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News 15 February 2023

EU ready to exit Energy Charter Treaty

After the turbulent discussions over the last months, when various EU Member States had announced or threatened their exit from the discussed Energy Charter Treaty (ECT), the EU Commission seems now ready to walk out the door as a whole. A non-paper was leaked to the press last week, where EC services suggest to move forward with a joint EU exit. The Energy Charter Treaty, founded in 1998 by more than 50 signatories including European Union countries, was crafted to protect the interest of companies active in the energy industry by allowing them to sue governments on policies affecting their investments. However, in recent years the treaty has allowed the same companies to sue countries for profits lost as a result of changes in government policy – giving rise to many advocating against this “weapon against climate efforts”. The ECT offers generous protections to an estimated €344.6 billion of coal, oil and gas investments in the EU, U.K. and Switzerland. 

By the end of 2022 France, Germany, the Netherlands, Poland and Spain had already announced plans to quit the treaty, with Italy having exited already in 2016, raising the pressure in Brussels to coordinate an EU-wide withdrawal. Whispers have now been put into words, as the leaked document clearly states that the “most adequate” option would be for the EU and its 27 member states to leave entirely. At the same time, other options are included, among them ratifying the modernised ECT and leaving afterwards, or leaving while granting a derogation for some EU countries to remain. Still, the non-paper arrives to the conclusion that “a withdrawal of the EU and Euratom from the Energy Charter Treaty appears to be unavoidable”. 

While a non-paper remains a simple indication of internal EC work, a spokesperson for the institution confirmed it would recommend an EU exit and presented the suggestion to diplomats from member countries in a meeting. The main reason is that the refusal of EU Member States to adopt the modernised provisions risks undermining the EU’s green goals moving forward. Talking about procedures, an EU exit would require support from at least 15 EU countries and the European Parliament, which has already backed a resolution calling for the idea. 

Still, exiting is not the end of the story. The ECT has put in place a provision, the so-called “sunset clause”, extending the treaty’s validity on existing investments for 20 years in case of a party’s withdrawal. The solution here lies in diplomacy: EU Member States could agree between themselves not to apply the clause anymore as most of the EU’s energy investments on its territories are made by EU-based companies, but the group would also need to reach an agreement with the other major parties to the ECT, like Japan and Great Britain. The non-paper underlines that this might be a cumbersome task, given that “for the time being, no non-EU Contracting Party has indicated they would be open to such a solution”. At the same time, an EU company could still benefit from ECT protection if it has a subsidiary in a country that hasn't left the pact. 

If the full EU exit will not happen now, due to controversies internal to the group, there will be two scenarios waiting for the EC: a withdrawal preceded by negotiations aimed at ensuring that some EU states remain part of a reformed treaty; or pushing the Council to back the reforms before proceeding to a coordinated departure. The first way seems more plausible to date, not only because it would leave space for those wishing to remain covered to do so, but also because too many - and politically relevant - countries have already made public announcements about their withdrawal.