The ECT collapse and the way forward

On October 18^th, the Dutch Minister for Climate and Energy Rob Jetten announced that the Netherlands intends to withdraw from the Energy Charter Treaty (ECT), an international agreement aimed amongst others at promoting and protecting foreign investments in the field of energy. This decision is quite remarkable considering that the ECT followed from a political initiative by former Dutch Prime Minister Ruud Lubbers in the early 1990s. Efforts have been made in the last five years to try and modernize the ECT, due to the extensive protection it grants to heavily emitting companies. However, Minister Jetten indicated that the proposed revision still remains insufficiently in line with Dutch and European climate targets. The decision to exit the treaty on the basis of climate considerations marks a historic step and should ideally initiate a broader process of rethinking the Dutch trade and investment treaty policy from a climate perspective.

The Energy Charter Treaty and the risks for climate policy

The ECT is an international agreement aimed at establishing a framework for cooperation among participating states in the field of energy. This agreement includes certain features in the realm of investment that are increasingly problematic, especially if looked at from the perspective of the current climate crisis. More specifically, the ECT articulates a set of rules for the protection and promotion of foreign direct investment that are very broadly worded and extend to all types of energy sources, thereby granting protection also to the fossil fuel industry. Rules like the fair and equitable treatment and protection from expropriation offer very generous safeguards to investors (with no corresponding obligations) and significantly restrict the ability of States hosting these investments to pass climate friendly laws and regulatory measures to fight the climate crisis. These standards basically require restrictive impact on investments – even if ensuing from general, urgent, public interest measures – to be compensated. This is complemented by an equally generous, in fact exceptional, dispute settlement mechanism (ISDS) that allows investors to challenge these measures before international investment tribunals. These tribunals are composed of arbitrators chosen ad hoc by the parties. They operate outside of the domestic judiciary system and are only accessible for claims filed by investors. This means that (host) States cannot initiate claims against investors to hold them accountable. What is more, this additional and privileged system of dispute settlement does not provide any access for the rest of the population, including communities or individuals that might be directly affected by these investments. ISDS has been generating severe distortions in the past decades, with the very recent example of Italy being condemned in an ECT arbitration to pay 250 million euros to the English company Rockhopper for passing laws enacting environmental protection of the Italian coastal marine environment.

It should be added that the ECT is a particularly ‘sticky’ treaty. Even if States withdraw from the agreement, investment protection standards remain in principle applicable for 20 years post withdrawal, as provided by the so-called sunset clause included in the text.

European exodus from the ECT

An attempt was led by the EU Commission to modernize the treaty and address some of the shortcomings indicated above. Yet, this modernization did not yield satisfactory results, with loopholes in the amended substantive standards, no meaningful change in ISDS, and a continued protection of at least ten years for existing stocks of fossil fuel investments in the EU and the UK, and indefinitely outside those regions.

For this reason, Dutch Minister Jetten announced that the Netherlands intends to withdraw from the ECT. The Netherlands is currently facing two claims by German energy companies RWE and Uniper over its decision to phase out coal-fired power generation, which Minister Jetten referred to as ‘bizarre claims’. These may have undeniably contributed to the shift in the government’s stance on the ECT. Other EU member states that have experience with ISDS, like Poland, Spain, France, Germany, and Slovenia, have also announced their intention to withdraw from the treaty. A blocking minority in the Council of the European Union prevented the EU from adopting a common position on the modernization of the ECT, with the final vote being postponed to the Energy Charter Conference in April 2023. But in light of declining support in European capitals, and the European Parliament urging the Commission to start preparing a coordinated EU withdrawal, continued membership of the EU in its own right seems rather unlikely. In case of withdrawal, it would be key to limit the sunset clause mentioned above to avoid future liability. This could arguably be done by adopting an inter se agreement among the withdrawing states setting aside this provision.

Rethinking investment treaty policy

The recent events in relation to the ECT also have implications for the other 2,000+ international investment agreements currently in force, many of which still contain old-style provisions on investment protection and ISDS. The Netherlands has a network of 75 bilateral investment treaties (BITs), mostly with countries in Africa, Asia, and Latin America. These BITs have been frequently used by foreign investors to obtain compensation for public policy measures, including by some of the largest fossil fuel companies in the world. The Netherlands adopted a new model investment treaty in 2019 for use in (re-)negotiations with partner countries, with the aim to exclude protection for mailbox companies among other things. Yet, the model still provides a broad scope of protection for investments, including in fossil fuels. The new model does neither distinguish between sustainable and unsustainable investments, nor sets directly enforceable investors’ obligations. It also keeps leaving affected communities and/or individuals out of the equation. Continued, unqualified, long-term protection for both existing and new investments in fossil fuels seems rather out of sync with the recent statements by Minister Jetten. Such unqualified protection could give rise to situations of large financial payouts to fossil fuel investors, thus interfering with the goal of the Paris Agreement to align finance flows with a low-carbon trajectory. The decision to withdraw from the ECT out of climate concerns should hence spur a broader rethinking of the Dutch trade and investment policy and the role of BITs in achieving the climate targets in particular.

dr. Federica Violi is universitair docent internationaal en Europees Recht aan de Erasmus Universiteit Rotterdam. Bart-Jaap Verbeek is onderzoeker op het gebied van handels- en investeringsbeleid.