A groundbreaking 2021 judicial decision ordering Shell PLC (Shell) to take specific action to reduce its carbon emissions has today been overturned in the Netherlands.
Shell successfully appealed an order from the Hague District Court which required the company to reduce its CO2 emissions by 45% by 2030 relative to 2019 levels. The reduction in emissions as ordered included Shell's Scope 3 emissions (i.e. those emissions not generated by Shell directly, but by users of products sold by Shell such as oil and gas).
The Hague Court of Appeal (the Court) refused the claims of the Dutch environmental activist group, Milieudefensie and others, quashing the contested order.
The Court acknowledged that although Shell did have a special responsibility to cut emissions, this could not be achieved by the imposition of a specific reduction target. The decision will represent a significant blow to climate activists seeking to challenge and influence corporate behaviour in relation to climate change through the courts.
The first instance decision in the Hague District Court was seen as a watershed moment in climate litigation against businesses, not only due to the nature of the order, but also the wide application of non-binding international standards and state-based goals when considering Shell's duties.
Although the decision to overturn the order compelling specific measures on the part of a global fossil fuel company is the foremost outcome, the Court repeatedly acknowledged that there is a responsibility on companies to tackle climate change in the absence of formal state-backed regulations in line with international regulations and soft law. Obligations arising from existing regulations do not preclude a duty of care on the part of individual companies to reduce their CO2 emissions that go beyond the scope of such state regulations.
Having analysed the appeal, we set out below some of the key outcomes below.
Take away 1: Duty on private companies to combat climate change
Elements of this judgment will be welcomed by climate activists. At first instance, Shell was found to have breached the Dutch 'social standard of care', an unwritten standard of care relating to generally accepted social conduct.
The Court identified recent judgments and decisions from across the world, noting that it is now widely recognised that states have an obligation to protect their citizens from the adverse effects of climate change. The 2019 decision in Urgenda, and the recent European Court of Human Rights decision in Verein KlimaSeniorinnen Schweiz were highlighted as key examples.
The Court then considered whether these same fundamental rights could apply to private relationships between citizens and private companies. Addressing the UN Guiding Principles on Business and Human Rights, OECD Guidelines on Responsible Business Conduct and other soft law instruments, the Court acknowledged that, although they are primarily directed at states, "they can have an impact on private law relationships by giving substance to open standards, such as the social standard of care" (Paragraph 7.24).
The Court explicitly stated that preventing climate change does not lie exclusively with states, rather everyone has a responsibility. Particular responsibility must lie with those companies "whose products have contributed to the creation of the climate problem" (Paragraph 7.26). These companies have "have an obligation to limit CO2 emissions in order to counter dangerous climate change, even if this obligation is not explicitly laid down in (public law) regulations of the countries in which the company operates. Companies like Shell thus have their own responsibility in achieving the targets of the Paris Agreement" (Paragraph 7.27).
In respect of the future supply of fossil fuels and how this impacts the social standard of care, the Court stated it was "reasonable to expect oil and gas companies to take into account the negative consequences of further expansion of the supply of fossil fuels for the energy transition also when investing in the production of fossil fuels" (Paragraph 7.62).
Take away 2: No reduction orders in respect of Scope 1, 2 and 3 emissions
At first instance, it was ordered that "Shell… limit or cause to be limited the aggregate annual volume of all CO2 emissions into the atmosphere (scope 1, 2 and 3) associated with the business activities and sold energy-carrying products of the Shell Group to such an extent that this volume will have reduced by at least net 45% at year-end 2030, relative to the 2019 level."
By way of reminder, greenhouse gas emissions are categorised as follows:
- Scope 1: emissions from sources that Shell owns or controls directly.
- Scope 2: emissions that Shell causes indirectly from the energy it purchases and uses, such as electricity.
- Scope 3: emissions neither produced by Shell, nor the result of activities from assets owned or controlled by them, but those caused by those in Shell's value chain. This would include emissions generated by users of products sold by Shell, such as oil and gas.
As part of their appeal in respect of Scope 1 and 2 emissions, Shell argued that the claims for a 45% reduction as ordered could not succeed because there was no risk that Shell would not comply with it. Milieudefensie acknowledged that Shell's current targets for reduction of Scope 1 and 2 emissions exceeded the reduction sought but argued that the order was necessary as Shell had adjusted its reduction targets previously.
The Court found that the "granting of an order aimed at preventing a future violation of standards requires the existence of a threatening violation of a legal obligation" (paragraph 7.64). There was no such threatened violation. Shell had committed to a target in documents, and largely achieved the target to date. The fact that Shell had previously watered down targets could not justify the reduction obligation as sought in respect of Scope 1 and 2 emissions. Therefore, the reduction order could not be granted.
On Scope 3 emissions, the Court noted that Shell "must make an appropriate contribution, but that existing climate legislation does not provide for a concrete reduction rate for individual companies or industries" (Paragraph 7.67).
Milieudefensie argued that companies in the energy sector, such as Shell, should have to achieve a 45% reduction at the very least. The Court recognised that companies such as Shell did have a 'special responsibility'. However, Shell should not be held to the average global reduction rate of 45%. There are different reduction pathways for different sectors in different countries, and the Court addressed the possibility that "an increase in Shell’s scope 3 emissions in the shorter term could, on balance, lead to globally lower emissions" (Paragraph 7.79).
There was no unequivocal conclusions or sufficient evidence available to "turn an average global reduction standard into a general, binding standard for Shell" (Paragraph 7.80), nor was it possible to apply a sectoral standard for oil and gas companies to reduce their emissions by 2030.
The Court also held that a reduction obligation on one company may not have an overall positive effect in reducing emission. Shell submitted that it could meet the proposed Scope 3 obligations by partially ceasing trade in third-party fossil fuels. However, this would not lead a reduction in CO2 emissions as Shell would simply be removed from the value chain, to be replaced by another company. The Court stated that "There may be a causal relationship between a production limitation and emission reduction… but Milieudefensie et al. have failed to put forward sufficient grounds to assume that in this case a causal relationship (also) exists between a sales limitation and emission reduction" (Paragraph 7.106).
The Court concluded that "Shell cannot be bound by a 45% reduction standard (or any other percentage) agreed by climate science because this percentage does not apply to every country and every business sector individually" (Paragraph 7.111). Therefore, the reduction order against Shell in respect of Scope 3 emissions could not be granted.
Finally, it is of note that the Court held that Milieudefensie did not have sufficient legal standing to bring the claim for a reduction of Scope 3 emissions. This follows from the conclusion that by removing Shell from the value chain, this would not lead to a reduction in GHG emissions, as other oil and gas companies would fill the trading gap. The Court notes that: "Since the latter is precisely what Milieudefensie et al. seek to achieve with the reduction order they claimed, the conclusion is that such an order with regard to scope 3 emissions is not effective and Milieudefensie et al. therefore have no interest in their claim." (Paragraph 7.110)
Looking forward
This decision highlights the substantial difficulties faced by climate activists looking to use litigation to force fossil fuel companies and other businesses into action to limit carbon emissions. There are some positive outcomes for climate activists on the wider duty on companies in responding on climate change but issues around the legal standing of activists to bring further actions will be a source of real concern.
At the time of writing, there has been no confirmation whether the decision will be appealed to the Supreme Court of the Netherlands but on our current understanding this is a likely outcome. However, it should be remembered that this judgment was handed down five years after proceedings were first commenced. While the first instance judgment was arguably the most significant climate action decision achieved by climate activists against a fossil fuel company, an appeal would require the fight to be started all over again.
Any appeal would need to be based on the law and not the facts of the claim. The judgment clearly sets out that Shell is reducing its Scope 1 and 2 emissions as was sought, and the court was not prepared to impose reduction measures where they were already taking place. There remain, however, significant challenges in approaching reductions in Scope 3 emissions.
Overall, it is interesting to receive this judgment at the same time as COP29 is taking place in Baku, Azerbaijan, which appears to throw the gauntlet back to national legislators and regulators to pick up the baton.
