The evil spirit of a fossil investment treaty threatens to continue to haunt Europe – and with it the Netherlands, which is explicitly trying to shake off this treaty. This week, EU member states are trying to agree on how to deal with the Energy Charter Treaty (ECT) – an international investment treaty that friends and foes now regard as outdated.
The ECT protects investments in fossil energy and offers companies the opportunity to submit claims worth millions against governments that take climate measures. That risk is certainly not theoretical: two billions of claims have been submitted via the ECT against the Netherlands alone in recent years. Recently, British oil company Rockhopper successfully claimed $190 million in a case against Italy. The number of similar cases has exploded since 2015, the year of the Paris Agreement.
Read also: How an old treaty can seriously hinder European climate ambitions
In such cases, an arbitration tribunal decides behind closed doors. Monday according to research by the British newspaper The Guardian that in the selection of the arbitrators who are independent on paper often have at least the appearance of a conflict of interest, and the arbitrators often wear ‘double hats’. Critics have also long pointed to the deterrent effect of the ECT in the development of new climate policy.
This explains why a real exodus from the treaty has started recently. After the Netherlands, Spain and France, among others, Germany also indicated its intention to leave the ECT last Friday. On the other hand, the European Commission, among others, continues to argue fiercely that it is better to reform the treaty from within and that departure poses great dangers. This position is important because, in addition to all individual EU countries, the EU as a group of countries is also affiliated with the ECT.
The discussion is heating up in the run-up to a conference of ECT parties in Mongolia next week. There, all 53 contracting parties – including Azerbaijan, Japan and Kazakhstan – must unanimously agree on a reform.
Expiration clause
Basically, the disagreement is about the question: how do you defuse a zombie? The zombie in question is the infamous expiration clause in the ECT. This prescribes that if a country has withdrawn from the treaty, the investment protection will still apply for another twenty years. This means, the Commission believes, that it is better for countries to agree to a reform of the treaty that smoothes out the sharpest edges than to just leave and drag the zombie clause behind them.
It is difficult to verify this statement properly, because the reform that the Commission agreed with the other parties is secret. But, emphasizes Martin Dietrich Brauch, investment law expert at Columbia University, “these are marginal adjustments anyway. Because at its core, it remains a very outdated and flawed investment treaty that is completely incompatible with any climate goal.”
Brauch rejects Brussels’ argument that the reformed ECT is important because it also protects investments in sustainable energy. “That does not remove the problems with this type of arbitration. Numerous studies have shown that investors do not need this at all. There are plenty of ways to provide protection through normal law.”
There are plenty of ways to provide protection through normal law
Brauch has been arguing for some time that EU countries decide together to leave and cancel the treaty among themselves. After all, most of the disputes are between investors from EU Member States and those Member States themselves. The protection of such an investor then lapses if his country of residence no longer participates in the ECT.
Such a joint exit, for which the enthusiasm is growing, is on the table in Brussels this week. The House of Representatives has already urged Minister Rob Jetten (Climate, D66) in a motion to make a case for this option at a European level.
But the European Commission is also opposed to this. She doubts whether arbitrators will accept such a mutual statement during the twenty years after departure. “Arbitrators tend to just ignore anything the Commission or the Court of Justice says,” said a Commission source involved in the negotiation. In other words: even with this option the zombie keeps popping up.
Take back control
“There is always that danger,” admits Brauch. “But it cannot be an argument to accept that and agree to a reform that yields little. This is a crucial time for states to take back control.”
Christina Eckes, professor of European Law at the University of Amsterdam, also advocates a joint European departure. She believes that arbitrators will subsequently recognize a possible mutual agreement by the EU under international law. She does not want to exclude a certain degree of legal uncertainty: “There is always that. But there are no convincing positive arguments to remain party.”
If the EU remains a party to the ECT, the Netherlands will also remain bound by the treaty. In a letter to the House of Representatives, Minister Jetten recently emphasized that ‘the vast majority of the provisions of the ECT’ will then remain binding for the Netherlands. What he means by this remains unclear and the claim is not undisputed. Eckes disputes that the Netherlands can be bound to it via the EU investor-state dispute settlement (ISDS) that makes the claims possible. She emphasizes that such investment protection requires “explicit consent” from all member states – which automatically expires when EU countries have left.
Analysts see a break with the power of the arbitration courts in the discussion and the exodus at the ECT. ‘Tidied up’ with the ‘investment protection madness’, the Eurointelligence economic newsletter indicated Germany’s departure from the ECT on Tuesday. But even if it comes to a joint European departure in the near future, it will remain uncertain for years to come how arbitrators will judge claims. The zombie can keep popping up.