In brief
The Energy Charter Treaty (ECT) is an investment treaty that enables multilateral cooperation in the energy sector. Fifty-three states are currently contracting parties to the treaty, including countries in Europe, Asia and the Middle East, as well as the European Union (EU).
On 18 November 2022, Luxembourg announced its intention to withdraw from the ECT, joining the wave of countries signaling their intention to pull out of the ECT. Like other EU member states, the Luxembourg minister of energy cited environmental concerns, in particular the fact that the ECT is frustrating significant efforts against climate change: “Even if the modernization of the Energy Charter Treaty leads to some progress, the treaty is still not compatible with the goals of the Paris Climate Agreement, as it continues to protect investments in fossil and nuclear energies.”
Such withdrawal may raise important questions for investors in the energy field regarding whether the ECT will still apply to (i) current and (ii) future investments, (iii) any protections for investment in the energy sector in Luxembourg.
Key takeaways
1. Luxembourg only announced its intention to withdraw
While the Luxembourg minister of energy stated that “Today, Luxembourg is exiting the Energy Charter Treaty,” Luxembourg has not yet taken any steps to leave. The minister only stated its intention to withdraw, which does not have any current impact on investments made within the territory of the Grand-Duchy of Luxembourg.
Pursuant to the ECT, any contracting party must give written notice of its withdrawal from the ECT to the depositary (ECT, Article 47(1)). Luxembourg has not yet met such requirement.
Besides, in the event that Luxembourg notifies the depositary of its decision to leave the treaty, such withdrawal will take effect at least one year after the date of receipt of the notification by the depositary (ECT, Article 47(2)).
In other words, investments will no longer benefit from the protection of the ECT only from the date on which the withdrawal becomes effective.
Therefore, as of today, Luxembourg’s intention to withdraw has not yet had any impact on investments related to the energy sector made within the territory of Luxembourg.
2. The ECT will still apply to investments already made for a period of 20 years from the date of Luxembourg’s withdrawal
Like many international agreements, the ECT includes a sunset clause (ECT, Article 47(3)). Such sunset clause ensures that the treaty should continue to apply to any investments, including with respect to fossil fuels, for a period of time after the withdrawal becomes effective. The ECT provides a period of 20 years.
Accordingly, any investments in the energy field made ahead of Luxembourg’s effective withdrawal from the ECT should continue to benefit from the protection of the treaty for a 20-year period.
3. The EU is still a member of the ECT
Luxembourg’s announcement of withdrawal may raise concerns for investors and perhaps they should think twice before investing in the energy market in Luxembourg. In fact, a future withdrawal from the ECT would imply that there will be no protection of any form in the energy sector in that state.
Such concerns are legitimate. However, their investments would still benefit from the provisions of the ECT because the EU is a member of the ECT. Any EU regulations or any national law originating from EU law will comply with the provisions of the ECT. Failing that, investors may claim a breach of an obligation of the EU under the ECT. In other words, if a Luxembourg statutory law arising from EU law infringes the ECT, an investor will be able to claim damages against the EU for the alleged breach. Therefore, investors would still benefit from the protection of the ECT.
For further information and to discuss what this development might mean for you, please get in touch with your usual Baker McKenzie contact.
