Global energy treaty shaken by Europe

IN THE build-up to June’s European Parliament elections, there are growing concerns that the 27-member bloc may retrench from its climate ambition in the face of a political backlash against the EU’s Green New Deal.

However, last Thursday (Mar 7) saw the latest evidence that the European Union intends to try to meet its net-zero ambitions as it crafted a coordinated exit from the controversial Energy Charter Treaty (ECT) whose other signatories include Asia-Pacific powers, such as Japan.

This European move has been made despite the priority the bloc has needed to put on energy security as it transitions away from Russian fuels in its energy mix since the Ukraine war began in February 2022.

This focus on energy security has seen the EU and its 27 member nations sign around 120 new energy agreements in the last two years with foreign powers, with a large number of these countries being in the Middle East. These deals have been mostly focused on securing new gas supplies which will, in turn, complicate the EU-27’s energy transition pathway in the years to come because the new gas infrastructure that has been invested in will require a medium- to longer-term horizon to secure value for money.

Nevertheless, many of the 27 EU nations remain solid in their intent to become the first major world power to hit net zero before 2050. There is widespread acknowledgement of the importance of this pioneering goal, with the European Green New Deal encompassing more than 50 major sustainability initiatives since the signature policy agenda was announced by the Ursula von der Leyen-led European Commission.

This has helped the bloc rebrand itself as a global green superpower, which it hopes can secure a renewed political lease of life to boot. This after several difficult decades that saw the rise of challenges such as growing Euroscepticism, and multiple financial crises.

Along this journey, there have been predictable obstacles to delivering on Europe’s climate ambition. One of these challenges, for instance, is the political backlash (or “greenlash”) by the political right, which includes not just populist groups, but also the mainstream conservative European People’s Party, which is the largest group in the European Parliament.

Conversely, there have been unexpected impediments too, including Russia’s invasion of Ukraine. Another unanticipated blockage to climate action delivery cited by governments is the 1998 ECT, signed by dozens of nations across the world. The treaty was originally intended to protect international investments in petroleum-rich post-Soviet states such as signatory nations such as Armenia, Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan.

This key international energy treaty allows energy companies to try to sue governments over policies that damage their investments. In recent years, the deal has been increasingly criticised by NGOs and some governments for allowing corporates to challenge policy decisions that would complicate delivery of net-zero objectives.

EU countries have reportedly so far been the target of around 90 per cent of ECT disputes, in part because of the region’s significant climate ambition. For instance, the EU-27 have embarked on a challenging pathway since 2022, as set out in the RePowerEU strategy, to scale up use of clean energy, while also saving almost 20 per cent of energy consumption.

Renewable successes in the first year of this strategy include reaching a record of 41 gigawatts (GW) of new solar energy capacity installed, and increasing wind capacity by 16 GW. This helped generate, for the first time, more EU-wide electricity from wind and solar sources than from gas.

In recent years, a steady stream of EU and non-EU European nations have therefore signalled their intent to leave the ECT, including Italy firstly in 2016. Most recently, the United Kingdom announced last month its departure decision, too.

Last July, the European Commission first proposed a coordinated bloc-wide departure from the treaty by the EU-27 nations. A total of nine member states have so far announced their intent to withdraw from the ECT since Italy: Denmark, France, Germany, Luxembourg, Netherlands, Poland, Portugal, Slovenia, and Spain. In the meantime, France, Germany, Luxembourg and Poland have officially notified their withdrawal, building from Italy’s departure.

On the other side of the ledger, however, a number of other EU countries including Cyprus, Finland and Hungary had expressed interest in staying in. Meanwhile, other members of the bloc had pushed for supporting wider international efforts to reform the treaty.

Until February, these splits in the EU had delayed decisive action, but suddenly a breakthrough was fashioned in negotiations in recent weeks. What the European Commission proposed to secure the end of the impasse is that, before leaving the ECT, EU countries should allow reforms to pass at the ECT conference, expected potentially this Autumn, while allowing the EU and Euratom, the European Atomic Energy Community, to leave the treaty.

This is not just an example of pragmatic politics in action to deliver a deal. It also potentially allows the member governments to revise a key provision of the ECT in a way that would halve the time (from 20 to 10 years) that energy firms would continue to enjoy the pact’s protections to their investments after treaty departure.

Should the ECT not completely collapse following withdrawal by these European nations, the wider agenda for reform of the treaty includes potentially extending its investor-state dispute settlement provisions to clean tech such as carbon capture and hydrogen.

However, this slate of proposed reforms, which some NGOs and governments claim still gives too much protection to fossil-fuel firms, requires unanimous approval from about 50 nations who are signatories to the treaty. This fell off in 2022, when France, Germany, the Netherlands and Spain prevented the EU Council from approving the potential revisions to the ECT deal.

Going forward, what Europe hopes now is that international energy firms will increasingly move their investments in the continent to cleaner fuels. EU officials estimate that reaching net-zero emissions by 2050 will require some 700 billion euros (S$1.02 trillion) in additional investment by the bloc each year, and the role of the private sector is therefore key to delivery.

Taken together, the EU’s decision to leave the ECT is therefore widely welcomed by NGOs as another key step on the journey to deliver climate action. Europe increasingly hopes that investment will be redirected from fossil fuels to cleaner energies that will help the region become the first to hit net zero before 2050, one of the key goals of the bloc’s Green New Deal.

The writer is an associate at LSE IDEAS at the London School of Economics