A coordinated EU exit from the Energy Charter Treaty looks increasingly likely

By January 19, 2023 No Comments

The European Parliament recently passed a resolution (‘the Resolution’) “urg[ing] the European Commission to initiate immediately the process towards a coordinated exit of the EU from the Energy Charter Treaty and call[ing] on the Council to support such a proposal. This happened against the backdrop of numerous withdrawals from the Energy Charter Treaty (‘ECT’/’the Treaty’) announced by Member States in November. The resolution was passed only two days after the majority of ECT contracting parties did not support the proposed modernised version of the ECT which was aiming to ensure that the Treaty is compatible with the Paris Agreement on climate change (see also The Energy Charter Treaty in Light of the Climate Change Agenda).

Although not binding for the European Commission, the Resolution signals EU’s intention towards the ECT. Such a coordinated exit from the Treaty, however, has some short- and long-term implications as the ECT contains a sunset clause (Article 47) which would leave Member States liable under the Treaty for 20 years after the withdrawal takes effect. This means that there is a high risk for Member States to face investor-state dispute settlement (ISDS) arbitration, especially arbitration related to climate-change related issues, for a 20-year period after the withdrawal.

The Resolution stressed the importance of the sunset clause, confirming that the European Commission had prepared a draft inter se agreement. Its aim is to clarify that the ECT and its sunset clause do not, and never did, apply in an intra-EU context. In practice, such an agreement would mean that investor protection under the ECT would cease following the withdrawal on the territories of willing contracting parties which sign up for it. It is unclear, however, how the neutralization of the sunset clause which is theoretically possible would materialize and in what ways it would be interpreted by arbitral tribunals.

As the European Parliament’s Resolution is recent, developments on the matter have still not unfolded. The remaining question is whether and/or when the European Commission will start the withdrawal process. Even if this happens, the Council of the EU will need to formally approve it.