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Climate case Milieudefensie et al. – The Hague District Court orders Shell to reduce CO2 emissions

Climate case Milieudefensie et al. – The Hague District Court orders

Climate case Milieudefensie et al. – The Hague District Court orders Shell to reduce CO2 emissions

07.06.2021 NL law

On May 26, 2021, the District Court of The Hague rendered its judgment in the case between Milieudefensie and others against Shell. In this blog, a multidisciplinary team from Stibbe gives its first view of this ruling and explains why it could be a groundbreaking ruling.

Introduction and summary 

On 26 May 2021, (ECLI:NL:RBDHA:2021:5339) the District Court of The Hague rendered its judgment in ‘the climate case of the century’. An alliance of associations and foundations, together with over 17,000 individual claimants, with Milieudefensie as their representative summoned Royal Dutch Shell Plc, located in The Hague (“RDS”), and claimed a reduction of CO2 emissions of RDS.

Milieudefensie et al. claimed that the activities of RDS constitute an unlawful act towards them and that, for the interpretation of the unwritten standard of care, use can be made of the ‘Kelderluik criteria’ (which relate to dangerous situations that can and must have been prevented by the actor), human rights, and soft law endorsed by RDS itself.

The District Court declared the claims allowable and ruled that RDS has an obligation to reduce CO2 emissions by at least net 45% by the end of 2030, relative to 2019 levels. This obligation to reduce lies upon RDS directly and via the companies and legal entities it commonly includes in its consolidated annual accounts and with which it jointly forms the Shell group. The obligation relates to the Shell group’s entire energy portfolio and to the aggregate volume of all emissions.

The District Court came to its decision by interpreting the unwritten standard of care from the applicable Book 6 Section 162 Dutch Civil Code on the basis of the relevant facts and circumstances, including the influential position of RDS and the CO2 emissions of the Shell group. However, also taken into account was the best available science on dangerous climate change and how to manage it, as well as the widespread international consensus that human rights offer protection against the impacts of dangerous climate change, and that companies must respect human rights.

This is a groundbreaking judgment – assuming the ruling stands on appeal and in cassation. Here we comment on certain key aspects of the ruling.

To whom is the order directed and what does it entail?

The order to reduce CO2 emissions by at least 45% by the end of 2030 relative to 2019 is an obligation borne by RDS. RDS is the direct or indirect shareholder of over 1,100 separate companies established all over the world. As the top holding company, RDS establishes the general policy of the Shell group, including its climate policy. The court acknowledged that RDS draws up the business principles for the Shell companies, as well as the investment guidelines in support of the energy transition. The court also highlighted RDS’ Sustainability Report 2019, where the RDS Board is designated in a ‘Climate Change Management Organogram’ as having ‘oversight of climate change risk management’. The court therefore concludes that RDS has a decisive role in the climate policy of the Shell group.

More specifically, the reduction obligation is aimed at greenhouse gas emissions in Scope 1, 2 and 3. Scope 1 concerns direct emissions from sources that are fully or partly owned or controlled by the organisation (such as a refinery). Scope 2 is for indirect emissions from third-party sources from which the organisation has purchased or acquired electricity, steam, or heating for its operations. Scope 3 includes all other indirect emissions resulting from activities of the organisation, but occurring from greenhouse gas sources owned or controlled by third parties such as other organisations or consumers, including emissions from the use of third-party purchased crude oil and gas. This latter category includes the emissions from cars using the fuel purchased from companies of Shell. The court takes as a basis that 85% of Shell group emissions were Scope 3 emissions.

The court concludes that the reduction obligation upon RDS is an obligation of result, concerning RDS’ Scope 1 emissions and the part of RDS’ Scope 2 emissions that can be ascribed to the Shell companies. As regards the business relations of the Shell group, including the end-users, RDS may be expected to take the necessary steps to remove or prevent the serious risks ensuing from the CO2 emissions generated by them, and to use its influence to limit any lasting consequences as much as possible. This is a significant best-efforts obligation, which is not removed or reduced by the individual responsibility of the business relations, including the end-users, for their own CO2 emissions.

Additionally, the court makes recommendations about how RDS can achieve the reduction obligation. For instance, a consequence of the significant best-efforts obligation is that RDS is free to decide not to make new investments in explorations or fossil fuels, and to change the energy package offered by the Shell group.

The court declared the order provisionally enforceable. This means that the interest of Milieudefensie et al. in RDS’ immediate compliance with the order outweighs RDS’ possible interest in maintaining the status quo until a final and conclusive decision has been made on the claims of Milieudefensie. The media has concluded that it will be necessary to achieve a reduction of 4.5% per year in order to achieve the obliged 45% in 2030. However, the court does not mention this. The order only entails the reduction at the end of 2030. The court has not formulated a legally binding standard for – in this case – a reduction pathway that Shell must follow.

Climate change and its consequences 

The court starts its judgment with a finding of the facts and an overview of the scientific consensus about the nature and consequences of climate change resulting from CO2 emissions. The court bases these facts on several research studies and reports, especially those of the Intergovernmental Panel on Climate Change (“IPCC”) of the United Nations. The court highlights certain conclusions of the IPCC, for which we will refer to paragraph 2.3 and ground 4.4.29 of the judgment. The most important IPCC conclusions are the following:

  • If global warming exceeds 2ºC, dangerous, irreversible climate change will occur, which should be prevented. To achieve this, the concentration of greenhouse gases in the atmosphere needs to be stabilised.
  • Due to climate change, extreme weather events will increase; including droughts, extreme precipitation, heat and (tropical) storms and hurricanes. Together with a sea level rise, these extreme weather events can lead to a risk of death, injury, ill-health, or disrupted livelihoods, systemic risks due to a breakdown of infrastructure networks and critical services, as well as a risk of food insecurity and a loss of diverse ecosystems and biodiversity.
  • The Paris Agreement prescribes that global warming must be kept well below the 2ºC threshold relative to the pre-industrial age, while striving to limit global warming to 1.5°C. To achieve this goal, it is necessary that the global CO2 emissions be reduced by 45% in 2030 compared to 2010 levels and by net 100% in 2050. To achieve net zero in 2050, the global CO2 emissions should substantially decrease even before 2030.
  • For the potential consequences of climate change for the Netherlands, the court uses research of the Royal Netherlands Meteorological Institute (“KNMI”). The Netherlands must take multiple measures to counter the consequences of the sea level rise, including faster and increased sand nourishment along the coast, strengthening or replacing storm surge barriers and other flood risk management works in a shorter term than currently envisioned, as well as moving and enlarging fresh water inlets. According to the court, Dutch residents will encounter climate change-related health problems, including heat stress, increases in infectious diseases, deterioration of air quality, increase in UV exposure, increase in water-related and foodborne diseases, and periods of drought and water shortage.

Admissability and the applicable law 

Admissibility of class actions and individual claimants

The class actions of Milieudefensie et al. are public interest actions. Book 3 Section 305a Dutch Civil Code (former) governs these class actions. This section entails that a foundation or association with full legal capacity may institute legal proceedings for the protection of ‘similar interests’ of other persons.

Principally, Milieudefensie et al. stated that with their claim they are serving the interests of current and future generations of the world’s population by curbing dangerous climate change. In the alternative, Milieudefensie et al. stated that they serve the interests of current and future generations of Dutch residents and (with respect to the Waddenvereniging) of the inhabitants of the Wadden Sea area, a part of which is located in the Netherlands.

The court rules that the entire world population is served by curbing dangerous climate change. However, the interests of current and future generations of the world’s population are not suitable for bundling because there are huge differences in the time and manner in which global warming caused by CO2 emissions will affect the global population at various locations. According to the court, however, this does not apply regarding the Dutch residents and the inhabitants of the Wadden Sea area. Even though there are differences in time, extent and intensity in the Netherlands and in the Wadden region to which the inhabitants will be affected by climate change caused by CO2 emission, these differences are ‘much smaller and of a different nature’ than the mutual differences when it concerns the entire global population.  Therefore, the court ruled that the interests (of current and future generations) of Dutch residents and of the inhabitants of the Wadden Sea are suitable for bundling, which is why the collective claims of Milieudefensie et al. are allowable.

Additionally, over 17,000 individual claimants have issued to the association Milieudefensie a document appointing it as their representative. The court rules that the claims of the individual claimants must be declared not allowable, as they do not have a sufficiently concrete individual interest. The class actions will already serve their interests and the individuals do not have an interest in a separate claim in addition to the class actions.

Applicable law

According to the court, Dutch law is applicable to the claim of Milieudefensie et al., which is in line with the concept of protection underlying Article 7 of Regulation Rome II (Regulation (EC) No 864/2007) (“Rome II”). Article 7 Rome II determines that there two options for the law that is applicable to a non-contractual obligation arising out of environmental damage. This is, the place where the damage has occurred (the Erfolgsort), unless the person seeking compensation for damage chooses to base his or her claim on the law of the country in which the event giving rise to the damage occurred (the Handlungsort).

The court takes as a fact Milieudefensie et al. is holding RDS liable in its capacity as the policy-setting entity of the Shell group. According to the court, RDS’ adoption of the corporate policy of the Shell group constitutes an ‘independent cause’ of the damage, which may contribute to environmental damage and imminent environmental damage with respect to Dutch residents and the inhabitants of the Wadden region. Therefore, the court applied Dutch law.

The reduction obligation upon RDS arises from the unwritten standard of care 

We now move on to the court’s substantive judgment. The court finds that RDS is subject to a reduction obligation, ensuing from the unwritten standard of care pursuant to Book 6 Section 162 of the Dutch Civil Code. The interpretation of the unwritten standard of care calls for an assessment of all circumstances of the case. The court includes fourteen aspects based on which it interprets the unwritten standard of care. We will address a number of these aspects.

i. Policy-making position RDS in the Shell group

The court recognises that the companies in the Shell group are responsible for the implementation and execution of the policy and, in doing so, must comply with the applicable laws and contractual obligations. However, this responsibility of the Shell companies for implementation does not alter the fact that RDS determines the general policy of the Shell group (see also the explanation of the court’s order above).

ii. CO2 emissions of the Shell group and Scope 1 to 3

The Shell group is a major player in the global fossil fuel market. If all Scopes are included, the Shell group is responsible for significant CO2 emissions worldwide. According to the court, these global CO2 emissions of the Shell group (Scope 1 through 3) contribute to global warming and climate change in the Netherlands and the Wadden region. The court does not take into account that 85% of the total emissions of RDS are Scope 3 emissions, such as the emissions of consumers.

iii. International standards

To interpret the unwritten standard of care, the court also considers the right to life and the right to respect for private family life of Dutch residents and inhabitants of the Wadden region. Milieudefensie et al. cannot directly invoke these human rights against RDS. However, because of the fundamental importance of human rights and the values embodied therein for society as a whole, human rights can play a role in the relationship between Milieudefensie et al. and RDS. The court therefore takes into account the human rights and values that derive from them in the interpretation of the unwritten standard of care. The court substantiates this by referring to the Urgenda judgment and a ruling by the UN Human Rights Committee. These rulings come down to the fact that the human rights invoked offer or require protection against dangerous climate change.

In addition to the human rights bindingly enshrined in the European Convention on Human Rights (“ECHR”) the court also involves soft law, namely the UN Guiding Principles (“UNGP”). According to the court, those standards are suitable to serve as a guide in the interpretation of the unwritten standard of care because the European Union (“EU”) has since 2011 expected European companies to act in accordance with the UNGP. The UNGP imposes a global standard of conduct that is not optional for companies, and applies everywhere. The court concludes from the UNGP that the responsibility to respect human rights means that companies must refrain from infringing human rights of others, must address negative human rights impacts in which they have a stake, and must take appropriate action. This responsibility to respect human rights applies to all companies. However, the means by which a company fulfills the responsibility is, among other things, proportional to the size of the organisation. The court expects a great deal from RDS in this regard, taking into account the size of the Shell group.

Furthermore, the court frequently cites the Oxford Report, a report analysing the carious climate change protocols and guidelines for non-state actors prepared by the University of Oxford in 2020. The court derives from this that there is broad international endorsement of corporate responsibility with respect to Scope 2 emissions and that each company should work independently toward the goal of net zero emissions by 2050.

iv. ETS system and permits

RDS relies on the indemnifying effect of the European Emissions Trading Scheme (“ETS”) and other similar ‘cap and trade’ emissions trading schemes applicable elsewhere in the world. The ETS system covers activities of the Shell group in the EU. This system, inter alia, regulates CO2 emissions from a wide variety of industries based on the ‘cap and trade’ principle. By creating scarcity in CO2 through the ETS system, the EU aims to reduce total emissions in its member states in absolute terms. For the EU, this is the cornerstone of climate policy and an important instrument for reducing greenhouse gas emissions in a cost-effective way.

The court finds that RDS may rely on the fact that the interests that are taken into account, which are also at issue in this proceeding, were fully and properly considered by the issuer(s) when issuing the allowances. The ETS system therefore has an indemnifying effect. However, that indemnifying effect is limited: RDS will have to meet its own independent obligation to the extent that RDS’s reduction obligation extends beyond the ETS system’s reduction target. That is why RDS cannot fully rely on the indemnifying effect of the ETS system. This also applies to other ‘cap and trade’ emissions trading systems. Permits and ongoing obligations borne by the Shell group do not have an indemnifying effect at all.

v. Onerousness and proportionality of the reduction obligation on RDS

The court ignores RDS’s argument that imposing reduction obligations on RDS would lead to distortion of competition and affect the level playing field for the oil and gas market. According to the court, Shell has not elaborated on this and, in addition, the defence does not hold because (among other reasons) other companies will also have to contribute to the required worldwide reduction of oil and gas production to counteract CO2 emissions.

In assessing proportionality, the court takes into account that the CO2 emissions for which RDS can be held responsible create a ‘very great danger’ for current and future generations. The court finds that the public interest outweighs the adverse effects that RDS may experience.

Final remarks regarding the court order

Country of incorporation

The ruling is far-reaching. Parties inside and outside of the Netherlands have followed this procedure with great interest, and may try to use the ruling in order to force other companies to reduce emissions as well.

The country of incorporation of the parent company may be important for other cases. In this case, the country of incorporation of the parent company is the Netherlands, and value has been placed on the policy-making position of that parent company. This is interesting, partly because of the court’s view that other companies must also contribute to a reduction of CO2. If those companies are located in other countries (perhaps where courts do not enforce CO2 reduction), imbalanced relationships may arise between reduction obligations of distinct globally operating companies.

Policy of RDS

The court recognises that the Shell group already had appropriate climate policies in place. For example, the court points out that the Shell group adopted a Net Carbon Footprint ambition in 2017, through which it aims to reduce the carbon intensity of its products over the long term. Additionally, the Shell group set more concrete short-term targets in 2019 that are tightened annually and are committed to the Climate Agreement. In 2020, the Shell group again made its climate ambitions stricter: it has since targeted net-zero emissions for Scope 1 and Scope 2 emissions by 2050, and a 30% reduction in Scope 3 emissions by 2035 and 65% by 2050.

However, the court finds this policy insufficiently concrete. The court notes that the Shell group’s climate ambitions and plans depend in many ways on the pace of the global energy transition and developments in society. Moreover, this policy takes the form of ambitions and intentions that have yet to be translated into concrete plans. According to the court, this policy is insufficiently in line with the reduction obligation that rests on the Shell group, as a result of which RDS risks violating this reduction obligation. Therefore, the order claimed by Milieudefensie et al. can be allowed.

WAMCA and damages

The court applied the ‘old’ collective action law. As of January 1, 2020, a new collective action regime came into force: the Act on the Settlement of Mass Damages Claims in Collective Actions (“WAMCA”) from the Dutch Wet afwikkeling massaschade in collectieve actie).

Human rights and soft law

The court notes that Milieudefensie et al. cannot directly appeal based on their human rights stemming from the ECHR and the International Covenant on Civil and Political Rights (“ICCPR”). However, the court ‘fills in’ the unwritten standard of care with the human rights and the values that derive from those instruments. Due to the fundamental importance of human rights for society as a whole, human rights can thus play a role in the relationship between Milieudefensie et al. and RDS. The court assumes a horizontal effect of human rights and refers to, inter alia, the Urgenda judgment for an interpretation of the scope of articles 2 and 8 ECHR. The Court pays little attention to the fact that in the Urgenda case it was not a company that was sued, but the Dutch State. In our opinion, such attention would have been appropriate, as the obligations of states differ substantially from those of companies. This is also expressed in the UNGP: companies must respect human rights, but it is up to states to create a legal framework to ensure that this can be enforced. In doing so, a broad, democratically embedded consideration of interests can then also be made with, for example, attention to the level playing field. Besides, in 2019, 35% of large companies in the Netherlands had endorsed the UNGP, despite the Dutch State’s target of 90% by 2023. RDS does support the UNGP. The court uses the UNGP as soft law to justify this effect of human rights on companies. It is questionable whether a civil procedure, in which the court interprets open unwritten standards of care, is the right remedy for declaring the UNGP indirectly mandatory and allowing human rights to have such an impact. Another consequence is that this may lead to actors being less likely to make commitments: after all, the commitments that they make could possibly also be enforced in the same way as in this case.

Indemnifying effect of granted permits and other statutory regulations

The ruling conflicts with the ETS system and the balance between being able to use a public law permission, and the legality of that permission. In this case, it concerns acting in accordance with provisions of an Act of Parliament (the Dutch Environmental Management Act or Wet milieubeheer), in which the ETS system is included, and the lawfulness of that acting. The ETS system was set up at European level in order to reduce greenhouse gas emissions in a way that also places responsibility on companies and in which all the various interests were weighed. For this reason, Dutch environmental permits cannot include regulations on CO2 emissions for companies that are obliged to participate in the ETS system. To date, the use of a permit is only potentially unlawful if the consequences were not sufficiently considered in the permit granting process. The ETS system, as the court expressly considered, involves precisely the effects of climate change, and the system exists precisely to mitigate climate change. The court therefore considers that the ETS system has an indemnifying effect. Nevertheless, the court finds that using that system only partially indemnifies the user. According to the court, the reduction obligation of RDS extends beyond the statutory framework when interpreting the unwritten standard

Infringement of property rights

Although RDS has the relevant permissions – which may include obligations in the Netherlands, for example, in the case of gas extraction – the court orders that emissions resulting from the permissions should be limited. This could amount to an infringement of RDS’s property rights: after all, activities based on concessions and permits must be scaled back. The court sees no opportunity for a weighing of interests. Besides, the court did not engage in a weighing of fundamental rights that RDS may be entitled to, such as the right of ownership.

Operative part and net reduction obligation

The court makes a distinction between result obligations (own emissions) and best-efforts obligations (third-party emissions). However, the reduction order given in the operative part makes no distinction between these different types of emissions. This could be explained by the court’s finding that the ordered reduction is 45% net, i.e. “the sum of the reduction of CO2 emissions of the entire energy portfolio of the Shell Group (Scope 1, 2 and 3)”. It also follows from the ruling that net reduction gives room for compensation of CO2 reduction, for example through the capture and storage of CO2 (Carbon Capture and Storage “CCS”).

The fact that the operative part does not distinguish between result obligations and best-effort obligations is especially problematic with regard to the obligation to reduce Scope 3 emissions. The court suggests that those emissions can be reduced by adjusting the energy package that the Shell group offers to end users. On this point, the court ascribes a very large steering role to the Shell group concerning the behaviour of end customers. It is unclear how realistic this assumption is.

Conclusion

RDS is considering lodging an appeal. The outcome of such an appeal will again be of great importance for the development of the law. Practice will reveal whether the considerations of the court will have consequences for other companies and situations.

The Dutch version of this article can be read here.

Team

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