Europe’s Energy Security and Climate Change: An Opportunity or a Threat? – Part II

Climate change as a catalyst to solve Europe’s energy security problems

This is the second of two blogs written for the University of Westminster discussing Europe’s energy security in times of climate change threats. The first part explains the challenges which occur for the energy sector by the changing climate and compares climate change to other historical challenges of energy security. Part II of the series argues that climate change, in fact, helps Europe to overcome path-dependent stasis and that the changes now implemented, in the long-term, will guarantee better security than the current system.

Read part one of the series.

Climate change as a catalyst to solve Europe’s energy security problems

This chapter argues that climate change, from an energy security perspective, is a huge opportunity for the EU as it forces the Union to commit a quick transition and to finally break out of the fossil fuels path dependency. Before outlining all the energy security benefits of a low carbon society with a high share of renewables, it is important to understand the threat that climate change currently poses on the energy market. With melting glaciers, longer dry periods and less snow, rivers in Europe transport less water in spring (EU Science Hub, 2018). This is perilous for the agriculture sector and residents relying on those resources, but also for energy suppliers. Power plants require a huge amount of cooling water and some countries already experienced times when power plants had to suspend operations due to a lack of cooling water (Klare, 2015). Water scarcity also threatens hydroelectric power plants, which would theoretically produce clean energy. Klare (2015), in what he calls a climate change blowback, also mentions the damage caused on American oil and gas infrastructure during hurricanes Katrina and Rita in 2005, destroying 115 offshore oil platforms and 535 pipeline segments. Similar incidents are expected to happen in Europe, threatening the entire supply chain. The EU energy strategy to address the contemporary issues comprises five dimensions: 1) Energy security, solidarity and trust, 2) A fully integrated internal energy market, 3) Energy efficiency contributing to moderation of demand, 4) Decarbonising the economy, and 5) Research, innovation and competitiveness (European Commission, 2019b). Ensuring energy security is thus a top priority and as will be explained, for energy-importing states emission minimization and a shift away from fossil fuels fit indeed very well into the energy security agenda (Anceschi and Symons, 2012).

We will first have a look at the obvious environmental benefits. Through the electrification of the transport sector, the implementation of renewable energy sources and new policy frameworks – including CO2 taxes, carbon trading schemes etc. – GHG emissions will hopefully stabilize or even decrease before 2050. This will, in theory, slow down global warming and limit it to the 1.5°-2°C target set in the Paris Agreement (UNFCCC, 2019). A low carbon economy, hence, complies with the energy security component of being environmentally friendly. Goldthau (2013) also points out that environmental friendliness includes much more than just tackling climate change: Apart from climate change, fossil fuels and nuclear power plants have directly caused many more environmental problems such as Chernobyl (1987), the oil leak in the Gulf of Mexico (2010), the Fukushima nuclear reactor accident following a tsunami (2011), or a gas leak at the Elgin platform in the North Sea (2012), to name but a few.

Many scholars pointed out that the main barrier for a climate-neutral Europe from a traditional energy security perspective is price-related (Mayer and Schoten in Anceschi and Symons, 2012). Today, fossil fuels may still be slightly cheaper than renewable energy, but it is only a matter of time until that changes and many renewable sources are already highly competitive (Ellsmoor, 2019). Nuclear power, on the other hand, is from an investors’ perspective delicate as the development costs are enormous – The UK currently builds a new nuclear power plant which is estimated to cost £22 billion (Ambrose, 2019). And the political situation is also not resilient. Germany, for instance, forced all energy suppliers to phase out nuclear energy by 2022 – breaking international treaties and binding contracts with the suppliers, which led to long-winding and expensive lawsuits (Bernasconi-Osterwalder and Hoffman, 2012). And talking about the price; the oil price is anything but stable. During the last two decades, it fluctuated between $10 in 1999, $147 in 2008, $35 in 2009 (Anceschi and Symons, 2012) and stands currently at around $60 per barrel. Furthermore, there are also economic side effects to take into consideration. Stern calculated that the externality costs of each ton of CO2 emission lie around $85 (Stern, 2007). The development of shell gas and tar sand may have increased the volume of available fossil fuels, and “clean coal plants” may greenwash coal’s image, but all of this comes with higher extraction and manufacturing costs. A second major energy security component, affordability, will thus also be greatly improved by the energy revolution.

From a political perspective, the reduction of fossil fuels and the increase of clean and local energy offer many benefits. First and foremost, it reduces the dependency on oil-, gas- and coal-exporting countries and offers new job opportunities in the home-grown renewable industry. Or in the words of a realist, the growing home market of renewable energy sources will create thousands of jobs while the layoffs of fossil fuel employees are mostly going to happen abroad. European money will thus be invested within the EU and is consequently strengthening the European single market (European Union, 2019). Decreasing Europe’s energy dependency – a key aspect of energy security – will minimize the risk of being outplayed by political tensions on European borders, as seen during the Ukraine-Russia conflicts in January 2009. Back then, Russia cut off gas pipelines to Ukraine, which, in the middle of the winter, became a threat for many EU countries who were relying on Russian gas (Smith Stegen, 2011).

Stronger storms, periods of drought, rising sea levels and other natural disasters enforced by climate change compels people to leave their homes. This inevitably leads us in a social and even legal direction. The UN Commission on Human Rights has recognized that climate change is the most serious threat to human rights (OHCHR, 2019). Various soft laws and guidelines, such as the United Nations Guiding Principles on Business and Human Rights (UNGP), should ensure that states and companies respect human rights and thus actively protect its citizens from climate change caused threats. The Sustainable Development Goals (SDG) from 2015 even go a step further and explicitly mention the importance of guaranteeing energy security worldwide (United Nations, 2019). While it is difficult to turn soft law into hard law, a recent development gives hope to environmentalists and may scare European governments. Strategic climate change litigation, which understands the strategic suing of countries if the state demonstrably fails to do enough to meet set climate targets, has mushroomed in recent years (see for instance Setzer and Byrnes, 2019). The Netherlands, for example, were successfully sued in 2019 (Khan, 2017) after the plaintiffs were able to credibly demonstrate that the government’s current efforts are not in compliance with the findings of the latest IPCC report. This brings for many European state leaders another aspect into play: Tackling climate change has become a bottom-up approach, with the “bottom” expecting proactive action from their governments. The European elections in 2019 and the “green tsunami” that swept across Switzerland (Rahim, 2019) are clear witnesses to this.

Summary and conclusion

The history of the 20th century has shown that energy security has always had a place in the agenda of European countries but with different prioritization over time. The neo-colonial order which emerged after World War II was very much in favour of Europe’s agenda. The first insecurity crisis arose in the 1970s when, amongst other development, OPEC was founded. A sudden shift of power towards the exporting countries became a threat for importing countries. Europe was able to solve this through various countermeasures such as a better diversification of their energy portfolio and new oil and gas trading partners (mainly Norway). However, anyone who thought that the newly emerged neoliberal order was the solution to all energy security problems was wrong. State capitalism replaced liberal capitalism in the 21st century and Europe faced a second energy security crisis. This time even more serious, though, as in addition to fossil fuel insecurity, the whole climate is at stake.

Although Europe’s answer to climate change is causing some critique, it is, as shown in this work, above all a huge opportunity for solving many energy security-related issues. This essay highlighted that the energy transition, which is at the core of Europe’s agenda to combat climate change, offers numerous advantages. And – hand on heart – without the imminent threats that climate change bears, the energy transition would not have proceeded so quickly. Therefore, it is fair to argue that climate change has been an important catalyst for Europe’s energy strategy. I am concluding by highlighting various policy tools that ensure energy security, as proposed by the International Energy Charter (2015): 1) Diversification, 2) supply expansion, 3) security enhancement, 4) stockpiling, 5) demand control, and 6) trading. Diversification can be achieved with promoting a variety of renewable sources combined with gas plants to compensate variable renewable energy fluctuations. Supply expansion and security enhancement are also promoted by renewable energy, which requires significantly fewer resources from abroad and uses freely available domestic energy such as sun, wind and water. Investments in Europe’s interconnectors will additionally improve supply and security. Future stockpiling policies will be more concerned with electricity storage than with oil and gas stockpiling, which explains why many European countries are heavily supporting R&D in this field (see for instance The Parliamentary Office of Science and Technology, 2014). Demand control will be guaranteed through demand-side responses (Houses of Parliament, 2014; Torriti, 2015; Taibi et al., 2018). What is more, from a European citizens perspective, the energy transition offers cheaper electricity rates and decreases health cost. The rapid execution of the energy system transformation has thus nothing to do with altruistic motives. On the contrary, it combats climate change, solves most of the current energy security threats, and is based on economic considerations. Europe’s energy strategy shows, very simply, a well-reflected understanding of a modern energy security agenda.

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Europe’s Energy Security and Climate Change: An Opportunity or a Threat? – Part I

Placing Europe’s energy strategy in the historical context of energy security

This is the first of two blogs written for the University of Westminster discussing Europe’s energy security in times of climate change threats. The first part explains the challenges which occur for the energy sector by the changing climate and compares climate change to other historical challenges of energy security. Part II of the series argues that climate change, in fact, helps Europe to overcome path-dependent stasis and that the changes now implemented, in the long-term, will guarantee better security than the current system.

Read part two of the series.

Introduction

Climate change is shaking up the energy market and with this also the conventional concept of energy security. Heavier storms, droughts and other natural disasters threaten energy infrastructures such as drilling platforms, pipelines and the grid (Klare, 2015). Ironically, those means of energy are now threatened by the climate change which have been identified as the main culprit of the anthropogenic impact on the climate (Goldthau, 2013) – “a blowback” as Klare (2015) puts it. This implies that to actively combat climate change and to guarantee energy security in the future, an energy transition is needed. Based on scientific forecasts about the anthropogenic influence on the climate, 195 states agreed to reduce greenhouse gas (GHG) emissions and to limit global warming to well below 2°C by signing the Paris Agreement under the auspices of the United Nations Framework Convention on Climate Change (UNFCCC). A driving force behind those climate change negotiations is the European Union (EU) which, for themselves, set even more ambitious targets. In the eyes of some European states, those targets, namely a climate-neutral economy by 2050 (European Commission, 2018), bear an even greater threat to their energy security than climate change itself (Pérez, Scholten and Stegen, 2019). Phasing out of domestically extracted coal as well as phasing out of nuclear power stands high on the agenda in many European countries. As a result, a gap in supplies may occur which subsequently means that more energy needs to be imported. This would further increase dependency on other countries – a dependency that has already increased in recent years, from 47% of the consumed energy imported in 2000 to 55% in 2017 (European Commission, 2019a). Russia thereby plays an important role as it is by far the biggest supplier of oil, gas and solid fossil fuel (Katona, 2017). This is in itself another energy security threat for the EU as Russia’s state capitalism in the 21st century is not favouring energy importing countries agenda. This essay sets Europe’s current understanding of energy security in the historical context and shows, how the EU has mastered previous threats. At the heart lies the question of whether climate change as a catalyst for the energy transition poses a major threat for Europe, or if it offers, in fact, the greatest opportunity ever to solve most of the historical challenges associated with energy security.

Europe’s energy security from a historical perspective

As described by Anceschi and Symons (2012), energy security is a “dynamic socially constructed phenomenon” which results in endless individual meanings and implications for governments. Buzan (1998), sketching on a social constructivist perspective, says energy security is “an arena where different voices seek to securitize their particular understanding of key risks and threats.” It is often defined with 1) a noninterrupted access to the modern energy market, 2) a price that promises economic growth, and 3) energy that is as environmentally sustainable with as few externalities as possible (e.g. health costs). For the EU energy security is generally understood as energy efficiency, sustainability and security of energy supplies (Winzer, 2012). Perhaps the most important distinction can be drawn between security for energy independent, energy exporting, and energy importing countries. For the latter, energy security is particularly delicate as their economies and citizens are directly dependent on foreign states (International Energy Charter, 2015). The level of risk varies, in turn, on many factors (Anceschi and Symons, 2012). This chapter demonstrates how energy importing countries have responded to changing parameters in the last century.

Energy security, although not necessarily linked to the oil age, entered the limelight of policymakers during and after the first World War (Dannreuther, 2015) where uninterrupted access to fuel was decisive to win the war. Especially after world war II, the 20th century was marked by an unprecedented economic boom in the western world (DeLong and Bradford, 2000). One of the key factors behind this was the supply of cheap oil, which lubricated the factories, provided warm homes and found an almost universal use all over the value chain (plastic products, drugs, fertilizers, paint, etc.) (Dannreuther, 2017). For European countries, oil was almost exclusively supplied by Middle Eastern countries and it had to be ensured that the “black gold” flew into the West without interruption. The former colonial powers Great Britain and France and, amongst all, the USA, established themselves as hegemons in the region and guaranteed secure access and transportation (Dannreuther, 2015). The bulk of global oil extraction and production was done by seven western oil companies, also known as the seven sisters (described in Oil: A Cultural and Geographic Encyclopedia of Black Gold, 2014). This neo-colonial form of energy security worked from the perspective of an energy importing country excellent until, in the late 1960s, resistance formed. This was bundled in particular in the formation of the Organization of Petroleum Exporting Countries (OPEC), which suddenly controlled over 50% of the world’s oil supply. It got worse in the early 1970s when many oil-producing countries began to nationalize Western oil companies (Dannreuther, 2015). The European understanding of energy security was visibly at risk and when the oil price quadruplet within a short time, Europe faced its first serious energy security challenge. To respond to the threat, energy diversification was pushed forward with nuclear energy, for instance in France, experiencing a boom (Anceschi and Symons, 2012). Also, investments in the gas market were made and new pipelines developed – and renewables, too, were seen as valuable supplementation to oil (Dannreuther, 2017). Possible war interventions were also being considered, especially in the United States (Dannreuther, 2017), and the International Energy Agency (IEA) was set up as a counterweight to OPEC (International Energy Charter, 2015). Western International Oil Companies (IOC) were sent out to search for new oil wells aiming at reducing the dependency on Middle Eastern oil – and they delivered. New findings in the North Sea and the Gulf of Mexico meant that part of the oil could now be sourced from Norway (compare with statistics from European Commission, 2019a) and other parts of the world. OPEC, as became obvious soon, had structural weaknesses which could not be concealed in the long run and consequently enabled Western energy importing countries to re-establish their desired neo-liberal order (Dannreuther, 2015).

Neo-liberalism worked well in the 1980s and 1990s and some experts already rejoiced that energy security issues were a matter of the past (Dannreuther, 2015). However, this was a fallacy that became apparent in the new millennium. Under leaders such as Hugo Chávez and Vladimir Putin, a re-nationalization wave hit the extractive industry (Chernykh, 2011). This resource nationalization led to a dwindling influence of IOC and National Oil Companies (NOC) were now dominating the oil and gas market (Dannreuther, 2015). Liberal capitalism gave way to state capitalism and additionally, the demand for energy in developing countries such as China and India rose sharply (International Energy Charter, 2015). The power shift in both supply and demand led to a sharp rise in the oil price culminating at $147 for a barrel in June 2008. Oil was no longer cheap and the old threat of energy insecurity was back, for the second time, energy security became the narrative of Europe’s political agenda (Dannreuther, 2015). The peak of the threat was not yet reached, though. These days, there is a clear consensus that climate change is at least accelerated by mankind and that fossil fuel combustion is the main driver (compare with various reports, such as IPCC, 2017). Decarbonizing our way of living thus seems to be the only option to face the climate challenge and Europe is eager to take the lead towards a climate-neutral future (European Commission, 2018; Goldthau, 2013). Decarbonizing, however, means abandoning coal-fired power plants, promoting electrification with clean energy sources, and limiting oil and gas consumption as much as possible. Simultaneously, many concessions for nuclear power plants are about to expire in the next decade and some European states do not intend to further push a nuclear energy agenda (for instance Germany, described in Appunn, 2018). All those issues combined inevitably raises the question if Europe’s energy security is existentially threatened. The EU answers with a range of plans and strategies. The Energy Union aims at providing secure, affordable and clean energy, the Clean Energy for all Europeans package sets a new legal framework to facilitate the clean energy transition, and the 2050 Long-Term Strategy requests for a climate-neutral economy by 2050 (European Union, 2018). If those plans will work out has to be seen in the future, one thing is already clear, though: Europe has entered into a new energy security era.

Is a climate change caused energy transition a threat to Europe’s energy security?

While the prior chapter explained the need for an energy transition, there is also criticism questioning the feasibility of a climate-neutral economy in the EU. This chapter outlines and challenges potential barriers towards and threats of a low carbon economy, taking into account energy security aspects from an economic, environmental, social, and political point of view.

An often-mentioned argument against renewable energy sources is the unreliable production of electricity. Most renewables only produce variable energy (intermittent energy sources), which means that they need to be supplemented with flexible and reliable conventional power plants such as gas plants in order to constantly match electricity supply and demand (Dannreuther, 2017). These days, subsidized renewables tend to financially outperform conventional power plants which makes gas investments uninteresting for investors (Winkler et al., 2016). If no investor invests in gas plants anymore, though, energy supply is at high risk. A counter-argument here is that interconnectors, linking the European grid system, will help to erase the risk of intermittent energy (Ofgem, 2019). From a neoliberal perspective, an intertwined European grid also ensures that the cheapest rates are applied to all clients in the EU and it offers more stability and improved cooperation amongst the EU countries (Pérez, Scholten and Stegen, 2019).

Renewable energy sources are also not the holy grail when it comes to a zero-impact-idea for the climate. Although renewable energy sources indeed have a much smaller impact on GHG emissions, they still cause damage to the environment. Their construction often involves a lot of minerals which need to be conventionally extracted (see for instance Business & Human Rights Resource Centre, 2019) and as the first generation has not yet reached the end of their life cycle, it is unclear what environmental impact their decommissioning will bear (Shellenberger, 2018). The raw material used in renewable plants mainly comes from developing countries and some of these minerals are scarce (Bloomberg News Editor, 2017). Also, windmills are responsible for the death of thousands of birds and bats every year and hydropower requires the flooding of entire valleys, which is why many environmentalists are not in favour of wind and water energy (Goldthau, 2013). It is therefore not possible to claim that renewables will erase dependency on other nations, nor that the proposed low carbon economy has no environmental impact. To counter those points one can argue, though, that already today a big share of the materials used in renewables are recycled and that further R&D will help to minimize the environmental impact further (Vekony, 2019). Furthermore, decommissioning a nuclear power plant, just as a comparison, takes between seven and 60 years (Gospodarczyk and Kincer, 2017). And whilst windmills bear some risk for birds and bats, the impact seems to be minuscule compared to road traffic, buildings, and natural predators such as cats (compare with Dienste, 2019).

Dannreuther (2017) points out that the energy transition particularly affects the coal industry. While for a climate-neutral economy phasing out of coal-powered plants seems to be elementary, it is precisely this source that is vastly available in Europe. From an energy security perspective, this is a big threat as many people working in this industry will lose their jobs and filling the supply gap that coal leaves will, at least in the medium term, have to be covered with foreign energy, most probably Russian gas. Poland for example heavily relies on its coal resources for which also up to 100.000 employees are at stake (Pérez, Scholten and Stegen, 2019), consequently Poland has little interest in phasing out coal. And while the overall oil-dependency may decrease during the energy transition, it is not the case for gas (Deign, 2018). New pipelines, for instance Nord Stream 2, express that many European countries still believe in Russian gas for decades to come. The energy transition, hence, will not decrease dependency on foreign energy and believing that energy security means the same for all EU countries, is naïve, too. While there is an EU-wide approach of fighting climate change and realising the energy transition, each of the 28 EU countries also follows an own national energy agenda (Pérez, Scholten and Stegen, 2019). Whereas Malta obtains 95% of its energy from abroad, Estonia and Denmark import less than 15%. And while Germany has a comparably high share of gas imports, Sweden and Cyprus are dominated by imports of oil (European Commission, 2019a). To say that Europe’s climate change caused energy transition is a blessing, hence, is wrong. Nevertheless, I would also counter this paragraph, arguing that renewables overall will create more jobs per energy unit produced than it is currently the case with fossil fuels, the number of jobs is indeed expected to rise fourfold (Pérez, Scholten and Stegen, 2019). And for Poland, it is to say that caused by their coal consumption they account for 33 of Europe’s 50 most polluted towns (Diaz, 2019). This increases health costs that Poland’s’ citizens need to pay for and it surely does not align with the energy securities’ idea of causing as little externalities as possible.

I conclude this chapter with a pure opportunistic view on climate change and fossil fuels in Europe. Path dependencies in the energy sector are closely linked to the fossil fuel industry. The current infrastructure and technological lock-ins as well as a very strong oil, gas and coal lobby (Dannreuther, 2017) make it very tough for policymakers to achieve a turnaround. We shall not forget that neither gas nor renewables are a new invention. Whilst they have been around for a long time, they did not manage to break the monopoly of oil or coal. And last but not least, climate change brings many positive externalities to Europe. Thanks to a milder climate and less snow, more agriculture land will be available in the summer months and less heating will be needed in the winter (Klare, 2015). Melting perm frost and ice caps will additionally help to find and exploit new mineral fields and even opening up new sea routes in the artic (Frederiksen, 2019).

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International Investment Treaties: Curse or Blessing for the Energy Revolution? – Part II

This article was written for the University of Westminster.

International law on the protection of foreign investment may impose excessive constraints on the freedom of states. But without international treaties, global companies may not invest in foreign countries – think about security, change in political administrations, shift in public perception, etc. This applies especially for the energy industry where contracts are signed for long-term periods. So: Are International Investment Treaties (IITs) a curse or a blessing for the governments and their plans for the energy revolution?

Read part one to learn more about the history and function of International Investment Treaties.

Why IITs are essential for foreign investors

It is understandable that a private company needs certain securities when making new investments. As described in the first chapter, this security is provided by national laws in its own country. However, if the investment is made abroad, other levers must be used. Of course, the company can also sue abroad directly at the national court if it feels unfairly treated. However, this is often regarded as too little objective – because ultimately even the most objective national court still represents the interests of its country. For this reason, IITs have been developed which guarantee the foreign investor greater security, fair and equitable treatment and the protection of expropriation – and at the same time define the framework conditions for an appeal. Most IITs give the investor the right to sue the host country directly at an international arbitration court – often the ICSID in Washington. As an independent body, this should serve to ensure a fairer arbitral award. In the energy industry, very large investment sums are often required to build up the sector. This applies equally to the oil industry, nuclear energy, and for renewable energy sources (e.g. on- and offshore wind farms). These high sums mean that the break-even point lies in the far future. For this reason, contracts in the energy sector are usually very long-termed and often guarantee rights for several decades. The companies are thus profiting very strongly from IITs, as they minimize the threat of a large economic loss due to changed political conditions. In Europe, this usually proceeds under the responsibility of the ECT. The next paragraph describes a concrete case which is currently pending at ICSID and involves two European parties: The Swedish energy company Vattenfall AB and the Federal Republic of Germany.

In 2011, Japan was struck by a tsunami that caused a nuclear catastrophe at the Fukushima reactor. For weeks, newspapers were full of new articles about this nuclear accident and the public perception about the “dangerous nuclear energy” manifested itself. In Germany, this debate led the government to add the 13th Amendment to its Atomic Energy Act. The 13th amendment stated to phase out nuclear power until 2022 and to shut down the oldest reactors in the country immediately (The Federal Office for Radiation Protection (Bundesamt für Strahlenschutz – BfS), 2013), although the official runtime was not yet over. This had consequences for some German energy operators and also for a foreign investor. Vattenfall AB, the national Swedish energy group, held large shares in two nuclear power plants which were asked to shut down immediately (Bernasconi-Osterwalder and Dietrich Brauch, 2014). For Vattenfall, this decision meant severe cuts in its business activities. This becomes obvious when analysing the company’s key figures for the German market, Vattenfall employs over 6,000 workers and achieved a turnover of € 6.19 billion in 2016. In addition, nuclear energy is responsible for over 40% of the company’s energy production matrix. While the German companies had to sue at the Bundesverfassungsgericht (national court), Vattenfall was able to choose a different path and submitted a request for arbitration at ICSID in May 2012. Vattenfall invoked three provisions in the Energy Charter Treaty (Bernasconi-Osterwalder and Hoffman, 2012):

  1. The provisions for protection against expropriation without compensation
  2. The obligation on fair and equitable treatment and the non-impairment through unreasonable or discriminatory measures
  3. The duty to observe any obligations vis-à-vis an investor or investment (umbrella clause)

The secretary-general of ICSID registered the request and agreed to be responsible for this issue (ICSID, 2019). Case No. ARB/12/12 was set up and now deals with the claims arising out of Germany’s enactment of legislation to phase out nuclear power plants in the country by 2022. The claimed sum is estimated to be around € 4.8 billion, however, since most negotiations are taking place behind closed doors only little is known and the claim, in reality, could be substantially higher. According to the arbitration rules of the ICSID convention, both parties, the claimant (Vattenfall AB) and respondent (Germany) appointed one arbitrator each and agreed jointly on a president (Albert Jan van den Berg). Over the next few years, the court gathered evidence and held negotiations with both parties, with the first official arbitration attempts finally taking place in Washington in October 2016. This, as a matter of fact, was broadcasted live. Apart from that, the public is in the dark and although it was expected that the arbitration would be swift, the court has not yet come to a decision. This is mainly caused by Germany, which repeatedly tried to delay the court’s decision (application to have all arbitrators disqualified) and even tried to withdraw jurisdiction from the ICSID (based on the ACHMEA verdict by the Court of Justice of the EU). All those attempts failed, though, but it shows how uncertain Germany is about the outcome of the tribunal.

This case study displays in what a difficult situation a foreign investor in the energy sector can find itself in if host countries make short-term changes to legislation due to changing environmental situations. Although this specific case may only be linked to the energy revolution to a limited extent (nuclear energy is rather clean), it becomes clear what a dilemma both parties can find themselves in. In addition to a large financial loss for Vattenfall, there is more at stake. For instance job security and general uncertainty about future investments, and also their general reputation in Germany. It is difficult for a company to explain to its customers in the host country why they are suing the host country for damages, which would consequently be paid with taxpayers’ money. The next chapter shows the advantages and disadvantages of IITs from the point of view of the host country and will again use the Vattenfall AB vs Federal Republic of Germany case to illustrate the impact.

Opportunities and threats for countries’ energy transition plans

Foreign Direct Investment (FDI) can provide a great service to a country in both the short and long term. Of course, this applies to different sectors of the economy, but it is of high importance to the energy sector. Especially energy-exporting and developing countries, which do not have the necessary capital themselves, may benefit as foreign investors can boost the energy sector, improve the economic performance, create jobs and thus improve welfare. But energy-importing countries, too, are dependent on investors who often do not come from their own countries. Think, for example, about expensive gas pipelines, the operation of nuclear power plants and, more recently, the development of renewable energy sources such as wind farms, solar and thermal power plants, or also hydroelectric power plants. Last but not least, investors often bring with them urgently needed knowledge and technologies that are simply not available in the host country. As explained in the previous chapter, contracts with investors are usually concluded on a very long-term, ensuring that the business is worthwhile for the investor. And this is where the challenges for the host country begin. Political, economic, ecological or social situations may change quickly, and the host country must adapt its framework conditions. While the local companies have to adapt to these changed conditions and have to resort to the national court in case of replacement claims, the foreign investor can invoke international law under the conditions described in the previous chapters. The next paragraph takes up again the case study of Vattenfall AB v. the Federal Republic of Germany and shows this time the perspective of the host country.

Nuclear energy has always had a hard standing in Germany as Appunn (2018) describes. 28.000 people occupied the construction site of a new reactor in Wyhl in 1975, 200.000 people demonstrated in Hannover and Bonn in 1979 after the Three Mile Island accident in the USA. The Chernobyl catastrophe in 1986 further fuelled the fear of a nuclear catastrophe in Germany. And in the 1990s, there were more demonstrations devoted mainly to final storage sites. As we can see from a political point of view, nuclear power plants have been a hot potato for a long time. The Fukushima catastrophe in 2011 consequently brought back the fear of a nuclear accident in Germany. At the same time, intensive discussions took place on how to achieve the energy revolution and how to move the best towards a low-carbon economy (Appunn, 2018). Having all this background, the Bundestag (German parliament) decided in the same year to carry out a radical nuclear phase-out, whereby eight plants were ordered to shut down immediately as well as all others until 2022. Over 80% of the parliamentarians voted for this request, which was added as the 13th Amendment to the Atomic Energy Act. Various newspaper polls showed that a large majority of the population agreed with this policy, too. In the industry, on the other hand, this decision was controversial, especially of course among the participating energy operators, who accused the federal government of breaching existing contracts. Those national energy companies subsequently sued the Federal Republic of Germany at the Bundesverfassungsgericht (German Federal Constitutional Court) and, some four years later, in December 2016, were partially justified. The court ruled that the 13th amendment was at least partially unconstitutional, but not an expropriation (Bundesverfassungsgericht, 2016). However, the court also found that “accelerating the nuclear energy phase-out and thereby limiting the residual risk associated with nuclear energy was a legitimate objective. Furthermore, setting fixed end dates and striking the previously granted additional electricity output allowances were suitable means to fulfil this objective” (Gesley, 2016). As already described in detail in chapter two, a foreign investor, Vattenfall AB, decided to file a complaint before the ICSID. The officially known claim amounts to € 4.8 billion, which is an extremely high sum even for an economically strong country like Germany. The outcome of this case is elementary for the country on several levels. In addition to the financial outlay, politicians will have to explain why they neglected or oversaw contracting rights of private companies while voting for the 13th amendment. Also, the question is raised as to what extent international law takes precedence over German law, which allows Germany to carry out its energy revolution in a self-determined manner. In the future, Germany would like to separate itself not only from nuclear power but also from coal power and may run into similar issues. If ICSID should rule against Germany, the verdict may have a significant influence on how Germany will administer its energy policy in the upcoming years. And not only Germany is concerned by it, the other signatories of the ECT, too, wait for the judgement, fearing that they may have to deal with similar complaints soon. Italy, as an example, announced to withdraw from the ECT and literature identifies the recent wave of ECT arbitrations and the fear of lawsuits as one of the reasons (Iacob and Cirlig, 2016). However, Italy does not get off easily as the ECT, as many other BITs and MITs, contains a so-called sunset clause. Article 47(3) states that “the provisions of this treaty shall continue to apply to investments made in the area of a contracting party by investors of other contracting parties or in the area of other contracting parties by investors of that contracting party as of the date when that contracting party’s withdrawal from the treaty takes effect for a period of 20 years from such date.” This widespread clause was established to safeguard investors right in a fast-changing political climate and means that Italy will still have to face potential legal claims for almost the next two decades (Iacob and Cirlig, 2016).

Conclusion

Does international law on the protection of foreign investment impose excessive constraints on the freedom of states to regulate their energy sector in the national interest? And are IITs more of a curse or blessing for the Energy Revolution? This essay has attempted to shed light on those two questions while analysing different perspectives and also highlighting the interests and fears of the parties involved. For foreign investors, disputes usually involve financial losses and security aspects. Points that have been assured to them contractually, and often in the long term. And for their country of origin, it is a matter of ensuring that national companies can also be protected abroad to the best of their ability. For the host country, one might argue, there is much more at stake. With increasing frequency, they have to justify themselves before international arbitration tribunals and more often they have to pay out high awards. The outcome of the described case study is also eagerly awaited by other nations because it can have a fundamental influence on their energy revolution strategies, too. If Germany is found guilty, the planned energy transition could be postponed by years. This puts developed countries, in particular, in a dilemma because they have signed internationally binding agreements such as the Paris Agreement and committed themselves to reducing greenhouse gas emissions and to working towards a low carbon economy with appropriate measures. In the current situation, it can, therefore, be argued that IITs such as the ECT have a negative impact on the energy transition and thus stand in sharp contrast to the climate change debate. However, one can also argue the other way around and say that it is IITs that make global investments in renewable energy sources possible and thus taking a central role in a rapid energy turnaround.

In my view, the answer to the opening question is “yes”: International law, linked with the signing of IITs and potential ISDS cases, can indeed represent a major hurdle for states, especially in the energy sector and in the context of climate change. The implementation of set climate targets can actually be slowed down by international law, and the question arises whether the well-being of multinational companies should take a higher priority than the well-being of the planet earth. Finally, companies may also be accused of having been passive about the energy revolution for too long and of actually having had the chance to prepare for legislative changes a long time ago. Moreover, it is legitimate to ask how “fair and equitable” international arbitration tribunals are for local companies which cannot appeal to these courts. And last but not least, it is difficult to have to explain to the public that under international law their taxpayers’ money is invested in awards for foreign multi-million dollar corporations. The growing criticism on the impact of ISDS claims from the point of view of the host country is therefore justified, so yes, international law on the protection of foreign investment imposes excessive constraints on the freedom of states. And yet I believe that IITs are important for the economic development, for supporting developing countries, for the energy revolution, and that it can increase overall welfare. They provide a clear framework, increase security for investors and define the rules of the free market (Iacob and Cirlig, 2016). They make it easier for knowledge, technology, and capital to be available worldwide, and for several decades IITs have been relatively uncontroversial and very useful. The fact that international arbitration courts are responsible for dealing with those claims rather than national courts, and hence apply international law, is also justified. National courts can hardly judge objectively in such important cases, especially since in some countries of the world there is no classical separation of powers, as is customary in democratic countries. It is also a fallacy to believe that a country can simply withdraw from treaties and then lull itself into a sense of safety from international lawsuits. As this essay showed, sunset clauses often oblige countries to comply with existing treaties for a further 20 years.

I would like to conclude this essay with a final look at climate change and the energy revolution, which is so important for it, arguing that while international law can generally restrict national governments, it is still a blessing. Because just as the ECT is subject to international law, so was the UNFCCC, the Kyoto Protocol and now the Paris Agreement. In my view, international law will play a major role in the future in achieving jointly formulated climate targets and sustainable development goals. Schrijver (2011) describes climate change as one of the greatest challenges currently facing international law. As early as 2008, the UN published a report stating that global warming may have implications for human rights. The rise in sea levels may also shift maritime borders and several island states risk losing their entire land. Last but not least, climate change also entails high costs and the question arises as to what extend the main perpetrators of climate change can be fined for these costs. All these issues will ultimately have to be regulated by international law if we want to tackle the climate challenge together.

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International Investment Treaties: Curse or Blessing for the Energy Revolution? – Part I

This article was written for the University of Westminster.

International law on the protection of foreign investment may impose excessive constraints on the freedom of states. But without international treaties, global companies may not invest in foreign countries – think about security, change in political administrations, shift in public perception, etc. This applies especially for the energy industry where contracts are signed for long-term periods. So: Are International Investment Treaties (IITs) a curse or a blessing for the governments and their plans for the energy revolution?

By signing the Paris Agreement at the United Nations Framework Convention on Climate Change (UNFCCC) Conference of the Parties 21 (COP21) in 2015, the majority of states committed themselves to actively combat climate change and to limit global warming to a maximum of 2° Celsius above pre-industrial levels. To achieve this goal, most signatories agreed that renewable, clean energy sources should be promoted while the use of hydrocarbon products ought to be reduced. This impacts energy producers who will have to reshape their business model if they seek to maintain their market position despite the planned energy turnaround. However, not all players seem to be affected equally. While domestic companies have to implement national laws immediately, foreign investors are to a certain extent subject to international laws. The only requirement is that both the host country and the investor’s country of origin signed bilateral or multilateral investment treaties, so-called IITs (international investment treaties). For government and national courts, this is a tough nut to crack, considering that the investments rely on long-term contracts that legitimize current business practices and guarantee security. Hence, the energy transformation can either become a very expensive undertaking or may be implemented with severe delays. This can be very unsatisfactory for states and implies that the international law on the protection of foreign investment imposes excessive constraints on the freedom of states. The most recent developments show that the concern of states is indeed justified; the number of claims from foreign investors has risen steadily during the last decade, the outcome of court cases is uncertain, and the potential awards are exorbitantly high. This essay discusses this proposition and is therefore split into four parts. The first chapter tells the story of bilateral investment treaties (BITs) and multilateral investment treaties (MITs) and illuminates the most important treaty in the energy industry; the Energy Charter Treaty. The second chapter looks at the securities and options for the foreign investor, while the third chapter explains the opportunities of foreign direct investment and the implications of BITs and MITs for the host country. Those two chapters are accompanied by a prominent case study, the case “Vattenfall AB against the Federal Republic of Germany”. The last chapter discusses the essay question and argues that international law indeed imposes constraints on the freedom of states – but that there are a number of arguments why this will not change soon.

International treaties and agreements protecting foreign investors

If companies are to invest for the long term, they need a guarantee that they can actually make their business a success. However, what at first glance sounds elementary quickly turns into a very complex situation, especially if the investment takes place in a foreign country. In that case, the protection and interests of the own country disappear, and one is dependent on the host country, hoping that it pursues the same political, economic and social goals. Question marks may arise quickly when thinking about a change in political leadership or changing environmental conditions. If the risk is perceived as too high, the investor will not be willing to set up business or, if the operation is already ongoing and gets tough, may think about leaving the country. For the host, this implies that the investment and foreign knowledge will either never reach its country or that it will be deducted at unfavourable times. For the company, in contrast, this often comes with an (existential) financial loss. This is where international law steps into the game; for more than a century, countries have been trying to mitigate this threat through mutual agreements.

Historically, the development of international agreements and treaties can be divided into three phases. As Kenneth J. Vandevelde writes in “Brief history of international investment agreements”, published by (Suavant and Sachs, 2009), the first agreements were already in place in the 18th century, for example the bilateral treaties of “Friendship, Commerce and Navigation”, which were applied by the United States to guarantee “special protection” for national companies working in the territory of a host country. Interesting to note; already these first contracts contained a clause for “compensation for expropriation”, which plays a central role in today’s treaties. This first phase, the so-called Colonial Era, was followed by the Postcolonial Era after the Second World War. The General Agreement on Tariffs and Trade (GATT) was established by the Allies in 1947 to liberalize world trade. This shifted the focus of legal frameworks from the previous bilateral agreements to multilateral agreements (Suavant and Sachs, 2009). A new challenge arose in the early 1970s. During the UN General Assembly 1974, socialist and developing countries demanded the right to expropriate foreign companies without having to pay compensation or an appropriate acquisition price. These states were in the majority. Consequently, and in the same year, the Charter of Economic Rights and Duties of States (CERDS) was adopted. The Charter declared that each state has the right “[t]o nationalize, expropriate or transfer ownership of foreign property, in which case appropriate compensation should be paid by the state adopting measures, taking into account its relevant laws and regulations and all circumstances that the state considers pertinent” (United Nations, 1974). This statement contained two key elements; the wording “should be paid” instead of “must be paid” and the fact that national law was responsible for the definition of the compensation rather than an international court (Brower and Tepe, 1975). In order to counter the risk of expropriation, the developed countries decided to conclude further BITs to protect their national companies. Those treaties dealt exclusively with investments and were largely negotiated between a developed and a developing country. Between 1959 and 1989, 386 such agreements were concluded (Ricupero, 2000). The fall of the Soviet Union, global market liberalization and rising powers in Asia signalled a further tipping point with a major impact on BITs. The number of bilateral investment treaties exploded, increasing from less than 400 treaties to over 2800 by the mid-2000s (Suavant and Sachs, 2009). Along with a number of other trade agreements, such as the North American Free Trade Agreement (NAFTA) between Mexico, Canada and the US, agreements for industry-specific topics popped up such as the European Energy Charter (EEC) which was signed in 1991. The EEC, however, was a political declaration only and did not constitute a binding international treaty. Yet, it paved the way for another highly influential treaty; the 1994 Energy Charter Treaty (ECT). As this essay deals with the energy industry, the general focus lies – especially in the following paragraphs – on explaining the ECT as well as outlining the implications this treaty has for its signatories.

The ECT is a multilateral framework which is currently ratified by 52 parties, amongst which the European Union and Euratom. It is worldwide the only multilateral framework covering exclusively the energy sector, was developed in 1994 in Lisbon and entered into legal force in April 1998. One of its main goals was to integrate the energy markets of the former Soviet Union states into the world market. In summary, the Treaty covers four key areas: 1) The protection of foreign investments, based on the extension of national treatment, 2) Non-discriminatory conditions for trade in energy materials, products and energy-related equipment, 3) the resolution of disputes between investors and host states, and 4) the promotion of energy efficiency and attempts to minimise the environmental impact of energy production and use (International Energy Charter, 2019). The framework is set up according to the rules of GATT (today World Trade Organization) in order to cover trade aspects, but it is also responsible for foreign direct investment (FDI) issues.

Under what circumstances an investor may pose a claim is defined in Part III of the ECT, which explains the investment promotion and protection. An investor thereby is defined as a “natural person having the citizenship or nationality of, or is a permanent resident in, a contracting state in accordance with its applicable law, or a company or other organization organized in accordance with the law applicable in that contracting state” (Hobér, 2010). Article 10(1) of the ECT explains the minimum standard of investment protection after the post-investment phase and sets out basic principles.

  • The first principle says: “Such conditions shall include a commitment to accord at all times to investments of investors of other contracting parties fair and equitable treatment” (Energy Charter Treaty, 1994) ,whereby “such conditions” are defined as an environment that encourages and create stable, equitable, favourable and transparent conditions for Investors (Energy Charter Treaty, 1994). Hobér (2010) describes that despite the fact that fair and equitable treatment (FET) are frequently applied in BIT tribunals and NAFTA arbitrations, the exact scope is not clearly defined and may lead to a flexible standard. This challenges both arbitrators and counsels in order to establish a source for good-government conduct – and not being alleged to decide on an individual perception of what is fair and equitable (Hobér, 2010).
  • The second principle says that “investments shall also enjoy the most constant protection and security” (Energy Charter Treaty, 1994) which, again, is not clearly defined. Academic literature argues that, amongst other things, it shall protect the investment against physical attacks.
  • The third principle is the discrimination clause, which is defined by the ECT (1994) as followed: “No contracting party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal. In no case shall such investments be accorded treatment less favourable than that required by international law, including treaty obligations.” This principle sometimes overlaps with the principle of FET.
  • The fourth principle is the so-called umbrella clause which tells each party to “observe any obligations it has entered into with an investor or an investment of an investor of any other contracting party” (Energy Charter Treaty, 1994). This principle refers to pacta sunt servanda which is often applied in international treaties.

One of the most important substantive rules of the ECT is addressed in Article 13; expropriation. The ECT determines that “investments of investors of a contracting party in the area of any other contracting party shall not be nationalized, expropriated or subjected to a measure or measures having an effect equivalent to nationalization or expropriation […]” (Energy Charter Treaty, 1994). If expropriation occurs nonetheless, states are requested to compensate with the fair market value of the investment. Hobér (2010) notes that Article 13 does not differentiate between a “lawful” and “unlawful” expropriation as in a “lawful” case compensation would be seen as a precondition in order to be lawful, whereas in the latter case “compensation is equivalent to damages for the loss suffered by the investor” (Hobér, 2010). In case of a dispute, article 26 provides the arbitration rules for the investor-state dispute settlement (ISDS). Article 26, paragraph 4(a) defines the International Centre for Settlement of Investment Disputes (ICSID) as arbitration court for investor-state disputes, if both the contracting party of the investor as well as the contracting party are members of the ICSID Convention. Paragraph 4(b) claims that the dispute may also be submitted to “a sole arbitrator or ad hoc arbitration tribunal under the 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” (Energy Charter Treaty, 1994). ICSID was established as an entity of the World Bank in 1966 and has become the world’s leading institution devoted to international investment dispute settlement.

In conclusion, this chapter presented the history of foreign investment law and outlined the framework of the ECT in depth. It showed the most important substantive rules which are treated in Article 10 and Article 13, as well as the dispute settlement provision which is defined in Article 26 and 27. A major takeaway is to understand that both BITs and MITs give foreign investors the right to bring claims directly against the host state, which is called investor-state dispute settlement (ISDS). While many ISDS cases are dealt under ICSID rules, it is not a must and there are other rules and institutions which could be applied. Vice-versa, the host state cannot claim its rights against a foreign investor in front of international courts but has to sue an investor at the own national court. The reason for this is that BITs and MITs are signed by countries only and not by the companies, which means that firms are protected by the treaties but are not a party of them. This has recently led to critical voices arguing that the ECT, for instance, does not guarantee an equal treatment but rather supports foreign investors. Critics also point out that only 19 claims were registered between 1998 and 2008, but that the number of claims has risen sharply since 2012, surpassing 110 claims by the end of 2017 (ECT’s dirty secrets, 2019). The next two chapters discuss the implication of the ECT for the signatories of the treaty (countries) and foreign investors under the perspective of climate change and energy transition. The theoretical description will be illustrated with the Vattenfall AB and others v. Federal Republic of Germany II case which started in 2012 and was still pending in April 2019.

Read blog II to learn more about why IITS are essential for foreign investors and what opportunities and threats they may bring for the countries energy transition plans.

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