By Professor David Collins, The City Law School
Scarcely covered by the mainstream media, this Thursday (22 Feb 2024) the UK announced the withdrawal from the controversial Energy Charter Treaty (ECT), following nine EU Member States, including G7 countries France, Germany and Italy.
Entering into force in 1998 and signed by the UK in 1994, the ECT is an international investment agreement (IIA) designed to encourage foreign direct investment in the energy sector by providing protection to foreign investors against excessive governmental interference, such as expropriation or the denial of justice in administrative or legal proceedings. The ECT has been perhaps the most significant of all the IIAs, spawning more investor-state dispute settlement (ISDS) claims than any other single treaty and with it, a host of awards issued by ad hoc tribunals. By falling under the protection of the ECT, foreign investors were granted assurances that they could rely on international law rather than the unfamiliar and unstable legal systems in host countries. Investment in the energy sector is especially needful of stable and reliable legal protections because of the extended period between making an investment and achieving a return. Under the ECT, investors may seek compensation for the loss of their future profits, not merely sustained losses. Many of the investment projects facilitated by the ECT related to infrastructure privatization projects in former Soviet countries.
Very much a product of its time, the ECT faced growing criticism for its continued encouragement of investment into energy derived from fossil fuels, paying insufficient attention to the modern fixation on climate change mitigation via renewable sources. Announcing the UK’s withdrawal, the Minister of State for Energy Security and Net Zero stated that continued ECT membership was incompatible with the country’s transition towards Net Zero. With this justification in mind, the UK’s withdrawal from the ECT could not have come at a worse time; it was acknowledged recently that the true costs of the UK’s Net Zero transition were wildly understated – costing trillions of pounds more than had been reported to parliament. Government ministers were accused by former Chancellor of the Exchequer of being ‘systematically dishonest’ about the costs of the plans.