UK threatens to leave Energy Charter Treaty

The government has confirmed it is reviewing the UK’s membership of the Energy Charter Treaty after modernisation efforts reached an impasse.

In its current form, energy minister Graham Stuart said the “outdated” treaty does not support signatories seeking to decarbonise their energy systems and “could even penalise our country for being at the forefront of those efforts”.

The Energy Charter Treaty was created following the end of the Cold War to encourage foreign energy investments in former Soviet states.

The treaty, which is signed by more than 50 countries as well as the EU, allows foreign investors to sue governments and claim compensation for revenue losses resulting from policy changes. In recent years, this has allowed fossil fuel investors to seek compensation for policies introduced to tackle climate change.

Following two years of negotiations between signatories, an agreement in principle to modernise the treaty was reached in June last year. Under the agreement, the modernised treaty would introduce a new “flexibility mechanism” allowing signatories to exclude fossil fuel investments in their territories from protection.

The UK government said it would use the mechanism to remove protections from new fossil fuel investments as soon as the treaty came into effect, while the EU said it would do same nine months later.

Both parties said protections for existing fossil fuel investments would be removed ten years after the treaty came into effect. However, in line with its planned phase out, the UK government said existing coal investments would lose protection from 1 October 2024.

The modernised treaty was supposed to be adopted in November last year. However, the vote was postponed until April this year after opposition from four member states prevented the Council of the European Union from backing the proposals.

A number of countries, including France, Germany, Spain, the Netherlands and Poland, subsequently announced plans to withdraw from the treaty. The vote has still not been held and in July the European Commission recommended that the EU also withdraws from the treaty.

Although the UK has never yet faced an investor-state dispute that has proceeded to arbitration, Stuart said if the modernised treaty is not adopted by November, then the UK will likewise withdraw.

“Rather than being stuck indefinitely with an outdated treaty, the UK wants to see an agreement on a modernised treaty as quickly as possible,” he stated.

“In its current form, the Energy Charter Treaty will not support those countries looking to make the transition to cleaner, cheaper energy sources such as renewables – and could even penalise our country for being at the forefront of those efforts.

He continued: “Governments around the world are looking to boost their sources of home-grown energy, including with new clean technologies – and that is why the Energy Charter Treaty must be modernised. It is also why we are reviewing our membership, and will consider withdrawal, if that vital modernisation is not agreed.

“The UK will continue to carefully consider the views of stakeholders in business, civil society and Parliament to inform the UK’s approach. The UK’s strong rule of law means it remains an attractive destination for investment in the energy sector regardless of its Energy Charter Treaty membership.”