United We Leave or Divided We Stay? Why it’s time for the EU to speak with one voice regarding the Energy Charter Treaty

After a written procedure that was finalized on Friday, July 7, the European Commission (EC) formally recommended a coordinated European Union (EU) withdrawal from the Energy Charter Treaty (ECT). This is a landmark move for the embattled accord, which fossil fuel companies have regularly used to challenge and hinder states' climate action. 

The move contrasts with the "compromise proposal" that EU member states have discussed in recent months, which intended to facilitate an uncoordinated exit, with the EU, Euratom, and some EU member states withdrawing individually while allowing others to stay in a modernized ECT. 

The news from the EU's executive arm comes as more ECT contracting parties indicate their own plans to leave. On the same day that the EC made its recommendation, Ireland announced its intention to withdraw, followed by Portugal on July 18, making these countries the ninth and tenth EU member states to do so. On June 28, the United Kingdom Climate Change Committee also recommended that the United Kingdom announce such an intention. 

A coordinated withdrawal from the ECT, now supported by the EC, would have the EU, Euratom, and all EU member states leave the treaty—an accord that also counts more than 20 states outside the EU among its contracting parties. The EC’s recommendation, if it becomes a reality, will allow the EU and its member states to speak with one voice and remove a major obstacle to achieving the bloc's climate ambitions. 

IISD research shows, for instance, that the ECT is the treaty most used by fossil fuel investors to challenge climate-related regulations. The treaty is also well known in the investment law community for the hefty arbitral awards against governments in claims filed by foreign investors using the ECT's investor–state dispute settlement (ISDS) mechanism.

Over the past years, IISD has analyzed the approach of a coordinated withdrawal and found that it is both legally viable and effective for safeguarding ambitious climate action. Moving forward, the Council of the EU, consisting of EU member state representatives, will now undertake complex talks to reach a final position. We therefore outline below why a coordinated withdrawal is the most viable option from a legal and policy standpoint—while describing some of the legal complexities involved—and show why an uncoordinated withdrawal that leaves some EU member states in the treaty could lead to damaging consequences.

Tackling the ECT’s famed "sunset clause"

The Commission's recommendation for a coordinated withdrawal is a major step forward when it comes to providing legal clarity for the EU and its member states on what happens after leaving the ECT, especially for investments made by EU investors in other EU member states prior to withdrawal.

Notably, the recommendation would allow the EU to address the risk of continued intra-EU arbitration after the withdrawal takes effect—a risk stemming from the ECT's so-called "sunset clause." This clause provides that investments involving a withdrawing state would continue to be protected under the ECT for a period of 20 years post-withdrawal. A coordinated EU withdrawal could be accompanied by an internal—also known as an "inter se" —agreement, in which the EU would clarify that the treaty, including its sunset clause, does not and never did apply within the EU and its member states.

This is a view that the EU has already expressed in past and ongoing arbitrations. Such a clarifying inter se agreement would address the remaining legal risks of EU investors suing other EU member states for taking climate action throughout that 20-year period. A coordinated withdrawal would furthermore contribute to a harmonized timeline for the EU and its member states to leave the treaty, providing even greater legal certainty for governments wishing to advance the energy transition.

From failed reform to coordinated withdrawal

The EC's announcement comes after many years of debate, within and outside the bloc, as to the options for reforming the treaty. Explaining their recommendation, EC officials made clear that the ECT is counterproductive when it comes to achieving an essential goal of the bloc: ambitious and effective action toward climate mitigation. 

Executive Vice-President for the European Green Deal Frans Timmermans highlighted, in the EC's strongest statement yet, that climate policy was the main reason for the decision:

"With the European Green Deal, we are reshaping our energy and investment policies for a sustainable future. The outdated Energy Charter Treaty is not aligned with our EU Climate Law and our commitments under the Paris Agreement. It’s time for Europe to withdraw from this Treaty and to put all of our focus on building an efficient and competitive energy system that promotes and protects renewable energy investments."

The EC's groundbreaking shift in strategy is the latest development in a years-long process. The ECT's contracting parties had initially sought to "modernize" the treaty in a bid to make it more supportive of climate action and address other problems that have emerged over the years. The result was a draft text negotiated among ECT contracting parties across 15 rounds from 2020 to 2022.

However, several EU member states did not support this "modernized" draft text, finding it inadequate for achieving their climate goals —a finding backed by IISD's legal research. They instead announced their respective intentions to withdraw unilaterally from the treaty. In light of these announcements and following a European Parliament resolution advocating for a coordinated exit rather than adherence to the "modernized" draft ECT text, a pre-scheduled vote in the Council to support the draft text was called off. The EC was facing a new reality.

The eventual result was a major shift of strategy: support for a coordinated withdrawal of the EU, Euratom, and all EU member states from the treaty (Euratom refers to the European Atomic Energy Community, established over 60 years ago.) An internal non-paper by the EC leaked to news outlets in February had already called such a step "unavoidable," and the Commission had started to negotiate an inter se agreement with EU member states. In its new recommended Council decision, the EC confirms that these efforts toward clinching an inter se agreement remain underway. The EC has also formally withdrawn its earlier proposals for Council decisions that would have supported the vote by the EU and Euratom in favour of adhering to the draft reform text.

Making a coordinated EU withdrawal a reality

In its new proposal, the EC unequivocally states that the ECT, in its current form, is incompatible with EU law, the EU's energy and climate goals, and the EU's approach to investment protection. Therefore, the EC proposes a coordinated withdrawal.

The ECT text itself sets out a procedure for withdrawal in Article 47. Under this article, a contracting party can withdraw by notifying the depositary of the treaty of its intention. Withdrawal will take effect 1 year after the receipt of this notification. As noted above, withdrawal will trigger the treaty's sunset clause, set out in paragraph 3 of that same article, according to which investments made prior to withdrawal will continue to be covered by the treaty for a period of 20 years from the date of withdrawal taking effect. This would generally allow investors of such investments to bring arbitration claims against withdrawing contracting parties for the full duration of this 20-year period. 

The EC's proposal clarifies, however, that this clause will not affect investments between EU member states, noting that the ECT, in its entirety, does not, never did, and never will apply among EU member states.

To solidify the clarification that the ECT, including the sunset clause, does not apply among EU member states, the EC is negotiating an inter se agreement with EU member states based on Article 31(3)(a) of the Vienna Convention on the Law of Treaties. This convention provides a general rule on how treaties should be interpreted and states that any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions should be taken into account.

In addition to addressing issues arising under the ECT, the EU also needs to ensure that a withdrawal from the ECT aligns with the EU's own body of law. Because the two principal EU treaties, the Treaty for the European Union and the Treaty on the Functioning of the European Union, do not expressly provide for a process to withdraw from an international agreement like the ECT, the EC has proposed to use Article 218(6)(a)(v) of the Treaty on the Functioning of the European Union as the procedural legal basis for leaving the ECT. Rather than withdrawal, this article describes the procedure for the EU to conclude international agreements. The EC now clarifies that the same procedure must be followed for withdrawal.

Similar to the approval of a new treaty, withdrawal of the EU from the ECT would, as a result, require a qualified majority of the Council, which usually means the support of 55% of the bloc’s member states—in other words, 15 member states—representing at least 65% of the EU population. The move will also require the consent of the European Parliament, which has already signalled such support. The EU can withdraw from the ECT under EU law if these conditions are met.

Uncoordinated withdrawal: Creating new legal complexities and uncertainty

A coordinated withdrawal provides far more legal and political clarity than an uncoordinated one. Under EU law, the ECT covers a range of areas, only some of which fall under the exclusive competence of the EU, such as foreign direct investment. For other areas, the competence is shared between the EU and its member states, such as portfolio investment. Other areas, such as the ECT's ISDS mechanism, require the consent of EU member states. Meanwhile, some areas, like tax policy, largely fall under the exclusive competence of EU member states.

Because the ECT was negotiated before the distribution of competences around investment were clarified at the EU level, the treaty is largely silent about how to deal with this issue. While Article 1(3) of the ECT provides some clarification, this remains limited.

This ECT article defines the term "Regional Economic Integration Organization" (REIO) as an "organization constituted by states to which they have transferred competence over certain matters a number of which are governed by this Treaty, including the authority to take decisions binding on them in respect of those matters." While the EU qualifies as an REIO, and the article seems to recognize that the EU has competence over "certain matters" covered by the ECT, the article does not clarify what this language implies if the EU but not all its member states withdraw.

This raises the more specific question of whether those EU member states remaining in the ECT would bear international responsibility for implementing normative acts taken by the EU, even if the subject matter of these acts falls within an area of EU competence, and even after the EU has withdrawn from the treaty. A recent legal analysis finds that this is very likely. Contrary to that finding, the EC has repeatedly stated that in international agreements where both the EU and its member states are parties, member states only bear international responsibility regarding areas within their competence under EU law. To date, however, ISDS tribunals have largely rejected this view.

If some member states remain in the ECT, the legal implications will continue to be unpredictable. It would also imply a violation of EU law, since ISDS cases could potentially continue to arise within the EU, where either a home or host state, or both, are still parties to the ECT. A coordinated withdrawal of the EU, Euratom, and all EU member states, accompanied by an inter se agreement, would resolve many of these questions related to member states' international responsibility, relative to that of the EU itself.

By contrast, a decision by some EU member states to remain in the ECT might require express authorization from the EU, since they would likely act in ways that concern areas of exclusive EU competence. The EU may also have to issue such authorizations on a rolling basis, since these states could be compelled to vote on or abstain from subsequent decisions taken under the Energy Charter Conference—the decision-making body of the ECT contracting parties—when it comes to areas that fall under exclusive EU competence in EU law.

Conclusion

A coordinated exit mitigates many of these potential legal problems while avoiding a situation that would place undue stress on the EU division of competences. For instance, a coordinated withdrawal would not require complex and politically strenuous procedures for individual authorizations for those EU member states wishing to remain party to the agreement. New formal mechanisms for the post-withdrawal coordination of positions among remaining and withdrawing EU member states would thus be avoided. This could also free up much-needed capacity in energy ministries across the EU.

Finally, a coordinated EU withdrawal would also prevent a situation in which some member states could indefinitely bear international responsibility for the implementation of normative acts of the EU. A coordinated withdrawal would thereby safeguard the bloc’s internal market—and the EU’s climate policies—from adverse external influence in the long term.

The EC's decision to recommend a coordinated EU withdrawal is an important step for creating more legal and political certainty in an already muddled area of law. Reflecting an "all EU" approach, it paves the way for creating a clean slate for the EU to develop a coherent, novel approach to international energy investment law that advances climate goals and supports the energy transition.

Member states representing more than 75% of the EU population have announced their intention to withdraw unilaterally from the treaty or have already withdrawn. This includes Spain, currently presiding over the Council. These member states should seize the chance offered by the EC to make coordinated exit a reality and publicly support this option.

Given this new momentum, reluctant EU member states may wish to reassess their strategy. Endorsing a coordinated exit would not only allow the EU to maintain unity and cohesion, but it would also reduce significant legal risks they could incur in the future. With the uncertain fate of reform, they may indefinitely remain party to an agreement that is in violation of EU law. Supporting a coordinated exit would instead send a strong signal for joint climate action. 

July is set to become the hottest month the world has experienced in 120,000 years, with the emission of greenhouse gases from fossil fuels and other sources being the main driver of the climate crisis. The EC's proposal is a chance for the EU to speak with one voice, adapt to the current geopolitical context, and cooperate more constructively and creatively on energy policy within the EU and other ECT contracting parties, including in its neighbourhood. 

The authors would like to thank Sofia Baliño and Isaak Bowers for their comments.