Chart of the Week: What’s Next After the ECT? The Top Investment Agreements Posing a Threat to Climate Policy
The European Union officially voted to withdraw from the Energy Charter Treaty (ECT) on May 30, after several years of increasing agitation over the role of investor-state dispute settlement (ISDS), a controversial legal tool in international investment agreements (IIAs) that fossil fuel companies can use when the value of their investments are threatened by climate action.
Due to its large membership, the ECT represents one of the largest ISDS threats of any trade treaty, and the EU withdrawal marked a significant win for climate action. This withdrawal and other recent anti-ISDS developments in EU member states and elsewhere indicate a rare window of opportunity, as tension grows between traditional support for ISDS and a shifting political landscape that instead favors green industrial policy.
EU members and the remaining ECT members should leverage the momentum of the EU’s ECT withdrawal to continue eliminating ISDS as a threat to climate mitigation and adaptation. Even once the EU withdrawal goes through and a coordinated withdrawal is negotiated with EU member states, 25 countries, or almost half the ECT membership, still remain and continue to face legal risk – the majority of which are low- and middle-income countries. Furthermore, there are many other treaties posing a significant threat to climate action all over the world.
A May 2022 Science study published with researchers from the Boston University Global Development Policy Center, Colorado State University and Queen’s University in Canada shows that countries face a cumulative risk of up to $340 billion under two conditions: (1) all countries take the ambitious steps of canceling all oil and gas projects without a final investment decision and halting those projects under development, and (2) firms impacted by those steps brought investor-state disputes under one of the many IIAs in force. At the time of the study, there were some 350 IIAs actively protecting foreign investments in oil and gas projects around the world.
The ECT is just one of those 350 agreements. This Chart of the Week – Figure 4 from a December 2022 Climate Policy study authored by the same team of researchers that explored how ISDS risk faced by low- and middle-income countries may impact their capacity for climate mitigation and adaptation – reveals the extent to which other treaties also pose severe ISDS risk.
Figure 1: Contribution of Individual Treaties to ISDS Risk
This Chart highlights the top five riskiest IIAs in two scenarios, (1) where all projects without a final investment decision are canceled or (2) where all projects currently under development are halted. Risk is then measured in three ways: the number of oil and gas projects protected by the treaty, the amount of production value in millions of barrels per day covered by the treaty and the average net present value of the projects covered by the treaty. The chart demonstrates that EU withdrawal from the ECT is just the tip of the iceberg when it comes to what is needed to eliminate ISDS risk for climate policymaking.
Three EU member states – the Netherlands, France and Italy – have already withdrawn, or announced their intention to withdraw from the ECT, yet maintain ISDS in their bilateral treaty relationships with various low- and middle-income countries – Argentina and Malaysia (Netherlands), Mexico and Libya (Italy), and Russia and Nigeria (France).
Poland has also withdrawn from the ECT but maintains an IIA with Norway, a country which has not yet voiced an intention to withdraw. Outside of the EU, the UK, though withdrawn from the ECT, still has three IIAs posing significant risk with middle-income countries – Russia, Senegal and Indonesia. Other significant risks are posed by the US-Argentina bilateral investment treaty, China’s investment treaties with Guyana and Ethiopia, and Japan’s investment treaty with Iraq.
The risks for low- and middle-income countries like those above are particularly acute. Our Climate Policy study finds that more than two-thirds of the calculated risk through potential ISDS claims would be borne by the Global South. This would effectively represent a transfer of essential public climate finance from the Global South to private firms in the Global North. These countries may also delay or water down climate policies because of ISDS risks. For countries that are traditionally large carbon emitters or have large fossil fuel extraction industries, ISDS makes the already high hurdle of climate mitigation, adaptation and development even higher.
While proponents of ISDS continue to promote it as a useful tool for incentivizing and protecting the private investment needed to catalyze the transition to renewable energy, research has debunked that myth and instead shows that ISDS will stymy the bold climate action needed for a livable future.
Policymakers around the world have a responsibility to build on the momentum created by the EU’s withdrawal from the ECT, and there are three concrete actions they can take.
First, EU members that are coordinating their withdrawal with the EU should work together with the UK to not only remove themselves from the treaty but also nullify the 20-year sunset clause, which protects existing investments for another 20 years despite a country’s withdrawal.
Second, EU members that have withdrawn should then align their actions with other treaty commitments, including removing the risk of ISDS in treaties with low- and middle-income country partners. The European Commission found that the ECT is “no longer compatible with the EU’s enhanced climate ambition under the European Green Deal and the Paris Agreement,” and the same logic applies to ISDS provisions in these other treaties.
Finally, the remaining ECT members who have not withdrawn should take their cue from the EU, which is well-supported by research, and negotiate their own withdrawal from the treaty.
It is well established that ISDS poses a threat to climate action. The EU’s withdrawal from the ECT reaffirmed this, but more work needs to be done to eliminate treaties with ISDS in favor of trade and investment treaties that make space for ambitious global climate action.
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