A Divided World? A Lesson from the Energy Charter Treaty

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This blog post was authored by Dr Dalia Palombo – Tilburg University. She was one of the organisers of the Symposium: Colonisation in, of and through Business and Human Rights, held in April 2023 in Tilburg (the Netherlands). The blog post is part of a Blog Series published on Rights as Usual.

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The morning after the Symposium: Colonisation in, of and through Business & Human Rights | Tilburg University, I tried to connect the dots between the thought-provoking presentations I heard the day before. From the need to decolonize investment or tax law to the imperialist danger entailed in mandatory human rights due diligence laws, the image of a world divided in two, the West and the Rest, started to emerge.

In extreme synthesis, countries from the Global North often argue that the corporate accountability gap depends on the inability of developing states to regulate corporate conduct in their territories (with a focus on the lack of rule of law and corrupted institutions). Instead, several Global South countries, and especially the least developed countries, argue that the bulk of the business and human rights problems originate from an exorbitant power (often resulting from colonial legacies) concentrated in a few multinational enterprises, furthering the interests of the West at the expense of the Rest. This division inevitably affects the solutions proposed to address business and human rights problems: better and more effective implementation of existing rules versus reconceptualizing and reframing the core structures of the global economy. For a clear picture of the dichotomy, one could check the declarations made, for example, by Cuba (in favour of a treaty establishing internationally legally binding obligations on transnational enterprises) and the United States (arguing that the business and human rights (BHR) treaty initiative shall not to be pursued in its current form) at the Human Rights Council Seventh Session of the Intergovernmental Working Group on Transnational Corporations and other Business Enterprises with Respect to Human Rights.

Unfortunately, the division between the West and the Rest does not only touch the BHR realm. This summer, the UN Secretary General Antonio Guterres warned at the BRICS Summit about the dangers entailed in an increasingly divided world. Listening to his powerful words, the North/South divide in BHR seems nothing other than the expression of a deeper dichotomy that is emerging in every field and risks becoming the defining fracture of the XXI century.

In response to such a dark picture of division ahead of us, I wonder what could make us embrace a different world conception. In other words, what should happen for the West and the Rest to better understand each other’s discourses to avoid living in two parallel worlds that rarely meet? Maybe it is necessary for each camp to be in the other’s shoes.

An excellent example demonstrating how the West can change its perspective when put in the Global South’s shoes is the rise and fall of the Energy Charter Treaty (the “Charter”), which indeed was discussed during the Symposium: Colonisation in, of and through Business & Human Rights | Tilburg University. The Charter is a trade agreement signed by all European Union states as well as extra-European countries, such as several post-Soviet and Middle Eastern countries. It includes Investment-State Dispute Settlement (ISDS), a mechanism enabling investors to sue states for failing to provide fair and equitable treatment or for property expropriation. ISDS is highly criticised by several scholars and NGOs for de facto preventing (often developing) countries from enforcing human rights and environmental standards that could limit corporate profit.

In 2009, Russia withdrew from the Charter, which it had signed and agreed to provisionally apply until ratification.

The withdrawal was met with sharp criticism by the other European states, given the centrality of Russia in providing energy to Europe. The European Union interpreted the withdrawal, to a large extent, as an answer to the filing of the Yukos case, that was later decided in 2014. Based on the Charter, an arbitral tribunal ordered Russia to pay the investors in the energy company Yukos over 50 billion euros in damages. In response to the Russian exit, European countries have put an effort to promote the Energy Charter outside of Europe, particularly in African countries that also provide energy to Europe. This has resulted in the adoption of the International Energy Charter, a non-binding political declaration aimed at strengthening cooperation among the signatory states.

However, other commentators interpreted Russia’s exit as part of a bigger movement initiated by developing countries to leave their investment treaties or eliminate ISDS from their trade agreements. Indeed, in those same years, Ecuador, South Africa, Indonesia and Bolivia terminated their investment treaties. Other countries, such as Morocco, Nigeria, and The Gambia adopted innovative investment treaties. For instance, the Brazilian BIT model does not include ISDS, while the Indian BIT model subjects the possibility for investors to file a request for arbitration to the exhaustion of domestic remedies.

The Charter could be considered at the very centre of the ISDS debate, facing two opposite camps: Europe in favour of ISDS and an increasing number of developing countries opposing it.

But climate change changed everything.

In 2015, after a series of environmental protests, Italy passed a law banning oil and gas drilling within 12 nautical miles of its coasts. It became clear that this, and other energy-related laws, could expose Italy to ISDS complaints under the Charter. Thus, in 2016 Italy left the Charter.

Other European states also understood that the Charter could expose them to liability when adopting laws fighting climate change. A particularly significant case (later withdrawn as part of a bailout deal) was filed by the German company Uniper against the Netherlands, alleging that the Netherlands’ plan to stop coal-fired power stations would violate the Charter.

As a result of this and several other cases, a long list of European countries decided to exit the Charter. The European Commission (EC) proposed to modify the Charter in order to take climate change into account. But European states considered this proposal not enough to guarantee they would not be subject to lawsuits for enacting laws combating climate change. As a result, the European Parliament called on the EC to establish a mechanism for states to withdraw from the Charter. This summer, the EC finally proposed a coordinated withdrawal from the Charter.

But this does not enable Europe to get rid of the Charter’s ISDS. Indeed, the Charter includes a sunset clause, meaning that states will still be subject to ISDS for 20 years after their withdrawal. Italy has already experienced the effects of such a clause. Although the country left the Charter in 2016, British company Rockhopper filed for arbitration in 2017 based on the sunset clause. Rockhopper received the award condemning Italy to pay over 185 million euros in damages for the loss of income (expropriation) resulting from Italy’s 2015 law preventing Rockhopper from drilling in the Adriatic Sea.

As evidenced by this case, the sunset clause could be a liability to European countries adopting environmental laws. If any investor can sue any European state, like Rockhopper did, for enacting laws preventing them from developing coal, oil and gas, then the costs of the energy transition might become unsustainable. This is not the first time Europe has to face the sunset clause challenge. Indeed, after a long debate, the European Union adopted the Termination Agreement, terminating all investment treaties between member states, including the effects of their sunset clauses. The question now is whether Europe can also convince third parties to remove the Charter’s sunset clause effects.

The Charter history suggests that when European countries find themselves in the shoes of developing countries, they react in the same way: they want to exit investment treaties. Once European states risked facing lawsuits from investors seeking damages, they realized they no longer wanted to be part of the Charter. Remarkably, a better implementation of the existing rules was not considered a viable solution to the Charter crisis. An increasing number of European states demanded a complete reconceptualization of the energy sector, which inevitably entailed exit from the Charter. This “radical” approach sounds very much in tune with the decisions taken by several developing countries to leave their investment treaties. Is this going to be an exception to the rule or can the Charter become an exiting model for countries to leave ISDS?

Only time will answer this question, but the Charter experience can certainly become a laboratory for the “putting ourselves in the others’ shoes” strategy. We may adopt this strategy to overcome our differences on a series of global challenges that an increasingly divided world raises.