The Italian government has recently declared its withdrawal from the Energy Charter Treaty (“ECT”). The ECT is a multilateral treaty between 53 countries across the world. It aims at establishing a legal framework to promote cross-border cooperation and investment in the energy sector. The Treaty contains, amongst others, provisions regarding the trade with and the transit of energy between the member states, the protection of foreign investments and the settlement of disputes.

 

Officially, the Italian government justifies its decision to quit the ECT with cutting the costs of its membership in international organizations due to the most recent budget restrictions (withdrawing from the ECT will save Italy around € 370.000 annually). However, it seems more likely that the government fears much larger bills. Under the ECT, solar power investors might sue the Italian state for enacting in 2014 the so-called “Spalma incentive” decree (the “Decree”).

 

In that Decree, the Italian government decided, among other things, to reduce the subsidies to photovoltaic plants exceeding 200 KW. The government also decided to apply the reduction with retroactive respect, i.e. to cut subsidies for already existing projects. Consequently, these subsidy cuts affect about 8,600 investors who have already planned and relied on their investments.

 

According to Italian newspapers, the solar energy industry has notified the government of numerous planned lawsuits in about 1,000 cases. They object to the legitimacy of the Decree and especially challenge its retroactive effect. The former President of the Italian Constitutional Court, Professor Valerio Onida, supports their view. Following his evaluation, the Decree not only violates the Italian Constitution (as it breaches the fundamental principle of non-retroactivity of laws) but also Italy’s duties under the ECT with respect to Articles 10 and 13. Under these Articles, Italy shall not expropriate foreign investors and shall respect the principles of fair and equitable treatment of investors as well as full protection and security of the investments.

 

From a legal perspective, Italy has every right to withdraw from the ECT. Article 47 allows each member state to withdraw from the Treaty at any time after five years of membership. Any withdrawal will become effective after a period of one year – meaning in Italy’s case at the beginning of 2016. Nevertheless, quitting the ECT will not protect Italy from the looming claims because the Treaty contains a “sunset provision” in Article 47(3). Regarding investments made before the withdrawal, foreign investors may use the dispute resolution procedures provided for in the Treaty for a period of another 20 years from the date when the withdrawal takes effect – and until 2036, solar energy investors affected by the Decree will probably have enough time to consider legal actions.

 

Italy’s decision to withdraw from the Energy Charter Treaty should also be seen in the wider context of a drive among some EU Member States to reign back on commitments allowing investor-state dispute resolution procedures (ISDS), such as Article 26 of the ECT, under which investors have the opportunity to bring arbitration claims against states directly, rather than having to seek redress in domestic courts. This resistance to ISDS began over a decade ago, when arguments arose between the EU Commission and newly acceded Member States concerning the compatibility of ISDS with the EU’s internal judicial mechanisms. Since then, states such as Ecuador and Venezuela have expressed their opposition to ISDS by withdrawing from the International Centre for Settlement of Investment Disputes (ICSID), which is a key institution in the ISDS framework. More recently, the debate has taken a new and more high profile turn, with strong opposition among EU Member States and civil society to the inclusion of ISDS in the forthcoming Trans-Atlantic Trade and Investment Partnership (TTIP). Whether Italy’s decision to withdraw from the ECT is a harbinger for a larger-scale retreat by European States from ISDS remains to be seen.