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The battle to dismantle the little-known Vitality Constitution Treaty

Electricity pylons next to the Uniper SE gas power plant in Irsching, Germany, on Wednesday, July 7th, 2021.

Michaela Handrek-Rehle | Bloomberg | Getty Images

LONDON – The Energy Charter Treaty is not widely known, but there are fears that the impact of this international agreement alone could be enough to dash hopes of limiting global warming to 1.5 degrees Celsius.

The ECT contains a highly controversial legal mechanism that allows foreign energy companies to sue governments over climate protection measures that could affect future profits.

These corporate court proceedings, sometimes referred to as investor-state dispute resolution, are top secret, take place outside the national legal system, and can often result in far higher financial decisions than companies would otherwise expect.

Five fossil fuel companies are already known to seek US $ 18 billion in compensation from governments for changes in energy policy, and most of these were brought in through the ECT.

For example, RWE and Uniper from Germany are suing the Netherlands over coal exit plans, and Rockhopper from Great Britain is suing Italy over a ban on offshore drilling.

Countries not only have to get out of this treaty, they have to torpedo it on the way there.

Julia Steinberger

Economist and professor at the University of Lausanne

A spokesman for Uniper told CNBC: “The Dutch government has announced that it intends to shut down the last coal-fired power plants by 2030 without compensation.

“Uniper is convinced that it would be illegal to shut down our power plant in Maasvlakte after only 15 years of operation without adequate compensation.”

RWE “expressly supports the energy transition in the Netherlands. In principle, it also supports the measures associated with the law to reduce CO2, but believes that compensation is necessary.”

A Rockhopper spokesman said: “The Energy Charter Treaty is designed to provide a stable platform for investments in the energy sector. The Italian government has issued licenses and promoted significant investments in oil and gas exploration based on this platform.”

“It is obviously not fair to change the rules halfway. It is also important to note that Italy continues to produce significant amounts of oil and gas within 12 miles of the coast.”

The number of these courts of law is expected to skyrocket in the coming years, a trend that activists fear will curb plans to move away from fossil fuels.

Governments willing to take action to tackle the climate crisis, meanwhile, could face huge fines.

“The Energy Charter treaty is a real trap for countries,” Yamina Saheb, an energy expert and former whistleblower of the ECT Secretariat, told CNBC over the phone.

Thick smoke, a cloud of water vapor comes from the cooling towers of the Weisweiler lignite power station of RWE Power AG in Germany.

Horst Galuschka | Image Alliance | Getty Images

Saheb resigned from the Secretariat in June 2019 after realizing that it was impossible to align the ECT with the goals of the groundbreaking Paris Agreement. She said any attempt to reform or modernize the treaty would ultimately be vetoed as many member states are heavily dependent on fossil fuel revenues.

“If we pull back, we can protect ourselves, we can start implementing the climate neutrality goals and stop promoting the expansion of this agreement to other developing countries,” Saheb said.

“I think the only way forward is to end this contract,” she added. “Either we kill this contract or the contract will kill us.”

The ECT Secretariat did not respond to a request for comment.

The fundamental aim of the Treaty is to “strengthen the rule of law on energy issues by creating a level playing field” that will help reduce the risks associated with energy-related investments and trade.

Who is involved and how does it work?

The ECT is a unique multilateral framework that applies to more than 50 countries – mainly in Europe and Central Asia – and its signatories include the European Union, the UK and Japan. Expansion to new signatory states, particularly in Africa, Asia and Latin America, is currently being sought.

The ECT was signed in 1994 and was primarily intended to protect Western companies that invested in countries of the former Soviet Union in the post Cold War era. It was also intended to help overcome economic divisions by ensuring the flow of western finances to the east through binding investment protection.

Since then it has been sharply criticized by more than 200 climate leaders and scientists as a “major obstacle” to averting a climate catastrophe.

Dozens of people walk through water due to heavy rainfall causing flooding in Dhaka, Bangladesh on Oct.7, 2021.

Take over Ahmed | Eyepix group | Barcroft Media | Getty Images

“I think the contract alone is probably enough to make 1.5. to kill [degrees Celsius]“Julia Steinberger, economist and professor at the University of Lausanne, told CNBC.

“I know 1.5 is a very tight target and there are a lot of things that can blow it up, but it’s because it essentially saves the fossil fuel industry from the financial meltdown they risked for theirs – and honestly said criminals – investments should suffer in a harmful technology. “

Corporate hearings pending through the ECT are private and investors are not required to acknowledge the existence of a case, let alone disclose the compensation they are seeking.

The average cost of investor-to-state dispute settlement is estimated at around 110 million euros (US $ 123.9 million), according to an analysis of 130 known lawsuits by think tank OpenExp, and the average cost of arbitration and legal fees are estimated to be around 4.5. estimated millions of euros.

International environmental law experts say that even the threat of legal action is seen as extremely effective in deterring national climate change – and fossil fuel companies are well aware of that.

This is because governments may have difficulty allocating resources to a single issue when considering other priorities. The threat of legal action increases the smaller the budget of the country concerned becomes.

In particular, a decision in favor of the state does not lead to zero costs for the taxpayer, since the defendant state has to pay the legal and arbitration fees.

“The countries not only have to get out of this treaty, they have to torpedo it on the way there,” said Steinberger. “And that could be achieved by a unit the size of the European Union.”

An EU spokesman was not immediately available for comment when contacted by CNBC.

At the beginning of this month, the EU concluded its eighth round of negotiations to modernize the ECT; the ninth round of negotiations is scheduled for December 13th.

France, Spain and Luxembourg have all raised the option of leaving if the EU’s modernization efforts are not in line with the Paris Agreement.

What happens when countries withdraw?

Italy left the ECT in 2016 but is currently being sued over a 20-year “sunset clause” which means it will be subject to the treaty until 2036.

Around 60% of Treaty-based cases are within the EU, with Spain and Italy being the most frequently sued countries. With most of these cases inside the bloc itself, Saheb said, a coordinated withdrawal would likely trigger a domino effect, with states like Switzerland, Norway and Liechtenstein likely to follow suit.

And should the bloc withdraw from the treaty collectively, the member states could agree to repeal the legal effects of the sunset clause themselves.

“This sunset clause is much longer than many sunset clauses in other treaties, but it is also completely incompatible with the idea that regulations evolve with the changing reality of climate change, the changing requirements for the protection of the environment and human rights must, ”Nikki Reisch, director of the climate and energy program at the Center for International Environmental Law, told CNBC.

“There are really strong arguments that the application or enforcement of this sunset clause is contrary to other principles of international law,” she added.

A look at open freight cars full of coal under smog during one day showed that the PM2.5 dust concentration was 198 ug / m3 on February 22, 2021 in Czechowice Dziedzice, Poland. According to a report by the European Environment Agency (EEA), the Central Eastern European country has the worst air in the EU.

Omar Marques | Getty Images News | Getty Images

The European Court of Justice ruled in early September that EU energy companies are no longer allowed to use the contract to sue EU governments. The ruling severely limits the scope of future intra-EU cases and calls into question the legitimacy of a number of ongoing multi-billion euro lawsuits.

“We’re not out of the forest yet,” said Reisch. The ruling is an important step in weakening a tool to protect fossil fuel investors, she said, but it does not remove arbitration from investors residing outside the EU.

“We must not leave our ability to cope with the greatest crisis we have ever experienced as a human being to the interests of investors,” said Reisch.

“I think it’s just another reminder of the need to eradicate the legal structures and fictions we have created that really lock us into a bygone era of fossil fuel dependency.”

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