European energy groups seek €4bn damages over fossil fuel projects

Five energy groups are suing four European governments for almost €4bn over the stymying of coal, oil and gas projects as climate change concerns rise, using a secretive process based on an international energy treaty.

Energy and exploration companies including Germany’s RWE and Uniper and the UK’s Rockhopper have launched cases against the Netherlands, Italy, Poland and Slovenia under the Energy Charter Treaty (ECT).

The active cases revolve around the decisions by the relevant governments to either mandate the closure of coal power plants, prevent the development of specific projects, or require an environmental impact assessment.

RWE said it endorsed “the importance of the energy transition” but “does not consider it right” that the Dutch coal phaseout “does not provide for compensation for the disruption to the company’s property”.

Uniper said its “first concern” was “to obtain legal clarity” about having to close its coal power plant early without adequate compensation. Rockhopper declined to comment.

The ECT, crafted after the cold war and signed by more than 50 countries, was intended to protect international energy investments by foreign companies or individuals. This protection extends to fossil fuel projects and climate change experts say it discourages governments from making policies to wind down the industries behind global warming owing to the risk of legal action.

The various companies are seeking an estimated €3.7bn in compensation in the five cases, according to documents reviewed by the Financial Times. A sixth case, for an unknown sum, was brought against Romania by the Austria-based Petrochemical Holding over a petroleum development contract.

Petrochemical Holding legal counsel Andrew Savage, a partner at global law firm McDermott Will & Emery, warned Romania’s “stated desire to move away from fossil fuels . . . may lead to further claims”.

Climate experts rang the alarm about the treaty becoming an obstacle to curbing projects that lead to global warming in an open letter more than two years ago.

Dmitri Evseev, a partner at law firm Arnold & Porter, agreed that the legal action “may have a chilling effect, undoubtedly, on all kinds of policy change”. “Investor-state arbitration is the biggest stick that investors have,” he said.

The German finance ministry warned the chancellor’s office in 2019 that using regulation to phase out coal would create an “increased risk of litigation, especially international litigation based on the ECT”, according to an email seen by the FT.

When the Dutch minister and state-secretary of economic affairs and climate were asked last year about accelerating the decommissioning of coal and gas fired power stations, they said “further intervention in the coal sector entails major legal risks in the context of pending claims”.

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One of the lawyers representing Italy in the case brought by Rockhopper — after the state’s refusal to permit the development of the Ombrina Mare oilfield in the Adriatic Sea — said a defeat would be “extremely serious”, as it would give other companies “the desire to emulate Rockhopper”.

The active cases add to mounting global climate litigation involving both public and private sectors. But ECT cases are often shrouded in secrecy, with documents rarely made public. The secretariat website notes that “some awards (and even the existence of some proceedings) remain confidential”.

The cost of bringing or defending a case related to the treaty can run into the millions, with some complaints financed by specialist litigation funders in return for a share of any damages. The compensation sought by investors can include estimated future lost profits.

A 2021 report by the International Institute for Sustainable Development found that “the majority of known fossil fuel [investor-state dispute] cases are decided in favour of investors”.

Talks to “modernise” the treaty are under way. The European Commission has submitted a proposal that would see protections for fossil fuel investments phased out, which so far has been rejected by other signatory countries.

EU member states that remain reliant on fossil fuels, including Poland, are pushing the commission to leave the treaty if the debate is not resolved. “The EU needs to have a set of well-prepared options for a possible EU exit from the ECT,” wrote Poland’s minister for climate and environment, Michał Kurtyka, in a letter seen by the FT and sent to the EU’s climate policy chief Frans Timmermans last year.

However, countries that withdraw from the treaty remain bound by it for 20 years under the agreement’s so-called “sunset clause”.

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