Energy Charter Treaty Reform: Key Changes and Implications
By Kaylee Vampola
The Energy Charter Treaty has undergone significant and historic reforms following the approval of substantial amendments to the treaty by the Energy Charter Conference on Dec. 3, 2024 (amendments available at: https://www.energycharter.org/pdf). These proposed reforms aim to align the treaty with climate goals while addressing longstanding concerns regarding investor-state dispute settlement (ISDS).
The modernized ECT is set to come into provisional effect on Sept. 3, pending ratification by three-quarters of the signatories, known as Contracting Parties under the treaty. See David Turner, “The ECT Reform Finally Moves Forward: Fossil Fuels Phased Out and Intra-EU Disputes Excluded,” Baker Botts (Feb. 10, 2025) (available at https://www.bakerbotts.com/). This article outlines the primary amendments and their implications for investors and State Parties.
Background of the Push for ECT Reform
Established in 1994, the ECT was designed to facilitate cross-border energy investments. It has since faced criticism for disproportionately protecting fossil fuel investments and allowing investors to challenge state policies through ISDS mechanisms,. See David Turner, Baker Botts, above. More than 160 investor-state disputes have been filed under the ECT with various international arbitral institutes, the majority of which pursued under the procedural rules of the International Centre for Settlement of Investment Disputes, raising concerns about its compatibility with the Paris Agreement. See ECT Case Statistics, https://www.energychartertreaty.org/cases/statistics/).
Beginning in early 2024, 10 key individual Contracting State Parties and the European Union, announced their formal withdrawal from the treaty, citing an incompatibility with their climate change goals. See David Turner, Baker Botts, above. These withdrawals are set to become effective this year, with some already in effect. Johannes Tropper, “The Completion of the Modernisation of the ECT and the Provisional Application of the Modernised ECT,” Kluwer Arbitration Blog (Dec. 30, 2024) (available at https://bit.ly/41LT13J). The United States has never signed onto Energy Charter Treaty
This follows a decision by the Court of Justice of the European Union, or CJEU, passed down in Republic of Moldova v. Komstroy, Case C-741/19 (Sept. 2, 2021) (available at https://bit.ly/41N75u8) . The Komstroy decision built on the previous landmark CJEU opinion in Slovak Republic v. Achmea B.V., Case C-284/16 (available at https://bit.ly/4iv24vM), interpreting the ECT’s compatibility with EU law.
With the Achmea interpretation announcing that bilateral investment treaties (BITs) between EU Member States are incompatible with EU law, Komstroy determined that intra-EU disputes under Energy Chart Treaty Article 26 were also incompatible with EU law. “Intra-EU Arbitration Under the ECT Is Incompatible with EU Law According to the CJEU in Republic of Moldova v. Komstroy,” Gibson Dunn blog (Sept. 7, 2021) (available at https://bit.ly/3F7gSST). See also Alina Leoveanu, Hector Clemente, John Conlon, “The Komstroy Saga: It Ain’t Over Till It’s Over,” Kluwer Arbitration Blog (March 1, 2023) (available at https://bit.ly/4imxeW8).
Despite these CJEU decisions, a large majority of international tribunals have refused to decline jurisdiction even when intra-EU dispute claims are brought under BITs or the ECT. Markus Burgstaller & Scott Macpherson, “EU Member States Reach Agreement on ECT Arbitration Clause,” Hogan Lovells blog (Jul. 1, 2024) (available at https://www.hoganlovells.com/). This prompted an issue in awards’ enforcement, where successful claims are brought for enforcement by EU Member State courts which, bound by EU law, have since the CJEU rulings consistently refused enforcement. Id. This has triggered significant shifts in the ECT, and the Contracting States’ views of their roles in energy dispute resolution.
Key Amendments of the Modernized ECT
After several years of deliberation and negotiation, the amendments to the ECT were agreed upon late last year. Conway Blake, Samantha J. Rowe, Jeffrey Sullivan & Patrick Taylor, “Modernized ECT: Narrower Protection, Greater Transparency, Fewer Parties,” Debevoise & Plimpton (Jan. 24, 2025) (available at Debevoise & Plimpton, https://www.debevoise.com/). The Dec. 3 amendments implemented numerous changes significant for their implications in investor-state disputes under the ECT. See generally, https://www.energycharter.org/pdf.
A major reform to the ECT from the most recent Energy Charter Conference comes in the form of phased exclusion of fossil fuel investments from protection under the ECT in the European Union, United Kingdom, and Switzerland. See David Turner, Baker Botts, above. For investments made before Sept. 3, 2025, a 10-year transition period of retained protection is . See David Turner, Baker Botts, above. . Any new fossil fuel investments beginning after the Sept. 3 ECT amendments’ effective date will no longer be covered under ECT protection. See David Turner, Baker Botts, above.
In order to comply with EU law, intra-EU ISDS claims will be explicitly excluded. Under the amended and new ECT Article 24(3), EU investors cannot bring claims against EU Member States, even if the arbitration is seated outside of the EU. See Markus Burgstaller & Scott Macpherson, Hogan Lovells, above.. This added provision provides effective implementation of the Komstroy decision, barring any intra-EU disputes even where EU law does not apply.
Another substantial amendment comes in the form of the clarification of the Fair and Equitable Treatment Standard, and added ECT Articles 13(2) and 13(3), providing an applicable standard for direct and indirect expropriation criteria and defining the threshold of the FET standard See David Turner, Baker Botts, above. This is the first straightforward description of these standards and will streamline the way they are interpreted by international tribunals.
Specifically, the clarification provides for non-discriminatory regulation measures, especially those accounting for combating climate change, to no longer be considered expropriation unless the regulation is “manifestly excessive.” See David Turner, Baker Botts, above. This provides greater flexibility and protection to Contracting States and elevates the standard for challenges to environmental policies by investors. See David Turner, Baker Botts, above. The changes adopted collectively strengthen the position of states in arbitration proceedings and reduce the potential scope for investor claims.
Procedural changes introduce additional constraints on investor claims and alter the arbitration framework moving forward. A narrower definition of investor and investment require that investors have substantial business activities in their home state to qualify for protections, increasing difficulty for shell companies to bring claims. See David Turner, Baker Botts, above.
A ban on “treaty shopping” prevents investors from restructuring holdings post-dispute to gain protection under the ECT. Additionally, enhanced transparency requirements under the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration increase public access to ISDS proceedings. See David Turner, Baker Botts, above.
Future Impact of the ECT Amendments
The amendments intend to emphasize the “urgent objective” of combating climate change and its effects in investment policies and practices. See Conway Blake, et al., Debevoise & Plimpton, above. The reforms mark a significant departure from the ECT’s traditional investor-friendly framework.
Investors must reassess their legal structures and dispute resolution selections, particularly within the EU, where the exclusion of intra-EU claims removes an avenue to pursue ISDS. Alternatively, States gain more regulatory flexibility to implement climate policies without facing extensive arbitration risks.
This shift in the balance between state sovereignty and climate policy considerations may signal a broader trend in international investment law, signifying environmental sustainability’s increasingly important role in treaty reforms on the international stage.
The modernized ECT represents a critical turning point in the evolution of investor-state arbitration. While some states have opted to exit the treaty all together, the reforms implemented ensure that for those remaining Contracting Parties, the arbitration framework will function under a more restrictive and state-favorable model. See David Turner, Baker Botts, above.
As noted, the amendments proposed in the modernized ECT provisionally go into effect Sept. 3, with full effect subject to ratification by a minimum of three quarters of Contracting Parties. Id. The modernized ECT will then apply to the ratifying Contracting Parties, and those who have withdrawn from the ECT will remain to be bound by the unamended treaty for 20 years following their withdrawal due to the treaty’s sunset clause. Id.
Despite the significant amendments and the negotiation required to implement them, substantial uncertainty and ambiguity remain as to the future of energy sector investment. Moving forward, both investors and States must adapt to these changes as the global energy sector shifts, redefining the landscape of investor-state arbitration under the ECT.
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The author, a Villanova University Charles Widger School of Law student, is a Spring 2025 CPR Institute intern.
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