UK leaves pro-fossil fuel Energy Charter Treaty

The UK has joined nine EU member states in exiting the Energy Charter Treaty (ECT), a controversial investment pact weaponized by big emitters to sue governments — most recently for phasing out fossil fuels.

Following the lead of Germany, Spain, France, Denmark, the Netherlands and others, the UK announced on Thursday that it is leaving the ECT due to its failure to align with "net zero" emission targets.  

"The decision will support the UK’s transition to net zero and strengthen its energy security," read a government statement, adding that efforts to modernize the treaty in line with the clean energy transition have failed. 

"The Energy Charter Treaty is outdated and in urgent need of reform but talks have stalled and sensible renewal looks increasingly unlikely," said UK Minister of State for Energy Security and Net Zero, Graham Stuart.  

The European Commission stated in February, 2023, its intention to coordinate a withdrawal of the entire bloc from the pact ratified in 1994 to protect energy investments in post-Soviet states.   

EU countries are the target of 90% of ECT disputes. This litigation threat has hamstrung climate policy to the point where the EU can "wave bye-bye to carbon neutrality targets," according to Yamina Saheb, a climate expert and former ECT employee.  

When the Netherlands, for example, legislated a 2030 coal-fired power phase-out in an effort to reduce carbon emissions, German energy giants Uniper and RWE sued the government under the treaty.

In the closed-door arbitration court where ECT disputes are settled, RWE demanded €1.4 billion ($1.55 billion) compensation from the Dutch government   — despite RWE susequently agreeing to its own 2030 coal phase-out in exchange for the right to mine lignite under Lützerath in western Germany.     

That case is ongoing, though Uniper withdrew its claim as part of a bailout agreement with the German government.  

Failed treaty modernization

The recent defections from the treaty are a sudden about face from June 2022, when the European Commission agreed on a series of modernization measures to better align the ECT with climate goals. 

But with one reform clause protecting existing fossil fuel investments for the next 10 years, France, Spain, Germany and the Netherlands decided modernization didn't go far enough. Announcing their intention to leave the treaty, they were also able to block a scheduled November 2022 vote on the reform measures in the European Council.

"Despite many of the modernizations that are now in the negotiation outcome, we do not see how the ECT has been sufficiently aligned with the Paris Agreement," said Dutch climate and energy minister Rob Jetten when confirming the Netherlands' ECT exit in October 2022. 

The next month, the European Parliament passed a resolution calling for a coordinated EU withdrawal from the treaty — aligning with the aims of campaigners who have lobbied for years for an exodus. The resolution passed with a significant 100 vote majority and inspired the European Commission to follow suit in February, 2023.

While the ECT secretariat wanted to push on with another modernization vote in April 2023, the Commission has not scheduled a meeting and is instead negotiating a coordinated withdrawal, noted Paul de Clerck, a Brussel-based campaigner for Friends of the Earth Europe.

Some EU countries like Cyprus, Malta, Finland and several Eastern European countries still support treaty reform, in part because they were "taken by surprise" by the Commission's sudden U-turn, de Clerck explained.

Stifling climate ambition?

The ECT's chill effect on climate ambition is strengthened by a zombie or sunset clause whereby states can be sued for another 20 years following their withdrawal from the treaty.

This loophole was exploited by UK oil company Rockhopper in 2017 when it sued the Italian government — after it became the first state to exit the ECT — for banning oil drilling on the Adriatic coast. Most of the €225 million ($224.4 million) claim, which succeeded in August 2022, was for projected future earnings — another contentious ECT clause.

Nonetheless, de Clerck contended, following Denmark's withdrawal in 2023, that more EU countries including Austria, Ireland and Portugal are close to announcing a withdrawal. With the UK now on the way out, such a "second wave" of exits could spark a domino effect, he said.

Most political parties in Portugal now consider a withdrawal "inevitable," reported Portuguese trade NGO, Plataforma TROCA, on April 8, 2023. This would be significant, as Portugal is the ECT depository country that manages the pact, noted Lukas Schaugg, law analyst with the International Institute for Sustainable Development (IISD), a Canada-based think tank.

"Denmark's announcement is yet another sign of the growing momentum for a coordinated withdrawal from the ECT," he said after the country withdrew in April 2023.

The UK withdrawal 10 months later confirms this momentum, while also weakening the fabric of the ECT.   

"The UK is a global hub for outward fossil fuel investment and investor-state arbitrations frequently take place there," explained Schaugg. "With its departure from the treaty, future outward fossil fuel investments made through London will not be granted the protection of the ECT."  

'Waiting game coming to an end'?

Yet even if a coordinated withdrawal is forthcoming, how might states avoid claims under the ECT's 20-year sunset clause? 

Schaugg suggests that after a mass exit, EU states can create an "inter se agreement" — that is to say, a new pact among themselves — that can "neutralize the sunset clause."

Secretive arbitration courts influenced by a highly litigious "Anglo-American legal system" have considered themselves effectively exempt from EU law, notes Schaugg.

But an inter se agreement will honor, for example, the 2021 European Court of Justice decision that EU energy companies cannot use the ECT to sue other EU countries.  

"There is a growing risk that with every day that EU states remain in the treaty, new claims will be filed," Schaugg said. He notes that in March 2023 a UK investor made a claim against Slovenia under the ECT (and a UK-Slovenia treaty) for more than €100 million because its fracking project will be subject to an environmental assessment.

But with the UK becoming the latest in a long line of defections, the "waiting game might be coming to an end," Schaugg added.

Edited by: Sarah Steffen  

This article was updated on February 22, 2024, to report that the UK had become the latest European country to exit the Energy Charter Treaty.