Arbitration battles that slow Europe’s clean-energy transition

Luxembourg investment funds have used the Energy Charter Treaty (ECT) to challenge changes in renewable energy incentives.

The treaty allows investors to seek compensation through arbitration for regulatory changes affecting profits.

Critics argue that bypassing national courts via supranational panels undermines democracy and rule of law.

Nearly two dozen Luxembourg investment funds joined a flood of legal cases that have been condemned from Brussels to Belem, Brazil, for using a tool also used by fossil fuel companies to block climate action.

As government ministers from around the world arrived at the ongoing United Nations climate talks in Brazil, activists at the UN-administered site of climate negotiations last Friday blasted the role that multinational treaties protecting investments have had in slowing the fossil fuels phaseout. 

“There is no longer plausible deniability that regulation was unexpected or unanticipated – investors can no longer say that climate action frustrates legitimate expectations,” Nikki Reisch, climate and energy programme director at the Center for International Environmental Law, said at the COP conference.

The multinational Energy Charter Treaty (ECT), advocates say, gives investors ready access to arbitration rather than courts to seek justice. The treaty allows investors in polluting and renewable energy projects alike to seek compensation from countries that change rules that hurt their profitability.

Arbitration is a common feature of hundreds of bilateral investment treaties and free trade agreements because the privately selected panels of judges are seen as being untouched by the political influences that could shape court verdicts.

Fossil fuel and mining industries have won more than $100 billion (€86 billion) in awards through all investor-state dispute settlement agreements, a UN Human Rights Council special rapporteur found in 2023.

Two dozen ECT arbitration cases have been brought by Luxembourg investors since 2013 against Spain, but also governments in Italy, Romania and the Czech Republic, according to data compiled by the United Nations Conference on Trade and Development, the UN’s leading body helping developing countries compete in the global economy. Thirteen out of the 17 cases that have reached a conclusion favoured the investors.

The Luxembourg funds include Cube Infrastructure, which won a €33 million arbitration award, and Canepa, whose case remains pending at the International Centre for Settlement of Investment Disputes, according to UNCTAD. Cube declined comment about pursuing arbitration. Canepa, a single-family office based in London, did not respond to a request for comment.

European Commission push-back

“Allowing foreign investors to circumvent national courts and sue states directly before unaccountable, supranational arbitration panels, when they claim public policy decisions adversely affect their interests, is fundamentally at odds with democracy and the rule of law,” Reisch said before the event in Brazil last Friday.

Participants sit in one of the corridors during the COP30 UN Climate Change Conference in Belem, Brazil, on Tuesday. © Photo credit: AFP

“Allowing foreign investors to circumvent national courts and sue states directly before unaccountable, supranational arbitration panels, when they claim public policy decisions adversely affect their interests, is fundamentally at odds with democracy and the rule of law,” Reisch said before the event in Brazil last Friday.

The pushback against the Energy Charter Treaty was highlighted earlier this year when the European Commission forbade EU member states from compensating Antin Infrastructure Services Luxembourg, now Infrastructure Services Luxembourg, €101 million plus interest that it won in a 2018 arbitration decision.

“The European Commission has concluded that an arbitration award, in which Spain is ordered to pay compensation to Antin for the modification of a renewable electricity support measure, constitutes illegal state aid,” the commission said in March.  

The Luxembourg-based investment fund sought the compensation after Madrid in 2013 reduced subsidies for investors in solar energy arrays that the country had adopted six years earlier.

Arbitration disputes brought by an EU investor against a member country violate fundamental rules of the bloc, including that the Luxembourg-based European Court of Justice has ultimate legal jurisdiction, the commission said. The ECJ reached the same conclusion in 2018 and 2021 rulings.

Infrastructure Services Luxembourg did not respond to the Luxembourg Times when asked about the motivations behind the fund pursuing arbitration against Spain.

Two people were listed in records as beneficial owners of the fund and listed as managers in the annual accounts filed in Luxembourg in July. Both are long-time employees of fund administrator Vistra, which declined comment.

One of the fund’s listed managers, Pieter van Nugteren, said he no longer held that role and could not comment. No documents filed in Luxembourg’s Business Register record a management change, and van Nugteren did not respond when asked about that discrepancy or who would have replaced him.

Energy charter exit

The EU this year joined Luxembourg in exiting the ECT. The Grand Duchy last year followed Germany, France and Poland out of the pact. Germany was sued over its decision to end nuclear power generation. More member states and the UK also quit. However, the 50-plus-nation treaty allows injured investors to bring cases for another 20 years.

“As long as these investment treaties exist and they remain in force, states that host foreign investment risk frustrating certain investors. And these investors, if they lose control of their investments as a result of these regulatory changes – if it affects the livelihood or the substance of their investments – can of course bring a claim before an international arbitration tribunal and say, ‘good that you’ve done this for your people, but this does not change the fact that I cannot proceed with my investment that I brought into this country’,” said Güneş Ünüvar, a postdoctoral researcher at the Centre for European Law at the University of Luxembourg who studies international economic law.

There are thousands of investment treaties – mostly between pairs of countries making promises to each other – all with the aim of promoting and protecting investments, he said.

One other example is the 1989 treaty between the former Soviet Union, now Russia, on one hand and Luxembourg and Belgium on the other. Russian billionaire Mikhail Fridman’s is using that agreement as the basis for his $16 billion (€13.8 billion) arbitration claim after Luxembourg’s government froze Fridman’s assets in the Grand Duchy following Russia’s full-scale invasion of Ukraine.

 “So this is the big issue that investment arbitration, investment law people like myself are dealing with – how do we balance economic private interests of investors and public interests, not only of the state itself but of the people?” Ünüvar said.