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Why World’s Post-Cold War Energy Treaty Is Crumbling – Bloomberg

A flare stack burns at an oil refinery in Schwedt, Germany.
A flare stack burns at an oil refinery in Schwedt, Germany (Krisztian Bocsi/Bloomberg)

John Ainger, Bloomberg News

EnergiesNet.com 07 05 2023

The Energy Charter Treaty, an obscure agreement struck nearly three decades ago to spur investment in eastern Europe, has come under new scrutiny as the world tries to end its addiction to fossil fuels. There’s talk in the European Union of pulling out amid fears that the 27-nation bloc could be on the hook for millions of euros of legal claims from major oil and gas companies as it looks to slash its greenhouse gas emissions this decade — something that will require the closure of polluting power plants.

1. What is the Energy Charter Treaty?

The treaty emerged from the ashes of the Cold War as a way of getting the West’s oil and gas industry to invest in former Soviet bloc countries. The idea was that large companies would be able to sue signatory governments to protect their investment if deals went awry, as many formerly communist economies moved away from their state-driven models. It also served to benefit western Europe, providing access to the huge natural resources in the east. There are currently around 50 signatories and contracting parties to the treaty, including the UK, Turkey and Japan but not the US or Russia.

2. Why is it being criticized?

Since its signing in 1994 and entry into force four years later, there has been no substantial update of the treaty to take account of international climate goals. That’s emerged as a problem in recent years, especially in the EU, where the push to roll out renewable energy has come into conflict with vested fossil fuel interests. The bloc has set a goal of reducing emissions by 55% this decade, which will require phasing out fossil fuels, putting at risk millions of euros of investment by oil and gas majors in the continent. The EU has said the treaty is “increasingly outdated and no longer matches the climate ambition at the EU and international levels.”

3. Have there been lawsuits related to climate goals?

Yes. For example, the German energy companies Uniper SE and RWE AG sued the Dutch government in 2021 over the forced early closing of their coal plants in the Netherlands. RWE alone demanded €1.4 billion ($1.4 billion at the time) in compensation. But a German court ruled in September 2022 the utilities couldn’t seek international arbitration under the treaty, and a Dutch court rejected their compensation bid two months later. Over the last 20 years or so, there have been about 158 cases brought under the treaty, roughly a third of which were tied to fossil fuels. It’s unclear how many involved losses due to climate goals. Even so, there’s concern that the numbers could grow as the EU moves further along on its energy transition, potentially leaving behind so-called stranded assets — basically projects that are no longer viable. Around €350 billion of oil, gas and coal projects are protected under the treaty, according to Friends of the Earth Europe, an environmental activist group.

4. Why does the EU want to exit?

Initially, it didn’t. Italy withdrew from the treaty at the start of 2016, and since then a bloc of countries including France, the Netherlands, Poland, Spain and Belgium have been pushing for the whole EU to leave as one. But the European Commission, the EU’s executive, favored staying in and reforming the treaty to better deal with intra-EU disputes, which account for almost all legal action taken by fossil fuel companies against governments for lost income due to the roll out of renewables. It also secured in principle the shortening of a “sunset clause” that protects energy company investments to 10 years, from 20. Leaving would prevent that change, it argued. But there wasn’t enough support from member states and the commission this year began to describe leaving as “unavoidable.”

5. How would leaving the Energy Charter Treaty happen?

Once the European Commission proposes withdrawing, a majority of member states would have to approve it. It’s unclear whether some member states could stay in individually if they wanted to. Whatever happens, there are doubts about whether the treaty could survive without the bulk of its members.

The Reference Shelf

bloomberg.com 07 05 2023

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