UK Withdrawal from the Energy Charter Treaty: Implications and Consequences

In a significant move, the United Kingdom’s Energy Security and Net Zero Minister, Graham Stuart, announced in February 2024 the country’s decision to withdraw from the Energy Charter Treaty (ECT). This decision aligns with a wave of similar exits by various European Union (EU) countries, motivated by dissatisfaction with the progress of ECT modernization efforts. On 26 April 2024, the UK's formal notification of withdrawal was received by the treaty’s depositary, Portugal. This article delves into the legal intricacies of the UK’s withdrawal, its implications for the modernization process, and the resultant paradox concerning investment protection in the energy sector.

Legal Framework of the UK’s Withdrawal:

The withdrawal from the ECT is governed by Article 47(2) of the treaty, which stipulates that the withdrawal becomes effective one year after the notification is received. Consequently, the UK’s withdrawal will take effect on 27 April 2025. However, under Article 47(3), the ECT’s protections for pre-existing investments will continue for 20 years post-withdrawal, ensuring that the treaty’s influence persists until 2045. The ECT’s amendment process, outlined in Article 36(1)(a), requires unanimity among contracting parties present and voting. Amendments take effect 90 days after ratification by three-quarters of the ECT membership, as per Article 42(4). Notably, countries in their one-year withdrawal period still count as contracting parties, meaning the UK's vote remains crucial during this time.

Interaction with the ECT Modernization Efforts:

The modernization of the ECT aims to address contemporary energy challenges and align with climate goals. Yet, the treaty’s complex amendment procedure means that any changes require substantial consensus. The EU Commission, following the UK’s withdrawal announcement, proposed that EU member states should not obstruct the modernization process. However, the UK's withdrawal notification restricts its ability to influence the version of the ECT it will be bound by under the sunset clause. If the modernization process is completed and is ratified by the necessary quorum before the UK’s withdrawal takes effect, the modernized ECT will govern the UK’s obligations. Conversely, if the modernization is not ratified in time, the UK will remain bound by the unmodernized ECT for two decades. Given the current political momentum, it is improbable that the modernization will be ratified by the required three-quarters of the parties before 27 April 2025.

Implications for Investment Protection:

The UK’s premature notification of withdrawal paradoxically ensures prolonged protection for fossil fuel investments, contrary to its stated climate ambitions. Under the unmodernized ECT, investments in fossil fuels will continue to receive protection until 2045. The modernized ECT, however, includes mechanisms to exclude fossil fuels from protection, aligning better with climate goals. The UK and the EU had negotiated a carve-out for fossil fuels, limiting protection to ten years post-modernization and excluding new fossil fuel investments after 31 December 2040. This scenario is ironic because the UK’s withdrawal ostensibly aimed to support its transition to net zero. Instead, it inadvertently extends protections for fossil fuel investments. From 27 April 2025, new renewable energy investments will no longer be covered by the ECT, potentially discouraging the inflow of essential investments for the UK’s energy transition. These investments might still be protected under the UK’s bilateral investment treaties (BITs), which remain in force with several countries. The UK’s decision to withdraw from the ECT reflects a broader European trend but also underscores the complexities of treaty withdrawals and climate policy. While the move was intended to bolster the UK’s net-zero goals, it ironically extends protections for fossil fuel investments.