Why is the ECT incompatible with the
Paris Agreement
on climate change ?
What is the Energy Charter Treaty?

The Energy Charter Treaty (ECT) is an international agreement signed in 1994. There are currently 53 contracting parties, including the EU, nearly all European countries, Turkey, Central Asia and Japan. The ECT protects all investments in energy supply, from extraction to consumption, including mines, oil and gas fields, pipelines, other energy infrastructure, refineries and power stations. It grants foreign investors in the energy sector extensive protection that goes far beyond the property protection that any company has under national law. It also gives foreign investors access to a private arbitration mechanism known as Investor-State-Dispute-Settlement (ISDS). Rather than having to use national courts – like everybody else – investors can use these private arbitration panels that consist only of three investment lawyers, to claim millions, sometimes billions of Euros in compensation.Energy companies have used it to challenge a range of state measures that harmed their profits.

What does it mean for the climate transition?
  • Fossil fuels account for 72% of European energy supply and they need to be urgently phased out in order to avoid a climate catastrophe.
  • The ECT is incompatible with the European Green Deal.
  • The ECT provisions de-risk private fossil industry investments, by making national states liable to cover any assets or investments which are made unprofitable by domestic climate policy.
  • The calculation of compensation is much more favourable to investors on the basis of the ECT than on the basis of domestic law, since investors can claim compensation not only for investments made but also for unrealized future profits. These provisions are inconsistent with Europe's net zero climate ambition.
  • By 2050, cumulative greenhouse gas emissions protected by the ECT, if fossil fuels are not phased-out, would be equivalent to one-third of the remaining global Carbon budget for the period 2018-2050.
How was the ECT used by investors?

ECT is the agreement that has triggered the largest number of lawsuits by foreign investors against signatory states in the world. In October 2020 the ECT Secretariat listed a total of 134 claims. As proceedings can be kept secret, the actual number is likely higher.

Compensation claims were for instance made against environmental rules, measures to alleviate fuel poverty, cuts in subsidies and changes in taxes. Recently, we have also seen a number of cases where the ECT is being used against governments that are limiting the use of fossil fuels.

Firms using the ECT
  • UK oil company Rockhopper is suing Italy for banning oil extraction in the country's coastal waters, claiming seven times the sum that the company initially invested.
  • Canadian company Vermilion threatened to sue France over a proposed law to end fossil fuel extraction, which was then significantly weakened.
  • In the autumn 2019, German company Uniper announced that it would sue the Netherlands and claim compensation if the country approved a law to phase out coal-fred power plants.
  • The Swedish company Vattenfall's €1.4 billion ECT legal attack was launched in 2009 on environmental standards for a coal-fred power plant in Germany. According to officials, the amount at stake forced the local government to weaken the regulations and settle the case, exacerbating the environmental impacts that the plant will have on the local river and its wildlife. In Vattenfall's second and ongoing ECT suit against Germany, the company is claiming €6.1 billion for the country's accelerated nuclear exit following the Fukushima disaster.
  • A UK gas company, Ascent Resources, has officially begun procedures to start an investor dispute against Slovenia for taking measures to protect its groundwater from fracking. Ascent Resources is expected to demand over 50 million euros from Slovenia in damages. It intended to frack gas out of the Petišovci gas field in eastern Slovenia, but was unable to begin fracking after the Slovenian Environment Agency asked the company to undertake an environmental impact assessment, which is required to obtain an environmental permit. These measures were mandatory due to the location of the planned fracking operations close to critical water sources, posing a health hazard for the local population.

More cases are expected to arise once countries get serious about putting their climate commitments into action. Coal mines and power plants will have to be shut down, oil and gas operations ceased and even new gas infrastructure being built now will have to be decommissioned well before their expected lifespan. In many cases, investors will be able to use the ECT to claim compensation. A new report from the International Institute for Environment and Development (IIED) for the first time quantified the effects the ECT could have on the phase-out of coal and found that it protects alone 51 coal-fired power stations.

The energy system needs to be altered comprehensively and swiftly to achieve climate neutrality. This will not succeed if the ECT continues to protect fossil fuel investments, making the energy transition prohibitively expensive and slowing down necessary decisions. Even the threat of a case can be enough to persuade a government to water down or halt proposed regulations that would otherwise support the energy transition. The ECT is therefore a powerful tool in the hands of fossil fuel firms.

For further reading on the dangers of the ECT and ISDS in other investment agreements, please see:

Tienhaara, Kyla (2018). Regulatory Chill in a Warming World: The Threat to Climate Policy Posed by Investor-State Dispute Settlement. Transnational Environmental Law, 7:2 (2018), pp. 229–250.

Kyra Bosa, Joyeeta Gupta (2019). Stranded assets and stranded resources: Implications for climate change mitigation and global sustainable development. Energy Research & Social Science, Volume 56, October 2019, p. 8.

OpenExp (2019). The Energy Charter Treaty (ECT). Assessing its geopolitical, climate and financial impacts. September 2019.