Struggle to dismantle the obscure Energy Charter Treaty

Power transmission towers near a gas-fired power plant operated by Uniper SE in Irsching, Germany, Wednesday 7 July 2021.

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LONDON. The Energy Charter Treaty is little known, but there are fears that the impact of this international agreement may be enough to shatter hopes of limiting global heating to 1.5 degrees Celsius.

The ECT contains a highly controversial legal mechanism that allows foreign energy companies to sue governments for climate action that could hurt future profits.

These “corporate court” cases, sometimes referred to as investor-state dispute resolution, are highly secretive, take place outside the national legal system, and can often result in much larger financial payouts than companies would otherwise expect.

Five fossil fuel companies Already known demand more than $ 18 billion in compensation from governments for changes in energy policy, most of which were received through the ECT.

For example, Germany’s RWE and Uniper are suing the Netherlands over plans to ditch coal, while Britain’s Rockhopper is suing Italy over a ban on offshore drilling.

Countries must not only withdraw from this treaty, but also torpedo it at the exit.

Julia Steinberger

Environmental economist, professor at the University of Lausanne.

A Uniper spokesman told CNBC: “The Dutch government has announced its intention to close the last coal-fired power plants by 2030 without compensation.

“Uniper is convinced that shutting down our power plant at Maasvlakte after 15 years of operation will be illegal without adequate compensation.”

RWE stated that it “directly supports the energy transition in the Netherlands. In principle, it also supports the CO2 reduction measures associated with the law, but believes that compensation is necessary. ”

Rockhopper did not respond to a request for comment.

The number of these corporate vessels is expected to skyrocket in the coming years, a trend campaigners fear will serve as a handbrake on plans to phase out fossil fuels.

In the meantime, governments willing to take action to tackle the climate crisis could face hefty fines.

“The Energy Charter Treaty is a real trap for countries,” Yamina Saheb, an energy expert and former ECT Secretariat staff member turned informant, told CNBC by phone.

Saheb left her role in the Secretariat in June 2019 after finding it was impossible to align the ECT with the goals of the historic Paris Agreement. Any attempt to reform or modernize the treaty will ultimately be vetoed, she said, as many member states rely heavily on fossil fuel revenues.

Thick smoke, a cloud of water vapor exiting the cooling towers of the Weisweiler lignite power plant, RWE Power AG in Germany.

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“If we get out, we can defend ourselves, we can start realizing the goals of climate neutrality, and we can end the push to extend this treaty to other developing countries,” Saheb said.

“I think the only way forward is to annul this treaty,” she added. “Either we kill this treaty, or the treaty will kill us.”

The ECT Secretariat was not available for immediate response when contacted by CNBC.

In the contract said its main goal is to “strengthen the rule of law on energy matters by creating a level playing field” that helps reduce the risks associated with energy investment and trade.

Who is involved and how does it work?

The ECT is a unique multilateral structure that used in more than 50 countries – mainly in Europe and Central Asia – and includes the European Union, the United Kingdom and Japan among the signatories. He is currently seeking to expand his presence to the new signatory states, especially in Africa, Asia and Latin America.

Signed in 1994, the ECT was primarily intended to protect Western companies investing in the countries of the former Soviet Union during the post-Cold War era. It was also designed to help bridge economic divisions by allowing Western finance to flow eastward through compulsory investment protection.

Since then, it has been heavily criticized by over 200 climate leaders and scientists as “main obstacle“to prevent a climate catastrophe.

Dozens of people walk on water as heavy rains cause flooding in Dhaka, Bangladesh on October 7, 2021.

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“I think the treaty is probably enough to kill 1.5 [degrees Celsius]Julia Steinberger, an environmental economist and professor at the University of Lausanne, told CNBC.

“I know 1.5 is a very tough target and there are many things that could blow it up, but that’s because it basically saves the fossil fuel industries … from the financial ruin they have to face for their risky – and, frankly, the criminal is investments in harmful technology. “

Corporate court hearings, conducted through the ECT, are held in private, and investors are not required to acknowledge the existence of a case, let alone disclose the compensation required.

The average cost of investor-government dispute resolution cases is estimated at around € 110 million ($ 123.9 million), according to data analysis out of 130 known lawsuits by the think tank OpenExp, and the average cost of arbitration and litigation costs is estimated at around 4.5 million euros.

International environmental law experts say that even the threat of legal action is considered highly effective in deterring climate change action domestically, and fossil fuel companies are well aware of this.

This is because it can be difficult for governments to allocate resources to one issue while taking into account other priorities. The threat of legal action grows more powerful as the country’s budget shrinks.

It is noteworthy that the decision in favor of the state does not lead to zero costs for taxpayers, since the respondent state must pay court and arbitration fees.

“Countries not only have to get out of this treaty, they have to torpedo it on the way out,” Steinberger said. “And that’s what a unit the size of the European Union can do.”

An EU spokesman was not available for comment when contacted by CNBC.

The EU completed the eighth round of negotiations on the modernization of the ECT earlier this month, and the ninth round of negotiations is scheduled for December 13th.

France, Spain and Luxembourg have offered an option if the EU’s modernization efforts are not in line with the Paris Agreement.

What happens if countries leave?

Italy withdrew from the ECT in 2016 but is currently being sued due to a 20-year “termination clause”, which means it is subject to a treaty until 2036.

About 60% of cases related to the agreement take place within the EU, with Spain and Italy being the countries with the most legal claims. Saheb said that, given that most of these cases take place within the bloc itself, a coordinated withdrawal is likely to set off a domino effect, and states such as Switzerland, Norway and Liechtenstein are likely to follow suit.

And if the bloc collectively withdraws from the treaty, the member states can agree to eliminate the legal consequences of the termination clause on their own.

“This termination clause is much longer than many of the termination clauses in other treaties, but it is also completely incompatible with the notion that rules must evolve in response to the changing reality of climate change, the changing demands of environmental protection and human rights.” – Nikki Reisch, director of the Climate and Energy Program at the Center for International Environmental Law told CNBC.

“There is really strong evidence that the application or enforcement of this termination clause is contrary to other principles of international law,” she added.

View of open freight cars filled with coal under smog during the day, with a PM2.5 dust concentration of 198 μg / m3 on February 22, 2021 in Czechowicki Dziedzice, Poland. This Central Eastern European country has the worst air in the EU, according to a report published by the European Environment Agency (EEA).

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European court ruled in early September, EU energy companies could no longer use the treaty to sue EU governments. The verdict significantly limits the scope of future cases within the EU and casts doubt on the legitimacy of a number of ongoing lawsuits worth several billion euros.

“We are not out of the woods yet,” Reisch said. The decision was an important step towards thwarting an instrument designed to protect fossil fuel investors, she said, but it does not remove from arbitration cases involving investors outside the EU.

“We cannot afford our ability to withstand the greatest crisis we have ever faced as humanity may have become hostage to investor interests,” Reisch said.

“I think this is just another reminder to remove those legal structures and fictions we have created that really lock us in in a bygone era of fossil fuel addiction.”

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