From fame to notoriety
Main criticism of ECT
Withdraw or modernise


The Energy Charter Treaty (ECT), which was concluded in 1994 with the aim to promote long-term energy cooperation around the world, has come to a fork in the road. This multilateral investment treaty, being the only international binding instrument dedicated exclusively to activities in the energy sector (namely, energy investment, trade and transit), has been amply criticised and is now undergoing a modernisation process. This process is primarily motivated by the global trend of reforms to multilateral and bilateral investment agreements,(1) which gave the ECT – in particular, its underlying investment protection provisions – the appearance of being obsolete and incompatible with such reforms.

In addition, bearing in mind the substantial contribution of the energy sector to the global carbon footprint, the ECT has been viciously criticised for the protection it affords to energy investments in fossil fuels, which could undermine the clean energy transition and the achievement of the low-carbon (and carbon-neutrality) targets underpinned by the Paris Agreement(2) and other international and national instruments (eg, the European Green Deal and the European Climate Law). This has led civil societies, energy environmental experts and certain political parties to call for the withdrawal from the ECT by its contracting parties. Such opinions were heightened right before the United Nations Climate Change Conference in 2021, which was hosted by the United Kingdom in partnership with Italy.

This article addresses:

  • the ECT's journey from fame to notoriety;
  • the key criticism against it; and
  • whether withdrawing from the ECT is the best answer for its contracting parties.

From fame to notoriety

The ECT was relatively successful in achieving its purpose of establishing:

a legal framework in order to promote long-term co-operation in the energy field, based on complementarities and mutual benefits, in accordance with the objectives and principles of the Charter.(3)

Such purpose was achieved mainly via the ECT provisions for the protection of foreign energy investments regarding host states. The protection of energy investments under the ECT has two limbs:

  • substantive protection; and
  • procedural protection.

Substantive protection includes:

  • obligations of fair and equitable treatment;
  • constant protection and security; and
  • non-discrimination commitments, a breach of which invokes the liability of host states.

The ECT's substantive provisions are enforceable through procedural provisions providing for different mechanisms for the settlement of disputes – in particular, the settlement of disputes through binding arbitration between investors and host states, known as "investor-state dispute settlement" (ISDS).(4)

The ECT's multi-tiered dispute settlement mechanism provides, under article 26, that a breach of any of the obligations under Part III ("Investment Promotion and Protection") of the treaty shall, if possible, be settled amicably within a period of three months. If it is not possible to reach an amicable settlement within this period, the investor party may choose to resort to:

  • the court or administrative tribunals of the contracting party;
  • a previously agreed dispute settlement mechanism; or
  • international arbitration or conciliation.

The ECT allows for "arbitration without privity", meaning that an investor can initiate arbitration proceedings even if there has not been an arbitration agreement with the host state. This means that a contracting party under the ECT provides an unconditional consent to the submission of the dispute arising from the ECT to international arbitration. Additionally, as per the ECT, an arbitration request can be submitted to:

  • the International Centre for Settlement of Investment Disputes (ICSID);
  • a sole arbitrator or ad hoc arbitration tribunal established under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL); or
  • an arbitral proceeding under the Arbitration Institute of the Stockholm Chamber of Commerce.(5)

To date, more than 130 arbitration cases have been filed under the ECT, with more than 80 of these cases subject to the ICSID rules. This makes the ECT one of the most litigated investment agreements(6) and has placed it under further scrutiny, with many critics advocating for its contracting parties' withdrawal.

Main criticism of ECT

The main criticism raised against the ECT is twofold and is aimed at its incompatibility with:

  • the ongoing reforms to investment agreements (mainly the ISDS mechanism thereunder); and
  • the clean energy transition and the low-carbon (and carbon neutrality) targets underpinned by the Paris Agreement and other international and national instruments.

Incompatibility with current reforms to investment agreements
The ECT, particularly its underlying ISDS mechanism, has been criticised for affording protection to foreign investors to the detriment of host states and their citizens.

The ECT has also been criticised for the large monetary compensation paid by host states to foreign investors as a result of disputes arising from breaches of the ECT and the burden that such compensation places on such states' budgets.(7)

Furthermore, the ECT has been criticised for undermining the host states' right to regulate, which has caused a "regulatory chill" effect. "Regulatory chill" is a term used when a state fears making regulatory changes. Accordingly, a state may delay or cancel regulations that fall within the public interest out of fear of ISDS procedures being initiated against it.

Other criticism relating to the ISDS mechanism includes the inconsistent interpretation and application of the treaty's provisions by arbitral tribunals as well as domestic courts.(8) Tribunals under the ECT have criticised one another while examining arguments.(9)

Incompatibility with environmental targets underpinned in international and national instruments
The ECT was designed to respond to certain political and economic circumstances of the early 1990s. As such, it reflects the historical, economic and political environment of that time, in which negotiators were mainly focusing on increasing their energy security rather than climate change and environmental matters. As such, the ECT appears to be poorly equipped to address the environmental challenges of the 21st century.(10)

As previously noted, the ECT provides foreign investors with substantive and procedural protection. For an energy investment to be protected under the ECT, it must qualify as an "investment" pursuant to article 1(6) and it must be associated with an "economic activity" as defined under article 1(5).(11)

When defining "economic activity" in the energy sector, the ECT is neutral as to the source of energy. In other words, when affording protection, the ECT does not differentiate between energy investments relating to fossil fuels and those relating to clean energy sources. In consequence, investments in fossil fuels and investments in clean energy are afforded the same protection under the ECT. With fossil fuel investments being protected under the ECT, it would be difficult to realise the environmental objectives set under the Paris Agreement and other international and national instruments.

Withdraw or modernise

In light of the criticism highlighted above, the question arises as to whether contracting parties should abandon the ECT. Although the recent wave of objections to the ECT may suggest that the withdrawal therefrom is the obvious answer, this position is likely to be short-sighted.

While affirming that the ECT, which was concluded back in 1994, is in need of modernisation in order to be compatible with the ongoing reforms to investment agreements, several energy experts have advised against withdrawing from it.(12)

The arguments in favour of modernising the ECT, rather than withdrawing from it, mainly pertain to the role of the ECT in:

  • promoting foreign investments, which are the key to financing the clean energy transition;
  • enhancing legal certainty and the rule of law; and
  • facilitating cooperation between its parties to advance energy transition agendas on a global level.

Further, withdrawal from the ECT would have limited effect, since such withdrawal would trigger the so-called "sunset clause" provided under article 47(3).

Financing clean energy transition
The clean energy transition will require a structural change to the energy sector, which would affect how energy is generated and used. A shift away from fossil fuels towards clean energy sources is required to decarbonise the energy sector. Such clean energy sources include solar, wind, hydro, nuclear, biomass and geothermal, as well as fossil fuels when their generation is complemented with effective carbon capture and storage.(13) The decarbonisation of the energy sector would further require the use of clean energy generated in the downstream sector, particularly in sectors that have a high carbon footprint (eg, transport and industry); therefore, increased electrification of the downstream energy uses is required.(14)

These structural changes, which are needed to realise the energy transition, would require investments in the field to be scaled up.

Legal certainty and rule of law
By withdrawing from the ECT, contracting parties would undermine the rule-based protection that it affords to investors. In doing so, these states would appear to be rejecting their accountability to the rules they agreed upon when concluding the ECT, thus undermining the legal certainty provided thereunder and ultimately the rule of law. Such withdrawal would send the wrong message to private investors that rely on the protection afforded under the ECT when making long-term and capital-intensive energy investments.

Cooperation for global energy transition
Climate change, investments and trade are all elements underlying the energy sector. The connection between these three elements reveals the need for holistic cooperation between all stakeholders on a global level to realise a substantial change, aiming to steer the energy sector to a low carbon and ultimately carbon-neutral sector. The ECT and related non-binding declarations (eg, the International Energy Charter)(15) provide a venue for signatories thereto to discuss and attempt to tackle energy challenges in the spirit of mutually beneficial cooperation.

Sunset clause
A decision to withdraw from the ECT would have only a limited effect since such withdrawal would trigger the so-called "sunset clause" provided under article 47(3). The ECT's sunset clause would keep withdrawing parties locked into the ECT for 20 years after their decision to withdraw. Investments made within this period would be afforded the full protection granted under the ECT.


The arguments presented in this article suggest that modernising, rather than withdrawing from, the ECT offers a real opportunity for its contracting parties to:

  • reform the ECT's investment protection and dispute resolution provisions in line with recent reforms to investment agreements; and
  • introduce new provisions pertaining to climate change and sustainable development in the energy sector.

For further information on this topic please contact Hassan Khalifeh at Obeid Law Firm by telephone (+961 1 36 37 90) or email ([email protected]). The Obeid Law Firm can be accessed at


(1) See, for example, the work of the United Nations Commission on International Trade Law Working Group III on Investor-State Dispute Settlement Reform.

(2) Paris Agreement (adopted 12 December 2015, entered into force 5 October 2016).

(3) ECT, article 2.

(4) ECT, article 26.

(5) Ibid.

(6) Energy Charter Secretariat, "PDF Statistics", 2021, accessed 3 November 2021.

(7) G Bottoni, B Seneroglu, Z De Pelsmacker and A Aldou, "The ECT, an Obstacle to the Energy Transition: How Did We Get Here?", GCEurope, 2020, accessed 3 November 2021.

(8) C Verburg, "Modernising the Energy Charter Treaty: An Opportunity to Enhance Legal Certainty in Investor-State Dispute Settlement", (2019) 20:2-3, Journal of World Investment & Trade, p 425–454, at 427.

(9) Ibid.

(10) E Cima, "Retooling the Energy Charter Treaty for Climate Change Mitigation: Lessons from Investment Law and Arbitration", Journal of World Energy Law and Business, (2021) 14:2, p 1-13, at 2.

(11) Article 1(5) of the ECT defines economic activities as:

exploration, extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing, or sale of Energy Materials and Products except . . . those concerning the distribution of heat to multiple premises.

(12) See, for example:

(13) J Sachs, "Foreword", in M Hafner, S Tagliapietra (eds), The Geopolitics of the Global Energy Transition, Springer: Cham, 2020, p vii.

(14) Ibid.

(15) The International Energy Charter (IEC) was adopted in May 2015 in The Hague. It is a non-binding political declaration that aims to:

better reflect the new realities of the energy sector, especially the growing weight from developing countries, including emerging economies, and to serve the interests of the existing and potential participants of the Energy Charter constituency.

The IEC also resulted in the creation of the Conflict Resolution Centre and the model instrument on investment dispute management, which help to avoid disputes between states and investors.