Insurance for Fossils
Following the arbitration actions brought by RWE and Uniper against the Dutch coal phase-out, the Energy Charter Treaty (ECT) has been heavily criticised. His reform is now in its final stages: In the coming weeks, it will be decided whether Germany and other countries will leave the agreement. But regardless of how the reform process ends, the conflict between investment protection treaties and climate protection will continue if the German government and the EU do not initiate a U-turn.
Many details are still being discussed, but the reform of the Energy Charter Treaty is expected to be completed by the end of June. The trade and investment agreement of the 1990s, to which 53 European and Asian countries belong, is no longer up-to-date, as the European Commission and critics from civil society agree. The latter fear, however, that the agreement will continue to stand in the way even after the reform of the decarbonisation of the energy system. It is already clear that the ECT will continue to protect fossil-fuel investments for at least ten years. What this means is shown by the lawsuits against the Netherlands. German coal companies RWE and Uniper are suing the country for about €2.4 billion in compensation for the coal phase-out by 2030, a measure that the Netherlands had to introduce in order to comply with its commitments under the Paris Climate Agreement. Even after the reform, such lawsuits, which are decided by three private business lawyers, remain possible. This runs counter to the EU's promise to stop concluding contracts that enable private arbitral tribunals to rule on state measures.
At present, it is still unclear whether EU Member States will remain in a treaty that, even after the reform, will not be in line with the Paris Agreement and the European Green Deal. A group of countries around Spain, the Netherlands, France, Poland and Germany are considering leaving. If it really does happen, it can be assumed that other countries would join in. An obstacle to an exit from the ECT is a continuation clause, which allows the contract to continue to apply for 20 years after an exit. However, there are proposals on how to defuse it.
The ECT is the most widely used agreement for investor lawsuits, accounting for about 13% of all known global lawsuits of this type. This is due both to the membership of many capital-exporting countries and to the extremely investor-friendly property rights they contain. However, lawsuits against climate protection measures are also made possible by a large part of the more than 2,500 other investment protection agreements that are currently in force. Germany is the world leader: No other country has signed as many investment agreements as the Federal Republic of Germany.
It is therefore all the more important that the new federal government will probably change direction here. In the coalition agreement, the traffic light parties agreed to ‘focus investment protection on direct expropriations and discrimination’. This represents a significant limitation compared to the previous approach, under which foreign investors are granted much more far-reaching rights. In addition, Minister of Economic Affairs Robert Habeck announced in an article written with Green Party leader Katharina Dröge that "protection for investments in fossil fuels should be abolished".2 Taken together, these announcements represent a significant change in the German position.
This is also urgently needed. New studies show that the fossil fuel industry is the economic sector most frequently resorting to arbitration lawsuits. At the same time, fossil investors have a significantly higher profit rate in the disputes and are awarded on average five times as much compensation as plaintiffs from other industries. In total, multi-trillion dollar fossil assets could lose value as a result of climate policy, and investors could file compensation claims before arbitral tribunals. At the same time, law firms specialising in arbitration are promoting the possibility of claiming compensation for climate action. And not without reason: Investment protection agreements were eventually developed to protect investments from devaluation through policy measures. In times of climate crisis, however, this becomes a trap for climate policy.
Although the number of known lawsuits against climate protection measures is still quite small at present, it could rise rapidly in the future if the far-reaching changeover of the energy system picks up speed. And even without complaining, fossil-fuel companies manage to influence the energy transition in their favour with the help of investment protection contracts. The mere possibility of suing the Federal Republic under the ECT has contributed to the fact that the two lignite companies operating in Germany, RWE and LEAG, have received far too high compensation for the coal phase-out. In other countries, the phase-out of fossil fuels has been delayed by lawsuit threats.
There is an urgent need for action so that investment protection contracts do not become a trap for climate protection. Since the beginning of this year, the Organisation for Economic Co-operation and Development (OECD) has been bringing together proposals for solutions. In their contributions, many experts call for the investment protection system to be fundamentally reconsidered or completely abolished in its current form. This would also be the right path for the federal government. The insufficient results of the reform negotiations on the Energy Charter Treaty show that international understanding is extremely difficult and lengthy. Negotiating an exclusion of fossil fuels from the more than 100 German investment agreements would be a mammoth task, which is hardly manageable given the shortness of time.
Bold steps are now necessary to ensure the state's ability to act. Together with countries that are also critical of investment protection, such as India, Indonesia, South Africa and the US, Germany could launch an initiative to suspend investment protection or an international agreement to terminate investment protection treaties. However, the absolute minimum is not to expand fossil fuel investment protection even further, such as through the ratification of the EU-Canada CETA agreement. This will show whether the government takes its own announcements seriously.
