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Dutch Court orders Shell to reduce CO2 emissions by 45%

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Jochem Spaans

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Amsterdam

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18 June 2021

On 26 May 2021, the Court of The Hague rendered a landmark decision in proceedings between Milieudefensie (a.o.) and Royal Dutch Shell plc (RDS). Milieudefensie claimed, in short, that RDS must reduce its CO2-emissions by 2030 with 45% compared to RDS’ emissions in 2019.

According to Milieudefensie, RDS’ obligation to contribute to the prevention of dangerous climate change via the corporate policy it determines for the Shell group and its value chain arises from an unwritten duty of care. Milieudefensie invoked the right to respect for private and family life pursuant to articles 2 and 8 of the European Convention for the Protection of Human Rights and Fundamental Freedom (ECHR) and soft law instruments such as the UN Guiding Principles on Business and Human Rights (UNGP).

The decision

RDS is the top holding company of the Shell group. Although each RDS subsidiary is generally responsible for policy implementation, the Court found that RDS establishes the overall Shell group policy. According to the Court, RDS' unwritten duty of care requires that, when determining the Shell group’s policy, RDS must observe certain standards of care concerning the Shell group's emissions and climate change policies. Whilst the Court ruled that Milieudefensie could not invoke the human rights under the ECHR directly, in interpreting the specific duty of care applicable to RDS in this context, the Court (amongst other considerations) followed the UNGP. In doing so, the Court noted that they set out the responsibilities of states and businesses in relation to human rights.

On that basis, the Court concluded that RDS is obligated to reduce the Shell group's overall CO2 emissions, noting that such reduction obligation consists of (1) a results obligation (resultaatsverplichting) in relation to the activities of RDS, and (2) a significant best-efforts obligation (zwaarwegende inspanningsverplichting) in relation to RDS’ business relations, ranging from suppliers to end-users.

In its decision, the Court ordered RDS to: “limit or cause to be limited the aggregate annual volume of all CO2 emissions into the atmosphere (scope 1, 2 and 3) due to the business operations 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 end 2030, relative to 2019 levels.” RDS has total freedom to comply with this reduction obligation as it sees fit, and to shape the corporate policy of the Shell group at its own discretion. A potential consequence of extending this obligation to Shell's entire value chain may be that RDS will forgo new investments in fossil fuel extraction and/or will limit its fossil resources production. Notably, the Court did not consider RDS’ current CO2-emissions unlawful.

45% reduction

The 45% reduction in CO2 emissions is based on the UN Intergovernmental Panel on Climate Change’s report, which concludes that limiting global warming to 1.5°C requires a net reduction of 45% in global CO2 emissions in 2030 relative to 2010.

CO2 emissions are subdivided in scope 1, 2, and 3. The RDS’ CO2 emissions covered by the decision include not only the Shell group’s closely affiliated companies, over which it influences policy-setting (scope 1 emissions), but also the Shell group’s business relations from which it purchases raw materials, electricity and heat (scope 2 emissions). The Court’s decision also covers end-users of the products produced and traded by the Shell group, who are at the end of RDS’ value chain (scope 3 emissions).

No indemnifying effect and level playing field

RDS claimed the European Emissions Trading Scheme (ETS) had an indemnifying effect, as the ETS already covers RDS’ CO2 emissions. However, the Court ruled that the ETS activities cover only a limited part of the RDS’ emissions and RDS’ reduction obligation goes further. For these ETS-covered emissions, RDS does not have to adjust its policy due to the indemnifying effect of the ETS system. In the proceedings, RDS identified other permits and Shell group’s current obligations, which the Court determined do not have an indemnifying effect.

RDS also claimed that governments decide the playing field for companies like RDS and that this reduction obligation creates an uneven playing field in relation to its competitors. The Court decided that RDS has its own responsibility and the interests served with the reduction obligation outweighs RDS’ commercial interests.

What are the decision’s ramifications?

Following the groundbreaking Urgenda decision, which ordered the Dutch government to take more action to prevent dangerous climate change, the decision of 26 May 2021 marks yet another landmark judgment. It is the first time a Court has held a large company directly responsible for reducing its CO2 emissions in line with the goals of the Paris Climate Agreement.