What is the ECT and Why Does it Need Modernization?

arbitration

This year marks the 24th anniversary of the Energy Charter Treaty (hereinafter ´ECT´), a multilateral treaty that regulates international trade, and investment in the European and Asian energy sector. The ECT came into force on 16 April 1998, and it currently has fifty-one Contracting Parties, including all EU Member States (with the exception of Italy), as well as the EU and Euratom as regional economic integration organizations.

According to Article 2, the purpose of the ECT is to ‘establish a legal framework in order to promote long-term cooperation in the energy field´. Therefore, the ECT does not to regulate in detail all issues concerning the energy field, but rather provides a ‘framework based on which the Contracting Parties can further negotiate various sets of rules applicable in the energy area’.1

energy arbitration

In September 2021, the Court of Justice of the EU, ruled that intra-EU arbitration under the ECT is incompatible with EU law. After this decision, it became clear that investors located in EU countries cannot bring proceedings against EU Member States (or if they brought these proceedings, the enforcement proceedings woud be very lengthy, with the final award being unforceable at all eventually). The decision, Moldova v. Komstroy, drove the ECT in very stormy water, as the treaty was already facing intense scrutiny and criticism for being environmentally unfriendly by protecting the fossil fuel industry and undermining climate action.

1 Crina Baltag and Stefan Dudas, ‘Chapter 3: Achmea, Arbitral Tribunals and the ECT: Modernisation or Regression?‘, in Ana Stanič and Crina Baltag (eds), The Future of Investment Treaty Arbitration in the EU: Intra-EU BITs, the Energy Charter Treaty, and the Multilateral Investment Court (Kluwer Law International 2020) p. 25.

modernization process

For these reason, the Energy Charter Conference has recently initiated a modernization process that aims at bringing the treaty in line with contemporary policy tendencies. If it does not do so, it may be the end of the ECT. Italy has already left the ECT in January 2016 and environmental activists are putting pressure on many other EU Member States to take the example of Italy. Therefore, The stakes of the modernization process are high. The list of topics to be considered in the modernisation process includes, among others, the definition of the notions of ‘investor’ and ‘investment’, the fair and equitable treatment, most favoured nation treatment and expropriation standards, third-party funding and transparency.

The EU’s Proposal to Modernise the ECT Has Three Main Aims:

● Firstly, to bring the ECT’s provisions on investment protection in line with those of agreements recently concluded by the EU and its Member States.
● Secondly, to ensure the ECT better reflects climate change and clean energy transition goals and facilitates a transition to a low-carbon, more digital and consumer-centric energy system, thus contributing to the objectives of the Paris Agreement and our decarbonization ambition.
● Thirdly, to reform the ECT’s investor-to-state dispute settlement mechanism in line with the EU’s work in the ongoing multilateral reform process in the United Nations Commission on International Trade Law (UNCITRAL).


Fredrik Jörgensen

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