How shadow courts threaten the climate

Enticed to join an international energy agreement with a poor history on climate change, governments across the Global South could be exposed to expensive lawsuits from corporate investors. Juliet Ferguson of Investigate Europe reports.

Coal-fired power station
The Energy Charter Treaty allows coal and gas operators to take legal action against attempts to close their industry. By Beyond Coal & Gas Image Library, under a CC BY 2.0 license.

The central Italian region of Abruzzo reaches from the peaks of the Apennines all the way down to the Adriatic coast. The Discover Italy tourism website rhapsodizes over its natural reserves, famous for wildlife, national parks and miles of stunning Trabocchi coastline. It’s described as the ‘greenest region’ in the country with sun-seekers flocking there throughout the summer.

But Abruzzo’s natural reserves aren’t limited to beaches and national parks: the Ombrina Mare oil field lies less than 10 kilometres off the coast, discovered in 2007 by the Mediterranean Oil & Gas (MOG) company. In 2014, UK-based Rockhopper Exploration acquired MOG and, along with it, the licence to drill.

Meanwhile, Italian civil society took to the streets to protest. Enrico Gagliano, founder of the ‘No Triv’ (No Exploration) Movement explained what prompted the opposition: ‘One day in 2008, we saw a small platform sticking out of the coast. An abomination. We asked ourselves what on earth it was, we joined forces, we started asking the authorities, we made ourselves heard.’

In 2013, in the city of Pescara, 40,000 people marched under the ‘No Ombrina’ slogan. By 2015 the numbers of protesters had grown; the town of Lanciano saw a demonstration by 60,000 people. Civil-society organizations, dioceses, local municipalities and the staff of the celebrated national parks all added their voices.

Concerns about damage to the environment and the risk of oil spills were raised alongside questions as to how the Italian government could claim to be reducing the use of fossil fuels while at the same time approving a drilling licence. Faced with such pressure and contradictions, in 2015 the Italian parliament decided not to allow any oil and gas extraction so close to the coast, thus spelling the end of the Ombrina Mare project. Or so they thought.

In 2017 Rockhopper filed a lawsuit against the Italian government, under the little-known Energy Charter Treaty (ECT). A verdict is yet to be announced but Rockhopper is demanding compensation for the investments the company has made to date. Under the ECT, companies can not only claim compensation for lost investments due to a policy change, but also for potential future lost profits – in this case as much as $200-$300 million. Through arbitration in Washington, Rockhopper has requested $275 million – only 29 per cent of this is for money already spent, the rest is for lost profits.

Investigate Europe asked Rockhopper about the case but they told us they had no new statements beyond what had already been released.

A chilling effect

Italy left the ECT in 2016, but under a 20-year sunset clause can be sued until 2036 for investments made prior to that date – as is happening with Rockhopper. It is feared that, depending on the outcome, more companies could follow Rockhopper’s lead.

Environmental groups and other non-governmental organizations have long been calling for the reform of the Energy Charter Treaty. And there are particular concerns that it could stymie governments’ ability to meet their climate targets.

Investigate Europe has found that nearly half a million euros have been allocated by the ECT for consolidation, expansion and outreach, with the aim of expanding the treaty’s global reach beyond the 54 countries already covered.

There are already signs that the threat of the ECT alone is enough to have a chilling effect. In spring 2017, then French Environment Minister Nicolas Hulot had a new law drafted. He wanted to ban the extraction of fossil fuels in France by 2030.

Then he received some mail. On behalf of the oil company Vermilion, a Parisian law firm wrote: ‘The project violates France’s obligations as a member of the Energy Charter Treaty.’ It seems the warning did not go unheeded. The final version of the law allowed for oil and gas production until 2040.

The ECT was designed in the early 1990s to protect investors from discriminatory practices relating to investments in the energy sector. It was set up after the collapse of the Soviet Union as a way to foster East-West policy co-operation. Many of the former Soviet republics were rich in fossil-fuel reserves but lacked the required investment as they were deemed risky. At the same time, countries in Western Europe were looking to diversify their energy supplies. Out of this was born the Energy Charter. Enforcement of the treaty has generally been through investor-state dispute settlement (ISDS) mechanisms, where investors can sue countries if they feel hard done by.

In the spirit of international agreements of the day, the provisions of the ECT are vaguely worded and open to interpretation. And the majority of these interpretations – 60 per cent of known cases as of October 2020 – have favoured the investor. A process for modernizing the treaty is currently under way and eight of the topics on the list for discussion include the word ‘definition’.

Lack of transparency

A company can sue under the ECT when countries pass laws that are viewed as against the company’s economic interests. This could be attempts to phase out fossil fuels, the cancellation of controversial oil or gas pipelines, limiting the use of nuclear power, or pushing for lower electricity prices. In 2020, disputes concerning renewable energy formed 60 per cent of all cases.

Civil-society groups call the treaty ‘the powerful secret weapon of the fossil-fuel industry to keep cooking the planet.’

A company’s income can be lost in many ways. For example, policies reducing subsidies for renewable energy have led to a number of cases against the Netherlands. Germany’s push to phase out nuclear power plants by 2022 prompted a Swedish investor to file a claim. Cutting electricity prices in Bulgaria in 2014 prompted three foreign utility companies to sue under the ECT. Many of the cases involving renewables, known as the ‘solar claims’, are against Spain and the Czech Republic for the reduction of feed-in tariffs and the withdrawal of incentives.

As of January 2021 there were 136 known cases but this is unlikely to be the complete picture: there is no obligation to report when claims have taken place and negotiations are confidential.

The ECT today is far more encompassing than in the 1990s and its investor rights cover 54 countries, plus the European Union as a whole. Russia has signed but not ratified the treaty. It withdrew altogether in 2009, but this hasn’t stopped it from being sued in six cases, most notably by shareholders of the oil company Yukos. When Russia dismantled Yukos it triggered years of claims from its former private investors for the illegal expropriation of their assets.

In 2014 the International Permanent Court of Arbitration (PCA), based in The Hague, found in favour of the investors with a $50 billion award against the Russian state. Russia appealed this in the District Court of The Hague, which ruled that because it hadn’t ratified the Treaty, Russia was not bound by the ECT. The investors challenged this ruling at the Dutch Supreme Court and the earlier compensation award was upheld.

This eye-watering $50 billion awarded against the Russian state ($57 billion now that interest has been added) is the most expensive indemnity in ECT and arbitration history.

Russia has one last legal avenue available in an appeal against the Dutch Supreme Court’s ruling. A decision is expected in the second half of 2021.

Standing in the way of climate targets

‘We see the Energy Charter Treaty as a significant obstacle to EU and Member States’ climate action policy,’ said the legal experts at environmental charity ClientEarth in 2020.

Within Europe, the French government in particular is pushing for change. In a letter to the EU Commission, French politicians wrote that the ECT ‘is in urgent need of thorough reform in order not to hinder the ecological transition of the European Union’, adding further that ‘a co-ordinated withdrawal of the European Union and its Member States should be publicly discussed from now on…’.

Ole Kristian Fauchald, a professor at the Department of Public and International Law at the University of Oslo, is highly critical of the Treaty, describing it as ‘human rights for investors’. He is critical of the ECT’s lack of precision, calling it ‘outdated’. ‘If such rules had been included in a contract, I would not have touched it with a ten-foot pole,’ he adds.

Even former members of the Energy Charter Secretariat (ECS, the body that oversees membership) are calling for reform. In 2019, Sarah Keay-Bright, the former Head of Energy Efficiency, wrote that the ECT must be ‘reformed, replaced or terminated’. Another article by Keay-Bright and the former Director of the Energy Charter Secretariat, Steivan Defilla, recommended a radical reform of the treaty: ‘The entire Energy Charter process should be evaluated, including its governance arrangements, institutions and instruments, any of which might only be achievable by amending the ECT.’

In December 2019, Friends of the Earth, Greenpeace and a number of other organizations published an open letter calling for the withdrawal of the protection for investments in fossil fuels and for the ISDS mechanism to be abolished. Should this not be possible, countries would have to remove themselves from the ECT altogether, and be subject to the 20-year sunset clause that Italy is currently languishing under.

Also in 2019, the Energy Charter Conference established and mandated the Modernization Group, ‘to start negotiations on the modernization of the ECT, with a view to conclude negotiations expeditiously’. Rounds of negotiations took place in 2020 and are scheduled to continue throughout 2021.

Discussions within the EU continue as states struggle to find a common position. After the third negotiation round to modernize the treaty at the end of October, an EU Commission proposal for the block’s position on fossil fuels became known. This includes the protection of existing investments in fossil fuels for another 10 years and of investments in gas pipelines until the end of 2040. It also proposes expanding the scope of investment protection to new technologies (for instance hydrogen and biomass). Even though future investments in fossil fuels are excluded, there are major loopholes.

A majority of MEPs had already opposed the idea that fossil fuels should be part of a reformed ECT and NGOs reacted with horror to the Commission’s proposal. Paul de Clerck, economic justice co-ordinator at Friends of the Earth, said: ‘While decisive action to halt climate breakdown is crucial within this decade, the Commission is proposing to continue to protect fossil fuels. This blind pandering to fossil-fuel interests undermines the Paris Agreement and the European Green Deal.’

The EU discussions are just one part of the process. For any changes to happen, there must be agreement among the treaty’s members beyond the EU. Japan’s position couldn’t be clearer: ‘Japan believes that it is not necessary to amend the current ECT provisions.’

Ahead of the first round of negotiations in July 2020, it was reported by Climate Change News that Japan had expressed ‘great concerns’ about an EU plan for a multilateral investment court to replace the ISDS. In this, Japan was supported by Kazakhstan. Both countries were noted as saying that ‘modernization should be minimal’.

What is behind Japan’s stance? One reason is that, up until now, the Japanese state has not had the ECT pointed as a weapon in its direction. However, in March this year, an investor in Hong Kong brought the first known claim against Japan over cuts to renewable energy subsidies.

In addition, Japan is the only G7 country still building coal-fired power plants, both in Japan and overseas. These coal power plants are in India, Indonesia, Vietnam, Bangladesh, Chile and Morocco. None of these countries are signatories to the ECT but several are either in the process of acceding or are observers.

Expansion into Africa

Russia didn’t ratify the treaty. Neither did Norway. Italy left in 2016. The EU Commission wants it modernized, the UK government agrees with the EU (not something you often hear) and ‘will ensure the Treaty supports our priorities to build back greener, create good quality green jobs across the country and lead the world in tackling climate change,’ according to a UK government spokesperson.

And yet, since 2012, the ECT’s Secretariat has been on a PR drive to recruit governments that have not yet signed up. A policy of ‘Consolidation, Expansion and Outreach’ was adopted to try to achieve the ‘enlargement of the geographic area’ covered by the Treaty to countries in the Middle East and North Africa (where investments in energy production are needed ‘if future oil supplies from the region are to be maintained’), and to elsewhere on the African continent, North East Asia and Latin America.In December 2019, ECT members put a ‘temporary pause on issuing invitations to accede to the ECT’. However, 11.4 per cent of the ECT’s 2021 core budget is allocated to the expansion policy. Efforts will apparently include ‘assistance to select observer countries already deeply embedded in the ECT accession process in various ways’.

Across Africa close to 600 million people currently lack access to electricity. The Energy Charter Secretariat’s pitch focuses on attracting foreign energy investments and increasing access to energy. According to a 2015 ECT presentation: ‘How can we reassure foreign private capital that investing in Africa is worth the hassle? Perhaps the key to unlocking Africa’s investment potential in order to guarantee universal access to energy and to overcome energy poverty is the Energy Charter Treaty.’

Uganda is at the front of the queue of African states that are considering joining. Eswatini, Burundi and Mauritania are in the ratification process, and 10 others are at different stages of the journey to eventually join, says Urban Rusnák, the ECT Secretary General. Each country has its own circumstances and reasons to join, he wrote in an email response to Investigate Europe.

Rusnák points out that the World Bank Multilateral Investment Guarantee Agency and the European Bank for Reconstruction and Development both consider the ECT as a ‘risk mitigant’ when assessing the legal risk of investing in a country. But he is less forthcoming on the risk of investors suing states if they feel unfairly treated.

Although expansion of the ECT should be on hold until the completion of the modernization process, Pia Eberhardt, Researcher at Corporate Europe Observatory, says this is not the case: ‘The push has not stopped. The ECT Secretary General asked for money for expansion this year too, and is keen to expand in countries that have few investment treaties and that are not yet part of the dense network of treaties. There is a high chance they will be sued if they join.’

Just before the decision was taken to pause expansion the ECT went into force in the Republic of Yemen where there are plans to revive the battered oil and gas sector. A civil war has raged there since 2014.

South Africa is one country that has resisted signing up to the ECT. The government in Pretoria has dismissed approaches by treaty representatives. Mustaqeem de Gama, Counsellor at the South African Mission in Geneva, told Investigate Europe: ‘The Energy Charter Treaty is bad news as far as my government is concerned. Channelling our energy disputes through an instrument like the ECT would not be in our best interest.’

He believes legislation should be on a national level and other African countries should beware: ‘The Treaty goes way beyond energy such as oil. We are also producers of other input to critical fusion processes, such as uranium and palladium, as well as many metals required in the high-tech industries. This imposes further restrictions and obligations on countries that may close off policy space available to them.’

African states risk becoming hostages to investors, claim civil-society groups Transnational Institute and Corporate Europe Observatory, calling the treaty ‘the powerful secret weapon of the fossilfuel industry to keep cooking the planet.’

‘There is really no evidence of systematic maltreatment of foreign investors around the world. It is not true that there is no protection of investors if you cancel all investment treaties,’ says Eberhardt. The activist insists that if there is a problem with access to justice in national court systems, this must be fixed for everyone, especially for poor people and victims of human rights abuses.

‘In many cases a company invests in a country and, at the first sign of trouble, they declare an international dispute. They basically circumvent local legal proceedings. There are issues regarding domestic procedures. But there should be some kind of local process,’ says de Gama.

More cases = more earnings

Investors aren’t the only ones that have benefited financially by suing under the Energy Charter Treaty. The recent increase in cases has turned international arbitration into a lucrative business for law firms and arbitrators alike. The ECT allows investors to go straight to the arbitration courts, bypassing national court systems. Investors back in the 1990s argued that they would have a fairer hearing at arbitration as not all judiciary systems could be trusted to preside over a fair trial.

There are multiple international tribunals that hear claims. The arbitration process is generally as follows: notice sent by the investor to the host state then both parties choose the tribunal. Each party selects an arbitrator to represent them and a third, to chair the tribunal, is agreed on jointly.

Arbitrators are appointed on a case-by-case basis and must be trained in law, although they can be working in a range of sectors including academia and the diplomatic service. They mostly share similar backgrounds: they come from Western Europe or North America, have attended Ivy League universities and are usually men.

Brigitte Stern is one of the few women in this select group. She tops the ECT Secretariat ranking of arbitrators with the most publicly known cases. Bearing in mind her extensive experience in international arbitration, we asked if we could speak to her, but she declined.

A fair system demands independence from its judges, but arbitrators can have changing roles – and sometimes they represent energy companies.

‘The arbitrators and the law firms are the gatekeepers,’ says Eberhardt. ‘It’s a very powerful club interested in keeping and expanding its power.’

Then there is the payment for their services. There is no limit to the amount arbitrators can receive. In the Yukos case, tribunal chair Yves Fortier received €1.7 million (approximately $2 million), while the investor-appointed arbitrator, Charles Poncet, pocketed €1.5 million ($1.8 million).

The practice of ‘double-hatting’ – acting as a counsel and arbitrator at the same time – has also been a cause for concern.

Sarah Brewin, international law adviser and Associate at the International Institute for Sustainable Development (IISD), explains: ‘In the arbitral system, there is no prohibition against “double hatting”, so you can be at the same time an arbitrator in one case, you can be a counsel, representing an investor in another case. And then in a third case you can even be advising a third-party funder who is advising a claim and then in another case you can be an expert giving evidence on which valuation technique should be used.’

Lawyer and academic Pierre-Marie Dupuy, who was one of three arbitrators on the Rockhopper case, insisted to us that it wasn’t good ‘that the two roles of counsel and arbitrator be melted [into one]’.

The impartiality and independence of arbitrators and counsels in international investor-state disputes has been a major topic of discussion both inside and outside of the arbitration community. Critics of the ECT are concerned that it is the arbitration system that allows such practices to exist.

For Pia Eberhardt the problem is bigger than the system. She sees the huge financial rewards as too tempting for the arbitrators: ‘The longer you take, the more cases you have, the more you earn as an arbitrator… There is a very systemic conflict of interest, even when arbitrators don’t work as lawyers on the side. They become rich on those cases and they don’t have a cap on income.’

‘In many cases a company invests in a country and, at the first sign of trouble, they declare an international dispute. They basically circumvent local legal proceedings’

It’s a view shared by Sarah Brewin: ‘It’s an overall concern how narrow the pool of arbitrators is and the fact that they switch up their roles on a given day. They are also paid on the number of cases that they are sitting on. They are not given an annual salary. They have an incentive there to be on more and more cases. How are there to be more and more cases? Investors, who are the only people who can bring the cases, have to be happy with the system, have to think it’s worthwhile to bring a case.’

Fossil-fuel favouritism?

The Energy Charter Conference is the governing and decision-making body for the Energy Charter process. According to a recently conducted audit, the Energy Charter Secretariat (ECS) has the primary role of ‘providing the Energy Charter Conference with all the necessary assistance for the performance of its duties and carry out the functions assigned to it in the ECT or in any protocol’.

The Secretariat is responsible for the day-to-day administration of the Treaty and for the recruitment of new members. It is a small organization, with an annual budget of around €4 million ($4.8 million), of which 65 per cent is financed by the EU Commission and the rest by the member states.

Secretary General of the Secretariat, Urban Rusnák, a Slovak diplomat who was appointed in 2012, has declared the organization to be ‘neutral’ with regards to types of energy, saying it ‘doesn’t advocate any fuel’. He has also recognized the need for modernization and is currently overseeing the process. He believes that the agreement can be reconciled with the Paris Agreement climate goals and his vision is to make a modernised ECT a ‘global golden standard’ and an ‘indispensable tool for securing private investment necessary for a successful global low carbon transition’.

Some former employees see things differently. Beginning in 2019, Masami Nakata, a Japanese university lecturer and energy specialist, was for two and a half years the Assistant Secretary General at the ECS. On her departure, she wrote a 182-page report outlining what she saw as dysfunction inside the ECT. She sent the report to the European Commission and some member states and it was leaked to the news website EURACTIV in June 2019.

A few months after the leak and under pressure from a ‘diplomat’ of a member state came an international audit.

An insider’s view

Yamina Saheb has first-hand experience of the challenges of modernizing the treaty.1 She has brought the climate crisis into her Parisian apartment and for the past two years has made the Energy Charter Treaty the focus of her life.

Circulating nervously around carefully stacked piles of documents, thick files and bound scientific reports she takes a number of phone calls; with a member of the European Parliament, someone close to the government, the representative of an NGO or a political party. Although today she behaves like a seasoned lobbyist, she didn’t plan it this way.

Until recently Saheb was just one of the many international civil servants that fill the corridors of Brussels. Her CV includes a PhD in energy engineering and employment at the International Atomic Energy Agency (IAEA) and the EU Commission.

In 2018 she accepted the position of Head of the Energy Efficiency Unit at the ECT and was asked to work on the text for the modernization of the treaty to bring it in line with the Paris Agreement. That is what she thought she would do.

Although Saheb knew very little about the Treaty, she immersed herself in it completely before coming to the conclusion that she had been given an impossible task and that it was contrary to the Paris Agreement. The fundamental problem, as she saw it, was that the Treaty protects all investors, including those producing fossil fuels.

The report she produced for the ECT highlighted the problem of what she described as ‘dirty fuels’. At this point things got difficult for her. Saheb says colleagues particularly took issue with her use of these words and she was accused of behaving like a climate activist. Eventually she left the ECT.

Determined to expose what she had discovered, she wrote a report for the OpenEXP thinktank about modernizing the ECT. She observed: ‘Despite being in an era of climate emergency, Contracting Parties active in the ECT modernization did not propose to phase out the binding protection of foreign investments in fossil fuels.’

Investigate Europe put this criticism to Rusnák, who told us by email: ‘The ECT does not allow to sue governments just for trying to phase out fossil fuels’ and that ‘the host State is entitled to maintain a reasonable degree of regulatory flexibility to respond to changing circumstances in the public interest.’

High stakes

Whether countries succeed in achieving their climate targets could depend on the success of the modernization process of the Energy Charter Treaty. In its current format, the Treaty remains a powerful tool for energy investors to compensate themselves for governments’ reducing their reliance on fossil fuels.

Operators of coal-fired power stations or gas infrastructure can take legal action against attempts to close their industry. With claims already being seen in the billions of dollars, just the threat of an investor suing can cause watering down of climate policy. The modernization process is moving at a snail’s pace.

Investigate Europe asked the EU Commission about the apparent contradictions. A spokesperson told us: ‘We will push very hard to bring about the reform. The ECT should not prevent States from making the transition from fossil fuels to sustainable sources of energy.’ One hope for the EU, if all else fails, is that the EU Court of Justice could soon prohibit intra-EU arbitrations as non-compatible with European law.

But while the EU might have a way out, there are three African countries in the ratification process, and ten others moving along the process to join. In signing the Treaty, they could be signing away control over their own energy policy, and potentially exposing themselves to costly lawsuits from unhappy investors.

Investigate Europe is a European team of journalists who jointly research topics of European relevance and publish them across Europe. In addition to the author, the following collaborated on this research: Wojciech Cieśla, Thodoris Chondrigiannos, Boryana Dzhamabzova, Ingeborg Eliassen, Maria Maggiore, Sigrid Melchior, Leïla Miñano, Oliver Moldenhauer, Paulo Pena, Harald Schumann and Elisa Simantke. IE is supported by its readers and the following foundations: Schöpflin Foundation, Rudolf Augstein Foundation, Fritt Ord Foundation, Open Society Initiative for Europe, Gulbenkian Foundation, the Adressium Foundation and the Reva and David Logan Foundation.

1 As Yamina Saheb is currently in proceedings against her former employer before the International Labour Office (ILO), she informs us that she is not in a position to comment in detail on her activity within the secretariat. Two ECS employees who agreed to speak to us have been able to do so.