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The fight to dismantle the little-known Energy Charter treaty

Electricity transmission pylons next to the gas-fired power station, operated by Uniper SE, in Irsching, Germany on Wednesday, July 7, 2021.

Michaela Handrek-Rehle | Bloomberg | Getty Images

LONDON – The Energy Charter treaty is not widely known, but there are fears that the influence of this international agreement alone is enough to derail hopes of capping global warming at 1.5 degrees Celsius .

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

These “company court” cases, sometimes referred to as investor-state dispute resolution, are top-secret, take place outside the national legal system, and can often lead to far greater financial rewards than companies could earn. ‘wait otherwise.

Five fossil fuel companies are already known to demand more than $ 18 billion in compensation from governments for energy policy changes and most of these were made through the TCE.

For example, the Germans RWE and Uniper are suing the Netherlands for plans to phase out coal and the British Rockhopper is suing Italy for the ban on offshore drilling.

Not only must countries withdraw from this treaty, but they must torpedo it along the way.

Julia steinberger

Economist and professor at the University of Lausanne

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

“Uniper is convinced that closing our power station in Maasvlakte after only 15 years of operation would be illegal without adequate compensation.”

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

Rockhopper did not respond to a request for comment.

The number of these company courts is expected to skyrocket in the coming years, a trend activists say will act as a hand brake on plans to transition from fossil fuels.

Governments that are ready to implement measures to tackle the climate crisis, meanwhile, could face huge fines.

“The Energy Charter treaty is a real trap for countries,” Yamina Saheb, energy expert and former ECT secretariat employee, turned whistleblower, told CNBC by telephone.

Saheb left his post at the Secretariat in June 2019 after concluding that it would be impossible to align the TEC with the objectives of the historic Paris Agreement. She said any attempt to reform or modernize the treaty would ultimately be vetoed, as many member states rely heavily on fossil fuel revenues.

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

Horst Galuschka | image alliance | Getty Images

“If we step back, we can protect ourselves, we can start implementing the goals of climate neutrality and we can stop promoting the extension of this treaty to other developing countries,” Saheb said. .

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

The ECT secretariat was not immediately available to respond when contacted by CNBC.

The treaty said its fundamental aim is to “strengthen the rule of law on energy issues by creating a level playing field” that helps mitigate the risks associated with energy-related investment and trade.

Who is involved and how does it work?

The TEC is a unique multilateral framework that applies to more than 50 countries – mainly in Europe and Central Asia – and includes the European Union, the United Kingdom and Japan among its signatories. It is currently seeking to expand to new signatory states, particularly in Africa, Asia and Latin America.

Signed in 1994, the TCE was primarily intended to help protect Western companies investing in countries of the former Soviet Union in the post-Cold War era. It was also designed to help overcome economic divisions by ensuring a western flow of finance to the east through binding investment protection.

It has since been sharply criticized by more than 200 climate leaders and scientists as a “major obstacle” to averting a climate catastrophe.

Dozens of people walk in the water due to heavy rains causing flooding in Dhaka, Bangladesh on October 7, 2021.

Sumit Ahmed | Eyepix Group | Barcroft Media | Getty Images

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

“I know 1.5 is a very tight target and there are a lot of things that can blow it up, but that’s because it essentially saves the fossil fuel industries … from the financial collapse they would have to face for. their risky – and frankly criminal – investments in harmful technology. “

Company court hearings initiated through the ECT take place behind closed doors and investors are not required to acknowledge the existence of a case, let alone reveal the compensation they seek.

The average cost of investor-state dispute resolution cases is estimated to be around 110 million euros ($ 123.9 million), according to an analysis of 130 known claims by think-tank OpenExp, and the average cost of l Arbitration and legal fees are estimated at around 4.5 million euros.

International environmental law experts say even the threat of legal action is seen as very effective in curbing national climate action – and fossil fuel companies are well aware of this.

This is because governments may find it difficult to allocate resources to a single problem when considering other priorities. The threat of legal action becomes progressively more powerful as the budget of the country concerned decreases.

In particular, a decision in favor of the state does not lead to zero cost to taxpayers because the respondent state must pay legal and arbitration costs.

“Not only do countries have to get out of this treaty, they have to torpedo it along the way,” Steinberger said. “And that’s something a unit the size of the European Union could do.”

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

The EU completed its eighth round of negotiations to modernize the TEC earlier this month, with the ninth round scheduled for December 13.

France, Spain and Luxembourg have all raised the option of withdrawal if the EU’s modernization efforts are not in line with the Paris agreement.

What happens if the countries withdraw?

Italy withdrew from the ECT in 2016, but it is currently being sued over a 20-year “sunset clause”, meaning it is subject to the treaty until 2036.

Around 60% of treaty-based cases are intra-EU, with Spain and Italy considered the most prosecuted countries. Saheb said that since most of these cases are within the bloc itself, a coordinated withdrawal would likely trigger a domino effect, with states like Switzerland, Norway and Liechtenstein likely to follow suit. .

And if the bloc collectively withdraws from the treaty, member states could agree to remove the legal effects of the sunset clause themselves.

“This sunset clause is much longer than many sunset clauses in other treaties, but is also totally incompatible with the idea that regulations must evolve with the changing reality of climate change, with the changing demands of safeguard. environment and human rights, “Nikki Reisch, director of the Climate and Energy program at the Center for International Environmental Law, told CNBC.

“There are very good arguments to say that the application or the execution of this sunset clause is contrary to other principles of international law”, she added.

View of open freight wagons filled with coal under smog on a day where the PM2.5 dust concentration level was 198 ug / m3 on February 22, 2021 in Czechowice Dziedzice, Poland. The central and eastern European country has the worst air in the EU, according to a report by the European Environment Agency (EEA).

Omar Marques | Getty Images News | Getty Images

The European Court of Justice ruled in early September that EU energy companies can no longer use the treaty to sue EU governments. The verdict severely limits the scope of future intra-EU cases and has called into question the legitimacy of a number of ongoing multibillion-euro lawsuits.

“We’re not out of the woods yet,” Reisch said. The ruling was an important step in blunting an instrument designed to protect fossil fuel investors, she said, but it does not rule out arbitration cases by investors domiciled outside the EU.

“We cannot let our ability to deal with the greatest crisis we have ever faced as humanity, arguably, be held hostage to the interests of investors,” Reisch said.

“I think this is just another reminder of the need to eliminate these legal structures and fictions that we have created that really lock us into a bygone era of fossil fuel dependence.”

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