UK quits ‘climate-wrecking’ Energy Charter Treaty after efforts to modernise it fail

The UK government is leaving the “outdated” and controversial Energy Charter Treaty (ECT), an international agreement that allows fossil fuel companies to sue governments over net zero policies that threaten their investments.

The decision follows failed attempts to modernise the agreement to better support cleaner technologies, such as carbon capture, use, and storage (CCUS) and hydrogen, while maintaining existing benefits for the energy sector.

Discussions for reform went on for two years before a modernised agreement was brokered in 2022.

It was to be adopted in November 2022, but signatories reached an impasse when it was rejected by nine EU member states including France, Germany, Spain, and the Netherlands – all of whom decided to withdraw. Concerned that the coming European parliamentary election will delay modernisation indefinitely, the UK has also decided to leave.

Legal hazard

Entering into law in 1998, the ECT was designed to promote international investment in the energy sector and has historically provided protection for investors in fossil fuels. The most litigated investment agreement in the world, a key hazard of the ECT is that is allows companies to sue governments over policies that affect their investments.

Last year, a Jersey-based oil refiner sued Denmark, Germany, and the EU for at least €95m (US$102.8m) over a windfall tax introduced following Russia’s invasion of the Ukraine. Prior to that, UK-listed oil and gas company Ascent sued Slovenia after the nation’s Environmental Agency requested that it undertake an environmental impact assessment before proceeding in the development of its Petišovci oil and gas field. Slovenia has since withdrawn from the ECT.

Graham Stuart, minister for energy security and net zero, said in September that the UK would review its membership if plans to update the treaty were not adopted.

Following the announcement of the withdrawal, he said: “The Energy Charter Treaty is outdated and in urgent need of reform, but talks have stalled, and sensible renewal looks increasingly unlikely.

“Remaining a member would not support our transition to cleaner, cheaper energy, and could even penalise us for our world-leading efforts to deliver net zero.”

The UK’s decision serves as acceptance for recommendations from civil society organisations and parliamentarians to abandon the outdated agreement. The UK’s Climate Change Committee encouraged the nation to announce withdrawal in its most recent progress report. The All-Party Parliamentary Group for the Environment has also recommended the UK leave the agreement.

Last year, organisations including Friends of the Earth and social justice organisation Global Justice Now submitted a petition of 120,000 signatures to Downing Street calling for a UK exit.

A grave threat removed

Cleodie Rickard, trade campaign manager at Global Justice Now, said: “By leaving the Energy Charter Treaty we have taken away one of fossil fuel companies’ most used weapons to deter or punish climate action. Doing so has untied a straitjacket on our current and future capacity to enact the just transition we desperately need.

“Today’s win is testament to years of cross-country campaigning and collaboration – taking a seemingly obscure trade agreement and demonstrating the grave threat it posed to both the planet and public purse.”

Liz Murray, head of Scottish campaigns at Global Justice Now, said: “Today’s announcement that the UK will leave the climate-wrecking Energy Charter Treaty is a huge win for the climate in Scotland and beyond – and testament to the tireless work of campaigners across the country placing pressure on politicians day after day. Now that the Scottish government is free from the fear of being sued by fossil fuel giants for essential climate action, they should seize the opportunity to push ahead with a just green transition to clean energy with truly ambitious policies.”

Not free and clear yet

The UK’s withdrawal will take effect for new investments after one year. However, a 20-year sunset clause means the government could face legal action for existing investments for many more years to come.

However, campaigners and experts have argued that a coordinated withdrawal from the ECT and a new pact among the exiting EU states would neutralise the clause.