UK quits treaty that lets fossil fuel firms sue governments over climate policies

Britain joins France, Germany, Spain and the Netherlands in withdrawing from charter it says ‘penalises’ shift to net zero

The UK is pulling out of a treaty that lets fossil fuel firms sue governments over their climate policies.

The UK will quit the controversial energy charter treaty (ECT) after efforts to align it with net zero emissions plans failed, the government announced late on Wednesday.

The treaty allows fossil fuel investors to sue states for lost profit expectations in an opaque corporate arbitration system set up to protect fossil fuel investors in the former Soviet economies in the 1990s.

Graham Stuart, the energy security and net zero minister, said: “The energy charter treaty is outdated and in urgent need of reform, but talks have stalled and sensible renewal looks increasingly unlikely. Remaining a member would not support our transition to cleaner, cheaper energy, and could even penalise us for our world-leading efforts to deliver net zero.”

Treaty protections for new energy investments will cease in one year’s time when the withdrawal takes effect, the government statement said.

It is unclear whether continuing cases such as the UK-listed Ascent’s €500m (£428m) ECT suit against Slovenia will be affected. The company launched the compensation claim after Slovenia requested an environmental impact assessment before the firm proceeded to develop an oil and gas field. Slovenia has since withdrawn from the treaty.

The shadow climate change minister, Kerry McCarthy, said: “We are in an urgent global fight against the climate emergency. We cannot allow fossil fuel companies to stop democratically elected governments from taking strong climate action. Labour has long argued that the energy charter treaty is clearly outdated and not fit for purpose. It is good that the government has finally taken the step to leave it.”

The ECT is the world’s most litigated investment agreement and the UK’s continued presence within it has raised fears of “climate-wrecking lawsuits” if the government manages to pass its offshore petroleum licensing bill, which aims to jack up UK oil and gas extraction. About 40% of North Sea oil and gas licences are owned by foreign investors, according to research by the Common Wealth thinktank.

Campaigners welcomed the news, with Global Justice Now saying it “untied a straitjacket” to a just transition. “The ECT is now a dead man walking, and only those profiting from the destruction of our planet will mourn its passing,” said the group’s trade campaigns manager Cleodie Rickard.

“However, the mechanism in the ECT which made it so deadly – the investor-state dispute settlement (ISDS) provisions – lives on in a number of other treaties, including the pacific trade deal. With ISDS’s legitimacy crumbling, now is the time to scrap all this system.”

A UN report last year said that ISDS contained risks of bias, conflicts of interest and abuses of power, with “catastrophic consequences” for climate action.

More than 54 countries are still listed as ECT signatories on the treaty organisation’s website, but in reality many have already exited – or plan to – after the failure of modernisation talks.

France, Spain, the Netherlands and several other European states have quit the treaty, and the UK’s announcement follows a proposal for the EU’s 27 nations to officially depart the treaty en masse. A technical meeting on Tuesday positively reviewed the proposal, which could now be signed off by EU energy ministers next month.

A European Commission spokesperson said: “As it stands, the treaty is not in line with the EU’s energy and climate goals and with the EU’s investment policy and law. Despite the commission’s successful negotiating efforts with international partners to update the treaty, it was not possible for member states to find the necessary majority to approve the modernised treaty. We therefore proposed that the EU, its member states and Euratom withdraw from the ECT in a coordinated and orderly manner.”

Yamina Saheb, a former treaty official turned critic, counselled caution after a series of recent EU retreats from climate action. “If [the EU president] Ursula von der Leyen fails to withdraw the EU from the treaty, her mandate will be seen as a complete failure from the climate perspective. Countries that have already withdrawn from the ECT should pressure her to speed up the process.”

Cover photo: The controversial treaty was established in the 1990s when the world energy system was heavily dominated by fossil fuels Photograph: Bloomberg/Getty