Disarm fossil fuel firms

Climate action

Two recent examples of the Dutch and German coal exit show how fossil fuel firms are using an outdated international investment treaty, the Energy Charter Treaty, to attack climate policies. The treaty provides fossil fuel companies with a strong tool to impede the clean energy transition. It is time to disarm them, writes Wendel Trio, director of Climate Action Network (CAN) Europe.

The German parliament passed a coal phase-out law last Friday that grants billions of Euro in compensation to German coal operators – and everyone wonders how these enormous sums came about. The government declines to say, simply stating they were the results of “intensive negotiations”.

No wonder the negotiations were intensive, considering the lignite operators had an investment treaty as a trump card that would have allowed them to sue for compensation if the settlement had not been to their agreement.

The Energy Charter Treaty protects all investments in the energy sector, including coal mines, oil fields, pipelines, other infrastructure and power stations. Almost any state measure that harms a company’s profit can be challenged and can result in the state having to pay millions or billions in compensation because companies cannot only demand compensation for actual financial losses but even for future prospective profits.

Commentators had so far only mused about its role in the German coal phase-out, but an analysis of the recently published contracts with lignite companies reveals that the Energy Charter Treaty (ECT) was indeed part of negotiations with the government.

Rather than risking a compensation claim under the ECT, Germany agreed to pay the compensations in advance and asked the companies to waive their rights to invoke the treaty. This explains why the compensation payments are up to €1.9 billion higher than a “rule-based (and generously designed) compensation model” as calculated by Öko-Institut would suggest.

It’s the second time within very few months that the ECT is used by fossil fuel companies attempting to impede a coal phase-out plan. In May, German utility firm Uniper, who owns one of the five coal-fired power stations in the Netherlands, put the Netherlands on notice of a compensation claim under the Energy Charter Treaty for the Dutch coal phase-out.

The treaty could spell disaster for the clean energy transition. Significant changes to the energy sector will have to be made to achieve climate neutrality. The prospect of having to pay out enormous amounts in compensation to fossil fuel companies could dissuade governments from taking the decisive action required for the clean energy transition.

EU Governments have to act immediately to take this powerful tool from fossil fuel companies and win back democratic control over the clean energy transition.

Today, a so-called “modernisation” process of the treaty is launched but it cannot serve as an excuse to wait. It is clear from the start that the reform proposals that are on the table – including the EU’s – wouldn’t render the treaty harmless. Substantial changes are also hardly achievable given that they would have to be unanimously approved by over 50 signatories of the treaty, some of whom have already stated clearly that they do not see a need for reform and depend heavily on fossil fuels for their national revenue.

It is therefore time for the EU and its Member States to collectively withdraw from the Energy Charter Treaty, following Italy’s example. This step alone would not be sufficient though because the treaty provides that upon leaving, states can be sued for another 20 years. To overcome this, the withdrawing countries should agree to not allow future arbitration cases amongst themselves.

Urgently needed climate policies are likely to be delayed or watered down unless governments act now and unshackle themselves from the Energy Charter Treaty. Let’s not allow a hand-full of fossil fuel companies to obstruct the changes that citizens and the climate emergency are demanding.