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Towards Europe’s 2050 Climate Neutrality: Is There a Place for the Energy Charter Treaty?

27 Jan 2022
By Dr Ivana Damjanovic
Exit the Energy Charter Treaty action in Brussels, July 2021. Source: Friends of the Earth Europe

Achieving climate neutrality is a major goal for the European Union. To make a sufficient contribution in this sector, the Energy Charter Treaty must be reformed.

In order to lower emissions by 55 percent by 2030 — as compared to 1990 — and to achieve climate neutrality by 2050, Europe must profoundly transform its energy sector. A strategy to achieve this has been proposed in the European Green Deal (EGD) policy. Incrementally, but nevertheless significantly, the European Union (EU) will be reducing its fossil fuel imports — substantially reducing coal imports by 2030, which are estimated to drop by 71-77 percent compared to 2015. After 2030, both oil and natural gas imports are set to decrease by 78-79 percent and 58-67 percent, respectively. While the EU intends to rely on oil and particularly gas imports for another decade, the decline in investments in fossil fuel infrastructure in the EU’s neighbourhood will likely be immediate. Nevertheless, in the long term, the EGD could lead to increased trade and investment in green electricity and hydrogen, which will have an essential role in the EU’s green future.

A stable regulatory framework that will enhance economic opportunities for green investment is of importance to the EU. During the energy transition, the security of fossil fuels — particularly natural gas — remains an important goal. In addition, as competing regulatory frameworks for a future energy system emerge, the EU needs to strengthen its geopolitical stance by positioning itself as a setter of new norms and standards in the transition to green energy. In the Central Asia region, the EU is notably competing with China’s investments in critical infrastructure through its financially powerful, and in contrast to the EU’s approach, normatively unconditional Belt and Road Initiative (BRI).

The Energy Charter Treaty (ECT) is one such regulatory and political tool to which the EU and its member states are signatories. Concluded as a multilateral treaty in 1990s, the ECT aimed at opening trade, facilitating energy transit, protecting private investment, and providing an international arbitration mechanism for resolving disputes between investors and states. Its 56 members include countries in Europe, Central Asia, and Japan, with many more states outside of these regions being involved in the ECT process as nonbinding members, observers, or acceding states.

With the EU’s enlargement to Eastern Europe and the development of the EU single energy market, the significance of the ECT for the EU has diminished internally. However, the ECT is still perceived by the EU as an important multilateral tool for exerting its influence on global energy markets. Arguably, the ECT has lost its multilateral relevance, particularly following Russia’s withdrawal from the ECT in 2009. The EU’s efforts to revive the ECT process through new initiatives, such as the International Energy Charter, have had limited success. In 2016, Italy also withdrew, with Australia being the latest country to terminate its participation in the ECT.

Notably, the ECT undermines the EU’s climate ambitions, both domestically and internationally. In the 1990s, the ECT was intended to fill a gap in the EU energy framework, based on a philosophy of trade liberalisation of energy materials and products. However, today the protection of fossil fuels investments under the ECT serves as a significant barrier to the regulatory efforts of states in adopting energy and climate policies — so called “regulatory chill.” In particular, the ECT has arguably not fulfilled its main purpose, as it was largely utilised as a tool against EU states by their own investors. Controversial incidents include the Swedish company Vattenfall challenging Germany’s decision to phase out nuclear energy, and most recently, claims against the Netherlands for its policy to phase out coal power by 2030.

The EU has thus initiated a major reform process of the ECT, which should ultimately bring the ECT in line with the EGD objectives and the Paris Agreement. The existing ECT arbitration mechanism should also be replaced with a Multilateral Investment Court, in accordance with another EU international reform initiative.

The EU has proposed to remove future investments in coal, oil, and gas from the investments protected by the ECT, with significant exceptions for certain gas power plants and pipelines enabling the use of renewable and low-carbon gases, which would receive protections for another ten years, or until 2040 at the latest. The modernised ECT should protect future investments in hydrogen, insulation materials, and biomass. In view of the long-term orientation of investment in the energy sector and the need for private funds to support the rapid transition to green energy — a costly and risky exercise, given the currently insufficient market demand — a stable investment regulation framework could give additional assurances to commercial investors, and thus support the energy transition.

With their reliance on fossil fuel exports, the countries of Central Asia have little incentive to reform the ECT, something further perpetuated by another influential gas proponent — Japan. Without the support of all ECT States, the EU will not be able to carry the reform given the unanimity requirement for the ECT amendments. On the other hand, the European Commission’s approach to the ECT modernisation has been slammed by domestic environmentalist groups as lacking ambition, galvanising strong opposition from Europe’s civil society, and there have even been requests for the EU to withdraw from the ECT.

The ECT is a good example of the challenges that the EU faces in achieving its external objectives. On the one hand, the EU is attempting to strengthen its geopolitical position by exerting influence over the governance of international energy markets that are dominated by fossil fuels, and on the other, the EU is aspiring to lead the global climate change reforms. While both goals go hand-in-hand in the EU’s vision of a green future, the EU’s energy diplomacy must also take into account the disparities between these two visions, as well as the developments between its own energy market and those of its partner countries.

The EU’s proposed ECT reform is a diplomatic alternative to an EU-wide ECT withdrawal. However, if outdated multilateral governance mechanisms are too difficult to be modernised, this would be the time to terminate them. 

Dr Ivana Damjanovic is a Lecturer in Law at the University of Canberra and a Visiting Research Fellow at the ANU Centre for European Studies. This research is supported by the Erasmus+ Programme of the European Commission: 620168-EPP-1-2020-1-AU-EPPJMO-PROJECT. The views expressed are solely those of the author and are independent of sources providing support.

This article is published under a Creative Commons Licence, and may be republished with attribution.