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German energy company RWE recently sued the Netherlands for 1.4 billion euros as compensation for the country's plan to phase out coal by 2030. (Photo: Boris Roessler/picture alliance via Getty Images)

German energy company RWE recently sued the Netherlands for 1.4 billion euros as compensation for the country's plan to phase out coal by 2030. (Photo: Boris Roessler/picture alliance via Getty Images)

Critics Warn Lawsuits by EU Fossil Fuel Giants Steal Billions From Public, Undermine Green Transition

"We don't only need to phase out coal and fossil fuels," said Sandra Beckerman, member of the Dutch Parliament. "We need to phase out the power that these companies... have over our governments."

Kenny Stancil

By weaponizing an arcane energy treaty to sue European Union governments that are phasing out fossil fuels, dirty energy corporations are siphoning off billions of taxpayer dollars that could otherwise be used to fund renewable energy development and climate action.

As Deutsche Welle reported Monday, German energy company RWE in February "invoked an obscure agreement called the Energy Charter Treaty (ECT) to sue the Netherlands for 1.4 billion euros ($1.67 billion) as compensation for phasing out coal by 2030."

That case was just "the tip of a litigation iceberg, with another German energy company, Uniper, on Friday confirming it is taking the Netherlands to court over its coal exit, and in parallel is suing for a reported 1 billion euros under the ECT," Deutsche Welle noted.

The news outlet added that "such claims are magnified due to an obscure 'future earnings' clause" in the ECT, which "protects around 345 billion euros worth of fossil fuel infrastructure in the E.U., Great Britain, and Switzerland."

According to an analysis earlier this year by journalists Oliver Moldenhauer and Nico Schmidt at Investigate Europe:

[T]he little-known Energy Charter Treaty could become a massive threat to the E.U. and its member states in trying to achieve their climate targets. With this treaty, the contracting parties (including all E.U. member states except Italy) guarantee foreign investors far-reaching rights. If, in the Energy investor's opinion, a government has violated the principle of "fair and equitable treatment," they can sue states before international arbitration courts for billions of Euros in compensation.
 
The treaty was signed in the 1990s to offer protection for Western companies investing in energy initiatives in former Soviet states, as many of these were deemed risky for potential investors. But today it is mainly used by European companies to sue European states. In the years to come the threat of ECT lawsuits could prevent states from adopting ambitious climate policies—or put plainly: this is already happening.

Investigate Europe also put together a video to explain how the ECT works. Watch:

E.U. politicians and climate activists are becoming increasingly worried, as Deutsche Welle reported, that "the investor-friendly ECT is slowing climate ambition [and] shifting the climate action burden from fossil fuel companies to taxpayers."

Rather than preemptively reimbursing dirty energy corporations for their anticipated economic losses stemming from a greening of the economy, opponents of the ECT say that "massive public payouts need instead to be spent on decarbonization and the energy transition," the news outlet noted.

Regarding the RWE lawsuit against the Netherlands, Paul de Clerck, economic justice coordinator for Friends of the Earth Europe, said: "That's 1.4 billion that can't be invested in renewable energy."

When it comes to ECT tribunals, the cards are stacked against states, critics say. As Deutsche Welle reported: "Instead of working through transparent national and international courts, the ECT 'regime is heavily tilted to energy interests,' says Pia Eberhardt, a researcher at corporate watchdog, Corporate Europe Observatory. Some 60% of tribunal decisions favor energy investors, according to Investigate Europe."

In addition to redirecting public funding from clean energy development to the coffers of fossil fuel corporations, critics of the ETC warn that the treaty has a chilling effect on climate ambition overall—prompting states to weaken climate policies in an attempt to prevent energy companies from claiming that certain measures do not meet the ECT's unclear standard of "fair and equitable treatment."

Schmidt likens the ECT to a "Sword of Damocles" hanging above the head of E.U. governments. He also said the investor-state dispute settlement (ISDS) process is so ambiguous that "there is no detailed mechanism for how compensation should be calculated."

As a result, Deutsche Welle noted, "payouts based on future earnings often repay initial investments many times over." According to Eberhardt, "It's like a cash machine. The sky's the limit."

This uncertainty "puts pressure on governments to craft climate policies that do not provoke litigation," Deutsche Welle pointed out. "Indeed, the German government has given away hundreds of millions of euros for fear of lawsuits over its 2038 coal phaseout, meaning companies don't even have to sue to receive huge payouts."

For this reason, Eberhardt considers the ECT "the most powerful tool" that fossil fuel corporations can use to derail climate action.

Pressure is growing to reform or eliminate the treaty. According to Deutsche Welle:

In September, 280 members of the European Parliament and national parliaments signed a statement on the reform of the ECT calling for the ISDS mechanism "to be scrapped or fundamentally reformed" by the end of 2020.

But heading into the 5th ECT modernization negotiation round in June, talks remain deadlocked. "There has been no progress at all," said Friends of the Earth Europe's Paul de Clerck.

Moreover, a February leak of the European Commission's ECT reform proposal shows that fossil fuel investments will be protected for another ten years under a compromise deal. Climate activists want these protections to end immediately.  

"The next ten years are going to be crucial for European governments to shift from fossil fuels to renewables," said de Clerck of the reform proposal. "This is going to stop governments from taking the decisions that are necessary."

As Deutsche Welle reported: "Even if individual countries do withdraw from the ECT, a 'zombie clause' means they can be sued for another 20 years. This loophole was exploited by English oil company Rockhopper in 2017 when it sued the Italian government, soon after it had withdrawn from the ECT, for banning oil drilling on the Adriatic coast. Most of the 225 million euro ($270 million) claim was for future profits."

Despite the political power of the fossil fuel giants, public pressure is growing on E.U. governments to abandon the treaty. Already a public petition by the advocacy group Avaaz has garnered over a million signatures calling for an end to the "toxic treaty" and that demand has been echoed by an open letter from over 500 experts and scientists.

"We don't only need to phase out coal and fossil fuels," said Sandra Beckerman, member of the Dutch Parliament. "We need to phase out the power that these companies still have, the power that they have over our governments."


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