The compatibility of the Energy Charter Treaty with EU law

This study answers the question whether the Energy Charter Treaty (ECT) as an agreement binding on the EU and the Member States is compatible with the EU Treaties. It finds that ECT as it currently stands is not compatible with the EU Treaties and that therefore the EU institutions and the Member States are required to either withdraw from the ECT or ensure that it is amended. The first main defect of the current text of the ECT is that the ECT adversely affects the autonomy of EU law by enabling investment tribunals to interpret and apply EU law without introducing the necessary safeguards that preserve the EU’s unique legal and judicial framework (autonomy of EU law). The second main defect is that the ECT adversely affects the operation of the EU institutions in accordance with the EU’s constitutional framework. The European Court of Justice (ECJ) in Opinion 1/17 (2019) placed emphasis on the legal safeguards that were introduced in EU-Canada Comprehensive Economic and Trade Agreement (CETA) to protect the EU’s autonomy and the EU institutions’ ability to regulate in the public interest. The Court concluded that, in light of these safeguards, CETA sufficiently protected the autonomy of the EU legal order (jurisdictional autonomy) and EU institutional framework (regulatory autonomy) in the particular context of CETA as an international trade agreement concluded between the EU and its Member States, as one party, and a non-EU country, as the other. The ECT, by contrast, as a product of the early 1990’s, does not contain any such safeguards. In addition, it is a very different type of agreement, namely a multilateral investment agreement that allows for arbitration in different constellations, including between investors from one EU Member State and another Member State (intra-EU arbitration). In addition to the incompatibility with the EU’s autonomy (both jurisdictional and regulatory autonomy), we find several other incompatibilities of the ECT with the EU constitutional framework: the ECT adversely affects the principles of mutual trust, equal treatment, and effectiveness, the operation of the internal market (state-aid), and Article 47 of the Charter of Fundamental Rights (access to an independent tribunal). This justifies that both the EU institutions and the Member States have an obligation under EU loyalty to end this incompatibility by taking all legal means to terminate their obligations under the ECT that are incompatible with EU law. The EU text proposal of May 2020 seeks to address a number of the identified incompatibilities; however, a general amendment of the ECT follows a cumbersome and long procedure and it remains to be seen whether the ECJ would declare such a text compatible with EU law. First, it requires unanimity of the contracting parties present and voting at the Conference of the Parties and second, the agreed amendments enter into force only between the Contracting Parties that have ratified them on the 90th day after deposit of the instruments of ratification of at least three fourths, or 41, Contracting Parties. CETA is in this respect a reminder that the ratification requirement may prove to be an obstacle for a swift entering into force. It has not yet been ratified by all EU Member States. In addition, the necessary amendments to Article 26 ECT as proposed by the EU are unlikely to be part of a modernized ECT, because the Energy Charter Conference did not include Article 26 ECT in the list of topics that are part of the discussions on the modernization effort. In other words, the EU text proposal is outside the scope of discussions as agreed by the Energy Charter Conference. The fact that the EU and 26 Member States (all but Italy) are party to an international agreement that is incompatible with its own constitutional framework, the EU legal order, is currently still a significant problem. The EU institutions and the Member States are bound by the EU Treaties and have to take the necessary steps to remedy such incompatibility. The interpretation of the ECT as EU law and its compatibility with the EU Treaties has already been brought to the ECJ and it is likely to be raised again in different contexts. In Komstroy, the ECJ ruled that intra-EU arbitration under the ECT is contrary to EU law. This already requires the Member States to use all legal means to terminate their obligations to take part in intra-EU arbitration under the ECT. In addition, Opinion 1/20 on the EU text proposal to amend the ECT is pending. Yet, the ECJ may also via other proceedings be asked to address the compatibility of the ECT with EU law, e.g., through a preliminary question on the validity of the Council decision concluding the ECT or the compatibility of an enforcement of an ECT award by a national court. The options under international law to remedy this incompatibility come down to general amendment, withdrawal from the ECT, inter-se modification, and/or making an additional declaration to the ECT. Of these options the combination of withdrawal, inter-se modification, eliminating the effects of the sunset clause between the withdrawing parties, and an attached interpretative declaration that avoids circumvention of the inter-se modification through relocation to a not withdrawing, non-EU Contracting Party to the ECT, appears in this respect the most promising way forward for the EU and the Member States to avoid regime conflict with the ECT.

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