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Letter to the European Commission: Implications of Komstroy ruling on the Energy Charter Treaty

Mathilde Dupré, 4 October 2021

[English] [français]

Abandon the Energy Charter Treaty or miss climate goals : the European Commission will have to decide

Following a ruling by the EU’s top court, we have written to the European Commission together with ClientEarth, Climate Action Network Europe, Friends of the Earth Europe, International Institute for Sustainable Development, PowerShift, SOMO and Transnational Institute, calling on the Commission to encourage the EU and Member States to leave the climate-sabotaging Energy Charter Treaty (ECT) or miss its climate goals.

Lettre à la Commission

The ECT is an outdated investment treaty which contains a controversial “investor-state dispute settlement” mechanism – a tool which allows companies to bypass national courts and sue states for billions in compensation in secretive private tribunals, notably when environmental or climate action affects their economic interests.

A ruling by EU Court of Justice on 2 September 2021 confirmed that using the Treaty’s mechanism for intra-EU investment disputes is not compatible with EU law. But we know that this judgment may not stop EU investors and companies from pursuing billions in ‘compensation’ before arbitral tribunals for legitimate regulatory changes, like coal phase-outs, that are urgently needed to meet EU climate targets.

In the letter, we explain why the only solution is for the EU to withdraw from the ECT.

The EU has a crucial and leading role to play in addressing the climate emergency, but its continued membership of the Energy Charter Treaty is an act of stunning self-sabotage.
The Treaty is basically a trump card that climate-wrecking businesses can play every time a government lays down positive climate policy. This risks creating a chilling effect where governments feel hamstrung and won’t dare introduce the changes we need to see, for fear of legal action.
Though we now have a ruling that outlaws investment arbitration in the EU, it is highly feared that the shadowy tribunals overseeing these disputes will not comply. Letting investors and arbitrators ignore the Court’s recent clarification would undermine the rule of law in the EU and sets a horrendous example
."according to ClientEarth trade lawyer Amandine Van Den Berghe

Polluting corporates are actively using the investor-state dispute mechanism to seek compensations for their stranded assets. This year, German coal giants RWE and Uniper both brought cases against the Netherlands for its decision to phase out coal by 2035, claiming combined damages of around 2.4 billion Euros.

The Commission has attempted to modernise the ECT and bring it in line with climate objectives – but efforts have been hopeless. Now, member states like France, Spain, Poland and Greece are all considering leaving the treaty.

The letter calls on the Commission to start preparing for a coordinated EU withdrawal, together with Member States. This should include abolishing the “sunset clause” – which allows disputes related to existing investments to be brought up to 20 years after a party has left the treaty. (see the proposal from ClientEarth and IISD).

As a reminder :
  • The Energy Charter Treaty (ECT) is an international investment agreement, to which both the EU and its Member States are party (Italy left in 2016), as well as non-EU states. It was designed by the EU in the 1990s in the post-Cold War era to protect foreign investments in the energy sector (it also covers the trade and transit of energy between states).
  • In 2019, the Paris Court of Appeal agreed to seek a ruling from the CJEU on the interpretation of the ECT before it decides whether to annul a $49 million ISDS award obtained by Ukrainian investor Komstroy against Moldova.
  • The proceedings themselves don’t involve the EU or EU member states, and the questions referred do not concern whether the ECT is applicable in EU disputes. However, to decide whether it has the remit to interpret the ECT provisions in its specific case, the CJEU decided to examine whether the ISDS provision in the ECT(Article 26) is applicable to disputes within the EU.
  • The Advocate General discussed the legality of intra-EU ISDS proceedings based on the ECT in this case in his opinion issued in March this year. He argued that the ISDS provision in the ECT is incompatible with EU law.
  • On 2 September, the CJEU clarified that using the ECT in intra-EU cases is illegal. This confirmed that ongoing intra-EU disputes using this mechanism shouldn’t have been brought in the first place. This followed the landmark 2018 Achmea ruling, which already found that investor state dispute settlement (ISDS) provisions in bilateral investment treaties are incompatible with EU law, because they sideline and undermine the power of EU courts.

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