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Opinion

23 May 2022

Author:
Fabian Flues, PowerShift

Billions paid out to coal companies show how investment rules are obstructing the green transition

The transition away from fossil fuels is urgent. But existing investment agreements mean this transition will be pricey and difficult, as illustrated by German coal companies using the Energy Charter Treaty to get rich on taxpayer money.

Germany’s policy of phasing out coal-fired power generation by 2038 will come at a huge price: the state is paying out €4.35 billion in compensation to coal companies. Independent experts, environmental organisations and the European Commission are all convinced this sum is far too high, and the European Commission are investigating it as suspected illegal state aid. But how did the coal companies manage to extract this much taxpayer money?

As our recent report shows, one important factor was the Energy Charter Treaty (ECT), an international trade and investment agreement between countries in Europe and Asia which gives energy companies the ability to sue states if laws, regulations or court decisions impact their profit expectations. It doesn’t matter whether those laws are aimed at supporting human rights or tackling climate change. Cases under the ECT are decided behind closed doors by three private lawyers in a system called investor-state dispute settlement (ISDS).

In ISDS cases where investors are successful they are often awarded large amounts of compensation from states, which usually include hypothetical future profits. Decisions made by an ISDS tribunal are very difficult to appeal and are enforceable worldwide, making it a powerful tool for corporations to pressure governments.

Germany, like many other states, has been on the receiving end of such cases. It has been sued twice by the Swedish energy company Vattenfall: once over environmental regulations placed on a coal power station and a second time for the exit from nuclear energy following the Fukushima disaster. Both times the government settled the case after making concessions to the company.

To avoid the repeat of an expensive and time-consuming ISDS case – Vattenfall’s second one lasted almost 10 years and left German taxpayers with a legal bill of more than €20 million – the government decided to negotiate a contract with the coal companies which would prevent them from using the ECT to sue Germany for the coal phase-out. The companies agreed to waive their rights to sue under the ECT, but demanded extra cash: the German government admitted the amount of compensation the companies are receiving increased due to the waiver. Experts from the climate think tank Ember taking into account the current operating conditions for coal powerplants, concluded that a must smaller compensation payment would have been justified – less than 10% of the final total.

The German coal exit demonstrates how the ECT creates a “heads I win, tails you lose situation” for fossil fuel companies looking for ways to obstruct the energy transition. They can extract large amounts of public money for the fossil fuel phase-out by (implicitly) threatening to sue and hoping governments pay voluntarily, as in the German case. Or they can actually start an ISDS case, as the coal companies Uniper and RWE did against the Netherlands.

Worryingly for governments which are unwilling or unable to shower fossil fuel companies with money for the energy transition, the alternative is to delay the fossil fuel phase-out to placate the companies. This already happened in France, where the government postponed a drilling ban for oil and gas after receiving a letter threatening an ISDS case. And New Zealand’s government chose not to join the Beyond Oil and Gas Alliance to avoid liabilities under its investment treaties. In such situations, the profits of fossil fuel companies are explicitly placed before the urgent need to transition to green energy.

Many investment treaties, the ECT being the most prominent example, seriously impede governments’ ability to fight climate change, guarantee environmental rights, and shift the financial burden of the energy transition onto the fossil fuel companies which have profited so handsomely over the decades. They reward companies for poor investment decisions that lacked any due diligence or appreciation of the threat climate change poses to their business model and our future.

But it’s not too late for governments to change course. In a few weeks the 53 member states of the ECT will have to decide if they want to stay in a treaty which – even after modest reforms – remains incompatible with the Paris Agreement. By exiting the ECT and other similar investment agreements, governments can restore democratic accountability and support the fight against the climate emergency at the same time.

Fabian Flues is a campaigner and researcher on trade and investment policy at PowerShift, based in Berlin.