A new dawn for uk’s net zero commitments after exiting the 1994 energy-treaty

The United Kingdom’s commitment to net zero has gotten a boost after the country withdrew from a treaty that could have penalised a shift in energy policy.  In late February, the UK withdrew from the 1994 Energy Charter Treaty, marking a significant shift in its approach towards energy governance. This treaty, established during an era heavily reliant on fossil fuels, has been a major stumbling block. It allowed foreign companies to challenge energy policies that may impact their investments through secretive arbitration courts.

The deal was originally intended to stimulate international energy investment, but with the shift in energy policy from fossil fuels to renewable energy, the treaty came increasingly under fire for impeding transition efforts.

Despite efforts to modernise the treaty to better align with cleaner technologies, including renewable energy, discussions among European countries reached an impasse. As a result, several countries, including France, Germany, Spain, and the Netherlands, withdrew from the agreement, with the UK now becoming the next country to withdraw.

Commenting on the withdrawal, Graham Stuart, Minister of State for Energy Security and Net Zero, emphasised the treaty's outdated nature and inability to support the UK's transition towards cleaner and more affordable energy. He highlighted the UK's substantial investments in the energy sector, its commitment to leading the world in emissions reduction, and its ability to attract international investment.

The move to withdraw has been welcomed by environmental advocates, citing its adverse effects on climate action. Shaun Spiers, executive director of the Green Alliance, emphasised that the treaty undermines global efforts to promote cheap and clean renewable energy. Labour, which has for long criticised the treaty as outdated and unfit for addressing the climate crisis, also welcomed the move to withdraw with Shadow Climate Minister Kerry McCarthy underscoring Labour's commitment to tackling the climate crisis through innovative policies aimed at fostering clean energy development and creating sustainable employment opportunities.

Recently, a growing number of countries, especially in the EU, have signalled their intention to withdraw from the ECT. Most of these countries have been citing concerns stemming from the ECT’s Investor-State Dispute Resolution mechanism.

Environmental concerns have also been cited, specifically that the ECT is frustrating aggressive efforts against climate change through its protection of foreign fossil fuel investments and is incompatible with the Paris Climate Agreement. This has especially become more relevant in the wake of the geopolitical tensions in Europe, as the urgent need to reevaluate overreliance on fossil fuels has increased the need to rethink commitment to the ECT.

However, exiting from ECT is not as simple considering its terms. First, the treaty requires that a country exit the treaty if there is a fundamental change in circumstances. Thus, all countries, including the UK, might be required to demonstrate that such changes have occurred and, if so, how. However, none of the countries that have so far exited has been asked to demonstrate the fundamental circumstance change thus far.

Further, the ECT contains a 20-year sunset provision, according to which the treaty takes effect for an additional 20 years after a party withdraws from it. However, given that several members have withdrawn and more are considering exit, an amendment or bilateral or trilateral agreement to waive the 20-year sunset provision may be in the cards.

A Brief Summary of the Energy Charter Treaty

The Energy Charter Treaty (ECT), established in 1994, stands as a pivotal international agreement geared towards fostering collaboration in the energy sector while simultaneously safeguarding investments among its signatory nations. Embedded within its framework are several crucial provisions.

Firstly, the ECT serves as a bulwark for investment protection, offering assurances against discriminatory treatment, expropriation, and arbitrary actions by member states. By establishing a stable and transparent legal framework, the treaty aims to bolster investor confidence and encourage cross-border investments in energy infrastructure.

Secondly, the treaty boasts a robust dispute resolution mechanism, allowing investors to seek arbitration in conflicts with member states. This mechanism not only serves to mitigate political risks but also provides a channel for resolving disputes efficiently, thereby fostering an environment conducive to investment.

Moreover, the ECT underscores the importance of promoting energy efficiency and sustainable development. It encourages member states to collaborate on initiatives aimed at enhancing energy efficiency and safeguarding the environment. The treaty strives to facilitate the transition towards a more sustainable and resilient energy landscape through dialogue and cooperation.