European action against ISDS in the Energy Charter Treaty needs to be universal

May 9, 2023: An article from Project Syndicate reports that over the past year, France, Spain, the Netherlands, Germany, Poland, Luxembourg, Slovenia, and Denmark have all withdrawn from the Energy Charter Treaty (ECT), or announced their intention to do so. Italy left in 2016.  The ECT includes Investor-State Dispute Settlement ISDS) rules. These allow foreign energy investors to sue national governments for losses caused by policy changes. The  ECT can prevents countries from delivering on their commitment to meet the Paris Agreement targets and can also be used against plans to tax oil and gas companies’ windfall profits.

Yet while EU member states are leaving the ECT, a growing number of African countries, including The Gambia, Mali, Burkina Faso, Nigeria, Rwanda, Senegal, and Eswatini, have been persuaded to join it. And while EU governments are protecting themselves from being sued through the ECT, developing country governments are being pressured  to put themselves at risk through bilateral investment treaties.

The ECT was set up in the early 1990s and its ISDS provisions were designed to protect western investments in fossil fuel industries in former Soviet-bloc countries. As of June 2022, at least 150 ISDS cases have been brought under the ECT.

There are also around 2,500 investment treaties – most of them bilateral – which permit international investors to use ISDS arbitrators to settle disputes with states. Corporations can sue states for any judicial, legislative, or regulatory decision, including at the municipal level, that could affect their bottom line. This makes it harder for governments to implement more effective environmental safeguards, labor rights, and safety standards. Even the threat of an investor suit can chill policymakers.

France still has 19 bilateral investment treaties with countries in Latin America and the Caribbean, as well as another 20 with African countries. Spain has 18 and 11, respectively, and the Netherlands has 15 and 22. And all three states continue to pressure developing countries to sign new investment treaties.

On an official visit to Ecuador in August 2022, Spanish Prime Minister Pedro Sánchez insisted that “it is important that we can conclude a [bilateral investment] treaty before the end of the year.” Repsol, Spain’s biggest oil company, has several projects in Ecuador and previously filed an ISDS case  against the country over its windfall tax. The Netherlands has likewise pressed Ecuador to sign an investment treaty, ostensibly to protect its energy sector.

The British-French oil corporation Perenco, which is registered in the Bahamas, a tax haven, used the ISDS clause in the Ecuador-France treaty to seek compensation for a tax on windfall revenues. The arbitral tribunal awarded $412 million to Perenco for “indirect expropriation,” and Ecuador has agreed to pay. Such “treaty shopping” allows multinationals to minimize tax liability while maximizing protection for their investments.

The Australian Labor government has a policy of excluding ISDS in new trade agreements, and of reviewing it in existing agreements, including 15 bilateral treaties with developing countries.  The EU experience of the ECT shows the urgency of this task.