Clean up myths about the Energy Charter Treaty

This week, the member states of the Energy Charter Treaty (ECT) will hold their annual conference and evaluate the ongoing attempts to reform the controversial agreement. Amid growing concern that the ECT is undermining much-needed climate action, its beneficiaries and the ECT secretariat are spreading propaganda to the point of falsehood that the Treaty is encouraging clean energy investment and how its "modernisation" will address existing shortcomings.

With this guide, we want to uncover the myths about the ECT and show how much it is a part of the world of dirty energy, corporate abuse and cheap profits for businesses.

Read here the long version of our guide to the ECT (previously only available in English, a German translation will follow in February).

Der Energiecharta-Vertrag gefährdet den Kampf gegen die Klimakrise und für eine saubere Energiewende.

The world's governments urgently need to take action to address the climate crisis. Above all, they must get out of coal, oil and gas and initiate a future of renewable energies. In order to prevent climate change, it is necessary that a large part of the world's reserves of fossil fuels Remains under the earth.

But governments that pull out of coal production, stop gas production, or stop new oil pipelines may be under pressure. Energy Charter Treaty (ECT) The ECT allows foreign investors in the energy sector to sue governments for decisions that can negatively impact their profits. This also includes climate policy measures.

For example, the British oil and gas company Rockhopper Italy Sued for Banning New Offshore Oil Drilling, and the Finnish-German coal company Fortum/Uniper threatens the Netherlands to be sued for phasing out coal production. However, these lawsuits are not filed in normal state courts, they take place in a kind of shadow jurisdiction in which three private lawyers decide the proceedings by an arbitration award.

On this basis, governments have already been forced to pay enormous sums. The outstanding claims of the publicly known ongoing proceedings on the basis of the ECT amount to a total of around $28 billion. However, only 25 out of 52 ongoing procedures have public access to information, which means that the actual amount could be more than twice as high. But already the 28 billion US dollars are a frighteningly high sum - it corresponds to the Estimated annual costs, arising from adaptation to climate change across the African continent.

Resistance to the ECT has intensified rapidly recently. In October 2020 The European Parliament voted to end the protection of fossil fuels by the ECT. In November 280 Members of Parliament We call on the European Commission and the EU member states to "seek ways to withdraw from the Treaty together". In December, 200 leading climate leaders and scientists joined this call, calling the ECT a "major obstacle" to the transition to clean energy. Behind the scenes in the Council, EU member states such as France, Spain and Luxembourg have also raised the withdrawal option in the event that the ECT cannot be brought into line with the Paris Climate Agreement. Belgium even has the European Court of Justice, whether the ECT is compatible with EU law at all.

But there are powerful interest groups that not only want to prevent states from withdrawing from the ECT, but are also trying to attract new signatory states. In order to achieve this, they claim everything they promise to be successful. Here are some of the key myths and ‘alternative facts’ that aim to spread a positive image of the ECT:

Myth 1: ECT brings much-needed foreign investment, including in clean energy

ECT supporters claim the contract attracts investment: By allowing foreign investors to sue states outside their "partisan" domestic courts, the treaty makes a state a safer and more attractive investment destination.

According to the Secretary-General of the ECT Secretariat (which is not just a governing body, but a driving force behind support for the Treaty), the ECT can play "a key role" in addressing the "huge investments in sustainable energy sources" called for in the Paris Climate Agreement and the UN Sustainable Development Goals.

The fact is: There is no clear evidence that the ECT is attracting investment at all, let alone in renewable energy.

In 2018, the Organisation for Economic Co-operation and Development (OECD) evaluation all existing studies on the subject concluded that "there is little solid evidence" that agreements such as the ECT are indeed attracting investment. A recent Meta-analysis of 74 studies found that the impact of investment agreements on the increase in foreign investment is "so small that it can be considered zero".

"There is still no evidence that ECT has a positive impact on investment flows in any sector, including the renewable energy sector." (Kyla Tienhaara, Queen’s University, Christian Downie, Australian National University)

The existence of investment protection treaties such as the ECT is also not one of the 167 criteria that Bloomberg's New Energy Finance used to assess the attractiveness of a State to invest in clean energy, on the contrary: Countries such as Brazil and India, which have never ratified or terminated such treaties, are among the top targets for investors in renewable energy. Targets for the expansion of clean energy and tax incentives, on the other hand, are among the factors that actually make these markets attractive to investors in renewable energy.

Myth 2: By protecting investments in renewable energy, ECT contributes to the fight against climate change

Faced with growing public opposition to the ECT, its secretariat, fossil fuel lobbyists and corporate lawyers have initiated a defence strategy. They claim that the treaty actually contributes to the fight against climate change. In doing so, they rely on the fact that: 60% the actions based on the ECT were brought by investors in renewable energy. To one advisors To quote Russian oil and gas giant Gazprom and former ECT secretariat staff: "[The] ECT today primarily protects renewable energy sources ... from a unilateral deterioration of the investment climate by the host countries".

The fact is: The ECT protects all existing energy investments, and most of them concern fossil fuels. It undermines much-needed environmental policies by allowing those responsible for climate change to sue governments for fighting it.

While recent cases based on the ECT concern renewable energy sources such as solar and wind, this does not make the ECT an instrument to combat climate change. On the contrary. The ECT protects existing energy investments - most of them in fossil fuels. Even in 2013-2018, when renewable energy financing was unusually high, they accounted for only 20 percent of the investments covered by the ECT. Fifty-six percent went to coal, oil and gas investments. (See also: this analysis a former member of the ECT Secretariat.)

This reflects the global trend According to the report, only 18 percent of energy investments went to renewable energies in 2019. Investment in fossil fuels, on the other hand, accounted for 52 percent. That's the staggering amount of $976 billion. (The rest went to power grids, nuclear power and energy efficiency.) In addition, governments are supporting fossil fuels with huge subsidies, reaching $5.2 trillion annually worldwide and $289 billion in the EU. appreciated become.

"The ECT poses a serious threat to the European goal of climate neutrality and, more broadly, to the implementation of the Paris Agreement." (Open letter from over 280 parliamentarians from across the EU.)

According to the assessment of Observers By protecting the status quo, the ECT has the function of a "bodyguard of the fossil fuel industry". To meet their climate commitments, governments would have to close coal mines and power plants, shut down oil and gas operations, shut down new fossil fuel infrastructure, and cut subsidies. But if they actually do, the investment in dirty energies will drastically lose value. Investors can then resort to the ECT and demand high compensation payments - such as Fortum/Uniper with its threatened claim of 1 billion euros against the Dutch coal phase-out.

It is estimated that the potential cost of such claims will be at least €1.3 trillion by 2050 - a strong financial incentive for governments to slow down or mitigate urgently needed measures to phase out fossil fuels.

Myth 3: ECT is mainly used by small and medium-sized enterprises

The ECT Secretariat asserted, The majority of all investment disputes under the treaty (approximately 60%) by small or medium-sized enterprises". of yours statistic According to the report, by October 2020, 261 ECT cases had been submitted by small and medium-sized enterprises, while only 7 were submitted by large enterprises.

The fact is: The ECT is a tool of large corporations and its proponents use erroneous figures to hide this fact.

The statistics of the ECT Secretariat are based on an incorrect definition of small and medium-sized enterprises (SMEs). They refer to all those companies as small or medium-sized, which do not belong to the 250 largest energy companies or the 100 Largest Multinational and Non-Financial Groups belong to the world. For this reason, several large corporations that have sued governments with the help of the ECT have been classified as medium-sized and small companies, including the Swedish energy giant Vattenfall.with 20,000 employees and an annual profit of almost 1.5 billion euros). The European Commission on the other hand, in accordance with common definitions, assumes that, that only companies with fewer than 250 employees and an annual turnover of less than EUR 50 million are SMEs.

In addition, it can be assumed that many companies referred to by the ECT Secretariat as ‘small or medium-sized’ are either part of much larger groups or belong to wealthy individuals. For example, the "Dutch" companies Charanne and Isolux Infrastructure sued Spain under the ECT - but they are only shell companies owned by Spanish businessmen Luis Delso and José Gomis. Both men were among the richest people in Spain. Allegations of corruption investigated against them. Letterbox companies-companies with few or no employees set up to shift profits and avoid taxes-have 10 out of 11 cases "Dutch" investors have sued Spain over the cuts in renewable energy subsidies.

"Whatever one thinks about investor-state dispute settlement, this is not a system that is widely used by really small plaintiffs to achieve justice." (The by Luke Eric Peterson, which works on investor lawsuits under contracts such as the ECT.)

Another category of ECT beneficiaries are holdings and investment funds, which account for more than a quarter of applicants under the ECT in statistics. They often manage huge amounts of money and/or are part of large corporations. For example, the RREEF investment fund is part of the DWS, One of the largest asset managers in the world. It is part of the German financial giant Deutsche Bank and manages investments of over 700 billion US dollars worldwide. RREEF sued Spain for withdrawing subsidies for renewable energy (while continuing to invest in coal and gas).

In 85% Of the 47 ECT actions brought against Spain, the applicant was a financial investor such as RREEF. On the other hand, the 60,000 Spanish families, real small and medium-sized enterprises and municipalities - all also severely affected by Spain's subsidy cuts in renewable energies - have been abandoned. They have no right to file ECT suits, as only foreign investors have access to this system of parallel justice.

Myth 4: ECT is the only way to protect energy investors abroad

Supporters of the ECT argue that foreign investors have little chance of justice if they are treated unfairly by host states. Not all countries will ensure that the rule of law is applied impartially and independently by domestic courts. EFILA, a lobbying group for law firms that collect millions in fees for proceedings under the ECT and similar contracts. ECT arbitration, on the other hand, ensures the "independence of investors from a possible pro-state bias of the courts". (Andrei V. Belyi, former staff member in the ECT Secretariat).

The fact is: Investors have numerous opportunities to protect themselves abroad, but the ECT is the most attractive to them because it is like a home for them. Money printing machine works.

Investors have access to legal and financial protection when they go abroad: They can defend themselves against political risks such as expropriation through private insurance, guarantees from the World Bank or insurance from domestic governments. securing. You can also negotiate project-specific contracts with the host state to determine how and where to resolve potential conflicts. Foreign investors, like everyone else, have the right to claim damages in national or international courts for alleged wrongdoing.

When the Swedish energy company Vattenfall, for example, was dissatisfied with the German decision to phase out nuclear power, he sued the government before the Federal Constitutional Court. The court ruled that the nuclear phase-out was constitutional. decided But that Vattenfall and other corporations have a right to limited financial compensation for certain government actions related to the exit. Despite access to the German justice system, Vattenfall continued its parallel arbitration action over 6 billion euros continue on the basis of the ECT - to get away with a greater profit.

Among other things, the ECT is much more lucrative for investors than regular courts because its arbitration system can award damages for forecast profits in the future that corporations are likely to lose. In most courts, expected future losses are not subject to compensation. Another reason is a "Road robbery method“ for the calculation of "grossly exaggerated" compensation payments in investment arbitration proceedings, as noted by the well-known investment lawyer George Kahale.

A telling example of a large ECT gain is the case brought against Russia by shareholders of former oil company Yukos. The ECT Tribunal in Russia Payment of $50 billion condemned damages, said the European Court of Human Rights, to which the investors referred in the same matter, only 1.9 billion euros Compensation for - less than 5 percent of the ECT arbitral award.

Myth 5: The modernisation of the ECT will address its shortcomings

Amid growing opposition to the ECT, a process to "modernize" it was launched in 2018. Profiteers and supporters of the treaty believe that negotiations on investor lawsuits under the ECT will be "significantly more difficult" (Law firm Winston & Strawn) and "give the states the necessary room for manoeuvre for measures to implement the energy transition" (State Secretary at the Federal Ministry for Economic Affairs and Energy, p. 39). In short: The modernisation will address the shortcomings of the ECT and turn it into the "greenest investment contract of all" (Blog by Kluwer Arbitration).

The fact is: Modernization will not tame the ECT and make it climate-friendly. At best, the process will bring cosmetic changes.

There are strong indications that a revised ECT will not manage its climate-damaging effects – especially as it may never see the light of day: Any amendment to the treaty requires unanimity - but states parties to the ECT such as Japan On all negotiating issues, they have stated that they do not want any changes.

An internal report The European Commission in 2017 already considered it "not realistic" that the ECT will ever be changed. However, in order to bring the ECT in line with the Paris Agreement and to avoid the risk of its investment protection provisions, a full Treaty revision is needed.

"The Parties are unlikely to reach an agreement to align the Treaty with the Paris Agreement on climate change." (Masami Nakata, former assistant to the ECT Secretary General, on the modernisation of the ECT)

Secondly: What is on the negotiating table does not in any way deliver on the promise of a climate-friendly ECT. No signatory country has proposed to abolish its dangerous investment arbitration mechanism. No state has proposed clear exceptions to climate change mitigation (in legal language: "Climate carve-out". And no member state of the ECT wants to immediately exclude the protection of fossil fuels from the modernized treaty. One proposal The European Commission of October 2020 would protect existing fossil fuel investments for another 10 years and many gas projects until 2040. This gives polluters another 20 years to hamper the transition to clean energy with costly demands.

Thirdly, a flowery language about the "right of states to regulate" will not prevent lawsuits against climate action based on the ECT. The key question under the ECT is not whether states have a right to regulation - they have that right. ECT tribunals have also confirmed this.

Rather, the key question is whether states violate the investor privileges enshrined in the ECT when regulating. In other words: States can regulate however they want - but they always run the risk of being fined billions if an ECT tribunal decides that regulation was "unfair" to an investor. The EU's planned reassertion of the right to regulate while maintaining investor privileges in the ECT will not protect public policy from costly and likely successful procedures. This means that the risk of regulatory stagnation (governments avoid claims by appeasing companies with a waiver of regulation) remains - also in connection with urgently needed climate action.

Myth 6: Global South countries benefit from ECT accession

Since 2012, the ECT Secretariat has been working hard to extend the geographical reach of the agreement to countries in Africa and the Middle East, Asia and Latin America. Many of these countries hope that joining the ECT will attract investment to end the energy poverty of the population, which often lacks access to electricity for basic needs such as cooking.

This hope will actively nurtured by the ECT Secretariat, which reiterates "the potential of the Treaty ... to attract foreign investment in the energy sector" and "the Eliminating energy poverty" stressed. In one Advertisingdocument This is even explicitly stated for Africa and the ECT: "Maybe the key to unlocking Africa's investment potential to ensure universal access to energy and overcome energy poverty is the Energy Charter Treaty."

The fact is: While there is little evidence that ECT offers any benefits, its risks are significant, especially for low-income countries.

For countries that want to increase their energy investments, joining the ECT does not bring any benefits (see myth 1 above). Nor is there any evidence that membership of the ECT reduces energy poverty. However, its disadvantages are clear - and particularly serious for low-income countries:

Countries that join the ECT risk a flood of costly investor lawsuits. The ECT is already the most widely used contract for investment arbitration in the world, and corporations from ECT member states are the largest users of the system. 60% of all 1061 known investor lawsuits against countries worldwide (633) come from companies whose home country is a member of the ECT - the vast majority of them EU countries.

"The ECT privileges the interests of foreign investors over the social and economic interests of the host State and national interest groups, which have no rights under the system." (Yamina Saheb, energy expert and former ECT secretariat employee)

Since corporations demand compensation not only for sums actually invested, but also for losses to be expected in the future, states can be forced to pay large amounts of compensation if they do not win in an ECT procedure. Governments have already been called upon or have agreed to more than $52 billion to pay compensation from the public purse - more than the annual investments that are required, to provide access to energy worldwide to all those who currently lack it.

ECT can also limit governments' ability to tackle energy poverty and regulate investment to contribute to national development. Several Eastern European countries have already been covered by the ECT. sued, because they have tried to reduce electricity prices for consumers, thereby reducing the profits of energy companies.

Under the ECT, large energy companies can also sue governments if they decide to tax takeaway profits, require the employment of local workers, transfer technology, process raw materials from export, or even protect natural resources. This makes it more difficult for states to minimise the social and environmental costs of foreign energy investments while maximising their benefits for the local population.

In particular, once a country has acceded to the Treaty, it is vulnerable to legal action under the ECT for at least 26 years - even if subsequent governments decide to leave the Treaty. While any State can withdraw from the Treaty five years after accession to the ECT and the withdrawal takes effect one year later, it can still be sued for 20 years for investments made before the withdrawal (see next section).

Myth 7: Withdrawal from the ECT does not protect governments from costly lawsuits

The defenders of the ECT claim that a withdrawal of the signatory states from the Treaty is "nonsensical in order to avoid compensation" (Andrei V. Belyi, former staff member of the ECT Secretariat). Due to the ECT’s “sunset clause”, which allows investors to sue a country for 20 years after its withdrawal, they argue that reforming the ECT is the only way to tame the ECT.

As Carlo Pettinato, one of the negotiators of the European Commission in the talks on the modernisation of the Treaty in a debating stated (minute 23'00): "Even if we leave today because we don't like [the ECT], we're stuck with investors under the current rules for 20 years... We don't want that. We want to change it, we want to reform it." (Minute 23'00)

The fact is: Leaving the ECT, as Italy has already done, significantly reduces the risk of being sued - and avoids new fossil fuel projects being protected from government interference.

Notwithstanding the ECT's forfeiture clause, leaving the contract significantly reduces a country's risk of being sued: This is because the provision only applies to investments made before the withdrawal, whereas the investments made after that date are no longer protected by the ECT. At a time when most new energy investments are still going to fossil fuels rather than renewables, this is important because the sooner states withdraw, the less new dirty investments will be protected by the ECT.

"If governments want to be seen as pioneers in climate change, they must refrain from investment agreements that tie their hands and continue to protect fossil fuels at the expense of taxpayers. Withdrawal from the Energy Charter Treaty is an essential first step. (Open letter of more than 200 climate leaders and scientists)

Leaving the ECT is not difficult. If a country has been a member for five years, it may withdraw from the ECT at any time by simple written notification. This applies to almost all of the more than 50 members of the Treaty, including the EU and its Member States. Withdrawing from ECT immediately is also part of a global trend: 2019 was after UN information the second year in which more harmful and outdated investment contracts were terminated than new ones. Italy has already taken this step with regard to the ECT and withdrew in 2016.

If several countries withdraw together, they can further weaken the sunset clause. The withdrawn countries could adopt an agreement that excludes claims within their group - before they collectively withdraw from the ECT. Such an explanation would make it difficult for investors from these countries to sue others from the group.

This is not absurd. In May 2020, the EU member states already had such a agreements Some 130 bilateral investment agreements have been signed between them. If the EU member states were to take a similar step with regard to the ECT, the majority of cases would be under the Treaty - currently 66% of all cases EU investors against EU member states - no longer possible in the future.

Get out before it's too late

Two political groups in the European Parliament have already called for the EU to withdraw from the ECT (see here and here). In November 2020, more than 280 parliamentarians from across the EU and various political parties called on EU member states "to look for ways to exit the ECT together" if provisions on the protection of fossil fuels and the ECT's investor-state dispute settlement mechanism are not deleted in the modernisation negotiations. Since the negotiations are very likely to fail due to the widespread disagreements between Member States and thus will not produce results that solve the deep-rooted problems of the ECT, States should consider a rapid withdrawal from the ECT. Given the urgency of tackling climate change and accelerating the energy transition, we must not waste time.

Would you like to learn more about ECT supporters and their strategies? Find out more about the ECT for citizens, activists, journalists and politicians in our detailed myth buster.

Authors: Fabian Flues, Pia Eberhardt & Cecilia Olivet

Translation: Attac Austria

Publisher: PowerShift, Corporate Europe Observatory (CEO) and the Transnational Institute (TNI)

Co-editor: 11.11.11, Acción Ecológica, AITEC, ATTAC Austria, ATTAC France, Both ENDS, Bund für Umwelt und Naturschutz Deutschland (BUND), Campaña No a los Tratados de Comercio e Inversión España, Center for Energy, Ecology, and Development (CEED), Chile Sustentable, CNCD, Ecologistas en Acción, Entraide et Fraternité, Focus on the Global South, Forum Umwelt & Entwicklung, Friends of the Earth Europe, Handel Anders! Coalitie, Observatorio Latinoamericano de Conflictos Ambientales, Plataforma TROCA, Platform “América Latina mejor sin TLCs”, Public Services International, SEATINI, Seattle to Brussels network, SOMO, Umanotera, War on Want.