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Week 12: The dark treaty that could upend Europe's green future
In this issue: ▸ High-frequency or low-frequency? ▸ The little-known Energy Charter Treaty ▸ What we now know about ECT ▸ The lawsuits so far ▸ Europe’s love affair with fossil fuels
I hope everyone is well and ready for a new edition of ‘ESG on a Sunday’!
High-frequency or low-frequency?
Nowadays, you can almost feel the tension. It’s high-frequency, loud, sometimes paralysing. Things are moving. Or let me put it this way: the sentiment for change has arrived in full force, shifting perceptions and forcing response.
It’s old systems versus new systems. It’s about what could be and not only about what is. Plans are developed, aspirations defined, rules are in the making. Humanity is rising to the occasion. We know that it will not be easy, and we know that it is all about ourselves and our ability to adapt and transform.
It’s a heavyweight boxing final. It’s us against us. Or, actually, it’s many small, marginal fights in odd basements, fist fights, with no gloves and small crowds shouting for more.
Maybe this description is far too bombastic. And to be honest, much of the fight actually takes place in much more boring settings. Conference rooms, with bad coffee and white walls, with no or only a few windows, and among people and topics you have never heard about or will never pay attention to.
It’s low-frequency and has nothing to do with the latest tabloid headline. The one crying out that “Greenland is melting”. Or the one about “millions of climate refugees”.
But, that low-frequency is crushing mountains, and today I will try to tell that story, and explain what it could mean for generations.
The little-known Energy Charter Treaty
This week, I read this story by Investigate Europe, a couple of times, trying really hard to understand the consequences. And ending up with that feeling when your brain goes numb.
Do we really know what is going on? Do we want to know? And, more important, do we understand how deep and radical system changes we need to implement?
The Energy Charter Treaty (ECT) is an international agreement that offers protection of foreign investments in the energy sector. One of its key features is that it allows companies and foreign investors to sue states under a system of international arbitration.
The framework of the ECT covers energy transit, trade and efficiency, and it is applicable to coal, oil, gas and nuclear projects.
Signatories to the ECT include more than 50 countries, stretching from Western Europe through Central Asia to Japan, plus the European Union and the European Atomic Energy Community. Russia has signed the treaty but not ratified it, and yet, has been sued in six cases so far. Italy left the ECT in 2016.
The workings of the ECT are managed by its administrative body, the Energy Charter Secretariat, while all governing and decision-making is done by the Energy Charter Conference, of which all member states are a part of. The Secretariat is located in Brussels, and its current head is the Slovak energy expert Urban Rusnák, who has been holding the position since 2012.
Under the ECT, investors and energy companies from one state are able to sue other member states if they feel that they have been treated unfairly, be it when the country tries to phase out fossil fuels, cancel controversial oil or gas pipelines, limit the use of nuclear power, or push for lower electricity prices.
As more and more EU states phase out fossil fuels (thanks to increasing pressure driven by their climate targets) operators of coal-fired power stations and gas infrastructure can invoke the ECT to sue states. Their claims, which would include not just compensation for investments already made, but also lost future profits, could total billions of Euros.
With this treaty, the contracting parties (including all EU member states except Italy) guarantee foreign investors far-reaching rights. If, in the Energy investor’s opinion, a government has violated the principle of “fair and equitable treatment”, they can sue states before international arbitration courts for billions of Euros in compensation.
The treaty was signed in the 1990s to offer protection for Western companies investing in energy initiatives in former Soviet states, as many of these were deemed risky for potential investors. But today it is mainly used by European companies to sue European states. In the years to come the threat of ECT lawsuits could prevent states from adopting ambitious climate policies. Or put plainly: this is already happening.
What we now know about ECT
To summarise, Investigate Europe’s splendid work on ECT has uncovered that:
The fossil infrastructure protected by the Energy Charter Treaty in the EU, Great Britain and Switzerland is worth 344.6 billion euros. This is more than twice the total annual budget of the EU and corresponds to 660 euros per resident.
Three-quarters of the protected fossil infrastructure are gas and oil fields (€126 bn) and pipelines (€148 bn).
Since investors can sue not only for the value of their infrastructure but also for lost profit expectations, the actual sum of possible compensation claims could be even much higher.
To water down climate laws, companies don’t even have to sue. The mere fact that they can sue can be enough to influence climate measures. Sometimes companies even openly threaten governments.
Although the Energy Charter Treaty was once intended to protect investments in states with uncertain legal situations, 74% of the Energy Charter cases are now lawsuits brought by EU investors against EU states.
EU states are divided on how to deal with the Energy Charter Treaty – even if the commission has officially found a common position for a modernization push by mid-February. France and Spain had even argued for a withdrawal – and this option remains.
Even with a common EU line, it is unclear whether the Energy Charter Treaty could be ever modernized. This decision requires unanimity and Japan has already announced that it will block any changes.
Leaving isn’t easy either: states can be sued up to 20 years after leaving. After Italy left the ECT in 2016, the British oil company Rockhopper sued in 2017 against the ban on producing oil and gas near the coast, claiming lost investment and future profits of 275 million US dollars. A verdict is expected to be reached in spring 2021.
The system of arbitration tribunals are a closed club of arbitrators that act in multiple roles in a system that allows them practically unlimited fees (paid by public money).
Lawyers are calling the system “a Russian roulette”, a “historical mistake”, or refer to the changing roles in arbitration as a potential conflict of interest.
Leading personnel of the Energy Charter Secretariat (the administration of the treaty), has close ties to the fossil fuel industry.
The lawsuits so far
The fact that investors can sue for compensation on the basis of such vague formulations is likely to lead to many lawsuits against climate laws of the EU and member states in the coming years.
This is because in the Paris Agreement and the Green New Deal, governments have committed themselves to meeting strict climate targets. In order to achieve them, they must phase out fossil fuels such as coal and gas in the coming years.
Energy companies can sue against such decisions. This is not a distant scenario. Investors have already started threatening or suing states.
In this article, you can read about the the cases known so far.
Europe’s love affair with fossil fuels
That feeling of numbness goes on and lingers between my third cup of coffee and the next text I’m about to share with you. “No, this is not the case,” I keep telling myself.
I have read European Commission President Ursula von der Leyen’s statement from Dec 2019 where she describes the European Green Deal many times. “Today’s the start of a journey. This is Europe’s man on the moon moment,” she said.
Yet, the 30 countries of the European Economic Zone and the United Kingdom provide subsidies for fossil fuels such as coal, lignite, gas and oil to the tune of at least €137bn a year. In comparison, the total annual EU budget is €155bn.
In absolute figures, Germany tops the list at €37bn per year, followed by the UK at €19bn, Italy at €18bn and France at €17.5bn. By 2030 — just ten years’ away — the EU governments have committed to reducing the emission of greenhouse gases by 40% of their 1990 level.
To achieve the promised decarbonisation of the economy, the European Commission demands that this reduction be increased to at least 55%. However, neither of these targets are feasible while these subsidies continue to exist.
According to European Commissioner Frans Timmermans, who is responsible for the Green Deal, these subsidies “will be phased out.” But actual commitment from the governments does not match this rhetoric.
By the end of 2019, all Member States were expected to have submitted their National Energy and Climate Plan (NECP) to the EU Commission. This was to include an inventory of all existing fossil fuel subsidies and a plan as to how they were to be phased out. Of those that have submitted a plan, 16 countries have provided an incomplete list of fossil fuel subsidies. And none of the 26 plans can clearly demonstrate how these subsides will be phased out.
The reason these plans are so incomplete is because of a loophole of the Commission’s own creating. Instead of stating explicitly what constitutes a fossil fuel subsidy, the regulation states: “When reporting, Member States may choose to base themselves on existing definitions for fossil fuel subsidies used internationally.
Read more in this article, also from Investigate Europe.
Can you feel it? Let’s discuss on Clubhouse 👋
I keep asking myself if there is another approach to all of this.
Currently, there’s so much optimism. There are millions of articles about the inflows of money into ESG funds. There’s ignited public debates on the role of business, finance and politics in the transformation to a more sustainable future.
I see it and I hear it. And as anyone else, I hope that this will make us – us – make it.
But do I feel it? Well, not yet.
Let’s discuss later today on Clubhouse. Here’s the link to the session: