Agreement in principle reached on Modernised Energy Charter Treaty

Once approved and ratified, the modernised ECT will facilitate sustainable investments in the energy sector by creating a coherent and up-to-date framework.  It provides legal certainty and ensures a high level of investment protection while reflecting clean energy transition goals and contributing to the achievement of the objectives of the Paris Agreement.

The ECT will offer investment protection reflecting the reformed and modernised standards developed by the EU in its recent bilateral agreements, preserving the right of governments to pursue their public policy objectives, including for climate change mitigation and adaptation. This fully preserves the EU’s ability to develop our climate policies.

We have thereby aligned the ECT with the Paris Agreement and our environmental objectives.  

The modernised ECT will allow the Contracting Parties to exclude new fossil fuel related investments from investment protection and to phase out protection for the already existing investments. This phasing out of protection for fossil fuel investments will take place within a shorter timeframe than in the case of a withdrawal from the ECT, for both existing and new investments: existing fossil fuel investments will be phased out after 10 years under modernised rules (instead of 20 years under current rules) and new investment in fossil fuels will be excluded after 9 months.

The new text will also confirm that an investor from a Contracting Party that is part of a regional economic integration organisation (REIO), like the EU, cannot bring an Investor-state dispute settlement (“ISDS”) claim against another Contracting Party member of the same REIO. This shall finally bring an end to the intra-EU applications under the ECT that are contrary to the EU law and recent judgments by the Court of Justice of the EU.

The Modernised ECT contains new definitions of “Investment” and “Investor” so that only investors with substantive economic interests but not mailbox companies will enjoy investment protection.

In the Modernised ECT, Parties reaffirm their commitment to respect internationally recognised fundamental labour principles and agree to refrain from lowering their standards to attract investment through the so-called non-regression clause, and to carry out Environmental Impact assessments. Provisions on transparency and corporate social responsibility are also part of the sustainable development provisions, all of which are subject to an ad-hoc dispute settlement procedure.

Regarding transit, the modernised ECT takes into account the requirements of integrated energy markets with third party access rights such as in the EU, with notably upgraded provisions as regards access for transit purposes, infrastructure use and tariffs.

Relevant dispute settlement rules have been modernised, like for example ensuring increased transparency of dispute settlement proceedings and the protection against frivolous investment claims.

Next steps

With an agreement in principle on the text of the modernisation of the ECT, a so-called silence procedure will be triggered between the Contracting Parties of the ECT. If no Contracting Party breaks the silence, the text can be formally adopted at the Energy Charter Conference foreseen in November. In order for the EU to conclude the agreement, the Commission will need to formally launch a procedure for signature and conclusion of the agreement that will require agreement of the Council as well as the consent of the European Parliament.

Background

The ECT was signed in December 1994 and entered into force in April 1998. Currently, there are fifty-three Signatories and Contracting Parties to the Treaty. This includes the European Union, Euratom and all Member States except for Italy that withdrew in 2015.

The initial aim of the ECT was to create a forum for East-West policy cooperation in the fields of energy, investment protection, trade and transit. The Treaty’s investment protection provisions have not been updated since the 1990s and are now outdated in comparison to the new standards established by the EU’s reformed approach on investment policy.

When the ECT was negotiated, differentiating among energy sources according to their compatibility with climate policy commitments was not yet in practice. Even if the current wording of the ECT contains some incentives for a transition to clean energy, they are implicit and very few, that is not sufficient to achieve the current environmental policy targets.

Moreover, the ECT has become the most litigated investment agreement in the world, with the majority of dispute being intra-EU, that is involving investors from an EU Member State against another EU Member State.

The Council has given the Commission in July 2019 a mandate to negotiate a profound modernisation of the ECT, since the ECT needed substantial reform both in terms of investment protection standards as well as a reinforcement of the sustainability dimension of the Treaty.

In May 2020, the EU submitted a proposal for the modernisation of the Energy Charter Treaty. On 15 February 2021, the EU submitted to the ECT secretariat a supplementary proposal to address the issue of the definition of economic activity in the energy sector, also known as the fossil fuel carve out. Fifteen rounds have taken place since July 2020. The Ad Hoc meeting of the Energy Charter Conference on 24 June 2022 endorsed the outcome of the modernisation negotiations and gave an “agreement in principle” on the resulting text. 

For more information

EU text proposal for the modernisation of the Energy Charter Treaty

EU additional submission to its text proposal for the modernisation of the Energy Charter Treaty