European Union’s surprising lack of ambition to eliminate fossil fuels

by: in Law

Last year’s COP28 has resulted in a ‘historic’ mention of fossil fuels in its final decision, be it in a rather limited way. Where does the EU, the forerunner in climate action, stand when it comes to the elimination of fossil fuels? This post highlights a few problematic features of the EU’s policy that relates specifically to cross-border investments and their international protection.

International calls for elimination of fossil fuels

Few have missed praises of a ‘historic’ achievement at COP28 relating to the mention of fossil fuels in a conference final decision. For the first time in the history of climate change negotiations – as astonishing as this very fact may be - fossil fuels are expressly mentioned, be it in a vague and notoriously non-binding language bestowing little hope of its actual implementation any time soon. That said, some 200 state parties to the Paris Agreement finally called on each other to contribute, in a nationally determined manner, to ‘transitioning away from fossil fuels in energy systems, in a just, orderly and equitable manner, accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science’. Although a seemingly stronger language of ‘phasing out’ (rather than merely ‘transitioning away’) proved acceptable for the common plea to remove inefficient fossil fuel subsidies as soon as possible, the agreement to gradually move away from fossil fuels altogether has been marked by i.a. the Washington Post as possibly ‘the most important global climate moment since the 2015 Paris Agreement’ and praised by the UN Climate Change Executive Secretary in his COP28 closing speech.

The weak language adopted at COP28 reflects the countries’ awareness of the gigantic complexities related to shifting away from fossil fuels when our entire economies and lives have been heavily depending on it for centuries. One need not to agree entirely with those referring to an ‘economic suicide’ to acknowledge that the transition away from fossil fuels is clearly among the most complex tasks ahead of the humankind. After all, how does one move away from something so vital as fossil fuels when alternatives are financially, technically or otherwise simply unavailable to the extent needed? Can we really expect countries to give up on their economies, on their people’s livelihood, without providing them with viable alternatives? Deep down we all know this will not happen, also not when yet another and ever so alarming scientific report about the discrepancy between what is needed and what is being done (or pledged) to prevent a catastrophic global warming.

Yet, we all realize just as well that there is no alternative to a fossil free future. In addition, that there in fact are readily available alternatives to fossil fuels, they ‘just’ need to be deployed quickly and on a large scale. To achieve this, what we need is a meaningful international cooperation, and political leadership and courage to get things done. A leadership and courage like those exposed by the Colombian President Gustavo Petro who called for a specific Fossil Fuel Non-Proliferation Treaty at COP28.

This call is not new. Back in 2015, the Leaders of the Pacific Islands Development Forum proposed an international moratorium on the development and expansion of fossil fuel extracting industries, stressing its importance for the decarbonisation of the global economy. Unsuccessful with their pledge at the COP21 (where the Paris Agreement was adopted), the Pacific Island countries subsequently proposed negotiations of a new fossil fuel treaty, later on joined by the least developed countries and civil society. Fast forward to 2024, by now the Fossil Fuel Non-Proliferation Treaty Initiative is endorsed by an increasing number of governments, public institutions, elected officials, academic and scientists, youth leaders, Nobel Laureates and other influential individuals. A sympathetic European Union citizen may be pleased to find the European Parliament and many European capitals and other large cities on the supporters list too, just to be subsequently deeply disappointed realizing that the European Union and all its Member States are painfully missing.

The EU’s lack of ambition in its international trade and investment policies

Considering itself a global forerunner in climate action, the EU has indeed an impressive record in proposing and adopting measures aimed at combating the climate change. As proudly sharing on its website, by delivering the European Green Deal the EU intends to become the first climate neutral continent. A closer look at the EU’s policies, in particular in the field of international trade and investment, however, reveals the EU’s lack of ambition to properly address the fossil fuels’ role in this battle. Yes, the EU does pledge to incentivize climate friendly technologies and to work towards phasing out of fossil fuel subsidies. It also intends to ‘discourage’ new investments in energy infrastructure projects based on fossil fuels, but limits this ambition to projects in third countries (i.e. not within the EU itself) and ‘unless they are fully consistent with an ambitious, clearly defined pathway towards climate neutrality in line with the long-term objectives of the Paris Agreement and best available science’. This makes one wonder whether there is any morally acceptable justification for new fossil fuel projects post-2015. And how does the EU actually intends to ‘discourage’ new fossil fuel investments? At present, it is really difficult to find traces thereof in the EU’s external policies relating to cross-border investments.

It is true that, already back in 2017, the EU initiated important negotiations for a modification of an international treaty known as the Energy Charter Treaty (ECT). This 1994 treaty, with 50+ signatories including the EU and most of its Member States, has been long considered an obstacle to taking necessary climate action. This is because the ECT provides for an international legal protection of all cross-border investments in the energy sector, including investments based on fossil fuels. The treaty grants foreign investors strong substantive rights which may be invoked against the state hosting the investment before the so-called investor-state arbitration, itself severely criticized for arbitrators’ bias towards foreign investors and disrespect for the regulatory autonomy of the state. The investors’ rights under the ECT include protection of a degree of legal stability in the host state, making it more challenging for the latter to adopt new policies if they result in significant losses to foreign investors covered by the treaty. While not the only one, the ECT has become the most litigated international investment agreement offering such investment protection, and a particular thorn in the eyes of the proponents of climate action. The EU worked hard to convince other ECT parties to modernize the treaty and, importantly, to exclude fossil fuels from its scope. Unfortunately, the negotiations concluded in June 2022 resulted merely in a possibility to carve-out new fossil fuel related investments from the ECT scope by individual parties that wish to make use of this possibility. Moreover, existing investments can only be excluded after 10 years from the entry into force of the ECT amendment (if ever the case). Strongly disappointed with this result, various EU Member States have decided to withdraw from the ECT instead, forcing the EU Commission to eventually propose a coordinated withdrawal of the entire EU, despite the fact that the ECT’s sunset clause will keep it in force for existing investments for another 20 years.

The decision to repudiate the ECT due to the failure to achieve a full-scale carve-out of fossil fuels from its scope is in stark contrast with the EU’s lack of similar attitude towards its other international investment agreements. None of them mentions fossil fuels and so investments based on them can benefit from the protection similar to that offered by the (modernized) ECT. No doubt, investors’ rights under the EU’s investment treaties are – at least on paper - better balanced with the state right to regulate, given the more recent character of these treaties. Nonetheless, as no disputes have been initiate under the recent treaties yet, this remains to be seen in practice. One would also think that, rather than taking a risk of yet another unintended interpretation of the relevant provisions by investment tribunals, the EU could and should explicitly carve-out fossil fuels from the scope of these treaties, just as it tried to do with the ECT.

The same should apply to investment treaties concluded by EU Member States with third countries. In respect of those, a very recent Commission non-paper recommends inclusion of a provision on ‘Investment and Climate Change’, explicitly recognizing the importance and urgency of climate action and the role of investment in it, and obliging the parties to implement the Paris Agreement, cooperate, and promote climate friendly investments. Yet, there too, no exclusion of fossil fuels from the scope of protected investments, or at least from the investor-state arbitration, is suggested.

Need for unambiguous action in respect of new fossil fuel related investments

Exclusion of fossil fuel related investments from the scope of protection or investor-state arbitration would be an easy-fix, and not unprecedented. States have been long using such approach for taxation and revocation of subsidies, and more recently also for tobacco control measures (preventing repetition of their targeting through investor-state arbitration). A recent proposal of a similar exclusion of dispute resolution claims for measures adopted to ensure compliance with i.a. the Paris Agreement, has also been put forward for consideration to (a large number of) states that participate in the global discussions on the reform of investor-state arbitration conducted under the auspices of UNCITRAL Working Group III. It shows the states’ awareness that an express carve-out may indeed be a safe way to go.

It should be noted that new investment treaties already contain various exceptions justifying breaches of investors’ rights by state (regulatory) measures. Such exceptions could potentially shield climate action from investors’ claims for damages. Unfortunately, relatively recent jurisprudence leaves serious concerns about the possibility of a questionable application of these exceptions by investment tribunals. Moreover, the availability of an exception does not necessarily prevent lengthy and costly litigation which, even if successful, consumes large portions of states’ budgetary resources that could rather be utilized for climate action.

Therefore, and in addition to exceptions, states should use other ways to enable adoption of robust climate action, also against fossil fuels investments, without a fear of litigation. The EU may be confident that its investment treaties are drafted in a manner addressing the problem. Yet, in its most recent agreement with Chile, signed earlier this month, it issued a specific Joint Interpretative Declaration further instructing investment tribunals to interpret and apply the agreement ‘by taking due consideration of the commitments of the Parties under the Paris Agreement and their respective climate neutrality objectives and in a way that allows the Parties to pursue their respective climate change mitigation and adaptation policies’. This shows that the EU (and Chile, in this case) do(es) not trust the treaty text and future investment tribunals fully. One keeps wondering then why the EU rejects the possibility to simply exclude investments most critical to, and potentially most hurt by, climate action from the scope of its investment protection agreements. Even if not an additional, it would certainly have a reassuring and symbolic value.