Most Favoured Nation: Energy Charter Treaty

Sunrise to the sunset ...

Welcome to the 98th edition of Most Favoured Nation. This week’s edition is free for all to read. If you enjoy reading Most Favoured Nation, please consider becoming a paid subscriber.

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(As mentioned last week, I am currently on holiday so this week’s edition is a little shorter than usual.)

Back in 2007 Spain introduced a load of new regulatory measures and a feed-in-tariff to incentivise the development of renewable energy. These schemes were massively successful. Investment in renewable energy boomed. A policy success!

Too much of a success, alas. By which I mean it all started to get a bit too expensive, so in 2008 (with the wider context of a real estate crash), the Spanish government backtracked and curtailed the generosity of its schemes.

This led to a load of foreign investors, who had poured money into Spanish renewables on the basis of these schemes to say “woah now, that’s a bit unfair”. Some took it even further, and sued the Spanish government using the investor-state-dispute settlement provisions of the Energy Charter Treaty (signatories listed here), generally claiming they had not been treated fairly or equitably.

In total 51 cases have been brought against Spain, with around $1.2 billion awarded in payouts so far (according to this, critical, TNI paper).

Anyhow — this example of the Energy Charter Treaty being used to penalise a state for backtracking on its renewable energy commitments has resulted in environmentalists across Europe lobbying their governments to pull out of the Energy Charter Treaty …

Wait.

That doesn’t sounds quite right.

My mistake. They are actually lobbying their governments to leave the Energy Charter Treaty because of firms using it to sue governments when/if they decide to forcibly phase out fossil fuels (while kinda ignoring the renewables example given above).

And, the campaigners have been pretty successful! In the EU, Italy has already left and Denmark, France, Germany, Luxembourg, the Netherlands, Poland and Spain announced they want to quit. The European Commission is reportedly about to propose the EU as a whole exits, rather than member-states doing it on piecemeal basis.

In the UK, there has been pressure this week with former net zero chief Chris Skidmore saying he will table a new amendment to the Energy Bill which would lead to UK withdrawal. [Note: the UK government position has so far been to say very little, and has actually, as part of its CPTPP accession, accepted new ISDS treaty commitments in the very recent past.]

My view? I have a bit of sympathy for campaigners on this. I can see why, if we accept that climate change has to be dealt with quickly [which I do!], some of the actions governments might take could breach their Energy Charter Treaty commitments and lead to, potentially very expensive, law suits from aggrieved foreign investors.

However, what I’m not sure about is why exiting the treaty would actually help resolve this problem …

That’s because the ECT has a sunset clause (key clause in bold):

Article 47: Withdrawal

(1) At any time after five years from the date on which this Treaty has entered into force for a Contracting Party, that Contracting Party may give written notification to the Depositary of its withdrawal from the Treaty.

(2)  Any such withdrawal shall take effect upon the expiry of one year after the date of the receipt of the notification by the Depositary, or on such later date as may be specified in the notification of withdrawal.

(3)  The provisions of this Treaty shall continue to apply to Investments made in the Area of a Contracting Party by Investors of other Contracting Parties or in the Area of other Contracting Parties by Investors of that Contracting Party as of the date when that Contracting Party’s withdrawal from the Treaty takes effect for a period of 20 years from such date.

(4)  All Protocols to which a Contracting Party is party shall cease to be in force for that Contracting Party on the effective date of its withdrawal from this Treaty.

So while exiting means that new investments in fossil fuels (and renewable energy, for that matter) wouldn’t be covered by the treaty, and governments could then discriminate against investors without fear of penalty … all pre-existing investors would still be covered for 20 years. And, presumably, it’s the pre-existing investments you are most worried about from a “phasing out dirty energy” perspective.

Anyway, tell me why I’m wrong in the comments below!

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Distinti saluti,

Sam