This week, the member states of the Energy Charter Treaty (ECT) will hold their annual conference and assess the ongoing attempts to reform the controversial agreement. Amid growing concerns that the ECT is undermining urgently needed climate action, its beneficiaries and the ECT secretariat are spreading propaganda to the point of untruths that the Treaty will promote investment in clean energy 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 part of the world of dirty energy, corporate abuse and cheap corporate profits.
Read here the long version of our guide to the ECT (so far only available in English, a German translation will follow in February).
The Energy Charter Treaty threatens the fight against the climate crisis and for a clean energy transition.
World 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 phase out coal production, stop gas production, or stop new oil pipelines may be under pressure. Energy Charter Treaty (ECT) be held liable for corporate losses in the billions – because the ECT allows foreign investors in the energy sector to sue governments for decisions that can negatively affect their profits. This includes climate policy measures.
For example, the British oil and gas company Rockhopper has Italy sued for banning new offshore oil drilling, and the Finnish-German coal company Fortum/Uniper threatens the Netherlands to Sue 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 arbitral award.
On this basis, governments have already been forced to pay enormous sums. The total outstanding claims of the publicly known ongoing procedures based on the ECT amount to approximately $28 billion. However, only 25 out of 52 ongoing procedures have public access to information, so the actual amount could be more than twice as high. But even the $28 billion is a terrifying amount – equivalent to the Estimated annual costs, which are caused by climate change adaptation across the African continent.
Resistance to the ECT has intensified rapidly recently. In October 2020 voted by the European Parliament to end the protection of fossil fuels by the ECT. In November demanded 280 parliamentarians the European Commission and EU Member States to “look for ways to withdraw from the Treaty together”. In December, 200 leading climate leaders and scientists joined this call, calling the ECT a “main obstacle” to the clean energy transition. 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 has even Asked the European Court of Justice, whether the ECT is compatible with EU law at all.
But there are powerful stakeholders who not only want to prevent states from leaving the ECT, but who are also trying to win new signatory states. In order to achieve this, they claim everything they promise success. Here are some of the key myths and ‘alternative facts’ intended to disseminate a positive image of the ECT:
Myth 1: The ECT brings much-needed foreign investment, including in clean energy
The supporters of the ECT claim that the contract attracts investments: By allowing foreign investors to sue states outside their, as they put it, “partisan” domestic courts, the treaty makes a state a safer and more attractive investment target.
In the opinion of the Secretary-General of the ECT Secretariat (which is not just an administrative body but a driving force behind support for the Treaty) the ECT can play "a key role" in addressing the "violent 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 conclude that “there is little robust evidence” that agreements such as the ECT are actually attracting investment. A recently conducted Meta-analysis out of 74 studies, it was found that the impact of investment agreements on the increase in foreign investment “is so small that it can be considered as zero”.
“There is still no evidence that the 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 contracts such as the ECT is also not among the 167 criteria used by Bloomberg New Energy Finance to assess a state's attractiveness for investing in clean energy, on the contrary: Countries such as Brazil and India, which have never ratified or terminated such agreements, are among the top targets for renewable energy investors. Targets for the expansion of clean energies and tax incentives, on the other hand, are among the factors that actually make these markets attractive for investors in renewable energies.
Myth 2: By protecting investments in renewable energy, ECT contributes to the fight against climate change
In the face of 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 claim that: 60% lawsuits based on the ECT were filed by renewable energy investors. For one advisors Russian oil and gas giant Gazprom and former staff of the ECT Secretariat: “[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 climate change perpetrators to sue governments for combating it.
Although 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 ECT. Fifty-six percent invested in coal, oil and gas. (See also: this analysis a former member of the ECT Secretariat.)
This reflects the Global trend After 2019, only 18% of energy investment went to renewables. Investments in fossil fuels, on the other hand, accounted for 52 percent. That's equivalent to an astonishing $976 billion. (The remainder went into electricity 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 will be.
“The ECT poses a serious threat to the European objective 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 ‘fossil fuel industry bodyguard’. 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 do, investment in dirty energy will drastically lose value. Investors can then rely on the ECT and demand high compensation payments – such as Fortum/Uniper with its threatened claim of one billion euros against the Dutch coal phase-out.
It is estimated that the potential cost of such entitlements 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: The ECT is mainly used by small and medium-sized enterprises
The ECT Secretariat asserted, that “the majority of all investment disputes under the Treaty (approx.%) by small or medium-sized enterprises”. yours statistic According to the report, by October 2020, small and medium-sized enterprises had submitted 261 ECT cases, while only 7 were submitted by large enterprises.
The fact is: The ECT is an instrument of large corporations and its proponents use erroneous numbers to hide this fact.
The statistics of the ECT Secretariat are based on an incorrect definition of small and medium-sized enterprises (SMEs). They describe all those companies as small or medium-sized, which do not belong to the 250 largest energy companies or the 100 largest multinationals and non-financial corporations 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 enterprises, 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 current definitions, it is assumed that, that only companies with fewer than 250 employees and an annual turnover of less than EUR 50 million are SMEs.
In addition, many companies referred to by the ECT Secretariat as ‘small or medium sized’ are expected to be either part of much larger groups or to belong to wealthy individuals. For example, the ‘Dutch’ companies Charanne and Isolux Infrastructure have 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, currently Allegations of corruption investigated against them. Letterbox companies – companies with few or no employees set up to shift profits and avoid taxes – have 10 of the 11 cases in which ‘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 much used by really small plaintiffs to get justice” (journalist Luke Eric Peterson, who works on investor lawsuits under contracts like the ECT).
Another category of ECT beneficiaries are holding companies and investment funds, which account for more than a quarter of the applicants under the ECT in the 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. He 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 cuts in renewable energy subsidies – have been abandoned. You have no right to file ECT lawsuits, as only foreign investors have access to this system of parallistic justice.
Myth 4: The ECT is the only way to protect energy investors abroad
Proponents of the ECT are of the opinion that foreign investors have little chance of justice if they are treated unfairly by the host states. Not all countries would ensure “that the rule of law is applied impartially and independently by domestic courts”, according to 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, guarantees the ‘independence of investors from a possible pro-state bias of the courts’. (Andrei V. Belyi, former member of the ECT secretariat).
The fact is: Investors have numerous opportunities to protect themselves abroad, but the ECT is the most attractive for them because it's like a Money printing machine It works.
Investors have access to legal and financial protection when they go abroad: You can defend yourself against political risks such as expropriation through private insurance, World Bank guarantees or insurance from domestic governments. securing. They can also negotiate project-specific contracts with the host state that specify how and where potential conflicts are to be resolved. Foreign investors, like all others, have the right to seek compensation before national or international courts for alleged misconduct.
When the Swedish energy company Vattenfall, for example, was dissatisfied with the German decision to phase out nuclear power, he sued the government in 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 measures related to the exit. Despite access to the German judicial system, Vattenfall continued his parallel arbitral action. 6 billion euros on the basis of the ECT – to get away with a bigger 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, losses to be expected in the future are not subject to compensation. Another reason is a ‘street robbery method’ for calculating ‘grossly exaggerated’ compensation payments in investment arbitration proceedings, as noted by the well-known investment lawyer George Kahale.
A revealing example of a large ECT gain is the case brought against Russia by shareholders of the former oil company Yukos. During an ECT-Tribunal Russia to $50 billion payment condemned damages, said the European Court of Human Rights, on which investors relied in the same matter, Only 1.9 billion euros Damages to – less than 5 per cent of the ECT arbitral award.
Myth 5: The modernisation of the ECT will address its shortcomings
In the midst of growing opposition to the ECT, a process for its “modernisation” was launched in 2018. Profiteers and proponents of the Treaty consider that negotiations on investor lawsuits under the ECT will “majorly complicate” (Law firm Winston & Strawn) and “give the States the necessary leeway 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 remedy 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. The process will bring cosmetic changes at best.
There are strong signs that a revised ECT will not get a handle on its climate-damaging effects, especially since it may never see the light of day: Any amendment to the Treaty requires unanimity, but states party to the ECT, such as: Japan have stated on all negotiating issues that they do not want any changes.
An internal report The 2017 European Commission already considered it “unrealistic” that the ECT will ever be changed. However, in order to bring the ECT into line with the Paris Agreement and to thwart the risk of its investment protection provisions, a full Treaty revision is required.
“It is unlikely that the parties will reach an agreement to align the Treaty with the Paris Climate Agreement.” (Masami Nakata, former assistant to the ECT Secretary-General on the modernisation of the ECT)
Secondly: What is on the negotiating table in no way fulfils the promise of a climate-friendly ECT. No signatory state has proposed to abolish its dangerous investment arbitration mechanism. No state has proposed clear exemptions for climate protection (in the 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 investments in fossil fuels for another 10 years and many gas projects until 2040. This gives polluters another 20 years to hinder the transition to clean energy with costly demands.
Thirdly, a flowery language about the “right of states to regulate” will not prevent actions against climate change 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 it comes to regulation. In other words: States can regulate however they want – but they always run the risk of being sentenced to pay billions if an ECT tribunal decides that the regulation was ‘unfair’ for an investor. The EU's planned re-affirmation of the right to regulation 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 avoiding claims by appeasing companies with no regulation) persists, including in the context of much-needed climate action.
Myth 6: Countries of the Global South benefit from joining the ECT
Since 2012, the ECT Secretariat has been working hard to extend the geographical scope 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 fed by the ECT Secretariat, which repeatedly “attracts the potential of the Treaty to attract foreign investment in the energy sector” and “the Eliminate energy poverty” stressed. In one advertisingThis is even explicitly stated in the document on Africa and the ECT: “Perhaps 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 the ECT offers any benefits, its risks are significant, especially for low-income countries.
For countries that want to increase their energy investment, joining the ECT does not bring any benefits (see myth 1 above). Equally, there is no evidence that ECT membership reduces energy poverty. However, its drawbacks are clear – and particularly serious for low-income countries:
Countries that join the ECT risk a flood of costly investor lawsuits. Worldwide, the ECT is already the most widely used contract for investment arbitration, and corporations from the member states of the ECT are the largest users of the system. 60% of all 1061 known cases of investor lawsuits against countries worldwide (633) come from companies whose home country is a member of the ECT, the vast majority of which are EU countries.
“The ECT shall privilege 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 member of the ECT Secretariat)
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 do more than $52 billion to pay compensation from the public coffers – more than the annual investments that are required, to provide access to energy for all those people around the world who are currently lacking it.
The ECT can also limit governments' ability to address energy poverty and regulate investments to contribute to national development. Several Eastern European countries have already been involved in the ECT sued, because they have tried to reduce electricity prices for consumers and thus reduce the profits of energy companies.
Under the ECT, large energy companies can also sue governments if, for example, they decide to tax take-away 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 will be vulnerable to ECT-based lawsuits for at least 26 years, even if subsequent governments decide to leave the Treaty. While each State may withdraw from the Treaty five years after accession to the ECT and the withdrawal will take effect one year later, it may still be sued for 20 years for investments made before the withdrawal (see next section).
Myth 7: Leaving 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 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], under the current rules we are stuck with investors for 20 years... We don’t want that. We want to change it, we want to reform it.” (minute 23’00)
The fact is: Withdrawal from the ECT, as Italy has already done, significantly reduces the risk of being sued – and avoids new fossil fuel projects being protected from state interference.
Notwithstanding the ECT's revocation 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, while the investments made thereafter are no longer protected by the ECT. At a time when most of the new energy investment is still going into fossil fuels rather than renewables, that's important because the sooner states withdraw, the less new dirty investments are protected by the ECT.
“If governments want to be seen as frontrunners 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 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 notice. This applies to almost all of the over 50 members of the Treaty, including the EU and its Member States. Retiring immediately from the ECT is also part of a global trend: 2019 was after UN information the second year in which more harmful and outdated investment contracts have been terminated than new ones have been concluded. Italy has already taken this step in relation to the ECT and withdrew in 2016.
If several countries withdraw together, they can further weaken the expiry clause. The withdrawn countries could adopt an agreement that excludes claims within their group – before leaving the ECT together. 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 reached such an agreement on around 130 bilateral investment agreements, which they had signed among themselves. If 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 fossil fuel protection and the ECT's investor-state dispute settlement mechanism are not removed from the modernisation negotiations. As the negotiations are very likely to fail due to 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 the ECT's proponents 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
Published by: 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.
