The Energy Charter Treaty (ECT) is a little-known but controversial trade agreement that potentially stands as an obstacle against the decarbonisation of Central Asia’s energy systems.
Signed in the 1990s, the Energy Charter Treaty aimed to create a more attractive investment environment for European energy companies by protecting investors against the prospect of expropriation and nationalisation, particularly in former Soviet states. Membership of the Energy Charter Treaty has since broadened and it now binds more than 50 countries, including almost all of Europe and the Central Asian countries of Afghanistan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan, as well as Mongolia and Japan.
The Energy Charter Treaty grants sweeping rights to foreign fossil fuel investors, including requiring all investors to be treated as favourably as those from a country’s closest trading partners, and barring domestic companies from receiving preferential treatment. One mechanism in particular, called investor-state dispute settlement (ISDS), has caused much controversy. ISDS allows foreign companies to sue a national government for virtually any action that damages their profits.
The Energy Charter Treaty allows fossil fuel investors to sue states that attempt to transition to greener energy for huge sums in compensation
The Energy Charter Treaty has generated more lawsuits than any other international investment agreement, and continues to shape the regulatory frameworks that underpin global trade in fossil fuels. It allows fossil fuel investors to sue states that attempt to transition to greener forms of energy for huge sums in compensation, making meaningful climate policies potentially hugely expensive.
Chilling lessons from Europe
The mere threat of costly litigation can cause governments to think twice about bold policies, causing what is known as ‘regulatory chill’. This impact of the Energy Charter Treaty is increasingly evident in Europe. For example, in 2017, the French government watered down a decision to ban oil exploration by 2030, delaying it to 2040 after Canadian oil company Vermilion threatened an Energy Charter Treaty dispute.
Even coal, the dirtiest fossil fuel, enjoys protection under the Energy Charter Treaty. Last year energy companies RWE and Uniper both commenced proceedings against the Netherlands, attacking measures taken by the Dutch government to phase out coal energy by 2030, with a combined claim of over USD 2.5 billion. A study by the International Institute for Sustainable Development shows that at least 61 coal-fired power plants are protected in this way in ECT member countries, placing a cloud of uncertainty over the global coal phase-out.
Italy left the Energy Charter Treaty in 2016, but a 20-year ‘sunset clause’ means that it can still be targeted by fossil fuel companies. Rockhopper, a UK-based company, is suing the Italian government for USD 275 million in compensation after new regulations upset its plans for oil exploration off the Adriatic coast. This figure is nearly 10 times the actual cost incurred through Rockhopper’s initial investments.
What this means for Central Asia
Last year’s ‘Net Zero by 2050’ report from the International Energy Agency concludes that no new oil and gas fields or coal mines can be opened if global warming is to be kept within the Paris Agreement target of 1.5 degrees Celsius. But the Energy Charter Treaty forces its members to foot the bill for the stranded assets and investments which are mounting in the fossil fuel sector.
As countries across Central Asia start to increase climate ambition in line with their commitments under the Paris Agreement, there is a growing risk that the kind of cases seen in Europe are more and more likely to emerge in this part of the world, along with an accompanying ‘regulatory chill’.
USD 6-18 billion
The potential cost for the Kazakhstan government in ISDS claims if oil and gas projects under development are cancelled
Litigation under the Energy Charter Treaty has already been seen in Central Asia. According to a 2018 report from the Corporate Europe Observatory (CEO) and the Transnational Institute (TNI), at least five cases had been brought against the Kazakhstan government, with USD 520 million granted in awards. The report cites two cases in Mongolia, with awards of USD 80 million granted, and one each in Kyrgyzstan, Tajikistan and Uzbekistan.
A recent study calculated that in Kazakhstan alone, the cancellation of oil and gas projects under development could cost the government USD 6-18 billion in ISDS claims.
Reforming or rejecting the Energy Charter Treaty
The European Commission calls the Energy Charter Treaty “outdated” and warns it is not aligned with today’s climate commitments. This is why parliamentarians, climate leaders and civil society organisations in Europe are urging EU member states to consider jointly withdrawing from the treaty.
Since 2018, the European Commission, which manages the EU’s membership of the ECT, has embarked on a reform agenda, hoping to align the treaty with climate goals such as the Paris Agreement and update the ISDS mechanism. It has committed to exploring options for withdrawal if it is unable to meet these objectives.
The European Commission’s first formal proposal for modernisations in 2020 suggested a gradual phasing out of protections for existing fossil fuel investments, but even this modest proposal was met with scepticism from other member countries. Leaked cables show that Kazakhstan was among those that rejected the proposition outright. Changes to the Energy Charter Treaty must be agreed unanimously by all members, but with a shift away from fossil fuel production having different economic implications for Central Asia’s oil and gas-producing countries to energy importers in Europe, negotiations on reform of the ECT have been dominated by the need to find compromise, with an inevitable lowering of ambition. Some crucial issues, such as ISDS, are not even being discussed and look set to remain unchanged.
The Energy Charter Treaty is propping up fossil fuel interests and obstructing the clean energy transition across Europe and Asia
The latest proposal for reform, submitted by the Energy Charter Treaty secretariat in late 2021, would allow member states to decide their own timeline for a phase-out of fossil fuel protections. This opens up the prospect of oil and gas-exporting countries opting out of a phase-out altogether.
The European Commission is hoping to conclude reforms on 24 June at a conference of ECT members in Brussels, but significant disagreements persist around protections for fossil fuel investments. Against this backdrop of low ambition, campaigners, parliamentarians and even the European Parliament Committee on International Trade have called for members to prepare for withdrawal. According to leaked cable reports, Germany, Spain and Poland have all said they’re unhappy with the outcomes of the ongoing reform and urge the Commission to look into withdrawal.
As European political opinion turns increasingly against the Energy Charter Treaty, the international scientific community is raising its voice in concern too. The latest IPCC report includes a reference to the ECT for the first time, singling it out as a barrier to efforts to reduce planet-warming emissions. This is why the Energy Charter Treaty matters to everyone who cares about climate change, not just campaigners in Europe. The Energy Charter Treaty is propping up fossil fuel interests and obstructing the clean energy transition across Europe and Asia: someone in Bishkek should be just as concerned as someone in Berlin.
In an age of increasingly terrifying climate projections, a treaty designed to protect corporate profits in the fossil fuel industry is clearly not fit for purpose. There has never been a more important time for us all to say no to the Energy Charter Treaty.