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30 Jul 2021

Elizabeth Meager, Capital Monitor

The Energy Charter Treaty: How an obscure investment treaty is delaying climate action

'How an obscure energy treaty is delaying climate action', 30 July 2021

"Energy companies have increasingly come under the cosh in recent years as the most obvious contributors to environmentally harmful carbon emissions. But some have been fighting back through a little-known treaty that enables them to sue governments outside the traditional court system.

And concerns are rising fast among activists – and some governments – over the chilling effect that the Energy Charter Treaty (ECT) can have on climate change policy. A few countries have withdrawn from the agreement and there is a push to modernise it. But progress on that is slow.

Meanwhile, the potential size of claims – the number of which looks set to rise substantially – can run into the tens of billions of dollars. That could be a major deterrent to climate policy reform, even for wealthy governments.

In place since 1991, the treaty has 54 signatories, including most of the G20 countries (see map below). It allows energy companies to bring investor-state dispute settlements (ISDSs) against countries that introduce policy changes that would affect their business...

...ISDSs were conceived in the 1950s by a Royal Dutch Shell executive, no less. The ECT itself was a legacy of the end of the Cold War, a time when major investment opportunities emerged for Western corporations in post-Soviet nations.

The thinking was that, before making such an investment, foreign companies would require some form of legal certainty to protect against sudden policy changes, including expropriation of their assets. This causal link has not been proven, but the treaty maintains its supporters: wealthy governments that rarely lose cases and natural resource-rich countries still looking to attract investment.

In any case, under ISDS proceedings governments tend to lose even if they win, often spending millions on a lengthy arbitration process. The average amount of public funds spent on fighting an ISDS case is between $8m and $10m.

Some countries, such as Italy, have withdrawn from the ECT. But even so, a sunset clause allows companies to bring claims for up to 20 years after a country exits the treaty, as the Italian government learnt just this week..."