By: Scarlett Horn, Senior staffer

Multilateral institutions and treaties, such as the United Nations Framework Convention on Climate Change (“UNFCCC”) and the Paris Agreement, set ambitious goals to mitigate and respond to the rapid increase of the average global surface temperature. Addressing climate change requires international cooperation, leading to the establishment of multilateral institutions and treaties aiming to organize collective action. However, collective action problems such as climate change are often hindered by a lack of cooperation as nations frequently have various conflicting interests. Multilateral institutions and treaties often lack the proper enforcement or accountability measures necessary to maintain consistent cooperation among nations. Nevertheless, arbitration and other methods of alternate dispute measures have been incorporated into several climate-related agreements, posing a viable option for private parties and governments to hold each another accountable in sectors most related to the health of the environment such as energy, urban industry and infrastructure, and land use. 

In 2019, the International Criminal Court reported an average of three new environmental protection cases per year, with most related to the transition of energy, urban industry and infrastructure, land use, and industry systems. Despite this trend, only two countries have opted into the UNFCCC and the Paris Agreement’s arbitration dispute settlement procedures – perhaps due to the lack of procedural guidelines. The Energy Charter Treaty (“ECT”) provides an interesting case study of how arbitration can attempt to regulate a specialized field of climate-related disputes between private parties and governments. Still, it may ultimately fail — with France, Germany, and Poland all withdrawing from the ECT in December 2023 due to the ECT’s burden on the transition to renewable energy.   

The ECT came into effect in 1998 intending to promote cooperation in the energy sector by integrating Eastern European markets with foreign investors. Currently, fifty nations are parties to the ECT and are bound by the dispute settlement provision in Article 26 (3)(a), which states, “…each contracting party hereby gives its unconditional consent to the submission of a dispute to international arbitration or conciliation in accordance with the provisions of this article.” Although renewable energy investors have brought roughly 60% of all claims under the ETC,  the ECT arbitration process has received criticism for its protection of fossil fuel investors, which has hindering nations’ ability to comply with climate agreements such as the Paris Agreement.

The arbitral tribunals responsible for hearing ECT cases are tasked with balancing the environmental provisions with the investment protection provisions; however, a study of sixty-four ECT cases revealed that none of them discussed climate change in any substance. Further, many recent cases dealing with renewable energy have favored investor protection over state regulation. Decisions unfavorable to state regulations that phase out fossil fuels are likely why many European countries are withdrawing from the ECT, as renewable energy regulations are necessary to comply with the Paris Agreement’s Net-Zero policy. To neutralize the amount of carbon emissions, nations are transitioning towards renewable energy rather than fossil fuels, which tend to interfere with various investments under the ECT.

The ECT is outdated in terms of the European Union’s climate goals and, despite the threats of withdrawal, has not been able to modernize enough to meet the demands of many member states.

Scarlett Horn

In 2023, the ECT held several negotiations to update and modernize the treaty in response to many critiques and threats of withdrawal from European nations. These modernizations included provisions on the transition of energy and sustainability, even creating a dedicated dispute settlement mechanism for the applicability and interpretation of the new sustainable development provisions. Despite these changes, the charter is most critiqued for its “sunset clause,” which protects investments for twenty years after a country has withdrawn. Twenty years from now, nations would ideally be on their final push towards net zero to meet the Paris Agreement’s goals by 2050. Hence, even withdrawing from the ECT still has lasting implications on the transition to clean energy. 

The ECT is outdated in terms of the European Union’s climate goals and, despite the threats of withdrawal, has not been able to modernize enough to meet the demands of many member states. One possible solution to this dilemma is to incorporate provisions of the Paris Agreement into the applicable law of the ECT, so when investors and nations are arbitrating disputes, the policies of climate change are at the forefront of the panel’s consideration. It is a very slow process to reform multilateral and bilateral treaties, but as they become outdated in an age where global interests are overtaking the financial interests of a few expansive and lucrative sectors, change could be the only step toward effective collective action and accountability.