Environmental organisations have hailed a court decision that could mean the end of a little-known legal mechanism that poses a massive threat to climate action.

The Court of Justice of the European Union today held that EU climate polluters could not use the arbitration system under the Energy Charter Treaty (ECT) to claim compensation in disputes between member states – in a decision environmental law charity ClientEarth and climate coalition CAN Europe said should spell the end of the outdated ECT.

The treaty contains a controversial investor state dispute settlement (ISDS) mechanism, which allows foreign investors to sue governments for changes in social or environmental laws that impact their business.

In 2018, a landmark ruling found the use of ISDS in bilateral investment treaties between EU countries was incompatible with EU law because it undermines the power of EU courts. But this has not stopped companies from seeking billions in compensation from governments over climate action.

Today’s ruling confirming the 2018 decision also applies to the ECT sends an irrefutable signal to companies that their climate-damaging actions would not stand, environmental organisations say.

“The ECT poses a massive threat to Europe’s clean energy transition. While ISDS may be a little-known mechanism, it has for decades given cover for fossil fuel companies to sue any time their climate-wrecking investments are challenged by democratic decisions,” ClientEarth lawyer Amandine Van Den Berghe said.

“Sovereign governments should be able to take action on climate change without fear of arbitration challenge from fossil fuel companies with vested interests in polluting projects.

“Given the scale of the climate crisis, it’s not only abhorrent that EU companies have used the Energy Charter Treaty to claim compensation, but it’s now confirmed that it’s also illegal.”

Environmental organisations said the ruling shows that ongoing arbitration using the ECT should not have been brought in the first place. This year, energy companies RWE and Uniper filed cases against the Dutch government over its 2030 coal power phase-out, seeking substantial compensation for their stranded assets. ClientEarth and CAN Europe said the tribunals should reject these claims.

“The majority of EU member states, the European Commission, the Advocate General and the CJEU have all stressed that ongoing ISDS proceedings within the EU are illegal – but arbitration tribunals are continuing to ignore this,” Van den Berghe said.

“The tribunals should apply today’s ruling to their current decision-making, and confirm that they will not accept the use of the treaty in this way in future disputes. Their repeated failure is all the more reason why the EU should abandon the ECT.”

Withdrawal from the treaty can help ensure that strong climate policy from governments is not later rolled back. The call to exit the treaty is being echoed by EU member states including France, Spain, Poland and Greece.

Leaving the ECT must be paired with an agreement amongst all exiting states to neutralise the ‘sunset clause,’ which allows investors to continue to bring ISDS claims related to existing investments for another 20 years after withdrawal.

Such a coordinated EU withdrawal from the ECT would put an immediate end to fossil fuel protection among states that exit the treaty. Since 60 per cent of cases based on the ECT are intra-EU, this would reduce the risk of future lawsuits brought against climate progress.

“It becomes harder by the day for the proponents of the Energy Charter Treaty,” said Cornelia Maarfield, Senior Trade and Investment Policy Coordinator for CAN Europe.

“Its reform is failing, fossil fuel firms are using it to attack climate policies, over a million citizens are calling for it to be scrapped and now the highest court of the EU has declared it illegal. Quitting the ECT should be a no-brainer.”

ENDS

Notes to editors:
  • The Energy Charter Treaty (ECT) is an international investment agreement, to which both the EU and its Member States are party (Italy left in 2016), as well as non-EU states. It was designed by the EU in the 1990s in the post-Cold War era to protect foreign investments in the energy sector (it also covers the trade and transit of energy between states).
  • In 2019, the Paris Court of Appeal agreed to seek a ruling from the CJEU on the interpretation of the ECT before it decides whether to annul a $49 million ISDS award obtained by Ukrainian investor Komstroy against Moldova.
  • This follows the landmark 2018 Achmea ruling, which found that investor state dispute settlement (ISDS) provisions in bilateral investment treaties are incompatible with EU law, because they sideline and undermine the power of EU courts.
  • The CJEU proceedings involve neither the EU nor any member state, and the questions referred to the CJEU do not concern the applicability of the ECT intra EU, but in order to decide whether it has jurisdiction to answer the questions and interpret these ECT provisions, the CJEU indicated (by requesting member state observations on the issue) it would have to examine the implications of Achmea for the applicability of ECT intra EU (Article 26).
  • The Advocate General discussed the legality of intra-EU ISDS proceedings based on the ECT in this case in his opinion issued in March this year. He argued that the ISDS provision in the ECT (Article 26) is incompatible with EU law, and invited the CJEU to examine the issue as part of its reasoning.
  • In today’s ruling, the Court confirmed that despite the multilateral character of the ECT and the fact that it also governs relationships with non-EU countries, “the preservation of the autonomy and specific character of EU law precludes the ECT from being able to impose the same obligations on the Member States among themselves” (para 65). The Court thereby confirmed the Achmea reasoning equally applies to the ECT and concluded that the ISDS provisions of the ECT “must be interpreted as not applicable to disputes between a Member State and an investor from another Member State concerning an investment made by the latter in the first Member State” (para 66).
  • ClientEarth has commented on the lawsuits brought by both RWE and Uniper.
  • Read ClientEarth’s summary of why the EU should withdraw from the ECT, or the longer legal analysis.
About ClientEarth

ClientEarth is a non-profit organisation that uses the law to create systemic change that protects the Earth for – and with – its inhabitants. We are tackling climate change, protecting nature and stopping pollution, with partners and citizens around the globe. We hold industry and governments to account, and defend everyone’s right to a healthy world. From our offices in Europe, Asia and the USA we shape, implement and enforce the law, to build a future for our planet in which people and nature can thrive together.

About CAN Europe

Climate Action Network (CAN) Europe is Europe’s leading NGO coalition fighting dangerous climate change. With over 170 member organisations active in 38 European countries, representing over 1.500 NGOs and more than 47million citizens, CAN Europe promotes sustainable climate, energy and development policies throughout Europe.