The Spanish government has announced that it will be withdrawing from the Energy Charter Treaty. The reason, according to Spanish Minister for the Ecological Transition Teresa Ribera (picture), are concerns regarding “climate change”, as negotiations to reduce the Treaty’s protection for fossil fuel projects would have brought “no improvements.”
The Energy Charter Treaty (ECT) serves as the cornerstone for international energy investment. It guarantees investors that in case of a dispute, they do not need to rely on the courts of the countries where they are investing, but are able to rely on impartial private arbitration courts, which have a good reputation and do not have any institutional link with the country where the investment happens.
It probably does not need to be explained that many countries with a lot of great energy exploration opportunities do not necessarily comply with overly high rule of law standards, let alone that judges over there would be independent from the executive branch. For that reason, many investments in such countries would not happen in the first place if it it weren’t for the ECT. So in the end, also emerging economies with a weak rule of law profit from this.
However, also for investment in industrialised countries, like Spain, the ECT is a good idea.
How the Spanish government lost many arbitration lawsuits
That’s evident from the experience of investors into renewable energy with the Spanish government. In 2018, the latter was ordered to pay a 101 million euro arbitration award to renewable energy investor Antin, after the tribunal had ruled that Spain had breached the fair and equitable treatment standard in Article 10(1) of the Energy Charter Treaty.
This compensation is only one of many imposed on the Spanish government, as a fine for having abruptly changed its financial support scheme in 2013 for renewable energy installations, which had been rolled out in 2007.
In summary, the Energy Charter Treaty is not just a framework to facilitate investment in emerging economies and it is not restricted to protecting fossil fuel investment, but also renewable investment.
This makes it even weirder to hear the Spanish government’s argument that the Treaty would not be in line with its efforts to combat climate change, given how renewable energy is strongly supported by those keen to reduce CO2 emissions.
"In defense of international arbitration as a means to promote foreign investment"
New article, by @pietercleppe: https://t.co/ZEesv8x0uc #ISDS #ICS— BrusselsReport.EU (@brussels_report) January 17, 2022
A poor track record of complying with arbitration rulings
Also outside of this particular case, Spain has a pretty poor record of complying with arbitration rulings, finding itself in questionable company, together with the likes of Russia, Argentina and Venezuela. In 2021, in the Yukos case, the Spanish government even intervened in favour of Russia, encouraging them also not to pay.
A brand new exhaustive study on the level of compliance of States regarding the payment of investor-State investment treaty Awards rendered against them, which will be published soon, also found that Spain has so far not paid a single Investor-state dispute settlement (ISDS) Award since the Maffezini Award issued in 2000, as the country ranks second of the most delinquent Respondents in the world when it comes to the refusal to pay these Awards.
Spain thereby also stands out as the country which has been facing the highest number of renewable energy cases by far, as well as the country losing the highest number of private arbitration challenges.
When the lawsuit against Spain on the basis of the Energy Charter Treaty was initially launched, Spain was only the second Western European country to face a challenge. Then, a person close to the groups bringing the case commented: “Spain is now in the same league as Kazakhstan and Azerbaijan when it comes to investor confidence.”
Noteworthy is that also the whole EU machinery is turning against private arbitration, from the European Court of Justice in its 2018 “Achmea” ruling – which held that investor-to-State arbitration in an intra-EU context was illegal – to the European Commission, which has been urging Spain not to pay compensation for its u-turn on renewable energy investment, claiming that arbitration awards would constitute “state aid”.
Spain has started the process of withdrawing from the Energy Charter Treaty —its minister for the ecological transition has said.https://t.co/3hfNnicn78
— POLITICOEurope (@POLITICOEurope) October 12, 2022
Last but not least, the Spanish move to exit the ECR is unlikely to help it avoiding having to comply with arbitration rulings, because of a sunset clause in the treaty, according to which signatories remain remain subject to litigation for 20 years after they have left.
When asked whether her government believed it would be subject to this clause, Spanish Minister for the Ecological Transition Ribera did not respond.
Sometimes, silence speaks louder than words ever will.
