If Labour wants an energy transition in which working people don’t foot the bill, it has to address fossil fuel companies’ secret weapon against national climate laws: the energy charter treaty (ECT).
The treaty is a multi-country investment deal for the energy sector that contains the notorious investor-state dispute settlement (ISDS), a mechanism written into international agreements that companies can use to sue governments over policy changes they allege could affect their profits. The cases are heard in secretive tribunals outside the national legal system.
The ECT is increasingly used by fossil fuel companies to make billion-dollar compensation claims against governments introducing climate policies. The Netherlands has been sued over its coal phase-out law, and Slovenia for its fracking ban. Last year an oil company won a case over Italy’s ban on offshore drilling, and was awarded six times the amount it had invested in the project. It has said it will use those winnings to fund new oil exploration.
On 5 Septemberthe rebel Tory MP Chris Skidmore put forward an amendment to the energy bill to scrap Britain’s membership of this deal. While it didn’t pass, the government has formally announced it will consider leaving the “outdated” treaty if modernisation is not agreed by November. It is crucial that Labour takes the opportunity to outpace the government’s dithering, and comes out unequivocally for exit.
With no evidence that ISDS attracts foreign investment, its only function is to drive up the cost of transition and heap huge financial risk on to the taxpayer. The IPCC has also warned of “regulatory chill”, where just the threat of being sued deters or delays necessary legislation. Denmark and New Zealand confess to this already happening.
These seem to be precisely the “legal obligations” Keir Starmer cited in a Times article on 6 August as reasons for Labour not committing to revoke the current government’s new oil and gas licences – a fear the taxpayer could end up on the hook for the cost of revoked licences. But this is an irrational capitulation when there is an easy and legitimate way out: by following other major economies in withdrawing from the energy charter treaty.
Starmer would hardly be going out on a limb: the ECT is already crumbling. Eleven countries, from Germany and France to Poland and Ireland, have decided to exit the treaty. Recently, the European Commission announced it was formally recommending a coordinated EU withdrawal.
Inaction in the UK rests on both the government and opposition refusing to commit to withdrawal while they wait to see if the treaty is reformed by the states that remain in it. But with so many countries deeming any modernisation proposals wholly inadequate, and voting with their feet, the reform is dead in the water. The time to act is now. By joining a coordinated withdrawal with other countries, the UK can neutralise the sting in the ECT’s tail – a sunset clause that maintains the treaty’s provisions for 20 years after a state leaves it. Withdrawing countries are currently negotiating an agreement that should extinguish the effect of the sunset clause for that group.
“Investor certainty”, or ensuring business has a stable climate to operate, is clearly an important goal for the Labour party – but that could easily be achieved if Starmer clearly signals that a Labour government would rescind dangerous oil and gas licences. The sooner the party nails its colours to the mast, rather thandithering like the Tories, the less time fossil fuel companies, aware of their obsolete projects, will have to “treaty shop” and find new avenues for lawsuits – that is, using or setting up subsidaries in other countries that may still make use of ISDS.
Neither is the ECT the right tool to support green investment, as some claim. Renewable investors have reported they don’t consider investment treaties with investor-state dispute settlement, such as the ECT, to be a factor when they are making decisions. In fact, the European Renewable Energies Federation even penned an open letter calling on countries to exit the ECT. Renewables companies are clear they want an agile and responsive set of policies and incentives, not a mechanism that tightens a straitjacket around a narrow set of expectations.
Committing to exit the ECT would be a no-costs-attached signal of Labour’s climate ambition, massively reduce the UK’s financial risk of being sued, and give investors certainty that nothing will prevent us implementing our climate obligations. If the party wants to ensure there is space for an ambitious future government programme, it is senseless to keep our hands tied.
The key question that Labour needs to answer when it comes to the green transition is: who pays? If the energy charter treaty and its archaic mechanisms of corporate power continue to restrict our move away from fossil fuels, then workers and taxpayers will be paying the polluters to phase out the projects that threaten a livable future on our planet. That’s potentially billions in public money going to some of the most profitable companies on the planet. Where is the fairness in that?
