After two years of negotiations, the EU and the UK have today won the right to end investment protection for fossil fuels under the Energy Charter Treaty (ECT).
Under a “flexibility mechanism” approved by members of the energy investment treaty, the EU and UK will end protection for new fossil fuel investments from August 2023. However, most existing fossil fuel investments will continue to be protected for 10 years from the date the modernised treaty is officially ratified.
The ECT, which has members spanning Europe and Asia, has been used by fossil fuel companies to sue governments over climate policies which hurt their profits. For example, German energy company Uniper is suing the Dutch government over its coal phase-out plans.
In 2020, a study found that ECT member countries faced up to €1.3 trillion ($1.4trn) by 2050 of compensation claims by fossil fuel investors.
The EU initiated “modernisation” talks to try and end these lawsuits but its attempts to remove fossil fuels from the treaty’s protection clause were thwarted by some Asian nations led by Japan.
At an ad-hoc conference, which was disrupted by protesters yesterday, members to the treaty reached a compromise which gives them some flexibility to choose what energy investment they want to continue to protect.
STOP PROTECTING FOSSIL FUELS! Extinction Rebellion & @wemoveEU have blocked the entrances to the toxic fossil fuel treaty (the ECT) building with a climate crime scene.
4 years of talks on the ECT must end today with the only viable conclusion: end the ECT now! #NoECT #ExitECT pic.twitter.com/iGFaA9Tx9L
— Extinction Rebellion Belgium (@XR_Belgium) June 23, 2022
Members like Japan, a staunch defender of the ECT, is likely to keep protecting fossil fuel investments in the country indefinitely. But the EU and the UK have said they will use the flexibility mechanism to limit them.
When the EU and UK end protections for fossil fuel investments for fossil fuel investors from ECT states like Japan then those states are likely to reciprocate, meaning European and British fossil fuel investments will no longer be protected in countries like Japan.
In Europe, environmental campaigners, who have repeatedly called on the EU to leave the treaty, reacted angrily, calling on ECT members to stage an on-mass exit from the treaty despite the reforms.
Former ECT employee turned anti-ECT campaigner Yamina Saheb told Climate Home the agreement was “a disaster from a climate change perspective”. Friends of the Earth’s Paul De Klerck said it would “lock the EU in fossil fuel investment protection” for a decade.
“This means countries will continue to spend taxpayers’ money in compensating fossil fuel companies rather than fighting climate change and moving to a renewable energy system,” added Cornelia Maarfield, trade and investment policy expert at Climate Action Network Europe. “This disastrous agreement must not be ratified,” she said.
The ten year protection for existing coal, oil and gas investments was a compromise reached between EU member states, which diverged on the best way forward, according to sources familiar with the negotiations. France, Spain and Luxembourg wanted to end the protection of fossil fuel investments that allows countries to be sued for damages by polluting companies. But several Eastern European states resisted change.
Under the agreement reached, some gas-fired power plants will continue to receive investor protection beyond the 10-year deadline and until the end of 2040. That applies to gas power plants whose emissions are under a certain level and which replace more polluting infrastructure.
The flexibility mechanism would have allowed the UK to end all fossil fuel protection immediately. But it hasn’t done so. Asked why, an energy ministry spokesperson declined to comment.
In a statement published Friday, the UK said protection for existing coal investments in the country will end in October 2024. But, in line with the EU, it will wait 10 years to end protection for oil and gas investments. It will continue to protect abated gas, which uses carbon capture technology, beyond those 10 years.
“Our success in negotiating a modernised treaty will boost our move to cheaper and cleaner energy by providing greater confidence to the private sector investors and risk takers we need for this transition,” said UK energy secretary Greg Hands.
Campaigners’ call to leave the treaty found some sympathy in EU member states. A Spanish government representative told an EU council meeting in April that Spain “did not see how the ECT could be adapted to the Paris Agreement” and deputy prime-minister Teresa Ribera recently told Politico: “It is time that the EU and its member states initiate a coordinated withdrawal from the ECT”.
But the treaty’s ‘sunset clause’ makes leaving difficult as its rules continue to apply for 20 years after a member decides to leave. Campaigners say the impact of this sunset clause can be greatly reduced if members withdraw on mass and refuse to implement the treaty against each other during that time.
But as well as protecting fossil fuels, the treaty protects renewable investments. Under its rules, renewable companies have claimed compensation for anti-renewable measures. The modernisation talks have led to the addition of protection for carbon capture and storage technology, hydrogen, , ammonia, biomass and biogas.
This article was updated to include the UK government’s decision not to comment.