The Energy Charter Treaty (ECT) is one of the best-known and most controversial of the international investment treaties. The energy transition necessary to achieve the Paris Agreement climate target will require large and sustained flows of investment capital. Scholars, environmentalists, industry representatives, and governmental officials have intensively debated the modernization of the ECT. The main point of contention is whether the ECT can facilitate the energy transition or whether it entrenches fossil lock-in in unsustainable and unjust ways. This article proposes a comprehensive and integrated approach to the ECT, guided by the theoretical matrix of Earth system law scholarship. Our analysis reveals that the ECT cannot address contemporary socio-ecological challenges, but rather it remains a sectoral piece of a supranational economic constitution far removed from the most pressing exigencies of the Anthropocene.

On 24 June 2022, the Contracting Parties of the Energy Charter Treaty (ECT) finalized discussions on the modernization of the treaty. After fifteen rounds of negotiations, an agreement in principle was reached to be adopted by the Energy Charter Conference on 22 November 2022 in Ulaanbaatar, Mongolia.1 The ECT, adopted in 1994, establishes a legal framework that aims to promote international cooperation in the energy sector.2 It has a membership of 53 countries primarily from Europe and Central Asia, as well as the European Union (EU) and the European Atomic Energy Community. In recent years, the ECT attracted widespread public attention due to its impact on states’ environmental and climate policies. Particularly, the treaty’s provisions on investment protection, with investor-to-state dispute settlement (ISDS) at the centre, allow foreign investors in the energy sector to challenge adverse state action before international arbitration and claim compensation for measures affecting their business activities. Fossil fuel investors have increasingly used the ECT to challenge environmental and climate measures, such as phasing out coal-fired power generation, banning offshore oil drilling in coastal areas, and prohibiting gas fracking projects. Such cases have fuelled concerns regarding the abilities of governments to roll-out large-scale climate action. The Intergovernmental Panel on Climate Change (IPCC) has warned that international investment agreements (IIAs) like the ECT could ‘be used by fossil-fuel companies to block national legislation aimed at phasing out the use of their assets’.3 With some of these damage claims running into billions of euros, the ECT enables fossil fuel investors to offload the costs and risks associated with their affected assets onto society at large in the face of necessary climate action. This would go, in the words of the editorial board of the Financial Times, against the ‘heart of the capitalist social contract’ and the ‘ability of markets to deal adequately with the challenge of climate change’.4

One of the main catalysts for the shift towards renewable energies has been the practice of support schemes in a key number of EU member states. Some of these states have since withdrawn or revoked much of their original support, which has resulted in investment treaty arbitrations being filed against them under the Energy Charter Treaty. Arguably, a balance should be found between investors’ legitimate expectations concerning the stability of the legal framework and the host states’ right to adapt regulations to new needs. This can be achieved by clarifying and delimiting the principle of fair and equitable treatment, and by encapsulating it in a more precise set of rules. Due to its open character, this principle could otherwise become too intrusive a standard of judicial review for the exercise of sovereign power by host states. It could be diluted into a rhetorical framework inviting uncertainty and subjective judgment. While the focus of this article is on energy, the concern for legal stability equally applies to all those sectors where large upfront investments are required, which can only be recouped in the long run.

A number of European Union (EU) countries have undertaken thorough reforms in the renewable energy sector over the past years. The regulatory changes have triggered a wave of claims from low-carbon investors asserting that the reforms have diminished or exhausted the economic viability of their investments. Unlike local investors, who typically take legal action before domestic courts, foreign investors have filed arbitration claims in accordance with the Energy Charter Treaty, notably against Spain, Italy, Bulgaria, and the Czech Republic, resulting in several awards of damages. However, recent developments in EU state aid law seem to restrict the ability of investors to obtain compensation. This article argues that such developments may undermine renewable energy policy, because arbitration enhances the regulatory stability and predictability which low-carbon investments require only if arbitral awards can be enforced effectively. The article examines the different scenarios that may arise out of the interplay between EU law and investment arbitration in the EU and concludes that the European Commission's arguable redrawing of the boundaries of state aid rules to encompass investment arbitration, combined with the EU's general quest to replace investment arbitration with alternative mechanisms of adjudication, may jeopardize climate change mitigation policies.

Admissibility — Energy Charter Treaty, Article 17(1) — Conditions necessary to invoke Article 17(1) — Ownership or control by a national of a Contracting Party

Admissibility — Ownership, misrepresentation of — Whether alleged misrepresentation is a question of jurisdiction or merits

Foreign investment — Misrepresentation as to identity of investors — Whether investment contrary to domestic law and international law — Obligations of investor to provide host State with information concerning the investor and investment — Whether investment made in violation of principle of good faith — Whether illegal investments protected by law

Energy Charter Treaty — Energy Charter Treaty, Article 26(6) — Applicable rules and principles of international law — Principle that nobody can benefit from his own fraud — Whether enforcement of an illegally obtained contract contrary to international public policy

Energy Charter Treaty — Scope of protection — Whether protection extends to investments made illegally — Whether protection extends to changes in the host State’s laws — Investor’s awareness of the state of the host State’s laws — Risks of investment — Energy Charter Treaty, Article 21 — Taxation excluded from scope of the Treaty

Energy Charter Treaty — Standards relating to investments — Energy Charter Treaty, Article 10(1) — Whether Article 10(1) applies to all stages of investment — Liability for past environmental damages — Fair and equitable treatment — Full protection and security — Whether failure to provide aid for environmental clean-up constitutes discrimination

Foreign investment — Actions of state-owned bank with respect to foreign investor — Whether actions taken on a commercially reasonable basis

Costs — Allocation of costs between parties — ICSID Convention, Article 61 — Tribunal’s discretion to award costs — Effect of a party’s conduct on apportionment of costs — Fraudulent conduct by a party

On July 18, 2014, the Arbitral Tribunal (Tribunal) constituted in accordance with Article 26 of the Energy Charter Treaty (ECT) and the 1976 UNCITRAL Arbitration Rules under the auspices of the Permanent Court of Arbitration issued its long-awaited final awards in the famous arbitral proceeding related to the demise of oil giant Yukos. The Tribunal held unanimously that a coordinated set of actions by the Russian government (including arrests, tax reassessments, fines, and the forced sale of Yukos) amounted to an indirect expropriation of Yukosin breach of Russia’s obligations under the ECT, and that Russia was liable to pay prompt, adequate, and effective compensation for that breach. The Tribunal concluded that Yukos’s claims were not barred by the company’s own illegal acts or because of the “carve-out” for taxation measures under Article 21 of the ECT. Instead, the Tribunal concluded that the claimants had contributed to the prejudice they suffered and it therefore reduced the awards and reimbursement for legal costs by 25 percent. Even accounting for this reduction, the composite final award is still, by far, the largest known arbitral award ever rendered. The Tribunal ordered the Russian Federation to pay damages totaling US$50,020,867,798, in addition to arbitral and legal costs. Post-award interest is due on any outstanding amounts of damages and costs not paid starting from January 15, 2015, and is to be compounded annually thereafter.

The development of the former USSR oil and gas resources presents considerable political and legal challenges, such as intergovernmental agreements, delimitation of borders, and jurisdiction over the energy resources (e.g., Caspian basin). In this respect the pipeline transportation and transit have become increasingly important issues. In view of Article 7 of the Energy Charter Treaty, the novel public international law obligation of states to facilitate and not to impede the transport of energy through pipelines, this article will briefly consider the possible international forums for the resolution of legal conflicts over pipeline transit in the former Soviet Union.

The Energy Charter Treaty came into force on 16 April 1998. The Treaty contains far-reaching provisions on trade and investment liberalisation within the energy sectors of 49 signatory states. The Treaty arguably offers a basis for multilateral agreement on micro-economic reform of the energy sectors. Some of the most significant initiatives contained in the treaty are the provisions for resolution of disputes. This article examines in detail the provisions dealing with arbitration of disputes between investors and states. These mechanisms build on models developed in other recent multilateral investment treaties. The limitations and potential offered by these provisions are discussed and some conclusions drawn.