Lukas Schaugg: “The Energy Charter Treaty hinders climate action”

The Energy Charter Treaty (ECT), established decades ago to facilitate energy investments in Europe and Central Asia, is now being challenged and accused of protecting investments in fossil fuels. Faced with the failure of the reform processes undertaken so far, several European countries, notably France and Germany, have decided to exit the ECT. However, the treaty is trying to expand to Africa as new oil and gas fields are discovered on the continent. In this interview, Lukas Schaugg, International Law Analyst at the International Institute for Sustainable Development (IISD), describes the challenges of the ECT in the face of the climate emergency.

Jean Marie Takouleu: The Energy Charter Treaty (ECT) came into force in 1998. It is an international investment agreement that establishes a multilateral framework for cross-border cooperation and financial investment in the energy sector. Not everyone is familiar with this legally binding treaty. What is it actually about? 

Lukas Schaugg (LS): The ECT was signed in the geopolitical context of the post-Cold War era in 1994 and entered into force in 1998. When it was signed, there were several contracting parties, including the European Community (now the European Union) and its member countries as well as several post-Soviet countries. Over time, other countries also joined the treaty. The main objective was to promote and protect investment between energy producing and consuming countries, especially in Europe and Central Asia. When we talk about investment here, we are not talking about investment within a country governed by national law, but about cross-border investment flows.

What is at stake in the ECT in the context of global warming, which requires the decarbonisation of all sectors of activity in the world?  

LS: In its current state, the ECT does not distinguish between different energy sources, i.e., fossil or renewable. This poses a risk to climate action as governments may be deterred from taking bold action on energy transition for fear of costly litigation. This hampers the ability of governments to steer their economies towards a more sustainable energy future and to meet their commitments to reduce greenhouse gas (GHG) emissions. Standards that apply to inward investment such as fair and equitable treatment and protection against expropriation are increasingly seen as outdated by contracting parties.

It is worth noting that the treaty’s Investor-State Dispute Settlement (ISDS) mechanism allows investors to sue host states in international arbitration tribunals for alleged violations of these investment protection standards. ISDS is often criticised for its lack of transparency, high costs and lack of an appeal mechanism. Moreover, tribunals often sit abroad, limiting a host state’s control over the decision-making that will apply to its sovereign measures.

In addition, the treaty may discourage governments from adopting environmental and climate-friendly public policies for fear of facing costly arbitration proceedings.

So, is the ECT obsolete? Can it be reformed?

LS: Ambitious reform of the ECT might have been possible if the contracting parties had agreed on an ambitious reform mandate at the outset. This was not the case, as some crucial issues, notably the ISDS and the so-called Survival Clause, were excluded from the reform mandate from the beginning. The Survival Clause provides that if one of the contracting parties – a state – decides to withdraw from the treaty, the investment protection provisions will continue to apply to investments made before the date of withdrawal, for a period of 20 years.

Nevertheless, there has been a process of reform to modernise the treaty. States have engaged in several rounds of negotiations since 2020. These efforts have resulted in an agreement in principle, but this has been deemed insufficient by some contracting parties for several reasons. In particular, several states considered the date of entry into force of the exclusion of fossil fuels to be too uncertain or the use of the Denial of Benefits Clause, which allows other states to deny each other the benefits of the treaty. The new mechanisms for more progressive climate policy in the reform have not really been used by many countries.

So, it was this complexity of reforming the treaty that pushed France and Germany out of the ECT?

LS: These states, along with six other European countries, now consider that withdrawing from the Treaty is preferable and have announced such a step. This is also the solution that we consider to be the most appropriate. As it stands, the risks associated with this treaty are too great. Moreover, there is no scientific evidence that accession to this treaty actually promotes foreign investment. Investment in renewable energy involves other considerations that do not necessarily concern the existence of an investment treaty. In practice, the existence of the ECT is often only raised when there is a conflict.

So, we are talking about it today because the ECT is trying to expand into Africa. And this is happening at a time when fossil fuel deposits are being discovered all over the continent. How does this treaty hinder the continent’s climate ambitions?

LS: Can African countries develop their natural resources today? And should these countries join the ECT in the hope of promoting investments in line with this objective? In my opinion, we need to distinguish between these two questions. On the first, the Paris Climate Agreement specifically recognises the principle of common responsibility, equity and respective capabilities.

With regard to the expansion of the treaty, it is true that the ECT Secretariat has been pursuing an intense expansion policy on the African continent, although this seems to have been put on hold recently, pending the outcome of the treaty reform process. For example, the Treaty Secretariat organises secondments of officials to its premises in Brussels, Belgium, where they prepare official accession reports under the close supervision of Secretariat staff. The ECT Secretariat also organises diplomacy, signing memoranda of understanding with African regional economic communities and presenting its case.

Several African countries have started the process of accession to the ECT. This is the case, for example, of Burundi, Niger, Morocco and Burkina Faso. The extension of the ECT poses a threat to developing countries. The ISDS challenges the legal and regulatory sovereignty of the states hosting investments and can therefore even hinder the exploitation of these resources in a way that ensures local added value and respect for environmental standards.

Instead of joining the ECT, African countries could adopt alternative approaches, such as strengthening their national regulatory frameworks, promoting good governance practices, or regional cooperation. A broader vision of energy transition on the continent is needed, instead of an investment treaty negotiated and signed in another area. The ECT is a treaty whose future is more uncertain than ever.

Beyond the ECT, many African countries, notably the Democratic Republic of Congo (DRC), are embarking on the exploitation of fossil fuels and are in the process of mobilising investments. And some investors may demand guarantees. Ultimately, is it not in the interest of African states to attract these investments, given their development needs, and despite the lack of flexibility in the treaty? Should they rely solely on renewable energies to develop?

LS: I’m not a renewable energy specialist. But I think it’s a question of equity, because the northern countries have exploited fossil fuels for decades. This is the root cause of the current global warming… Therefore, African countries can perhaps not be forbidden to exploit their natural resources to a certain degree. However, European countries must support the transition to renewable energy, particularly through capacity building.

The question can also be posed in a positive way: how can Africa’s enormous renewable energy potential be exploited quickly and efficiently? And to do this, we need to move away from treaties that protect and perpetuate investments in fossil fuels.