Climate: The fight to dismantle the little-known Energy Charter Treaty

LONDON — The Energy Charter Treaty will not be broadly recognized, but it's feared the affect of this worldwide settlement could possibly be sufficient by itself to derail hopes of capping world heating to 1.5 levels Celsius.

The ECT comprises a extremely contentious authorized mechanism that permits overseas power firms to sue governments over local weather motion that might damage future income.

These "corporate court" circumstances, generally referred to as investor-state dispute settlements, are extremely secretive, happen outdoors of the nationwide authorized system and may typically lead to far bigger monetary awards than firms may in any other case count on.

Five fossil gas firms are already recognized to be looking for over $18 billion in compensation from governments over power coverage modifications and most of those have been introduced by way of the ECT.

For instance, Germany's RWE and Uniper are suing the Netherlands over coal phase-out plans and the U.Ok.'s Rockhopper is suing Italy over a ban on offshore drilling.

Not solely do nations have to get out of that treaty, they’ve to torpedo it on the means out.Julia SteinbergerEcological economist and professor from the University of Lausanne

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

"Uniper is satisfied that shutting down our energy plant in Maasvlakte after solely 15 years of operation could be illegal with out ample compensation."

RWE said it "expressly helps the power transition in The Netherlands. In precept, it additionally helps the measures to scale back CO2 related to the legislation, however believes compensation is important."

A spokesperson for Rockhopper said: "The Energy Charter Treaty is designed to present a steady platform for power sector investments. The Italian authorities issued licenses and inspired important funding in oil and fuel exploration, primarily based on this platform."

"Clearly it’s not equitable to change the guidelines midway by means of. It can be vital to observe that Italy continues to produce important portions of oil and fuel inside 12 miles of the coast."

The number of these corporate court tribunals is expected to skyrocket in the coming years, a trend that campaigners fear will act as a handbrake on plans to transition away from fossil fuels.

Governments that are prepared to implement measures to tackle the climate crisis, meanwhile, could be hit with enormous fines.

"The Energy Charter Treaty is an actual entice for nations," Yamina Saheb, an energy expert and former ECT Secretariat employee turned whistleblower, told CNBC via telephone.

Thick smoke, cloud of water vapour comes out of the cooling towers of the lignite-fired power plant Weisweiler of RWE Power AG in Germany.Horst Galuschka | picture alliance | Getty Images

Saheb quit her role with the Secretariat in June 2019 after concluding it would be impossible to align the ECT with the goals of the landmark Paris Agreement. She said any attempt to reform or modernize the treaty would ultimately be vetoed since many member states are heavily reliant on fossil fuel revenues.

"If we withdraw, we will defend ourselves, we will begin implementing the local weather neutrality targets and we will finish the promotion of the enlargement of this treaty to different creating nations," Saheb said.

"I believe the solely means ahead is to kill this treaty," she added. "Either we kill this treaty, or the treaty will kill us."

The ECT Secretariat did not respond to a request for comment.

The treaty has said its fundamental aim is "to strengthen the rule of legislation on power points by making a degree enjoying subject of guidelines" that help to mitigate the risks associated with energy-related investment and trade.

Who's involved and how does it work?

The ECT is a unique multilateral framework that applies to more than 50 countries — mostly in Europe and central Asia — and includes the European Union, the U.K. and Japan among its signatories. It is currently looking to expand to new signatory states, particularly in Africa, Asia and Latin America.

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

It has since been sharply criticized by more than 200 climate leaders and scientists as a "main impediment" to averting climate catastrophe.

Dozens of people walk through water due to heavy rains causing flooding in Dhaka, Bangladesh on October 7, 2021.Sumit Ahmed | Eyepix Group | Barcroft Media | Getty Images

"I believe the treaty might be by itself sufficient to kill 1.5 [degrees Celsius]," Julia Steinberger, ecological economist and professor from the University of Lausanne, told CNBC.

"I do know that 1.5 is a really tight goal and there are a whole lot of issues that may blow it, however it’s as a result of it principally saves fossil gas industries … from the monetary collapse that they need to face for his or her dangerous — and actually felony — investments in a dangerous expertise."

Corporate court hearings brought via the ECT take place in private and investors are not obliged to acknowledge the existence of a case, let alone reveal the compensation they are seeking.

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

International environmental law experts say that even the threat of legal action is thought to be highly effective in chilling domestic climate action — and fossil fuel companies are acutely aware of this.

That's because governments may struggle to allocate resources to a single issue when accounting for other priorities. The threat of legal action becomes progressively more powerful as the budget of the country involved becomes smaller.

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Notably, a ruling in favor of the state does not lead to zero cost for taxpayers because the defendant state must pay for legal and arbitration fees.

"Not solely do nations have to get out of that treaty, they’ve to torpedo it on the means out," Steinberger said. "And that's one thing a unit the dimension of the European Union may do."

A spokesperson for the EU was not immediately available to comment when contacted by CNBC.

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

France, Spain and Luxembourg have all raised the option of withdrawing if the EU's modernization efforts fail to conform to the Paris accord.

What happens if countries withdraw?

Italy withdrew from the ECT in 2016, but it is currently being sued because of a 20-year "sundown clause" which means it is subject to the treaty through to 2036.

Around 60% of cases based on the treaty are intra-EU, with Spain and Italy thought to be the most sued countries. Saheb said that given most of these cases are within the bloc itself, a coordinated withdrawal would likely kickstart a domino effect, with states such as Switzerland, Norway and Liechtenstein seen as likely to follow suit.

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

"That sundown clause is for much longer than many sundown clauses in different treaties however can be fully incompatible with the notion that rules want to evolve with the altering actuality of local weather change, to the altering calls for of safeguarding the surroundings and human rights," Nikki Reisch, director of the Climate & Energy Program at the Center for International Environmental Law, told CNBC.

"There's a very robust case to make that the software or enforcement of that sundown clause is opposite to different rules of worldwide legislation," she added.

A view of open freight wagons full of coal under smog during a day that the level of PM2.5 dust concentration amounted to 198 ug/m3 on February 22, 2021 in Czechowice Dziedzice, Poland. The central eastern European country has the EU’s worst air, according to a report published 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 could no longer use the treaty to sue EU governments. The verdict significantly limits the scope of future intra-EU cases and has thrown the legitimacy of a number of ongoing multi-billion-euro lawsuits into question.

"We should not out of the woods but," Reisch said. The ruling was an important step to blunting an instrument designed to protect fossil fuel investors, she said, but it does not take arbitration cases by investors domiciled outside of the EU off the table.

"We can't let our capacity to confront the biggest disaster that we now have ever confronted as humankind, arguably, be held hostage to the pursuits of buyers," Reisch said.

"I believe it’s simply one other reminder of the want to remove these authorized constructions and fictions that we've created that basically do lock us right into a bygone period of fossil gas dependence."

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