25 October 2022
France has this week confirmed its intention to terminate its membership of the Energy Charter Treaty (ECT), becoming the fourth signatory to announce its withdrawal in the last two months, alongside the Netherlands, Spain and Poland.
This wave of withdrawals comes after the announcement of the so-called 'ECT modernisation' plans which we covered last month. The modernisation efforts were undertaken with a view to preserve states' rights to pursue public policy objectives in the climate context. The changes were made in response to the often-debilitating threat of investor-state dispute settlement (ISDS) arbitrations which has led to a state of stagnation or 'regulatory chill' by contracting states on matters of climate policy.
While the aim of the ECT modernisation was to increase the level of states' protections under the treaty to support them in the green transition, the latest raft of withdrawals is a clear indicator that states don't feel this goal has been achieved. The Dutch Government last week commented that the treaty was simply not aligned with the Paris Climate Accords, while France confirmed that quitting the ECT was 'coherent' with the Paris Agreement.
In practice, the withdrawals don't mean much in the short-term: even after formally withdrawing (which requires one year's notice), withdrawing states will remain subject to Article 47, also known as the 'sunset clause', which provides investors with 20 years' continued protection.
Take Italy for example, who withdrew in 2016 but was recently the recipient of a €190 million award against it relating to a proposed oilfield in the Adriatic Sea. Legal recourse for investors by means of an ISDS arbitration will therefore remain a possibility in France, the Netherlands, Poland and Spain until 2043 at the very earliest.
If nothing else, however, a strong political signal has been sent out by these states that they want to address the climate crisis without facing the risk of arbitration awards running to several hundreds of millions; money that could instead be spent contributing to the acceleration of energy transformation away from fossil fuels and towards renewable sources.
A meeting to approve the new ECT text is scheduled to take place this November. States such as Germany and Belgium have already indicated that they are considering abstaining from voting on whether the EU should endorse the new ECT text. If enough countries abstain or vote against the text, then the European Commission would not win EU-wide support for it and the proposed reforms could effectively be blocked.
While the uncertainty surrounding these reforms (and whether they will actually be implemented) is no doubt troubling for investors, one thing is sure: access to recourse via the ISDS mechanism will remain for some time to come – even if a contracting state has signalled its desire to leave.