Investment protection for fossil fuels will cease to exist in Europe, UK in 10 years

The EU and the UK have reached a compromise agreement to end investment protection for fossil fuels under the Energy Charter Treaty (ECT), after two years of negotiations.

Under a flexibility mechanism approved by members of the energy investment treaty, the EU and UK will end protection for new fossil fuel investments from August 2023.

But under the agreement reached, some gas-fired power plants will continue to receive investor protection beyond the 10-year deadline and until the end of 2040.

However, most existing fossil fuel investments will continue to be protected for 10 years from the date the modernised treaty is officially ratified.

The ECT, which has members spanning Europe and Asia, has been used by fossil fuel companies to sue governments over climate policies which hurt their profits. For example, German energy company Uniper is suing the Dutch government over its coal phase-out plans.

In 2020, a study found that ECT member countries faced up to €1.3 trillion ($1.4trn) by 2050 of compensation claims by fossil fuel investors.

The EU initiated modernisation talks to try and end these lawsuits but its attempts to remove fossil fuels from the treaty’s protection clause were thwarted by some Asian nations led by Japan.

At an ad-hoc conference, which was disrupted by protesters, members to the treaty reached a compromise which gives them some flexibility to choose what energy investment they want to continue to protect.

However, members like Japan, a staunch defender of the ECT, is likely to keep protecting fossil fuel investments in the country indefinitely. But the EU and the UK have said they will use the flexibility mechanism to limit them.

When the EU and UK end protections for fossil fuel investments for fossil fuel investors from ECT states like Japan then those states are likely to reciprocate, meaning European and British fossil fuel investments will no longer be protected in countries like Japan.