Publication

Dutch Appeal Court Quashes Court-Imposed CO2 Target: 4 Key Takeaways

Published:

January 22, 2025

Author(s):

• Melanie Gillis

Share

Print

On November 12, 2024, the Hague Court of Appeal quashed the 2021 landmark decision of the Hague District Court in Milieudefensie et al v. Royal Dutch Shell PLC. The Appeal Court removed the emission reduction target previously imposed on Shell.

The 2021 decision sent shockwaves through the energy world: it was the first time a court ordered a company to align its corporate policies with the climate change goals under the Paris Agreement. Specifically, the Hague District Court in the Netherlands ordered Royal Dutch Shell to reduce its CO2 emissions by net 45% (of 2019 levels) by 2030. The appeal decision has once again redrawn the boundaries of the Netherland courts’ prescriptive power when it comes to climate change. For companies navigating the race to reduce emissions – type of race where the rules are written in real time, with a finish line in constant flux- the appeal decision offers some respite. However, the decision is a far cry from declaring carte blanche for Shell. While it removes the hard percentage reduction requirement, it reaffirms corporations have a responsibility to address climate change and leaves the door open for further climate change litigation targeting corporate actors.

While the Dutch Courts’ decisions aren’t binding on Canadian courts, the decision is a major moment for a developing body of climate change litigation globally, which has been known to transcend traditional legal boundaries – mirroring climate change itself. To help Canadian companies better prepare their businesses for the evolving legal risks presented by climate change litigation, here are four key takeaways from the Appeal Court’s decision.

1. Companies do have a general duty of care to combat climate change.

The Appeal Court found that combatting climate change was baked into the unwritten civil standard of care that applies to Shell (direct quotations are taken from the English translation of the issued decision):

…companies like Shell, which contribute significantly to the climate problem and have it within their power to contribute to combating it, 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…

On appeal, Shell argued CO2 reductions were the exclusive domain of government, not the courts, and the complexity of the energy transition requires the nuance that only government can meaningfully achieve. While the Appeal Court recognized it is “…primarily up to legislators and governments to take measures to minimise dangerous climate change…”, it ultimately dismissed Shell’s argument, stating that nowhere in existing legislation does it state companies must simply comply with government reduction schemes and have no independent obligations of their own: 

…obligations arising from existing regulations do not preclude a duty of care based on the social standard of care on the part of individual companies to reduce their CO2 emissions. (7.53)

In short, existing obligations under legislation inform the standard of care that applies to companies; they don’t constitute the standard of care itself. This distinction is simple but important: it preserves the courts’ authority to adjudicate climate-related disputes against corporate actors.

2. The “horizontal human rights” doctrine applies to climate change.

The Appeal Court also applied what it called the “horizontal human rights” doctrine. The starting assumption is that human rights don’t apply to the private sphere (that is, horizontally) but rather to the citizen-government relationship (vertically). The horizontal human rights doctrine says the societal values underlying these rights are of such importance to society that they can be invoked by citizens against private companies to some extent. The Court agreed: 

…the court may include fundamental rights — or the values embodied in them— in its considerations when applying general private law concepts, such as conflict with what is proper social conduct according to unwritten law. This is referred to as indirect horizontal effect of fundamental rights.

This is legally significant because it means the courts can invoke rights-based legal principles when determining corporate wrongs in the climate litigation space rather than reserving these principles for assessing government wrongs. 

3. The duty of care to combat climate change includes a duty to consider the “carbon lock-in” effect. 

Milieudefensie argued the Court should consider the `carbon lock-in effect’ in its analysis:

A carbon lock-in effect could occur primarily in the infrastructure field. The exploration, and extraction, production, transportation and distribution of fossil fuels require significant initial investments. Once these investments are made, they cannot be reversed and can only be recovered with the realised infrastructure. Because of their scale, these investments have a long payback period. Parties that have invested in fossil infrastructure therefore have an incentive to keep using this infrastructure for as long as possible. (7.59)

While the Appeal Court agreed oil and gas companies should consider the carbon lock-in effect when ensuring its planned investments are in keeping with its duty of care, it ultimately found this question fell outside the narrower question of whether Shell is obliged to reduce its emissions by a certain percentage. Its comments on the carbon lock-in effect were therefore not binding in law – but do leave the door open for future litigants to cite carbon lock-in effects when challenging corporate actions with respect to climate change. 

4. The Paris Agreement sets out global – not sector-specific – emission reduction targets.

The cornerstone of the Appeal Court’s decision came when it observed, crucially, that the Paris Agreement targets are global in nature: they aren’t sector-specific targets and the target is a net goal. This seems obvious. But the way in which the Appeal Court connects this obvious observation to the issue of causation is of the utmost significance to its decision.

It goes without saying that different fossil fuels have different carbon intensities. Coal is a more intense emission source than oil; oil is more intense than gas. As the Appeal Court observed, Shell neither extracts nor supplies coal. Specifically:

…this means that although a shift from coal to gas will lead to an increase in emissions from the combustion of gas, on balance it will be less damaging to the climate because the (higher) emissions from the combustion of coal will decrease. (7.74)

The Appeal Court considers the scenario where Shell expands its operations and starts supplying gas to a company that previously obtained its energy from coal. This will lead to an increase in Shell’s scope 3 emissions but on balance may lead to lower global CO2 emissions. Based on this reasoning, the Appeal Court held:

It follows from that example alone that applying the general standard to Shell of a 45% reduction by the end of 2030 (or 35% or 25% in the alternative and further alternative claims) is not sufficiently case-specific. Nor is the standard designed for that purpose. On the contrary, there are indications that different reduction pathways are appropriate per sector, and they may also differ per country.

 The Appeal Court goes on to hold that there is a possibility that “…an increase in Shell’s scope 3 emissions in the shorter term could, on balance, lead to globally lower emissions” (7.79) For the 45% emissions reduction target to apply to Shell, its product range and customer base would have to mirror the global product range and customer base exactly, which of course it does not. This led the Appeal Court to conclude 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.” (7.111)

This analysis hinges on the very crucial observation that the Paris Agreement contains net targets, not sector-specific targets, which the court found must be taken into account when assessing causation. In other words, if you are going to ascribe responsibility for a global issue to an individual actor, you must also account for the net nature of the carbon-related consequences arising from corporate actions. This, in our view, is also a significant takeaway for companies operating in the Canadian energy sector.

Please contact your McInnes Cooper lawyer or any member of our ESG Team @ McInnes Cooper to discuss how you can prepare for the risks of climate change litigation.

Share

Print