What does the future hold for a post-Energy Charter Treaty world, with sunset clauses guaranteeing the international framework a place on the world scene for years to come, asks Alex Lee and Matt Riding.

First published by the Commercial Dispute Resolution Magazine, July 2024. This article has been edited for 2025.

The signing of the Energy Charter Treaty (ECT) in 1994 was a pivotal moment within the energy sector. In the geopolitical context following the fall of the Soviet Union (USSR), it aimed to promote international energy cooperation, securing hydrocarbon energy supplies from countries in Central Asia and the former Soviet bloc in exchange for foreign investment and technical cooperation.^[1]https://www.euractiv.com/wp-content/uploads/sites/2/2019/09/Report-ECT.pdf The agreement entered force in 1998; however, with shifts in global energy and environmental policy in the years that have ensued, coupled with the apparent inflexibility of the Treaty to modernisation, it now increasingly finds itself standing distant and outdated to contemporary laws and thinking. Interestingly, while hydrocarbons were undoubtedly the overwhelming focus of the Treaty at the time it was established, it is important to note that Article 1(6) does also cover foreign investment in multiple stages of the renewable energy value chain. Given its widespread international adoption and the array of assets protected, how nations and investors within the energy sector act in response to the demise of the ECT, could come with a significant, long-lasting sting.

Under the ECT, host states are subject to broad obligations, which investors can enforce through binding international arbitration. This is achieved through an inbuilt investor-state dispute settlement (ISDS) mechanism (Article 26(2)C), whereby investors can seek compensation before an international arbitral tribunal if they believe their rights under the Treaty have been violated. If an amicable settlement cannot be reached within three months, the investor can escalate the dispute to the courts or administrative tribunals, either nationally or internationally, the latter mainly relating to investment protection, expropriation and compensation.^[2]https://www.euractiv.com/wp-content/uploads/sites/2/2019/09/Report-ECT.pdf ^[3]https://www.taylorwessing.com/en/insights-and-events/insights/2024/03/uk-announces-withdrawal-from-energy-charter-treaty

As of the end of 2021, out of over 1,100 global ISDS, more than 145 were brought about due to the ECT,^[4]https://www.oecd.org/investment/investment-policy/OECD-investment-treaties-climate-change-consultation-responses.pdf the highest number of all investment protection agreements.^[5]https://www.oecd.org/investment/investment-policy/OECD-investment-treaties-climate-change-consultation-responses.pdf It is little wonder that the ISDS mechanism is the most contentious issue under the Treaty, with some arguing that it amounts to the over-protection of the economic interest of foreign investors, of which fossil fuels represent over half the total protected investment.^[6]https://www.euractiv.com/wp-content/uploads/sites/2/2019/09/Report-ECT.pdf Curiously, as the ECT also offers foreign investors a range of protections for renewable energy installations, as of May 2023, approximately 59% of all ECT-based investment arbitration cases concerned renewable power generation, with the solar sub-sector alone accounting for 38% of all cases.^[7]Renewable energy investors continue to rely on treaty protection: updated statistics on Investment cases under the ECT – Energy Charter

Many of the cases stem from changes to investment incentives provided to encourage development in the renewable energy sector due to the high up-front cost of new technologies, and prohibition of unfair or unwarranted policy change that could amount to expropriation.^[8]Investment Disputes Involving the Renewable Energy Industry under the Energy Charter Treaty – Global Arbitration Review It has been suggested that the large number of cases brought under the ECT by renewable energy firms indicates its effectiveness at protecting green foreign investment.^[9]Despite consensus on the ECT’s incompatibility with the global climate agenda, claims that it is well-suited for the clean energy transition persist – Investment Treaty News (iisd.org) However, the overall picture is less clear, as many of these cases are concentrated in a small number of countries, and few have been successfully brought to arbitration.^[10] Despite consensus on the ECT’s incompatibility with the global climate agenda, claims that it is well-suited for the clean energy transition persist – Investment Treaty News (iisd.org)

As it stands, there are concerns with the Treaty for both investors and signatory states. The heavy association of the Treaty fossil fuels, the adoption of the Paris Agreement, Sustainable Development Goals (SDGs), and net zero ambitions within the EU by 2050,^[11]https://climate.ec.europa.eu/eu-action/climate-strategies-targets/2050-long-term-strategy_en#:~:text=The%20EU%20aims%20to%20be,to%20the%20European%20Climate%20Law%20 climate change and sustainable development are now intrinsically interwoven and inseparable.^[12]https://www.sciencedirect.com/science/article/pii/S2214629618305383 The aim of limiting the global average temperatures to below 2°C above pre-industrial levels means that some parties argue that the available global fossil fuel reserves should remain in the ground. An inevitable consequence of meeting these objectives is potentially to turn the reserves and investments made in extractive infrastructure into stranded assets; those which cannot be developed, extracted or used due to changes in environmental and societal norms.^[13]Investment Disputes Involving the Renewable Energy Industry under the Energy Charter Treaty – Global Arbitration Review

The lack of compatibility between the ECT and the EU’s climate goals was highlighted in April 2021, when the Netherlands passed a law banning coal-fired power plants from 2030 and was sued by RWE and Uniper for 2.4 billion Euros ^[14]https://www.europarl.europa.eu/RegData/etudes/BRIE/2023/754632/EPRS_BRI(2023)754632_EN.pdf Similarly, the cancellation of permits for the Keystone XL Pipeline resulted in USD16.3 billion in claims by TC Energy and the Province of Alberta against the United States.^[15]https://www.oecd.org/investment/investment-policy/OECD-investment-treaties-climate-change-consultation-responses.pdf Such compensation is often based on hypothetical incomes over the lifetime of the asset and can easily reach exceptionally large liabilities for states.^[16]https://www.oecd.org/investment/investment-policy/OECD-investment-treaties-climate-change-consultation-responses.pdf

The scale of potential future ISDS if counties are to move toward net zero goals is staggering. In 2020, the ECT protected around 51 coal power plants that were at risk of being stranded assets in a scenario compliant with the Paris Agreement^[17]https://www.iied.org/sites/default/files/pdfs/migrate/17660IIED.pdf)), with an estimated total of 345 billion Euros of fossil fuel assets in the EU, UK and Switzerland currently protected.(((Olivier … Continue reading These, therefore, represent a large and potentially debilitating legal threat to governments; they may be a driver for climate inaction, risking states falling behind on their climate ambitions,^[18]https://www.taylorwessing.com/en/insights-and-events/insights/2024/03/uk-announces-withdrawal-from-energy-charter-treaty and failing to protect the interests of the public, who will ultimately bear the long-term cost of carbon targets.^[19]https://www.euractiv.com/wp-content/uploads/sites/2/2019/09/Report-ECT.pdf

In the wake of the Paris Agreement, proposals to modernise the Treaty for states wishing to adopt cleaner technologies were made, as well as those aimed at removing the risk of ISDS against contracting states.^[20]https://www.taylorwessing.com/en/insights-and-events/insights/2024/03/uk-announces-withdrawal-from-energy-charter-treaty In June 2022, a modernised text was announced, but EU Member States failed to agree on a common stance.^[21]https://www.taylorwessing.com/en/insights-and-events/insights/2024/03/uk-announces-withdrawal-from-energy-charter-treaty Differences in the climate ambitions of ECT signatories, combined with the unanimity required to make changes to the Treaty, led to the postponement of modernisation. This left many countries with carbon targets reconsidering their position within the ECT.^[22]https://www.taylorwessing.com/en/insights-and-events/insights/2024/03/uk-announces-withdrawal-from-energy-charter-treaty

As of June 2024, there are 50 contracting members of the ECT[1]. The UK submitted written notice of formal withdrawal on 28^th May 2024,^[23]https://www.energycharter.org/media/news/article/written-notification-of-withdrawal-from-the-energy-charter-treaty-4/ concerned that modernisation would not occur and that still being a member would hinder the UK’s transition to cleaner, cheaper energy and possibly even penalise efforts to deliver net zero.^[24]https://www.taylorwessing.com/en/insights-and-events/insights/2024/03/uk-announces-withdrawal-from-energy-charter-treaty Such sentiments appear widely held.^[25]https://www.taylorwessing.com/en/insights-and-events/insights/2024/03/uk-announces-withdrawal-from-energy-charter-treaty The Russian Federation, Italy, France, Germany and Poland have already formally withdrawn.^[26]https://www.sciencedirect.com/science/article/pii/S2214629618305383 Others, including Luxembourg, have given notice of withdrawal, and Spain and Slovenia have announced their intention to do so.^[27]Despite consensus on the ECT’s incompatibility with the global climate agenda, claims that it is well-suited for the clean energy transition persist – Investment Treaty News (iisd.org) Denmark, Ireland and Portugal have also announced their intentions to withdraw unilaterally.^[28]Despite consensus on the ECT’s incompatibility with the global climate agenda, claims that it is well-suited for the clean energy transition persist – Investment Treaty News (iisd.org) A leaked paper from the European Commission has commented that ‘re-negotiating the outcome of the modernisation process does not seem feasible’ and that ‘a withdrawal of the EU and Euratom from the Energy Charter Treaty appears to be unavoidable.’^[29]https://www.euractiv.com/wp-content/uploads/sites/2/2023/02/Non-paper_ECT_nextsteps.pdf

Yet, from the perspective of former signatory states, once formal notification of withdrawal has been made, the risk of ISDS does not disappear immediately. To ensure long-lasting cooperation between states and investors, two sectional sunset clauses were included within the Treaty.^[30]Despite consensus on the ECT’s incompatibility with the global climate agenda, claims that it is well-suited for the clean energy transition persist – Investment Treaty News (iisd.org) The first extends the validity of the Treaty for an additional year from the date notice to withdraw is received,^[31]Despite consensus on the ECT’s incompatibility with the global climate agenda, claims that it is well-suited for the clean energy transition persist – Investment Treaty News (iisd.org)) new energy investments would still be covered under the ECT for one year, and still afforded the same access to recourse by the ISDS mechanisms until the end of the sunset clause. The second requires signatory states to adhere to provisions applying to existing investments for 20 years post-withdrawal,^[32]Despite consensus on the ECT’s incompatibility with the global climate agenda, claims that it is well-suited for the clean energy transition persist – Investment Treaty News (iisd.org) Therefore, even after unilaterally leaving the Treaty, parties are bound to honour the provisions for up to 21 years.^[33]Despite consensus on the ECT’s incompatibility with the global climate agenda, claims that it is well-suited for the clean energy transition persist – Investment Treaty News (iisd.org) The possibility of abandoning these provisions within the sunset clause is the subject of much legal uncertainty.^[34]https://arbitrationblog.kluwerarbitration.com/2022/11/04/withdrawing-from-the-energy-charter-treaty-the-end-is-not-near/^[35]https://www.ashurst.com/en/insights/the-uk-and-others-exit-the-energy-charter-treaty-what-does-this-mean-for-energy-sector-investors

Instances where climate change regimes and the ECT’s investment protection interests conflict materialise in disputes already, but with the increasingly strict climate mitigation rules, their numbers are expected to increase.^[36]https://www.mdpi.com/2075-471X/13/2/24 In future disputes, we foresee and have seen states presenting arguments for consideration and integration of climate obligations in the context of the ECT and the specific dispute, but ultimately, will have to rely on international climate obligations being taken into account by an arbitrator.^[37]https://www.energycharter.org/media/news/article/written-notification-of-withdrawal-from-the-energy-charter-treaty-4/

Meanwhile from the perspective of those who have or are considering future investments within countries that have withdrawn or soon to withdraw from the ECT, efforts should be made to ensure planned investments are made as soon as possible to attain the protection of the ECT, and alternative treaties or contractual protection mechanisms should be considered. Furthermore, as time fades for resolution under the neutral dispute forum provided by ECT, disputes should be raised and arbitration sought promptly.^[38]https://www.energychartertreaty.org/treaty/contracting-parties-and-signatories

A social license can never be self-awarded, it requires that an activity enjoys sufficient trust and legitimacy and has the consent of those affected. As described briefly by the McKinsey Group.^[39]https://www.mckinsey.com/capabilities/sustainability/our-insights/does-esg-really-matter-and-why

“Social license is not static, and companies do not earn the continued trust of consumers, employees, suppliers, regulators, and other stakeholders based merely upon prior actions. Indeed, earning social capital is analogous to earning debt or equity capital—those who extend it look to past results for insights about present performance and are most concerned with intermediate and longer-term prospects. Yet unlike traditional sources of capital, where there are often creative financing alternatives there are ultimately no alternatives for companies that do not meet the societal bar and no prospect of business as usual, or business by workaround, under conditions of catastrophic climate change.” (or, I add, other environmental issues)

Conclusion

In conclusion, although many now seek to depart the ECT, the fading of its sun to disappearance is to be slow. Environmental triggers may even, at times, depict a resplendent sunset as the number of cases increases within the 20-year window. We envisage pressures arising from social licence and evolving climate (and environmental) legislation as catalysts for more such cases. Investors may also seek to expedite planned investment, or pursue their cases early to avoid missed opportunity in a closing window. Finally, while demise of the ECT is widely considered a positive for climate mitigation efforts, it also has the potential to harm foreign investment in the renewable technologies required to meet Paris Agreement targets. Needless to say, such complex cases have and will require a depth and mix of the best environmental experts to aid the tribunal.

If you would like to know more about HKA please visit www.HKA.com. If you would like to explore ECT or otherwise discuss how HKA Environment and Climate experts can help you in times of dispute or advisory, then please contact Dr Alexander Lee (alexlee@hka.com), who would be delighted to listen and discuss.

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About the Authors

Alex Lee (MSc, PhD, FGS, CSci, CGeol, EuGeol, ASoBRA, SiLC), Principal 
​​Dr Alexander Lee​ has over 25 years of experience in ground risk and remediation. He is a Chartered Geologist and Scientist and a Specialist in Land Condition (SiLC). He is a critical thinker and industry leader with a history of influencing and writing UK guidance. He has been cross-examined in litigation and regularly provides expert opinion, analysis, and advice within dispute values of up to £700 million. 

Matt Riding (B.Sc., M.Sc., M.Sc., Ph.D.), Senior Engineer 
Matt Riding has seven years of experience in ground risk and remediation. His academic research focused on the fate and transport of new and emerging chemicals within the environment, as well as developing methods to profile their mechanisms of toxicity in prokaryotic and eukaryotic cells.