{"id":10437,"date":"2024-03-15T11:14:09","date_gmt":"2024-03-15T15:14:09","guid":{"rendered":"https:\/\/journals.law.harvard.edu\/ilj\/?p=10437"},"modified":"2024-03-15T11:21:34","modified_gmt":"2024-03-15T15:21:34","slug":"the-graduate-the-e-u-and-its-member-states-exit-from-the-energy-charter-treaty","status":"publish","type":"post","link":"https:\/\/journals.law.harvard.edu\/ilj\/2024\/03\/the-graduate-the-e-u-and-its-member-states-exit-from-the-energy-charter-treaty\/","title":{"rendered":"The Graduate: The E.U. and its Member States\u2019 Exit from the Energy Charter Treaty"},"content":{"rendered":"

Marios Tokas*<\/strong><\/p>\n

I. Introduction<\/h2>\n

At the end of \u2018\u03a4he Graduate<\/span><\/a>,\u2019 the protagonist duo happily sits in the back of the bus together. As the music plays on, the duo starts becoming less and less happy as they think about their future and the repercussions of their actions, since Elaine has just fled her wedding to run out with Benjamin to an uncertain future.<\/p>\n

The ending scene of \u2018The Graduate\u2019 resembles the situation in the aftermath of the denunciation of the Energy Charter Treaty (ECT) by various E.U. member states (including France<\/a><\/span>, Germany<\/a><\/span> and the Netherlands<\/a><\/span>) and the proposal for a so-called coordinated exit<\/a><\/span> together with the E.U. This move radically differs from the E.U.\u2019s previous stance. The E.U.\u2019s previous position, based on a 2022 agreement in principle<\/a><\/span>, favored the adoption of a \u2018modernized\u2019 version of the ECT which purported to reduce the protective scope for \u2018climate-dirty\u2019 investors.<\/p>\n

The coordinated exit<\/a><\/span> will entail two parts: 1) denunciation of the ECT by the E.U., as a member of the ECT, and of the E.U. member states; and 2) an inter se<\/em> agreement between the E.U. and its member states intended to terminate the 20-year sunset clause in the ECT concerning existing covered investments.<\/p>\n

This move has been met with enthusiasm by climate think-tanks<\/a><\/span> which have been advocating<\/a><\/span> for an exit<\/a><\/span> from the ECT for quite some time, calling the ECT a \u2018climate-wrecking treaty<\/span>.\u2019<\/span><\/a> However, this enthusiasm has gradually faded as disputes<\/a> <\/span>continue<\/span><\/a> to arise, politicians<\/a><\/span> with anti-climate agendas are elected, and many states exploit the climate emergency to pursue a protectionist agenda<\/a><\/span> which includes export controls, restrictions in critical raw materials<\/a><\/span> trade, and nationalizations<\/span><\/a> of investments.<\/p>\n

Without getting into the debate over the impact of the ECT on the E.U.\u2019s climate goals and the climate policies of the E.U. member states, it is useful to examine what happens next. No politically viable legal instrument is available to replace the ECT at the moment. Meanwhile, the old ECT remains relevant due to its 20-year sunset clause (Article 47.3 ECT<\/span><\/a>), which extends protection to covered investors and investments for 20 years after a party\u2019s denunciation of the ECT. Any investment made before the end of the withdrawal notification\u2019s one-year notice period is also protected under the sunset clause.<\/p>\n

In the present article, I provide some reflections on the legal and policy considerations of the uncertain future of investment arbitration in the E.U. in light of the ECT\u2019s apparent collapse.<\/p>\n

II. Reasons for the Coordinated Exit<\/h2>\n

The first argument in favor of the coordinated exit is that it will ensure legal security and predictability within the E.U. and boost climate change cooperation among the E.U. member states. This argument is premised on the fact that many E.U. member states\u2019 energy and environmental policies have given rise to numerous large<\/a><\/span> investor-state dispute settlement (\u201cISDS\u201d) claims by E.U. investors. The E.U. has recently ramped up its policy interventions on climate change as part of its Green Deal<\/a><\/span>; new initiatives include mandatory emissions reduction targets, stricter environmental regulations, and subsidies for renewable energy.\u00a0 The E.U. and its member states want to ensure that the Deal is not derailed by ISDS claims. In other words, the elimination of such claims will prevent regulatory chill that could hamper the carbon neutrality targets set by the bloc.<\/p>\n

This leads to the second main argument for an exit: after the Achmea<\/a><\/span> and Komstroy<\/a><\/span> judgements from the Court of Justice of the European Union,<\/em> and the decisions of several<\/a><\/span> E.U. domestic courts<\/a><\/span>, any new intra-E.U. claims would now be incompatible with E.U. law. Despite these proclamations, all but one<\/span><\/a> arbitral tribunal have rejected all jurisdictional objections based on the various intra-E.U. allegations. Investors simply enforce their intra-E.U. awards in other jurisdictions. Indeed, investors have traditionally had no issue in resorting to U.S. courts<\/span><\/a> to enforce<\/a><\/span> intra-E.U. claims, aside from one recent and heavily criticized exception<\/a><\/span>, and have also enforced awards in the U.K.<\/a><\/span> and Australia<\/span><\/a>. With the coordinated exit, the E.U. and its member states want to ensure that no new claims will be made.<\/p>\n

The last argument in favor of the coordinated exit is the desire to avoid claims from carbon-intense industries. Even if these claims fail at the merits stage, they have significant costs. The costs of the proceedings have frequently angered E.U. member states.<\/p>\n

III. Much Ado About Nothing?<\/h2>\n

However, the real question lies in whether the coordinated exit can in fact achieve these three objectives.<\/p>\n

A. Application of the Coordinated Exit in the Intra-E.U. regime: Uncertainty Remains<\/h3>\n

The legal effects of the coordinated exit are twofold. First, the exit will be considered an inter se <\/em>modification of the ECT under Article 41 of the Vienna Convention on the Law Treaties<\/a> <\/span>(\u201cVCLT\u201d) with regards to the ECT sunset clause. Second, the exit will be considered a withdrawal from the ECT (in light of VCLT Article 54 and ECT Article 47) for the rest of the ECT\u2019s provisions. The second effect is not contested. By contrast, the effects of an inter se<\/em> modification to the sunset clause have stirred substantial debate.<\/p>\n

The first legal question is whether the inter se <\/em>modification would be in accordance with Article 41 of the VCLT. Article 41 introduces two requirements:<\/p>\n