Grand declarations on tackling the climate emergency are sabotaged by a treaty from the 1990s that sees European nations held to ransom by the energy companies
Europe’s dirtiest secret – one deterring it from seriously and rapidly tackling the climate emergency – is not being addressed this week at Cop27, the United Nations climate change conference hosted by Egypt.
Mention of the Energy Charter Treaty would expose how far western states, the biggest greenhouse gas polluters, are from being in a position to cut carbon emissions in half by 2030. Failure to do so sets the world on course for catastrophic global warming above 1.5C.
Whatever grand declarations they issue as the summit in Sharm el-Sheikh concludes this week, the reality is that European states effectively tied their hands for the foreseeable future by ratifying the energy treaty back in the 1990s. They have landed themselves with a massive financial burden if they try to cut emissions.
Europe would rather not admit it has made itself the prisoner of transnational energy corporations. The firms can hold member states to ransom for compensation, frustrating European efforts to significantly change energy policies for at least the next two decades.
The treaty’s stipulations help to explain why, despite years of climate pledges, the latest research shows fossil fuel emissions are set to hit a record high by the end of this year.
Antonio Guterres, the UN’s secretary-general, told world leaders at Cop27: “We are on a highway to climate hell with our foot on the accelerator. Our planet is fast approaching tipping points that will make climate chaos irreversible.”
The Energy Charter Treaty is one of the main drivers propelling Europe down that highway.
Further dissuading Europe from publicly addressing problems with the energy treaty is the fact that it would highlight tensions over energy policy with Russia that are at the root of the current Ukraine war.
It might even provide a crucial piece of the puzzle in trying to understand who was behind the sabotage of the two Nord Stream pipelines supplying Russian gas directly to Germany – and why. The pipelines were blown up by an unknown party or parties in October.
Instead, there continues to be a conspiracy of silence over the energy treaty and its effects. The failure to push for its abolition at Cop27 will undermine any declarations of progress on addressing the climate crisis.
Secret tribunals
The Energy Charter Treaty came into being shortly after the collapse of the Soviet Union in 1991. Energy firms lobbied for its adoption to secure long-term investments exploiting fossil energy resources in the former Soviet Union, in case these newly independent states later switched their industries back to public ownership.
Corporations were given the right to sue any treaty member that changed its energy policy in ways that might harm their profits. Even if states pull out of the treaty, a sunset clause means they are still liable to loss claims for an additional 20 years. Hearings are made in secret at special international tribunals.
The European Union and individual European states, including the UK, are among the more than 50 states that have ratified the treaty. There has been mounting concern in Europe, however, at its impact on their plans for a green transition. Italy pulled out in 2015, and in a major development, Germany announced last week its intention to quit too. Spain, France, Poland and the Netherlands have threatened to follow.
Other contracting parties include Turkey, Japan and states in Central Asia.
Despite its obvious drawbacks, the treaty is being pushed aggressively at Africa, the Middle East, Latin America and Asia, with the promise of new energy investments. It will become harder to reduce these countries’ carbon emissions the moment they sign up.
The United States is an observer to the treaty but not subject to its provisions. Russia signed the treaty but never ratified it – nonetheless arbitrators at a special tribunal ruled that it is still liable.
Compensation suits
Although the trade pact is a legacy of distrust stemming from the Cold War, energy corporations have repurposed it in recent years as a tool for obstructing European efforts to go green. States face a stark choice: either give in to corporate bullying to stick with fossil fuels or face massive compensation suits, valued at hundreds of billions of pounds, for shifting to renewable energy supplies.
Even the move to renewables by Europe entails major risks under the treaty, as the science around green energy constantly evolves and regulations change with it. Any amendment to energy policy risks triggering a spate of compensation suits.
Had, for example, Britain’s former Labour leader Jeremy Corbyn won the 2019 general election, his government could have faced a series of crushing damages claims if it had implemented its manifesto commitment to nationalise the UK’s energy sector.
Similarly, states could be sued if they try to take measures to curb fuel poverty or impose energy windfall taxes.
Concerns about Europe’s ability to meet its 2015 Paris Agreement targets – designed to limit global warming to 1.5C – have grown as fossil fuel firms have scored a string of victories at the treaty’s special tribunals.
Among the hardest hit is Spain, which already faces damages claims of €10bn. The Netherlands has risked a legal backlash over its plans to phase out coal. And Italy, even outside the treaty, is being sued, under the sunset clause, for its ban on oil and gas drilling in the Adriatic. In August a tribunal awarded the UK oil firm Rockhopper £210m in damages over Italy’s moves to become greener.
Russia is mired in a series of cases that could cost it $50bn – equivalent to the GDP of Slovenia.
A 2020 study suggested total energy investments protected by the treaty amounted to some €1.3 trillion – far above the $630bn estimated to have been invested globally in climate action in 2020. Potential compensation claims will continue to grow under the treaty, and damages will have to be paid in addition to expenditure on renewables.
It would be hard to deny that these astronomical compensation sums are creating a decisive “regulatory chill”, dissuading governments from phasing out fossil fuels and switching to renewables for fear of being sued.
Energy firms are rushing in to fill the void. New research has found that they are massively expanding exploration for additional sources of fossil fuel, spending $160bn over the past two years. The International Energy Agency has warned that the world cannot avoid climate catastrophe unless there is a moratorium on the opening of new oil and gas fields.
That may explain why there were a record number of fossil fuel lobbyists at Cop27 – more than the combined delegations of the 10 countries facing the biggest impacts from the climate emergency.
Far too little, too late
In June, members of the European Parliament urged the European Commission, the nearest Europe has to a government, to ditch the energy treaty so that member states could make changes to their energy policies in line with their commitments under the Paris Agreement.
Last month the UN warned that, even assuming industrialised nations stick to their pledges to cut emissions, the world is heading towards a 2.5C rise in temperatures and catastrophic climate breakdown.
But cutting and running would still leave EU members open to legal actions for losses over the next two decades.
The European Commission has instead proposed reforms that will be discussed at an Energy Charter Treaty conference due to be held later this month in Mongolia. The amendments to the treaty are designed to placate countries like Germany that have been growing increasingly restless over the treaty.
The proposal would allow EU member states to exclude any new fossil fuel investments from the treaty. They would also be able to shorten their liability for existing investments to 10 years or “at the latest 2040”.
Climate activists have warned that the EU process is far too little, too late. Amendments to the treaty require unanimity and have previously taken years to complete. And activists also warn that Brussels’ plan, even if it is eventually agreed, would allow investors to set up headquarters in other jurisdictions, such as the UK and Switzerland, where they could launch new settlement claims.
Cornelia Maarfield, from Climate Action Network Europe group, told Energy Monitor this month: “It is unbelievable the EU agreed to lock in fossil protection for at least another decade. This means countries will continue to spend taxpayers’ money in compensating fossil fuel companies rather than fighting climate change and moving to a renewable energy system.”
She also warned that the reform would still leave Europe and other contracting parties exposed to compensation suits over polluting non-fossil fuel energy sources, such as hydrogen and biomass.
Climate action groups have demanded a coordinated mass walkout from the treaty, effectively nullifying it, though there seems to be little appetite for it among European leaders.
Energy war
The problems with European energy policy have been thrown into stark relief too by the current war in Ukraine. That has sent energy prices – alongside energy industry profits – soaring. It has also seen Europe scrambling for new sources of energy, including shipments by the US of a glut of liquified natural gas (LNG) resulting from increased fracking. Such shipments have more than doubled over the past year.
A new report by 50 watchdog groups notes that fossil fuel companies have been “happy to take advantage” of the chaos in the global energy market from the war, channelling their profits into fracking and new infrastructure to export liquified natural gas.
Reversing course on this fossil fuel bonanza would most likely result in yet more damages claims under the energy treaty in years to come.
The secretary general of the Energy Charter Treaty has cited the Ukraine war as a reason why EU members should not quit the pact, arguing that such a move would add to Europe’s energy insecurity by antagonising alternative suppliers to Russia, such as Azerbaijan.
But in reality, the treaty is deeply bound up with the origins of the war and its continuing geopolitical reverberations – all of them disastrous for the environment.
Through the 2000s, the treaty provided the background to an energy war between Russia and Ukraine as the economies of both continued to struggle in the aftermath of the collapse of the Soviet Union.
Moscow was incensed by Kyiv’s failure to pay its debts on gas supplies, and also accused it of stealing gas in transit to Europe, Russia’s biggest customer. In response, Russia twice shut down supplies through its Ukrainian grid, the second time – in early 2009 – depriving Europe of gas too. The cut-off came during one of Europe’s coldest winters.
Investors in Russia’s gas giant Gazprom and Ukraine’s national utility Naftogaz spent years battling out various disputes in arbitration courts. It was the failure of the treaty to resolve these that led Moscow to pull out in 2009.
These tensions exacerbated too the split between Ukrainian politicians that looked to Moscow for security, including energy security, and those that preferred to ally with the EU and Nato. Ultimately that division, and the Ukrainian civil war it engendered, triggered Russia’s invasion and contributed to the decision by the US and Europe to get directly involved in the war by supplying weapons to Ukraine.
Pipeline explosions
European concerns about the security of Russian gas supplies through Ukraine led to the construction of two pipelines – Nord Stream 1 and 2 – from Russia direct to Germany through the Baltic Sea. The first opened in 2011, while the second was finished in 2021.
But that simply shunted problems caused by the energy treaty further down the line. As the West intensified its hostility towards Russia, especially following the invasion of Ukraine in February, Germany found itself caught in the middle.
If it accepted Russian gas through Nord Stream for domestic heating and its industries, it risked running foul of the West’s sanctions programme. But if it reneged on the deal, it could be sued under the terms of the energy treaty by European firms invested in the project.
As Germany’s former environment minister, Svenja Schulze, observed back in February of her country’s problem: “We also run the risk of ending up in international arbitration courts with compensation claims if we stop the project.” Instead, Germany tried to buy time by delaying Nord Stream 2’s certification.
Berlin’s conundrum about how to proceed was finally solved last month when a series of explosions tore large holes in both the Nord Stream 1 and 2 pipelines. Russia has been excluded from the investigations, while Germany, Sweden and Denmark have so far kept their findings under wraps.
Sweden has said it cannot formally share information from its criminal investigation because of “national security”.
All of this should be cause for deep concern. The energy treaty not only acts as a major disincentive to a much-touted green new deal, but it also helps perpetuate the very energy conflicts and wars that have undermined progress towards the international cooperation necessary to curb emissions.
Experts are agreed that the world is on the very edge of a climate precipice if urgent action is not taken to cut emissions. And yet the legal architecture of energy regulation breeds distrust and antagonism, pitting states against each other – and against the future of humanity.
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