Green activists have praised the UK for exiting a treaty that allows fossil fuel companies to claim billions of dollars in compensation from governments that enforce climate policies.
The decision in Westminster comes as the EU also seeks a route to withdraw, although not all countries in the bloc want to follow suit.
Established in 1994, the Energy Charter Treaty (ECT) provides legal protections for energy investments and was intended to encourage Western financial support for projects in former Soviet states.
However, the ECT has been criticised for being a significant obstacle to enacting national policies to combat climate change and for actively disincentivising national governments from compliance with recent international climate treaties such as the Paris Agreement due to the threat of significant financial loss.
While some have labelled the ECT a barrier to net zero because it effectively restricts the ability of member states to freely regulate the energy sector, others argue that the reality is far more nuanced.
Particularly contentious are the provisions on the Promotion, Protection, and Treatment of Investment, which demand fair and equitable conditions, ban expropriation, and provide a system for investors to make claims against member states if they impede opportunities.
France, Spain, and Germany withdrew from the ECT in recent years, citing their inability to reform the agreement, designed to streamline and lower the cost of energy trade.
Departure from the ECT does not provide automatic immunity from lawsuits, as the treaty has a sunset clause that enables suits to be filed for 20 years following a member’s withdrawal; Italy left the ECT in 2015 but was sued in 2022.
The argument put forth by proponents of the ECT is that it draws investment because it makes a state a safer and more desirable place to invest since it allows foreign investors to sue states outside of domestic courts.
According to the Secretary General of the ECT Secretariat, the ECT can “play a key role” when it comes to the “huge investment in sustainable energy sources” that is required by the Paris Agreement and the UN Sustainable Development Goals.
However, critics argue that there is no clear proof that agreements like the ECT attract investment. In 2018, the Organisation for Economic Cooperation and Development (OECD) concluded that “little robust evidence has been generated today.”
A meta-analysis of 74 studies found the agreement’s impact on boosting foreign investment “is so small as to be considered zero.”
On February 22, the UK became the latest country to quit the ECT, citing its “outdated” nature. “Remaining a member would not support our transition to cleaner, cheaper energy and could even penalise us for our world-leading efforts to deliver net zero,” said Energy Security and Net Zero Minister Graham Stuart.
Since 2001, investors have filed almost 160 ECT-based lawsuits against governments, arguing that green policies like renewable energy subsidies have harmed their investments and seeking.
Leo Mercer, policy analyst at the Grantham Research Institute on Climate Change, said: “[The treaty] was designed to protect energy companies from sudden policy decisions that undermine their investments.
“However, it has been abused by the oil and gas industry over the past few years to the detriment of British consumers.”
In recent years, nations enacting climate change policies have attempted to prevent fossil fuel companies from suing; however, after more than 15 meetings, signatories could not agree on the timeline to achieve this.
Signatory nations have expressed fear that the ECT will expose them to litigation from all quarters, with businesses alleging they violated the agreement and environmental organisations contending they were not meeting their climate-related obligations.
In 2009, Germany faced a $1.9bn (£1.5bn) claim by Swedish energy company Vattenfall after delays for permits to operate a coal-fired power station.
Shaun Spiers, executive director of the Green Alliance think tank, said, “Civil society organisations and parliamentarians from all political parties have been clear that the Energy Charter Treaty is an out-of-date agreement and undermines our efforts to tackle climate change. We welcome the UK’s decision to leave, which will strengthen global efforts to roll out cheap, clean renewable energy.”
Kierra Box of Friends of the Earth said, “Leaving this incredibly flawed treaty is a brilliant win for our environment and the climate. “Future UK governments will now have more freedom to take ambitious action to protect our planet without the threat of being sued for millions of pounds by companies based overseas.”
Chris Skidmore, the Conservative MP who led the government’s review into its net-zero policies, said he was “pleased” with the withdrawal, having called for it for over a year.
The government said the withdrawal would take effect in one year, but what will happen to cases already in progress remains unclear.
The UK-listed Ascent Resources company is suing Slovenia after its environment agency requested an impact assessment on the redevelopment of an oil and gas field.
Labour’s shadow climate minister Kerry McCarthy agreed with the government’s move, saying, “We are in an urgent global fight against the climate emergency. We cannot allow fossil fuel companies to stop democratically elected governments from taking strong climate action.”
Photo: Environmental campaigners protest the UK’s inclusion in the Energy Charter Treaty during a four-day climate protest in April 2023. (Credit: Jonathan Salariya/Friends of the Earth)
Elham Asaad Buaras
