Explanatory Memorandum to COM(2022)521 - EU position in the 33rd meeting of the Energy Charter Conference

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dossier COM(2022)521 - EU position in the 33rd meeting of the Energy Charter Conference.
source COM(2022)521 EN
date 05-10-2022


1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

This proposal concerns the decision establishing the position to be taken on the Union’s behalf in the 33rd meeting of the Energy Charter Conference in connection with the envisaged adoption of proposed amendments to the Energy Charter Treaty (CC 760) and the approval of (i) proposed modifications and changes to the Annexes to the Energy Charter Treaty (CC 761), (ii) proposed changes to Understandings, Declarations and Decisions (CC 762), and (iii) a decision regarding the entry into force and provisional application of amendments to the Energy Charter Treaty and changes/modifications to its Annexes (CC 763). The adoption of the amendments to the Energy Charter Treaty and the additional approvals are to be passed simultaneously by the Energy Charter Conference.

Contents

1.

The Energy Charter Treaty


The Energy Charter Treaty (ECT) is a multilateral trade and investment agreement applicable to the energy sector that was signed in 1994 and entered into force in 1998. The ECT contains provisions on investment protection, trade and transit in energy materials and products, and dispute settlement mechanisms. The ECT also sets up a framework for international cooperation in the energy field between its 54 Contracting Parties. The European Union is a party to the ECT 1 , together with Euratom, 26 EU Member States 2 , as well as Japan, Switzerland, Turkey and most countries from the Western Balkans and the former USSR, with the exceptions of Russia 3 and Belarus 4 .

2.

The Energy Charter Conference


The Energy Charter Conference is the governing and decision-making body for the Energy Charter process and was established by the ECT. All states or Regional Economic Integration Organisations (such as the EU) who have signed or acceded to the ECT are members of the Conference, which meets on a regular basis to discuss issues affecting energy cooperation among the ECT's signatories, to review the implementation of the provisions of the ECT and the Protocol on Energy Efficiency and Related Environmental Aspects, and to consider possible new instruments and joint activities within the Energy Charter framework. In particular, the Energy Charter Conference adopts texts of amendments to the ECT and approves modifications of, and technical changes to, the Annexes to the ECT. When voting on proposed amendments to the text of the ECT, the Energy Charter Conference passes a decision to adopt the amendments by unanimity vote of the Contracting Parties present and voting. The EU has a number of votes equal to the number of its Member States that are Contracting Parties to the ECT, provided that the EU shall not exercise its right to vote if its Member States exercise theirs, and vice versa.


3.

The decisions to be taken at the Energy Charter Conference


On 22 November 2022, during its 33rd meeting, the Energy Charter Conference is to take four decisions related to the modernisation of the ECT. These decisions will be taken simultaneously and their purpose is to:

–adopt the proposed amendments to the text of the ECT (CC 760);

–approve the proposed modifications and changes to the Annexes to the ECT
(CC 761);

–approve the proposed changes to Understandings, Declarations and Decisions
(CC 762); and

–approve the decision regarding the entry into force and provisional application of amendments to the text of the ECT and changes/modifications to its Annexes
(CC 763).

In the absence of any substantial update of the ECT since the 1990s, the ECT became increasingly outdated. It also became one of the most litigated investment treaties in the world, with EU Member States being the principle target of claims by investors, most of them based in other EU countries. As a result, a modernisation process was initiated in November 2018. The Energy Charter Conference first approved a list of topics for discussion, chiefly concerning provisions related to investment protection. The EU then proposed the removal of protections for investments in fossil fuels, in order to bring the ECT in line with the Paris Agreement.

After 15 rounds of multilateral negotiations held between July 2019 and June 2022, an “agreement in principle” to close negotiations was reached at the extraordinary Energy Charter Conference of 24 June 2022 in Brussels. The revised text of the ECT and its Annexes then underwent a legal revision until mid-August. Thereafter, the final draft decisions
(CC 760, CC 761, CC 762 and CC 763) containing the revised texts were shared on 19 August 2022 with all Contracting Parties, including the EU, Euratom, and all EU Member States that are Contracting Parties to the ECT.

At the 33rd meeting of the Energy Charter Conference on 22 November 2022, the decisions related to the modernisation of the ECT will be subject to a unanimity vote. If the vote is successful, i.e. if no Contracting Party raises an objection, the decisions for the modernisation of the ECT will be considered “adopted” by the Energy Charter Conference. This adoption will trigger subsequent processes for the ratification, provisional application, and eventual entry into force of the various elements of the reform package.

The provisional application of the amendments to the ECT and the other elements of the modernisation will be governed by the decision regarding the entry into force and provisional application of amendments to the text of the ECT and changes/modifications to its Annexes (CC 763). In line with this decision, the modernisation will be provisionally applied by all Contracting Parties automatically as of 15 August 2023. However, any Contracting Party may deliver to the depositary (Portugal) before 23 February 2023 a declaration that it is not able to accept the provisional application of the amendments to the ECT, effectively allowing each Contracting Party to opt out from provisional application. The ECT Secretariat will make such declarations public. Even if a Contracting Party initially makes such a declaration, it may at any time withdraw the declaration again, allowing it to apply the modernisation of the ECT provisionally at a later point in time.

The present proposal for a decision under Article 218(9) TFEU seeks to establish the position to be adopted on the Union’s behalf at the 33rd meeting of the Energy Charter Conference regarding the decisions (CC 760, CC 761, CC 762 and CC 763) described above.

At the same time, the Commission is proposing the adoption of a subsequent agreement, within the meaning of Article 31(3)(a) of the Vienna Convention on the Law of Treaties (VCLT), between the European Union, Euratom, and the Member States on the interpretation of the ECT. That agreement should include, in particular, a confirmation that the ECT has never, does not and will not apply intra-EU, that the ECT cannot serve as a basis for intra-EU arbitration proceedings, and that the sunset clause does not apply intra-EU. It should also set out the obligations of the Member States in the event that they are involved in arbitration proceedings pursuant to a request based on Article 26 ECT.

It has been the consistent interpretation of the EU that the ECT does not apply to disputes between a Member State and an investor of another Member State concerning an investment made by the latter in the first Member State. This interpretation was specifically confirmed by the Court of Justice of the European Union (CJEU) in its Komstroy judgment 5 . Yet, arbitral tribunals have held and continue to hold, that they are not bound by the judgments of the CJEU. In order to prevent tribunals from continuing to accept jurisdiction in such disputes, it is necessary to reiterate, expressly and unambiguously, the authentic interpretation of the ECT. The most appropriate way to do so is by means of an agreement within the meaning of Article 31(3)(a) VCLT.

While that agreement will codify the interpretation of the EU and its Member States in a separate treaty (something that is possible because of the bilateral nature of the obligations), the ECT modernisation will embed in the text itself and via a “for greater certainty” clause, the understanding of all Contracting Parties that its Article 26 does not apply intra-EU. Both elements will help to remove any ambiguity and eliminate present or future risks of intra-EU arbitration under the ECT with the necessary degree of legal certainty.

Position to be taken on the Union’s behalf

The Commission proposes to take, on behalf of the Union, at the 33rd meeting of the Energy Charter Conference on 22 November 2022, the positions described in points 1 to 4 below.

4.

Regarding the adoption of the proposed amendments to the text of the ECT (CC 760)


The proposed amendments to the text of the ECT (CC 760) consist of substantial improvements that will effectively bring the ECT in line with modern standards of investment protection and EU positions in other fora (e.g. UNCITRAL 6 ). The amendments will also bring the ECT in line with the EU’s approach to investment protection in its recently agreed free trade and investment agreements, as well as with EU energy and climate objectives, including the Paris Agreement.

In particular, the amended ECT contains:

–New investment protection provisions, in line with modern standards and EU positions, reaffirming the right of Contracting Parties to take measures to achieve legitimate policy objectives (“right to regulate”), including as regards the fight against climate change; Only investors with real economic interest will be protected, with no protection being afforded to mailbox companies 7 ;

–New provisions on dispute settlement, protecting Contracting Parties from frivolous claims, foreseeing security for costs, and introducing a high level of transparency to the proceedings;

–New provisions on sustainable development, in particular on climate change, the clean energy transition and the Paris Agreement, effectively incorporating the commitments of the Paris Agreement into the ECT, and providing an actionable mechanism in case of misalignment, in a way that was never achieved before in a multilateral investment treaty;

–In addition, the EU secured provisions for regional economic integration organisations (such as the EU), expressly confirming that it is not possible to bring intra-EU investment arbitration under the ECT 8 , in line with the case law of the Court of Justice of the EU 9 ;

–Substantial clarifications regarding to transit-related provisions to factor in the requirements of integrated energy markets with third party access rights, such as in the EU, without creating new obligations for the EU 10 ;

–An updated definition of economic activity in the energy sector, which, together with Annexes EM/EM I, EQ/EQ I and NI (see point 2 below), allows the EU to align investment protection in the EU with the EU’s energy and climate objectives.

The adoption of the amendments to the text of the ECT does not, in principle, have legal effects. Under international law, it is not equivalent to a signature but to the initialling of the negotiated text.

5.

As a result, the Commission proposes to take a position on behalf of the Union at the Energy Charter Conference supporting the adoption of the proposed amendments to the ECT

(CC 760).

6.

Regarding the approval of the proposed modifications and changes to the Annexes (CC 761)


Article 34(3)(m) of the ECT provides for a simplified procedure empowering the Conference to adopt modifications to the Annexes of the ECT. The proposed changes to the Annexes to the ECT (CC 761) bring about an essential change to the current Treaty: the exclusion, through Annex NI, of certain Energy Materials and Products and activities from the scope of investment protection under Part III of the ECT. As a result, the EU obtained the right to carve out investment protection in the EU as follows:

–Exclusion of protection for all new investments in fossil fuels in the EU as of 15 August 2023, with a transition period for hydrogen/low-carbon gas-ready gas power plants and infrastructure emitting less than 380 gCO2/kWh – until 31 December 2030 by default or until 15 August 2033 if they replace a coal, peat or oil shale-fired facility;

–Exclusion of protection for all existing investments in fossil fuels in the EU as of 10 years after the entry into force (or entry into provisional application) of the amendments to the ECT, and by 31 December 2040 at the very latest;

–Protection for renewable and low-carbon hydrogen and synthetic fuels only;

–Exclusion of protection for activities in carbon capture, utilisation and storage.

The proposed changes also bring the scope of the ECT into line with the new landscape of renewable and low-carbon technologies required for the green energy transition. This will be achieved through changes to Annex EM/EMI (adding new energy materials and products, e.g., hydrogen and derivative fuels such as ammonia and methanol, biomass, biogas and synthetic fuels) and Annex EQ/EQ I (adding new energy equipment, e.g., various insulation materials, as well as multiple-walled insulating glass).

In addition, new Annexes have been created to implement the principle of reciprocity, according to which Contracting Parties cannot be forced to protect investments from other Contracting Parties if such investments have been excluded by the latter in Annex NI, either by not applying the investor-state dispute settlement mechanism in Article 26 of the ECT (new Annex IA-NI) or the entirety of Part III on investment protection (new Annex NPT).

As a result, the Commission proposes to take a position on behalf of the Union at the Energy Charter Conference that approves the adoption of the proposed changes and modifications to the Annexes to the ECT (CC 761).

7.

Regarding the approval of the proposed changes to Understandings, Declarations and Decisions (CC 762)


Changes introduced to Understandings, Declarations and Decisions (CC 762) concern corrections of obsolete provisions (e.g., replacing “European Communities” with “European Union”), as well as additional clarifications for the text of the ECT (e.g., the clarification that “subsidy” includes “State aid” as defined in EU law). The approval of such changes to Understandings, Declarations and Decisions will bring further clarity and precision to the text of the ECT.

As a result, the Commission proposes that the position to be taken on behalf of the Union at the Energy Charter Conference on this matter is to approve the proposed changes to Understandings, Declarations and Decisions (CC 762).

8.

Regarding the approval of the decision on the entry into force and provisional application of amendments to the text of the ECT and changes/modifications to its Annexes (CC 763)


The Conference will approve a decision that provides for the following modalities of entry into force and provisional application of the proposed amendments to the ECT and the changes to its Annexes (CC 763):

–The amendments to the text of the ECT will enter into force in accordance with Article 42 i of the ECT. This means that the amendments will enter into force once three-fourths of Contracting Parties have ratified them. In addition, the decision provides that the amendments will be provisionally applied by default by all Contracting Parties as of 15 August 2023, unless they lodge a declaration by 23 February 2023 that they are not able to do so;

–Changes to Section C of Annex NI, which notably contains the rules providing for the transition period of 10 years to phase out the protection of existing investments in fossil fuels in the EU, and changes to other Annexes: these changes will enter into force when the amendments to the ECT enter into force (see above). Section C of Annex NI and changes to other Annexes will be provisionally applied by default by all Contracting Parties unless they make a contrary declaration by 23 February 2023 (see above);

–Changes to Section B of Annex NI, which notably contains the rules providing for the exclusion of new investments in fossil fuels from protection in the EU, will enter into force automatically on 15 August 2023 without any further ratification;

–Changes to Understandings, Declarations and Decisions will enter into force on 22 November 2022 as far as they concern corrections of obsolete references. The remaining changes will enter into force when the amendments to the ECT enter into force. In the meantime, they will apply provisionally in the same way as the amendments to the ECT.

The modalities of entry into force and provisional application of the amendments to the ECT and of Section C of Annex NI, as well as the changes to other Annexes, are in conformity with the provisions of the original ECT as regards entry into force and provisional application. In addition, the EU achieved that Section B of Annex NI enters into force automatically as of 15 August 2023, further securing the date of entry into force of the EU’s carve-out for investments in fossil fuels regarding new investments.

As a result, the Commission proposes that the position to be taken on behalf of the Union at the Energy Charter Conference on this matter is to approve the decision regarding the entry into force and provisional application of amendments to the text of the ECT and changes/modifications to its Annexes (CC 763).

The subject matter of the envisaged decisions concern an area for which the Union has exclusive external competence by virtue of Article 3(1) TFEU, namely the common commercial policy. The envisaged decisions concern rules on trade and the protection of foreign direct investment, which fall within this area of exclusive Union competence.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

9.

Procedural legal basis


Principles

Article 218(9) TFEU provides for decisions establishing “the positions to be adopted on the Union’s behalf in a body set up by an agreement, when that body is called upon to adopt acts having legal effects, with the exception of acts supplementing or amending the institutional framework of this agreement”.

The concept of “acts having legal effects” includes acts that have legal effects by virtue of the rules of international law governing the body in question. It also includes instruments that do not have a binding effect under international law, but that are “capable of decisively influencing the content of the legislation adopted by the EU legislature” 11 .

10.

Application to the present case


The Energy Charter Conference is a body set up by an agreement, namely the Energy Charter Treaty.

The acts which the Energy Charter Conference is called upon to adopt constitute acts having legal effects. These acts will be binding under international law.

The decisions to be adopted by the Energy Charter Conference to approve the proposed modifications and changes to the Annexes to the ECT (CC 761), as well as to approve the proposed changes to Understandings, Declarations and Decisions (CC 762), constitute acts having binding legal effects under international law. This is because the ECT grants the Energy Charter Conference the power to amend the Annexes, Understandings, Declarations and Decisions to the ECT without the need for any subsequent ratification by the Contracting Parties. Under Article 48 of the ECT, the Annexes and Decisions are an integral part of the Treaty.

The decision to be adopted by the Energy Charter Conference to approve the decision regarding the entry into force and provisional application of amendments to the text of the ECT and changes/modifications to its Annexes (CC 763) constitutes an act having binding legal effects under international law because it obliges the Contracting Parties to provisionally apply the amended text of the ECT and the changes to certain sections of its Annexes as of 15 August 2023, if no contrary declaration is lodged before 23 February 2023.

The decision to be adopted by the Energy Charter Conference to adopt the proposed amendments to the text of the ECT (CC 760) constitutes, in the particular circumstances of the case, an act having binding legal effects under international law because it is to be adopted simultaneously with the decision regarding the entry into force and provisional application of amendments to the text of the ECT (CC 763 – see above), which obliges the Contracting Parties to provisionally apply these amendments as of 15 August 2023 if no contrary declaration is lodged before 23 February 2023.

The envisaged decisions do not supplement or amend the institutional framework of the ECT.

Therefore, the procedural legal basis for the proposed decision is Article 218(9) TFEU.

11.

Substantive legal basis


Principles

The substantive legal basis for a decision under Article 218(9) TFEU depends primarily on the objective and content of the envisaged decisions in respect of which a position is taken on the Union's behalf. If the envisaged decisions pursue two aims or have two components and if one of those aims or components is identifiable as the main one, whereas the other is merely incidental, the decision under Article 218(9) TFEU must be founded on a single substantive legal basis, namely that required by the main or predominant aim or component.

With regard to envisaged decisions that simultaneously pursues a number of objectives, or that has several components, which are inseparably linked without one being incidental to the other, the substantive legal basis of a decision under Article 218(9) TFEU will have to include, exceptionally, the various corresponding legal bases.

12.

Application to the present case


The envisaged decisions pursue objectives and have components in the area of energy and the common commercial policy. These elements of the envisaged decisions are inseparably linked without one being incidental to the other.

Therefore, the substantive legal basis of the proposed decision comprises the following provisions: Articles 194(2) and 207 TFEU.

13.

Conclusion


The legal basis of the proposed Council decision should be Articles 194(2) and 207 TFEU, in conjunction with Article 218(9) TFEU.

14.

Publication of the envisaged acts


As the decisions of the Energy Charter Conference will amend the Annexes to the ECT, it is appropriate to publish them in the Official Journal of the European Union after their adoption.