Earlier this year, the think tank Climate Change Counsel (“CCC”) undertook a major study on the Energy Charter Treaty (1994) (“ECT”). The aim of the research was to understand the impact of the ECT in relation to climate change and the energy transition.

To this end, CCC analysed ECT-related jurisprudence, compiling a comprehensive review of 64 out of 75 known arbitral awards rendered under the ECT before 3 August 2021. The analysis showed that by and large, climate change issues have not been at the forefront of the discussion during ECT arbitration proceedings to date. However, as States begin phasing out fossil fuels to meet their commitments under the Paris Climate Agreement, potentially triggering claims by fossil fuel companies against this State action (“phase out cases”), this could all change.

The legal architecture to combat climate change has already been in operation for years, and its importance is growing. As early as 1992, the United Nations concluded the Framework Convention on Climate Change (“UNFCCC”), the ultimate aim of which was preventing “dangerous” anthropogenic interference with climate systems. The UNFCCC entered into force in 1994 and currently has nearly universal application (with 197 State Parties having ratified the Convention). The same year, the ECT was signed in order to facilitate cross-border energy(-related) transactions in the post-Cold War era. The importance of the UNFCCC as well as the need for environmental protection measures is recognised in the ECT. This shows that the ECT may be interpreted in an environmentally-“friendly” manner. At the same time, it is important to note that these references do not place any obligations on investors and are not contained within the section of the ECT related to investment promotion and protection.

The legal framework in the ECT dealing with climate is based on several provisions. It can first be observed in the preamble (i.e., paras 12, 13, 15). As for the substantive provisions of the ECT:

• Article 19 requires Contracting States to strive to minimize environmental impact of energy operations,
• Article 24(2) allows Contracting States to adopt measures necessary to protect human, animal or plant life or health, and
• (finally) the Protocol on Energy Efficiency and Related Environmental Aspects (along with Article 19) refers to Contracting States’ efforts to combat the environmental impact of energy operations.
  
  

CCC’s study shows, however, that the reference to these ECT environmental provisions is to date virtually non-existent, with only four of the 64 ECT awards referring to Article 19 or preambular language at all, and with only limited references to climate change or energy transition being found in tribunals’ analyses.

Phase-out cases, on the other hand, would trigger important questions related to the rights of (fossil fuel) investors to protection under the ECT versus the rights of States to regulate on the environment. Balancing these tensions will also require careful consideration as to the interactions of various international law regimes (e.g., international climate law on the one hand, and international investment law on the other).

When it comes to claims that might be brought in the phase-out cases, the Report identifies that these will likely be based on the breach of a State’s substantive treaty obligation of Fair and Equitable Treatment (“FET”) or Expropriation. The claims, therefore, might be based on Articles 10(1) and 13 of the ECT. Additionally, the ECT gives an investor a choice of forum before the dispute may be resolved, which enhances an investor’s procedural protection by including well-established international arbitration centres, including the International Centre for Settlement of Investment Disputes (“ICSID”), the Arbitration Institute of the Stockholm Chamber of Commerce (“SCC”) and the proceedings conducted under the 2021 UNCITRAL Arbitration Rules.

The Report also acknowledges that the ECT has not been created in a legal vacuum and inevitably interacts with other treaties. This interaction particularly comes into play via Article 26(6) of the ECT, which mandates that tribunals hearing investment disputes under the ECT “decide the issues in dispute in accordance with this [ECT] Treaty and applicable rules and principles of international law.” As the study concedes, the ECT has not expressly been interpreted alongside any international environmental agreements such as the 2015 Paris Agreement. Rather, the overwhelming majority of interaction between the ECT and other treaties has involved the Vienna Convention on the Law of Treaties (1969)(“VCLT”) – which dictates how arbitral tribunals must interpret the provisions of the ECT – and the EU treaties that form the basis of EU law.

Under Article 31 of the VCLT, arbitral tribunals interpreting the ECT must do so also in light of its context and purpose, which includes the ECT’s preamble and annexes. Given the ECT’s reference to the UNFCCC and other environmental agreements in its preamble, as well as Article 26(6) of the ECT and the mandate in Article 31(3)(c) of the VCLT, arbitral tribunals have an obligation to interpret these treaties in a way that harmonizes them, which the study notes is sometimes referred to as the principle of systemic integration.

One difficulty noted by the study is Article 16 of the ECT, which stipulates the relationship between the ECT and other international agreements. Critically, Article 16(2) provides that in the event of a material inconsistency between the ECT and another provision, the provisions more favourable to investors and investments will prevail. In the context of intra-EU disputes, Article 16 has been used by tribunals to deny jurisdictional objections by EU Member States attempting to deny intra-EU investors the right to access dispute resolution under the ECT. According to these tribunals, Article 16 has been found to constitute “an insurmountable obstacle” to the argument that EU law would prevail over the ECT to deny the right of an investor to access arbitration under Article 26 of the ECT.

The study notes, however, that some tribunals have taken a different course in which EU law was taken into consideration as a “fact” in the analysis of the alleged breach, particularly in considering whether investors were entitled to legitimate expectations (under a FET analysis).

It remains to be seen how future tribunals will deal with Article 16 of the ECT in relation to the obligations of States under international environmental law considering the objection and purpose of the ECT, but the study notes that the use of international environmental law as a “fact” – considering whether investors could possibly have legitimate expectations given the global emphasis on fighting international climate change – could be one way that this issue is resolved satisfactorily.

The interaction between international legal frameworks leads to the States’ competing obligations – towards a protection of the environment on the one hand and a protection of the investor on the other hand. Effectively, it requires a fine balance between States’ right to regulate aiming at a just energy transition and protection of (fossil fuels) investors. The Report evidences that none of the awards had to asses States’ climate actions. At the same time, the States’ right to regulate has been subject to the tribunals’ analyses.

The study distinguishes regulatory disputes that are not related to the renewable energy incentives schemes and those which are. This is a helpful distinction because a great number of known ECT cases were brought by renewable energy investors. In a nutshell, these investors relied on their expectations that the regulatory framework for renewable incentives will remain largely unchanged. These investors were often successful, demonstrating that respondent States made specific commitments with regard to the regulatory frameworks into which investors were entering. In the context of the global fight against climate change, it is the other side of the same legitimate expectations coin. Whereas it is likely that fossil energy investors cannot have legitimate expectations that the regulatory regime will remain unchanged (and highly favourable), it is also likely that renewable energy investors should be able to rely on favourable regulatory regimes that do not change for the worse.

The CCC Report concludes with a set of considerations addressed to each of the actors involved in the investment arbitration process (States, investors, arbitrators, and civil society actors). The Report findings will certainly prove to be valuable in the context of the debate on the energy transition, the use of the ECT and its ongoing reform. Drafters of the modernized ECT certainly intend to make the treaty fit for the clean energy transition – as demonstrated by the recent Agreement in Principle reached by the Contracting Parties on 24 June 2022. While the ECT continues to be a controversial treaty criticized by some for its potential to be weaponized by the fossil fuel industry, it should not be forgotten that it remains an important mechanism protecting the renewable energy investments that are key to reaching the goals of the Paris Agreement.

This blog was first published on the JusMundi's Blog.