The ECT’s Long Road to Modernisation

On 3 December 2024, the Energy Charter Conference (ECC) adopted the amendments to modernise the Energy Charter Treaty (ECT). It was concluded in the 1990s mainly to protect energy investments, particularly those of companies from Western European countries in Eastern Europe. However, in the light of developments in case law and investment treaty practice, the investment protection standards of the ECT have come to be seen as outdated. There have also been concerns that the ECT is not in line with the Paris Agreement. Accordingly, a modernisation process was launched in November 2017. The EU was its main driver and provided comprehensive proposals (here and here, see also the analysis here). In June 2022, an Agreement in Principle (AIP) on modernisation was concluded, which should have been adopted by the ECC in November 2022. However, the adoption was repeatedly postponed. The delay in modernisation resulted from disagreements between EU Member States on whether to still support modernisation. Instead, many of them started to withdraw from the ECT.

This blogpost discusses the withdrawals and opposition to modernisation before outlining why modernisation was eventually supported. It then addresses the climate concerns as a key factor for opposing modernisation and argues that EU Member States would have been better off supporting modernisation first, before contemplating withdrawal. It also suggests that the lack of support for modernisation may have stemmed from the ultimately unfulfilled hope that the ECT would be terminated or at least that all EU Member States would withdraw. This, however, prolonged the existence of the old ECT.

The Backstory

Several EU states expressed criticism about the AIP and regarded it as an obstacle to climate transition and not in line with the Paris Agreement (see e.g. France, Netherlands, Germany). Thus far, the following eight EU Member States have decided to withdraw from the ECT (not including Italy which notified its withdrawal in 2014): France, Germany, Poland, Luxembourg, Slovenia, Portugal, Spain and the Netherlands. In addition, the EU and Euratom, parties to the ECT in their own rights, eventually notified their withdrawal in June 2024.

The EU Commission originally wanted to salvage modernisation, advocated against withdrawals, and stated that the EU itself would remain party to the ECT. However, given the deadlock, it eventually relented and suggested that a coordinated withdrawal of the EU and its Member States was the best option. In addition, it proposed a subsequent agreement to exclude access to intra-EU arbitration under the ECT. This was considered necessary, inter alia, because otherwise the sunset clause in Art 47(3) ECT would have allowed investors to continue to have access to investment arbitration for their existing investments for 20 years after withdrawal (see e.g. here).

The criticism and the preference for withdrawal resulted in a de facto blockade of modernisation. The EU repeatedly asked for a postponement of the vote at the ECC because there was no majority in the Council of the EU for it to vote in favour of modernisation. The EU had the share of votes equal to all EU Member States parties to the ECT (Art 36(7)) and had the majority of votes at the ECT level. In addition, unanimity was required for the adoption of amendments by the ECC (Art 36(1)). Without the EU, the amendments could not be adopted. The then Secretary General of the ECT-Secretariat criticised the EU for blocking modernisation and suggested that the EU should help to modernise the ECT before contemplating withdrawal.

Unblocking the Modernisation Blockade

The modernisation process seemed to be dead in the water, but several EU Member States apparently were unwilling to abandon the ECT and its modernisation. As withdrawal by the EU also required a majority in the Council of the EU, a compromise was reached: the EU and Euratom would withdraw from the ECT, but not block modernisation. Instead, they would not exercise their right to vote and would have the Member States still party to the ECT vote to approve the modernisation at the ECC (Council Decision (EU) 2024/1644). This allowed the ECC to adopt the amendments on 3 December 2024. The modernised ECT will be provisionally applied as of 3 September 2025.

Climate Concerns About the ECT and Unintended Consequences

The desire of several EU Member States to withdraw from the ECT was certainly motivated by concerns about climate change. But broader concerns about (fiscal) sovereignty were also at play. The main issue raised in public was that fossil fuel investors would be able to bring arbitration cases against EU states under the ECT, for example in the context of phasing out fossil fuel-based energy production (see e.g. the RWE case and Uniper case). Also, the chilling effect of such investment claims on regulatory action was a concern (see e.g. here). Still, it has frequently been  pointed out that roughly 60% of claims under the ECT have been initiated by renewable energy investors. However, large-scale phase-outs of fossil fuel energy production may lead to claims in the future, and a policy of foresight may indeed imply that states wish to take steps to escape potential liability under the ECT. It is therefore not necessarily surprising that some states that are not really affected by investment claims under the ECT (e.g. France) have been among the first to withdraw.

However, the question arises whether withdrawing from the ECT rather than modernising it really addresses these concerns. Those states that have withdrawn from the ECT before modernisation was completed, may be worse off under the sunset clause of the ECT. Leaving aside the question of the exclusion of intra-EU arbitration by means of an inter se agreement between EU Member States, fossil fuel investors (from outside the EU) may sue those states that have withdrawn from the ECT for another 20 years under the rules of the old ECT. If one considers the modernised ECT as a risk to climate transition, then the old ECT is an even greater risk. The modernised ECT provides much more clarity on what states can do without having to pay compensation than the old ECT, e.g. on the expropriation standard, the right to regulate or the FET (see e.g. here and in more detail here).

Moreover, the modernised ECT provides for a phase-out mechanism to end the protection of existing fossil fuel investments for those states willing to use that mechanism (i.e. the EU/its Member States, Switzerland and the UK). Within the territory of the EU, these investments will no longer be protected ten years after the entry into force of the modernised ECT and by 2040 at the latest. Assuming rapid entry into force, this effectively halves the sunset period for existing fossil fuel investments. In addition, any fossil fuel investments made in the EU after 3 September 2025 will not be protected under the ECT. As a result, if an EU Member State decides to withdraw from the ECT right now, it may be somewhat difficult to argue that the goal is to insulate itself from claims by fossil fuel companies. In fact, the withdrawal would take effect in one year only, after the provisional application of the modernised ECT has started on 3 September 2025, and the sunset clause would be fully applicable after the withdrawal (at least in extra-EU relations). There are, of course, several ifs and buts. In particular, it is not possible to know which states will opt out of the provisional application of the modernised ECT.  Contracting parties will have to actively opt out before 3 March 2025, making this date a more appropriate point of reflection for the impact of the modernised ECT.

Backed the Wrong Horse?

One cannot shake off the feeling that the hope of some states was that the ECT would collapse altogether, or at least that all EU Member States would be on board with withdrawal. Some activists have called for the abolishment of the ECT, seeing modernisation as a lifeline to a ‘climate killer’ treaty. In this high-stakes gamble, however, they may have overplayed their hand and thereby delayed modernisation. In hindsight, the modernised ECT could have already excluded protection for new fossil fuel investments in the EU as of 15 August 2023. Certain fossil fuel-based investments in the EU, Switzerland, and the UK would most likely no longer be protected under the provisionally applied ECT (and intra-EU arbitration under the ECT would probably have come to an end as well, see Article 24(3) new ECT). Arguably, it would have been preferable to modernise the ECT first and then discuss a possible withdrawal. Not least to guarantee that the ECT without the EU would not remain an unreformed treaty, but one with more flexibility to address public policy concerns in investment cases.

Conclusion

With the adoption of the modernised ECT, an old investment treaty has been updated in many respects. Although it will take some time for the amendments to enter into force, the modernised ECT will provisionally apply from 3 September 2025. The delay in adopting the modernised ECT is regrettable and was a deliberate choice by some EU Member States, ostensibly in the interest of climate protection. Ironically, this has prolonged the life of the outdated ECT and will remove ECT protection for fossil fuel investments in the EU later than originally planned.