OPINION OF THE ECONOMIC AND SOCIAL COMMITTEE on the Energy Charter Treaty
Date: 1995-10-26
Institutions: European Economic and Social Committee
Subjects: Russia, energy policy, international charter, international cooperation, ratification of an agreement













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51995IE1178

OPINION OF THE ECONOMIC AND SOCIAL COMMITTEE on the Energy Charter Treaty  


Official Journal C 018 , 22/01/1996 P. 0146 





Opinion on the Energy  Charter Treaty(96/C 18/26)On 30  March 1995, the Economic and Social Committee, acting  under Rule 23(3) of its Rules of Procedure, decided to draw up an Opinion on the Energy Charter  Treaty. The Section for Energy, Nuclear Questions and Research, which was responsible for preparing the  Committee's work on the subject, adopted its Opinion on 26  September 1995. The Rapporteur was Mr  Lyons. At its 329th Plenary Session (meeting of 26  October 1995), the Economic and Social Committee  adopted the following Opinion by a unanimous vote. 1. Background1.1. It was in  July 1991 that the Committee adopted an Opinion on a draft  of the Energy Charter (). The Charter itself was formally adopted at the Hague in  December 1991.  While making proposals for improving some of the provisions of the draft text available to the  Committee at the time, the Committee was quite clear in its support of the concept of the Charter  and the main principles on which it was constructed. 1.2. The Committee was delighted that the Charter of 1991 was, only three years later, turned into  a Treaty and signed by the European Communities and by 49  countries (). This has to be one of the  Union's major international successes. The Committee is pleased, therefore, to take this  opportunity to comment on the progress which has been made, and on some significant questions to  which this progress has given rise. 1.3. The Energy Charter Treaty1.3.1. The Treaty comprises some 50 Articles. They create a legal  framework in which to promote long term cooperation in the energy field by means of provisions on  investment, trade, transit, sovereignty over resources, environment, competition, taxation and  access to capital and technology. The key features are as follows: 1.3.2. Existing foreign investments must be accorded treatment no less favourable than that  accorded to domestic investors ('national treatment') and that accorded to investors of any other  contracting party ('most favoured nation treatment'). Provisions also cover the employment of key  personnel, the transfer of capital and returns, compensation for expropriation and losses caused by  war and civil disturbance. 1.3.3. For trade in energy products contracting parties who are not members of GATT will enjoy GATT  rights and also undertake GATT obligations. (However, the GATT provisions on binding tariffs are  unworkable in the energy sector alone. Instead there is a 'best endeavours' commitment which calls  upon contracting parties not to raise tariffs above the level notified when signing the  Treaty.)1.3.4. Energy must be allowed to move unhindered across borders. The Treaty requires  contracting parties not to impede the establishment of new capacity if transit in existing capacity  cannot be achieved on commercial terms. It also provides for transit to continue uninterrupted in  the event of a dispute until a process of conciliation has been completed. 1.3.5. Each party is required to apply and enforce competition law. 1.3.6. As far as the environment is concerned, the Treaty embodies the principle of 'the polluter  pays' and promotes the objective of market oriented pricing which fully reflects environmental  costs and benefits. 1.3.7. Each party has sovereignty over its energy resources and also the right to decide the  geographical areas within its area to be made available for exploration and development. 1.3.8. The Treaty creates its own dispute settlement machinery for disputes over all provisions  except those on competition and environment. In a dispute between an investor and a State the  investor has the right to choose to submit it to international arbitration. 1.3.9. Direct taxes will continue to be governed by each country's domestic legislation, together  with the provision of any relevant bilateral tax treaties. 2. Comment2.1. Ratification2.1.1. Only two countries (Georgia and Latvia) have ratified the  Treaty so far. It is expected that the minimum requirement of 30 ratifications will be achieved  during the first half of 1996. 2.1.2. Some concern had earlier been expressed that Russia may not ratify the Treaty, but that was  eased when in  June the Duma (the Lower House of the Russian Parliament) approved legislation  allowing foreign investment in the Russian oil industry. However, certified copies of the Energy Charter Treaty have only just been officially forwarded to  the Russian government. While this should enable the Parliament to begin its debate on ratification  shortly, there is now considerable doubt as to whether the process will be completed before the  term of office of the existing deputies expires at the end of the year. If that is what happens,  Russian ratification will certainly be delayed, and could not be assured. 2.1.2.1. In 1992 the former Soviet Union provided the European Union with nearly 16% of its natural  gas, 11% of its crude oil, and 3% of its solid fuel supplies. In total, the Union receives around  10% of its energy supplies from the former USSR. Very large percentages of energy are also provided  to the Association Agreement countries of central and eastern Europe, a number of which are due to  become members of the Union in a few years' time. 2.1.2.2. For Russia, maintaining and increasing its energy exports and income is possible the  single most important factor in stabilizing the Russian economy. The export of fuels and raw  materials currently provides 66% of the country's foreign earnings. The real challenge Russia faces  may be gleaned from a recent authoritative estimate that an investment of $50 billion will be  needed just to stabilize Russian oil production at the current level of 6 million barrels a day,  while twice that sum would be required if production were to be increased to 1988 levels. 2.1.2.3. Thus, Russian ratification is not only vital to the ultimate success of the Treaty, it  must be of major importance to Russia's own efforts to modernize its economy and establish itself  as a stable democracy. The European Union must make every effort open to it to assist the process  of ratification, since the outcome cannot be taken as certain. 2.1.2.4. It is hopeful, in the above context, that Russia has recently signed up to play a full  role on NATO's Partnership for Peace programme, and that pressure within NATO to extend its  security guarantees as far east as Russia's western border has apparently lessened. A serious  disruption of relations with Russia over security matters would almost certainly jeopardize the  prospects of Russian ratification of the Treaty. It is essential that this central consideration is  taken fully into account by those responsible for handling diplomatic and intergovernmental  relations between Russia on the one hand and the European Union and the United States on the  other. 2.1.3. The situation with the United States is quite different. The United States did not and will  not sign the Treaty, so the question of ratification does not arise. 2.1.3.1. Various reasons are advanced for the United States' position. One is that acceptance of  the Treaty would raise the question of Federal versus States' rights in the US, when this is  currently a particularly sensitive issue. 2.1.3.2. Another is that signature would contravene the still existing legislation that Most  Favoured Nation (MFN) Treatment cannot be granted to countries which are former members of the  Soviet Union (introduced in response to Soviet discrimination against Jews). It is true that  eventual signature by the United States is not ruled out; but it is not, on the other hand,  expected to arise as a political possibility for some years to come. 2.1.4. Apart from the United States only Canada (among the countries which signed the original  Charter) had not signed by the 16  June deadline. In all, 49  countries plus the EU had signed the  Treaty by that date. The signatories included Norway, an important energy-producing country whose  willingness to sign had been in some doubt before hand. In Canada's case, the Federal Government  strongly favoured signing the Treaty, but not all Canada's Provincial Governments could sign it  before the due deadline. It seems likely that the Canadian Government will in due course apply  formally for accession to the Treaty, which will require the unanimous consent of the existing 50  signatories. 2.1.5. The area of the Middle East and North Africa is, of course, also of great importance to the  EU, and not least in the energy context. However, the countries concerned were never signatories to  the original Energy Charter, and it is not considered that any of them is likely to seek accession  to the Treaty in the near future. It is encouraging, nevertheless, that a dialogue has now been  established between these countries and the EU about the desirability of establishing closer and  more cooperative relationships in a wide range of political, economic and social areas of activity,  including the area of energy, in which there are shared interests. 2.1.6. The Committee is particularly pleased that at the important conference for European and  Mediterranean countries being held this year in Barcelona the EU is inviting the Mediterranean  countries to foster an association between themselves and the Energy Charter Treaty. The European  Union must press ahead with vigour and imagination in seeking the active practical identification  of these countries with the aims and objects of the Energy Charter Treaty. 2.2. Protocols and Declarations2.2.1. Article  33 of the Treaty authorizes the negotiation of a  number of Protocols or Declarations in order to pursue the objectives and principles of the  Charter. Article  1(13)(a) states that Protocols can be entered into in order 'to complement,  supplement, extend or amplify the provisions of this Treaty...' and that they can also be adopted  to cover '... areas of cooperation pursuant to Title III of the Charter'. 2.2.2. The reference to Title III of the Charter is significant since Title III listed a number of  topics which might be considered for specific agreement (under, for example, the Protocol  procedure) at a later date. 2.2.3. So far, one Protocol has been agreed. This is the Protocol on Energy Efficiency and Related  Environmental Aspects, which was signed on the same date as the Treaty (i.e. 17  December 1994) and  will come into operation when the Treaty is formally ratified sometime next year. 2.2.4. Work on a second Protocol, dealing with the subject of the peaceful purposes of nuclear  energy, was started in 1991 but this has ended up as a proposed Declaration (see 2.2.5 below). Work  on another Protocol, on the subject of hydrocarbons, was also started, but subsequently suspended  indefinitely. 2.2.5. The proposed Declaration on Nuclear Energy was begun in 1991 with the intention to draw up a  legally binding Protocol. Work on this was interrupted in 1992 when the International Atomic Energy  Authority (IAEA) decided to draft an international convention on nuclear reactor safety. The IAEA  completed this task successfully in the summer of 1994. This raised the question of whether the  proposed Charter Treaty Protocol on nuclear energy should still be made legally binding. There was  considerable debate about this, and the matter was only finally resolved at a meeting in  May this  year when it was decided to drop the concept of a Protocol on nuclear energy and embody the work  that had been done in a non-legally binding Declaration. However, four countries (Russia, Ukraine,  Belarus and Armenia) opposed this. They favoured a wider content, and wished to retain legal  enforceability. These differences were considered but not resolved at the  September Charter  Conference, and will be addressed again in November. 2.2.5.1. While, therefore, the IAEA Nuclear Safety Convention is legally binding and the intended  Declaration on nuclear energy is not, the latter is a good deal wider in scope than the IAEA  Convention. The Convention applies only to land-based civil nuclear power plant (though including  storage). The Declaration covers those areas of activity but in addition it deals with the  non-proliferation of nuclear weapons and the safeguards of nuclear material related to this; with  the physical protection of nuclear material; with civil liability for nuclear damage on an  international scale, and with the safe transport of radioactive materials and waste. 2.2.5.2. It needs to be borne in mind, of course, that even the language used in the legally  binding Nuclear Safety Convention is broadly stated: that is to say, there is much room for  detailed interpretation as well as for differences of approach as to timing as between one  signatory and another. It will be enormously difficult to enforce any of it in the event of  non-compliance and, to take a practical view, it could hardly be otherwise. 2.2.5.3. There is another difference between the Convention and the Declaration, and that is in the  provision in the Convention that the implementation of its requirements will be subject to a three  yearly review. In this way the broad legal basis of the Convention will be complemented by peer  pressure. There is no provision in the Declaration for any review of the way (or indeed whether)  its requirements will be carried out by its signatories. 2.2.5.4. It is perhaps unsatisfactory that there are now two international agreements dealing with  nuclear safety - one, the narrower in scope, having a legal underpinning and subject to regular  peer review, and the other considerably wider in scope but without legal underpinning and not  subject to review. It may be, however, that it was thought it would be even more unsatisfactory to  have two international agreements on nuclear safety, partly covering the same territory, but not in  exactly the same way, and both legally binding, and that was the reason why the originally  envisaged protocol on nuclear energy ended up as a Declaration. 2.2.5.5. A possible resolution of the difference between the two agreements over the course of time  might well be to widen the scope of the IAEA Convention to cover the full range of issues covered  by the nuclear energy Declaration. It will be surprising if international opinion does not press  for such an eventual solution once it understands the implications of what has happened. In the  Committee's view there has to be one set of minimum international safety standards for civil  nuclear energy, and the IAEA has pointed the way forward. 2.3. The extension of the Treaty2.3.1. Article  10 of the Treaty deals extensively with the  protection of existing investments. New investments (or, to use the Treaty's own wording 'the  making of investments') are not covered in the same way. It is intended that new investments should  be treated in the same way as existing investments but the Treaty [Articles 10(2) and 10(3)]  accepts that this can at present only be done on the basis of exhortation to use 'best  endeavours'. 2.3.2. It is provided in Article  10(4) that a supplementary Treaty will be drawn up to put all  investments on the same basis 'with a view to concluding it by 1  January 1998', and work on this  has begun. The Committee fully supports this objective. It is vital that a proper legal framework  for new investments is put in place as soon as possible, and no effort should be spared to bring  this about. 2.3.3. One question still to be settled is whether the United States should participate in the  Supplementary Treaty negotiations. The United States was granted observer status, with a right to  take part in the negotiations, at the first meeting of the Working Group on new investments.  Unfortunately, the United States has informed the Conference that budgetary constraints now prevent  it from continuing with its financial contribution. The possibility of granting the United States  observer status, but without a right to take part in the negotiations, is now under discussion. The  Committee urges that a compromise should be sought, provided the United States contributes to its  own costs. 2.3.4. Privatization is seen as possibly a difficult issue to resolve in respect of the 'making of  investments'. Governments do not necessarily see the need to open up publicly owned assets to  foreign investors at the time of privatization. Some have developed the concept of the 'Golden  Share' to maintain control of a privatized organization. 2.3.5. It is foreseen as inevitable that there will be exceptions to the principle of 'equal  treatment' in the making of investments in the intended Supplementary Treaty. Nevertheless, there  is no doubting the significance of a broadly satisfactory conclusion being reached about future  investment rights since, if it is not, one of the primary purposes of the Treaty will be  undermined. 2.3.6. One matter missing altogether from the Treaty is any provision dealing with industrial  relations. The importance of good industrial relations in ensuring the safe production of nuclear  energy is self-evident. But good relations between the social partners involved in all the  enterprises and activities to which the Treaty applies are just as necessary. The Committee  recommends strongly that a suitable reference to good established practice (as e.g. provided by the  text of the 'OECD Guidelines for Multinational Enterprises', published again only last year),  should be included in the Supplementary Treaty being drawn up for incorporation in the main Treaty  in 1998. 2.4. Resources2.4.1. The expenditure of the Treaty Secretariat in 1994 was MECU 2,3. The Committee  is aware that there was a proposal to expand this expenditure to MECU 4 once the Treaty was signed  at the end of 1994. This proposal was based on the view that once there was a Treaty to administer  there would need to be some increase in the staff of the secretariat. However, the proposal was  turned down. It was decided instead that the 1995 budget should be MECU 2,7 and that the staff  numbers should remain virtually unchanged. 2.4.2. The Charter Conference decided at its September meeting that the Secretariat would be  located as an independent entity in Brussels. It also approved the organization of the Secretariat  and its staffing as was proposed. The Conference was also informed of a letter from its  Secretary-General, Mr Clive Jones, stating that he would not be seeking re-appointment when his  term of office expires at the end of the year. 2.4.3. The Committee regards it as essential that the adequacy of the structure, staffing and  resources of the Secretariat is reviewed at the time the ratification process is approaching its  conclusion. 3. Summary3.1. The Committee regards the Energy Charter Treaty as potentially one of the  European Union's major international successes. 3.2. It is essential to its prospects of success that Russia should ratify the Treaty, and that  this factor is taken fully into account in the consideration given to extending NATO's security  responsibilities eastwards. Consideration now has to be given to the implications of ratification  being put back for decision by the new Duma next year. 3.3. The Union must press ahead vigorously in its efforts to develop cooperative relationships in  the energy field with the Middle Eastern and North African countries. 3.4. There has to be one set of minimum internationally agreed safety standards for nuclear energy.  These have to be established through the IAEA's legally binding Convention, but this should be  expanded to cover the full range of issues embraced in the Declaration shortly to be adopted by the  Energy Charter Treaty Conference. 3.5. It is desirable that the United States should at least have observer status in the  negotiations intended to draft a supplementary Treaty. An accommodation, as proposed, should be  reached if possible. 3.6. A suitable reference should be incorporated in the Supplementary Treaty to the need for good  industrial relations practices to be followed in the enterprises and activities to which the Treaty  applies. 3.7. The adequacy of the structure, staffing and resources of the Secretariat needs to be reviewed  at the time that the ratification process is approaching its conclusion. Done at Brussels, 26  October 1995. The Presidentof the Economic and Social CommitteeCarlos FERRER () OJ No C  269, 14. 10. 1991, p. 79.  () OJ No L 380, 31. 12. 1994.