France leaves the controversial Energy Charter Treaty.
Written by: Garance Picant
Monday January 16, 2023
On Friday 21 October, the French president Emmanuel Macron stated that France was to leave the largely criticised Energy Charter Treaty (1). This treaty is indeed seen by some as protecting fossil fuel investments and delaying the transition toward renewable energy sources.
Introduction: what is the Energy Charter Treaty?
First of all, what is this highly criticised Energy Charter Treaty?
To answer this question, one must go back to the end of the cold war. The iron curtain left a highly economically divided continent. Moreover, Russia and the former soviet republics are rather rich in energy resources, but in dire need of foreign investment, while Western Europe wants to diversify its energy sources.
In 1991, this political context gives birth to the European Energy Charter, which in 1994 becomes the Energy Charter Treaty (ECT).
However, its role extends over the East-West cooperation as the goal of the ECT is to ‘promote long-term cooperation in the energy field, based on complementarities and mutual benefits’ (ECT, Article 2).
The ECT aims at creating a level playing field of rules that all the signatory States need to observe, thereby lowering the risk for foreign investment and energy-related trade. It does so by providing a set of legally binding instruments which promote free trade in the energy market, and non-discrimination rules for foreign investors (2).
Last but not least, the ECT allows private firms to sue states through international arbitration (a private form of international dispute resolution) (3). Why would states and investors want to escape national courts? International arbitration offers legal security for investors. There is indeed a suspicion that if a dispute arises against the state in which it invested, national courts will tend to favour their national government instead of giving a fair and just judgement. This suspicion is especially high when it comes to non-democratic countries. International arbitration offers an impartial panel of arbitrators who will not be influenced by national politics to make their judgement on the case.
In practice, this means that if a state (which signed and ratify the ECT) enacts non-investor friendly rules, the investor can take this state before an international arbitration court. This point is precisely why the ECT became so controversial and criticised in the last few years.
I: Why did France leave?
The protection of foreign investors brings me to my second point: why did France leave? And in a broader formulation: why is the ECT so heavily criticised today?
As a reminder, the ECT was signed almost thirty years ago. Back then, climate change was not the priority. However, in the last few years, climate change and global warming became unavoidable topics in politics (and sometimes at the dinner table). In 2015, 196 UN-members negotiated the Paris agreements. The goal is now to keep the rise of the global temperature to well bellow 2°C above pre-industrial levels, and preferably limit the increase to 1.5°C (4).
In order to reach this goal, UN-members have started taking measures to move their energy production away from fossil fuel energy sources to renewable energy sources. The graph below shows how this measures where received by foreign investors: post-2015 saw a rise of international arbitration cases related to renewable energy sources.
Changing its energy sources obviously means taking policies that are not the most economically beneficial for polluting industries. Where does that lead? To court (or more precisely to an international arbitration tribunal). For instance, back in August 2022, the oil firm Rockhopper won a £210 million compensation from the Italian government after Italy banned offshore oil drilling. Italy has also withdrawn from the ECT (6).
It is in this context that President Emmanuel Macron announced on Friday 21 October 2022 that “France has decided to withdraw from the energy charter treaty” in order to be coherent with the goals of the Paris agreements. France becomes the fourth European country to leave the ECT.
II: What will become of the ECT?
Last but not least, what will become of the ECT now that European countries are leaving?
The ECT was originally thought as a tool to facilitate investments from Western European companies into poorer countries (7). Today, Western European states are starting to realise that the very same tool they have been using for thirty years can also take them to court (it did not seem to bother them as much when the ones brought before arbitrators’ panel were emerging countries). How does one have a green policy when their bans of fossil fuel are automatically challenged by fossil fuel investors on the basis of the ECT?
The ECT conference (the governing and decision-making body when it comes to the ECT) is aware that the treaty falls short when it comes to the environment. Last June, agreements in principle on the modernisation of the ECT were taken. The main goal of those agreements is to recentre the treaty around the protection of the environment rather than the protection of the investors. Whether those principles will actually be incorporated to the treaty is still to be seen (8). Nevertheless, the withdrawal of several European countries and the public critics of the treaty from EU and NGO officials seem to show that the ECT currently has two choices: adapt or fade away as its members leave one after the other.
https://www.lemonde.fr/planete/article/2022/10/22/apres-l-espagne-et-les-pays-bas-la-france-se-retire-du-traite-sur-la-charte-de-l-energie-pour-respecter-ses-ambitions-climatiques_6146867_3244.html see also https://www.theguardian.com/world/2022/oct/21/france-becomes-latest-country-to-leave-controversial-energy-charter-treaty?utm_campaign=Carbon%20Brief%20Daily%20Briefing&utm_content=20221024&utm_medium=email&utm_source=Revue%20Daily
Bernadette LE BAUT-FERRARESE, Énergie - Environnement - Infrastructures n° 2, Février 2021, étude 2, Le Traité sur la Charte de l'énergie au défi de la transition énergétique. (https://www-lexis360intelligence-fr.docelec-u-paris2.idm.oclc.org/revues/%C3%89nergie_-_Environnement_-_Infrastructures/PNO_RENENINF/document/PS_KPRE-608195_0TT0?q=trait%C3%A9%20sur%20la%20charte%20de%20l%27%C3%A9nergie&doc_type=doctrine_revue#PS_6)
Elena CIMA, Journal of World Energy Law and Business, 2021, 14, 75–87, Retooling the Energy Charter Treaty for climate change mitigation: lessons from investment law and arbitration.