UK confirms withdrawal from Energy Charter Treaty

The UK has confirmed it will withdraw from the Energy Charter Treaty after negotiations to modernise the agreement hit a stalemate.

Energy minister Graham Stuart said continued membership of the “outdated” treaty could see the UK penalised for its efforts to decarbonise its energy system.

Signed in 1994, the Energy Charter Treaty was designed to encourage foreign investment in former Soviet states following the end of the Cold War by allowing investors to sue governments to claim compensation for financial losses resulting from policy changes.

The treaty, which has more than 50 signatories, is the most litigated investment treaty in the world and in recent years has allowed fossil fuel investors to seek compensation for policies to fight climate change.

In June 2022, following two years of negotiations, members reached an agreement in principle to modernise the treaty to prevent this from happening. The update would allow members to exclude new fossil fuel investments in their territory from protection, while also expanding coverage to technologies such as hydrogen and carbon capture and storage.

The modernised treaty was originally intended to be adopted in November 2022. However, the vote was repeatedly postponed, mostly recently in November last year, after it was rejected by multiple EU states.

In July last year, the European Commission recommended that both the EU and its members make a coordinated withdrawal from the treaty. Although the UK has not yet faced a dispute that has proceeded to arbitration, energy minister Graham Stuart announced in September that it too would withdraw from the treaty if the modernised version was not adopted by November.

The update has so far been rejected by nine EU states, all of whom have decided to withdraw from the treaty or have already done so. They include France, Germany, Spain and Netherlands. The Department for Energy Security and Net Zero said the European Parliament election later this year could mean that modernisation of the treaty is delayed indefinitely.

“The Energy Charter Treaty is outdated and in urgent need of reform but talks have stalled and sensible renewal looks increasingly unlikely,” said Stuart.

“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.

“With £30 billion invested in the energy sector just since September, we continue to lead the world in cutting emissions, attracting international investment and providing the strongest legal protections for those who invest here.”

Eunjung Lee, senior policy advisor at the environmental think tank E3G, said: “The UK withdrawal from the Energy Charter Treaty is a hammer blow to its survival chances. With the discussions in the EU still at an impasse, this is likely to swiftly lead to the treaty’s collapse.”

“It would be best for remaining countries to leave the treaty promptly and insulate themselves from future litigation risks,” she added.

“This treaty was written to protect the incumbents – the fossil fuel industry – and has held back the transition to clean energy. Its demise cannot come fast enough.”

The UK’s departure will come into effect one year after the treaty’s secretariat has been notified of the withdrawal, from which point new investments in the UK will not benefit from protection.

However, E3G noted that the treaty contains a sunset clause protecting existing investments for another 20 years. It said the UK should work with other withdrawing countries to try to eliminate risks from this clause.