses the EU itself, most of the full EU membership and 49 others, including States in Europe and Asia.
Over the years, the European Commission (not the member States per se) has become disenchanted with its brainchild. First, Russia never ratified the ECT, meaning that the major energy supplier to Western Europe (hydrocarbon and mineral) was outside the system. Second, the European Commission became allergic to intra-EU investment treaty arbitration (which are expressly allowed by the terms of the ECT); for the past decade or so, the European Commission kept insisting that the evolution of the EU’s internal position on this should be read to have altered the terms of the ECT but no ECT tribunal considering the issue ever adopted the European Commission’s vision of international law principles. Third, the EU’s response to the armed conflict in Ukraine has included a disengagement from Russia as an energy supplier. The EU’s referencing of environmental protection and climate change goals is a mere afterthought of virtue-posing.
Although in-principle agreement on the reforms was reached on 24 June 2022 (on which Volterra Fietta reported here), the reform proposals failed to receive majority support at the European Council in November 2022. As a result, the ECT’s Contracting Parties vote on whether to adopt the modernisation proposal was called off. Since then, the Contracting Parties have remained deadlocked over proposed ECT reforms. The recent EU roadmap for the ECT expressly cited this deadlock as a key reason for its withdrawal.
Next Steps
The decision to withdraw from the ECT entered into force on 30 May 2024. It will take effect one year after the receipt of the notification to the depositary of the treaty. It is likely, however, that the EU will remain bound for a transitional “sunset period”, specified as 20 years under the ECT.
At the same time, the European Council has confirmed that member States who wish to remain party to the ECT will be able to vote during the upcoming Energy Charter Conference by approving or not opposing the adoption of a “modernised” ECT. The conference is expected to take place before the end of 2024.
Comment
To combat climate change, the transition towards clean and renewable sources of energy remains a priority for many States. For some observers, the withdrawal of the EU from the ECT will be disappointing because of the significant role that it could have played in encouraging investment into clean and renewable energy. Ironically, the majority of investor-State arbitrations brought under the ECT (including many of those brought against EU Member States) have been brought by foreign investors in the renewable energy sector whose investments have been harmed by EU Member States which have been forced to their change pro-renewable energy policies by the European Commission itself (whilst pursuing its own EU constitutional objectives).
The EU’s withdrawal from the ECT will have the potential seriously to affect the future protection of foreign energy investors in their dealings with the EU. It will adversely affect investors in traditional fossil fuels as well as investors into renewable energy.
Prudent investors in the energy sector should consider any future ECT reforms and the EU’s upcoming withdrawal carefully. Affected investors will have a number of steps that they can begin taking under international law (such as other foreign investment protection avenues) in order to mitigate their potential political risks, particularly within the EU as a result of the European Commission’s erratic approach to renewable energy.
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