The Climate Crisis, Investment & The Energy Charter Treaty

Do measures taken to address the climate crisis infringe or breach investment treaties made to secure investment into the Energy sector? This short article explains the potential for investor led climate litigation under the 1994 Energy Charter Treaty (the "ECT") and the necessity for reform.

High profile climate litigation cases have slowly filtered into various news headlines and are sparking debates around the globe. To name a couple of examples - the Uragenda judgment from the Dutch Supreme Court at the end of 2019 and Heathrow Airport "third runway" judgment of the English Court of Appeal this February. Both cases demonstrate the recognition by the Courts in these countries to the legal obligations of their Governments to reduce carbon emissions. The grounds for intervention by the Courts are protecting human rights or giving effect to commitments in international treaties (such as the Paris Agreement) and domestic legislation (such as the Climate Change Act 2008).

The outcome of such landmark Court judgments forces change to legislation and policy. However, a perhaps less obvious result is that practical measures subsequently introduced to fight the climate crisis can give rise to a cause of action by investors under the ECT. The United Kingdom is amongst the signatories of the ECT.

The ECT

The ECT is an international investment agreement that establishes a multilateral framework for cross-border cooperation in the energy industry. It provisions focus on four broad areas:

  • The protection of foreign investments, based on the extension of national treatment, or most-favoured nation treatment (whichever is more favourable) and protection against key non-commercial risks.
  • Non-discriminatory conditions for trade in energy materials, products and energy-related equipment based on World Trade Organisation rules, and provisions to ensure reliable cross-border energy transit flows through pipelines, grids and other means of transportation.
  • The resolution of disputes between participating states, and - in the case of investments - between investors and host states.
  • The promotion of energy efficiency, and attempts to minimise the environmental impact of energy production and use.

The ECT allows investors to bring claims for breach of its provisions against the "host state" at the International Centre for Dispute Resolution under the UNCITRAL Arbitration Rules or at the Stockholm Chamber of Commerce.

The ECT and Climate Litigation

Many companies, perhaps encouraged by the additional investment protection the ECT afforded them, made substantial investments in the energy sector. For example, Uniper, a German energy company, invested over one billion euros in the Maasvlakte 3 coal-fired power plant in Rotterdam in 2007.  However, in December 2019, the Netherlands passed legislation banning the use of coal in the production of electricity. This means that the plant must stop using coal by 2030 and convert to another fuel or otherwise, will have to close. Media reports suggest that Uniper is considering bringing a claim against the Dutch government for compensation for losses resulting from the current plans to phase out coal use under the ECT.

Whilst overall the ECT may provide a gateway for investors to combat determinations by courts and the new legislation or regulation enabling climate action, it is not without flaws. There are substantive issues with the regime, particularly its interaction with the question of jurisdiction and state supremacy under article 45. This provides that the ECT provisions shall be applied by the member state to the extent that such provisional application is not inconsistent with its domestic constitution, laws or regulations. Undoubtedly this will be a pivotal factor to any party seeking to enforce the ECT. Jurisdictional matters aside, and whilst litigation under the ECT is not new, it will be interesting to see if a new international treaty based approach to investment related climate litigation evolves and how the basis of claims will sit with more established concepts relating to legitimate expectations, human rights and public interest.

Reform or litigation - a way forward

Flaws and legal arguments aside, is there merit in continuing to balance these interests through conflicting policy and treaties, which lead to costly litigation or is reform required to align both interests?

Recent talks by treaty members resumed to consider modernisation in light of member states being subjected to costly litigation, and revealed discontent. There is disagreement over whether the ECT is a way to assist a government in meeting its obligations under the Paris Agreement (i.e. the two are complimentary) or whether it simply encourages litigation or worse, hampers climate action policy.

Currently, the ECT simply protects investment in the energy sector as a whole, and a more ambitious reform to promote the clean energy transition (which would chime with existing climate litigation aimed at protecting the environment and human rights) may be called for. Negotiations in respect of a perhaps more ambitious reform continued throughout November with a report being submitted for consideration in December 2020.

Energy and the UK

From a UK perspective, the Government has voiced its clear commitments to meeting its Net Zero targets, which is to involve major infrastructure decisions such as measures to manage the demand and production of energy. Despite the apparent desire to make investment in renewable energy production measures feasible (i.e. the construction of the Swansea Tidal Lagoon), in reality, the current demands are said to only be feasibly met by a mixture of energy sources. There has been substantial financial investment by foreign governments and companies such as Hitachi in the UK energy market, particularly in relation to the construction of nuclear power plants. Whilst the energy sector awaits the publication of the new policy in the coming months, investors will be keen to follow any suggestion of legislative or court intervention. 

Should you have any queries relating to this article, or Michelmores' Renewable Energy and Sustainable Economy sectors, please do not hesitate to contact Ian Holyoak or Jonathan Kitchin.