[Investigation] How Energy Treaty ‘shadow’ courts prolong EU’s fossil age

But one morning in 2008, locals awoke to a sight that disturbed this picture postcard scene: “We saw from the coast a small platform sticking out of the sea. An abomination. We went together, started asking the authorities and made our voices heard,” Enrico Gagliano told Investigate Europe.

What he saw was an oil platform put in place to explore one of the largest oil fields in the Mediterranean, Ombrina Mare.

Within months, along with others, Gagliano founded the “No Triv” [No Extraction] movement.

Soon the protest grew, finding support in the 10 regional councils.

In March 2015, more than 60,000 people took the streets of Lanciano.

Just months later the Italian government banned oil drilling within 12 nautical miles of the coast. The end of the Ombrina Mare project. The environmental movement cheered.

But not everyone was happy.

The British oil company Rockhopper, which had bought the oil field, sued the Italian state using an international investment protection agreement that few have heard of: the Energy Charter Treaty.

The Energy Charter Treaty (ECT) was hammered out in 1994 by some 50 countries – mainly from the EU and Central Asia.

The treaty enables companies to claim billions in compensation from states in front of international arbitration tribunals, if they feel unfairly treated by the states’ energy or climate policies. Hearings under the ECT don’t take place in national courts but in courts of international arbitration.

The case between the British company Rockhopper and the Italian state is currently being heard in the US capital, Washington DC. The public rarely has access to these tribunals, making them appear as ‘shadow courts’.

The treaty was once intended to protect energy investments in countries with new and not-yet stable democracies. There are 136 known ECT disputes in the last 20 years, between investors and states, with 107 dating from the past 10 years.

In 74 percent of these cases, it is an investor from the EU that has sued an EU member state.

Historic mistake

This is a situation the EU member states could have foreseen, says Markus Krajewski, legal scholar at the University of Erlangen-Nuremberg., He describes the treaty as a “historical mistake”.

The treaty could now become a problem for EU states that have committed to ambitious climate targets.

Soon the number of cases – such as the Rockhopper one – could rise steeply. Just a few weeks ago, the German energy company RWE sued the Dutch state for €1.4bn after the Dutch government’s decision to phase out all coal power by 2030.

The EU (plus Switzerland and the UK) has committed to cut almost all greenhouse gas emissions by 2050.

Based on data from Global Energy Monitor and Oil Change International, Investigate Europe have for the first time calculated that investments in fossil infrastructure that are partly or wholly foreign-owned (and so protected by the ECT) amount to the enormous sum of €344.6bn.

And this sum, vulnerable to compensation claims, is a conservative calculation as it does not include future lost profits.

There are already signs that the threat alone is enough to have a chilling effect on policies. In spring 2017, then French environment minister, François Hulot, had a new law drafted.

Hulot wanted to ban the extraction of fossil fuels in France by 2030. Then he received a letter. On behalf of the oil company Vermilion, a Parisian law firm wrote: “The project violates France’s obligations as a member of the Energy Charter Treaty.”

It seems the warning did not go unheeded.

The final version of the law allowed for oil and gas production until 2040.

Location-shopping and role-swapping

Investors can choose where they take their claims – and tend to select the tribunal with the rules most favourable to them.

The arbitration system has also come in for criticism; for the secretive nature of the cases and for some of the arbitrators themselves.

A fair system demands independence from its judges – but arbitrators can have changing roles, and sometimes they represent energy companies.

Lawyer and academic Pierre-Marie Dupuy, who was one of three arbitrators in the Rockhopper case, was insistent that it was not good “that the two roles of counsel and arbitrator be melted [into one].”

Environmental and non-governmental organisations have long been calling for the reform of the ECT.

And now that EU member states are finding out the hard way the consequences of the treaty, they have given the EU Commission a mandate to negotiate on their behalf for its modernisation.

Some governments had hopes for a real game-changer.

A paper seen by Investigate Europe shows some ambitious proposals: Luxembourg and Austria do not want gas-fired power plants protected beyond 2030.

While in EU Council meetings, representatives from France, Luxembourg and Spain pushed for a significantly more ambitious limit. But without success.

On 15 February the commission presented its final position, alongside the original exit goals.

The single concession was to the limit values; only power plants with CO2 emissions of less than 380 grams per kWh should be protected. To put this in context, coal power plants emit less CO2 per kWh.

Luxembourg’s Green party environment minister, Claude Turmes, cheered the agreement: “After months of effort, I am pleased to have an EU proposal for the modernisation of the Energy Charter that corresponds to the Paris Agreement”.

Paul de Clerck, who monitored the talks between member states for the NGO Friends of the Earth, did not find much to cheer: “Nothing about this proposal is compatible with the Paris Agreement or the European Green Deal,” he says.

“With this modernisation, companies will continue to be able to use the Energy Charter to challenge states’ climate measures.”

If a common European line was hard to achieve, the effort pales in comparison to the negotiations taking place to modernise the treaty.

Any changes need agreement from all members. Japan’s position couldn’t be clearer: “it is not necessary to amend the current ECT provisions.”

The treaties modernisation group have had four meetings over the last year. Discussions so far have been about fundamental questions, such as responsibility in cases for court costs.

‘Terminate’?

“It’s incredibly technical,” says a diplomat involved in the negotiations. “We spent six hours at a time with the talks for 16 days.”

By his estimate it will take at least two years before an agreement can be reached. The next round of negotiations starts in March.

According to the chair of the EU’s parliament powerful trade committee, Bernd Lange (Socialists & Democrats) the EU has to get out of the Energy Charter Treaty: “I don’t see that a reasonable revision of the content is possible.”

Then, according to Lange, there is only one consequence: “to terminate the Energy Charter Treaty”.

But withdrawal isn’t the easy solution it might appear. Italy left in 2016 – but languishing under a 20-year sunset clause it can still be sued. Rockhopper is claiming $275m including investment and estimated future lost profits.

And as the government awaits the Rockhopper verdict, in the words of the Italian state lawyer, Giacomo Aiello this system “really becomes Russian roulette.”

We asked the EU Commission about the apparent contradictions, a spokesperson told us: “We will push very hard to bring about the reform. The ECT should not prevent states from making the transition from fossil fuels to sustainable sources of energy.”

One hope for the EU, if all else fails, is that the EU Court of Justice could soon prohibit intra-EU arbitrations as non-compatible with EU law.