The writer is policy advisor at the International Institute for Sustainable Development.

The UK’s Labour government came to office last year pledging to become a clean-energy superpower. Since then, it has upped its ambitions to cut national greenhouse emissions, banned the issuance of new coal licences and started consulting on how to wind down North Sea drilling. 

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While laudable, these goals face a formidable obstacle: legacy liabilities under the Energy Charter Treaty (ECT). These risks are amplified by the investor-state dispute settlement (ISDS) system, through which ECT disputes are resolved, which is drawing growing criticism for its bias in favour of foreign investors, unpredictability, and some arbitrators’ alleged conflicts of interest.

But the UK has a potential solution at hand — it involves striking an agreement with the EU that could also help bridge the post-Brexit divide. 

A formidable obstacle

Since entering into force in 1998, the ECT has generated at least 54 claims against governments around the world regarding fossil fuel investments. These have challenged, inter alia, state decisions to phase out coal-fired power generation, deny coal mining concessions, halt offshore oil drilling and tighten environmental rules for fracking. 

The damages that states have been ordered to pay when investors prevail are high and rapidly growing. Research by the International Institute for Sustainable Development shows that tribunals for fossil fuel disputes under investment treaties (including the ECT) are ordering states to pay, on average, $600m

Recognising this threat, the previous UK government joined the EU and other signatories in withdrawing from the ECT in 2024.

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But this isn’t the end of the story. The ECT’s so-called sunset clause protects existing investments in these countries for another 20 years. Such powerful legal privileges in the hands of fossil fuel investors for the next two decades is fundamentally at odds with the UK’s government’s climate goals. 

The EU and its members have already moved to reduce its ECT’s legacy risks by declaring last June that the treaty does not allow for the arbitration of intra-EU disputes. Recent arbitral decisions rejecting such ECT claims are encouraging signs that this move has been successful. For the UK to deliver on its climate commitments, its government must secure a similar agreement with the EU, to carve out their bilateral investment relations from the ECT’s sunset clause. 

Two birds, one stone

Striking an agreement that neutralises the ECT for UK–EU investments would help the Labour government pursue its climate change agenda. The UK’s exposure to the risk of being sued under the ECT’s sunset clause is laid by it having more than 90 fossil power plants, and more than 100 upstream oil and gas assets, either owned or operated by entities based in other ECT countries. 

Given EU firms have pledged $108bn worth of fossil fuel investments in the UK over the past two decades, according to fDi Markets estimates, such a deal would help reduce the UK’s exposure to fossil fuel ISDSs. It would also expand necessary policy space for delivering on its pledges to become a green energy superpower and climate leader.

This could also help foster closer ties with the EU. For their part, UK companies have pledged $10.3bn towards EU fossil fuel projects since 2003, according to fDi Markets. A deal neutralising the sunset clause would protect the EU from claims arising from these investments — a situation it knows well through the UK’s Rockhopper successfully suing Italy’s government for £210m in 2022 for an offshore oil drilling ban. 

There are signs that these prospective benefits are gaining traction in Brussels. Last November, the European Economic and Social Committee, an EU advisory body, called on the European Commission to negotiate such an agreement with the UK (and other countries). That same month, European Commission executive vice president Maroš Šefčovič also showed interest in the idea of such an agreement.

The UK’s enthusiasm may be tempered by the fact it has not to-date been sued under the ECT. But the Labour government’s ambitious green agenda makes it more vulnerable to investor lawsuits than ever.

Neutralising the ECT sunset clause would also be a step towards the deeper ‘strategic partnership’ pledged by UK prime minister Keir Starmer and Commission president Ursula von der Leyen. The time is now for them to rule out ECT claims between their investors and governments.