UK to exit the Energy Charter Treaty

MP Graham Stuart (Minister of State for Energy Security and Net Zero) announced on 22 February 2024 that the United Kingdom will leave the Energy Charter Treaty (ECT) to support the government’s plans for a transition to net-zero. The UK’s withdrawal will take effect one year after the ECT Depository is notified.

The ECT entered into force in 1998 and was designed to protect foreign investments in the energy sector. The treaty has been widely criticised for causing a “regulatory chilling effect” and seen as a long-standing obstacle in the way of climate-friendly policymaking, as it allows conventional fossil fuel companies to make claims against states adopting clean energy transition policies. Its supporters point to the need to provide stable and reliable protection to foreign investors in the energy sector, due to the long period between making an investment and achieving a return.

Expectedly, the British government’s decision to withdraw from the ECT comes after efforts at adopting a ‘modernised’ version of the ECT failed. This would have allowed the treaty to be updated to preserve the acceptable parts but to remove the potential negative effects on the energy transition. Obviously multilateral trade and investment treaty-making is much more complicated than it was in the 1990s.  

In 2022, the European Parliament called for a coordinated exit from the ECT. Four EU member-states have already effectively withdrawn from the ECT, while five others have either notified or declared their intention to withdraw.

Nonetheless, the end is not as near as it may seem. The ECT contains a sunset clause by which investments made under the treaty, as at the effective date of withdrawal, remain protected by the treaty’s provisions for 20 years from withdrawal. For instance, Italy continues to face a multitude of claims by virtue of this provision post-withdrawal.

To resist such claims after a formal exit from the treaty, several EU member-states have sought to argue that intra-EU claims (which constitute a large share of ECT disputes) cannot be adjudicated under the treaty’s dispute resolution mechanism. The European Court of Justice has held that intra-EU proceedings under the ECT are incompatible with EU law and several EU domestic courts have declined enforcement on this basis (read here for more on the Komstroy decision). However, this argument has not found favour with most arbitral tribunals and failed in cases where the seat-court is outside the EU. Further, investors have been able to take enforcement steps outside the EU, in more conducive jurisdictions such as the United States. Some ECT state-parties have also discussed entering into an inter se agreement to invalidate the sunset clause for disputes amongst parties to such an agreement. However, the legal efficacy of this route remains doubtful.

Though the UK has not been sued under the ECT to date, the exit does not insulate the UK from ECT claims in the future – the treaty will continue to protect investments made in the country as of next year for as long as 2045. Additionally, the ECT also allows investors to seek compensation for the loss of future profits, and not just actual sustained losses, making the prospective value of any potential claims sizeable.