EU Finally Withdraws From ‘Dated’ Energy Charter

EU 2030 Net-Zero Targets Out Of Reach As Investments Plunge

The European Parliament recently gave its approval to withdraw from European Union (EU) Energy Charter Treaty. This withdrawal was made after receiving recommendation of the Industry, Research, Energy and International Trade committees. This withdrawal was adopted by 594 votes to 7, with 15 abstentions. To complete the process, the parliament gave its consent to the council to adopt the decision by qualified majority. This decision was made after prolonged debate and deadlocks.

The Energy Charter Treaty (ECT) was established in 1994 to regulate trade and investment in the energy sector. However, it has widely been seen to have fallen short of new EU expectations and goals, and the European Parliament also expressed the need for the EU to withdraw in a resolution adopted in 2022. The Charter Treaty is a multilateral agreement focused on the energy sector, to facilitate international cooperation and provide a framework for investment protection, trade and dispute resolution in the field of energy. However, it has remained largely unchanged since the 1990s. It was becoming obsolete and one of the most contentious investment treaties in the world. The commission proposed a coordinated withdrawal by the European Union and its member states, as it considers that the treaty is no longer compatible with the EU’s climate objectives under the European Green Deal and the Paris Agreement, mainly due to concerns about continued investments in fossil fuels.

Last year, European Commission published a proposal for a Council decision on the withdrawal of the Union from the Energy Charter Treaty (ECT) – a multilateral agreement that regulates energy investment. This came after a previous proposal to modernize the ECT did not gather the required majority among member states. Earlier the treaty faced lack of support on EU position de facto blocks the ECT modernization process. Due to many concerns over the protection of fossil fuel investments and amid the lack of prospects for change, several countries have announced their intention to withdraw unilaterally.

Countries such as, France, Germany and Poland were expected to leave the ECT by the end of 2023 and Luxembourg by mid-2024. Additionally, the Netherlands, Slovenia, Spain and, more recently, Denmark, Ireland and Portugal also announced their intention to leave unilaterally. The commission proposed a coordinated withdrawal by the union and its member states. It considers the treaty to be no longer compatible with the EU’s climate goals under the European Green Deal and the Paris Agreement, predominantly due to concerns over continued fossil fuel investments. Another concern relates to the specifics of the investor-state dispute settlement mechanism.

Although the proposal for withdrawal was made in July 2023 however, lack of majority in council prevented the treaty to reach its culmination. Countries such as, such as Cyprus, did not want to leave the treaty. Germany withdrew from the Energy Charter treaty last year. The council has approved EU’s withdrawal from the Energy Charter, only EU parliament excepted the withdrawal.

This decision was made after prolonged debate around commission proposal for withdrawal by the Union and its Member States. It was the redundancy in relations to EU’s climate goals under the European Green Deal and the Paris Agreement which and predominantly due to concerns over continued fossil fuel investments which led to the withdrawal.

Another concern relates to the specifics of the investor-state dispute settlement mechanism. The rulings of international arbitration tribunals are rarely in the public domain, with few opportunities for legal redress and oversight; the majority of cases have been launched against EU Member States, often by investors headquartered in the EU. The Court of Justice of the European Union (CJEU) judgment from September 2021 found it to be contrary to EU law, as it excluded the CJEU from jurisdiction over intra-EU disputes in its areas of competence. A qualified majority of Member States need to back the Commission proposal to withdraw. The procedure requires that the Commission notify the ECT secretariat about the withdrawal of the EU as a whole and that each country does so on its own account. However, some countries have already signalled that they prefer to stay within the ECT. The European Parliament will be asked to give its consent to the EU withdrawal and has already announced in a resolution that there is a required majority to approve the withdrawal. Due to the sunset clause, the parties are bound by the ECT provisions for 20 years after the withdrawal.