On 12 November 2024, the Hague Court of Appeal overturned the landmark ruling ordering Shell to limit its CO2 emissions by at least 45% by 2030. Although, according to the Court of Appeal, companies also bear responsibility to combat dangerous global warming, a court is not able to set a percentage by which Shell must reduce its CO2 emissions.
In our summary of the judgment, we analyse (i) the effect of human rights in regards to the social standard of care, (ii) the reduction obligation, (iii) the effectiveness of a reduction obligation and (iv) a potential investment ban.
Introduction
In 2021, the district court in The Hague, at the request of NGOs such as Milieudefensie, ruled that Shell had to reduce its CO2 emissions by 45% by 2030 compared to 2019. This was a watershed moment in climate litigation: for the first time, a court imposed a reduction obligation on an individual company. According to Shell, this would de facto force the company to stop investments and divest operations. Shell appealed.
The social standard of care and human rights
According to Milieudefensie et.al, Shell is violating the "social standard of care". This is the obligation to act in accordance with "proper social conduct". It is comparable to what in Belgian law is "a prudent and reasonable person in the same circumstances". Shell is alleged to have breached the social standard of care by violating certain human rights.
In this regard, the Court of Appeal ruled first that that there "there can be no doubt that protection from dangerous climate change is a human right". Specifically, climate protection would fall under the right to life (article 2 ECHR) and the right to private life (article 8 ECHR). In coming to this finding, the Court referred, not only, to the Dutch Urgenda judgment, the recent Verein Klimaseniorinnen Schweiz v Switzerland judgment of the European Court of Human Rights, but also to court decisions from Pakistan, Colombia, Brazil and India, and UN reports and resolutions.
Moreover, according to the Court of Appeal, human rights can have an impact on private law relationships: it is " primarily up to legislators and governments to take measures to minimise dangerous climate change. That being said, companies, including Shell, may also have a responsibility to take measures to counter dangerous climate change". This is striking, given the principle that human rights primarily affect the vertical citizen-government relationship rather than the horizontal relationship between citizens themselves or between citizens and companies.
This "indirect horizontal effect of human rights" is possible, as per the Court of Appeal, by interpreting "open private law standards", such as the social standard of care, by reference to human rights. In this respect, the Court cites quite a few "informal and non-binding regulations" on corporate sustainable development, such as the United Nations Guiding Principles on Business and Human Rights, OECD Guidelines and ISO 'guidelines'. Importantly, however, Shell itself had explicitly endorsed those non-binding regulations. The Court of Appeal deduced from this that "companies whose products have contributed to the creation of the climate problem" are obliged to contribute to combating this problem, "even when (public law) rules do not necessarily compel them to do so".
Shell is therefore obliged to limit its CO2 emissions, even if that obligation is not explicitly set out in regulations. The significance of such a ruling for practice is significant: this reasoning could be applied to (certain) other companies in the future.
No concrete reduction obligation
Nevertheless, the Court of Appeal does not impose a reduction obligation on Shell. This would require a "threatening violation of a legal obligation". The Court notes the creation of "a considerable amount of new climate legislation", even after the 2021 district court ruling. For instance, the amended EU ETS system already covers a lot of Shell's direct and indirect emissions (so-called scope 1 and 2 emissions). This would put these "(almost) completely outside the scope of the district court’s order". For those emissions, Shell has already substantially achieved the target of - 45% vs 2019 by the end of 2023 and has also committed to continue that effort. Thus, according to the Court of Appeal, this does not amount to a "threatening violation of a legal obligation".
Regarding emissions from Shell's customers (so-called scope 3 emissions), the Court of Appeal is more nuanced. On this point, the Court finds that there is consensus that, to limit global warming to 1.5°C, emissions must be reduced by a net 45% compared to 2019 by 2030. However, the Court "the court cannot determine what specific reduction obligation applies to Shell". Simply applying the general standard (-45%) to Shell, would not be “sufficiently case-specific". Reports by the IEA and the European Commission show that different reduction pathways per sector and country are appropriate.
The Court of Appeal does not consider a sectoral reduction standard for Shell's oil and gas portfolio possible either, since "no sufficiently unequivocal conclusion can be drawn" from the scientific reports that exist on the subject. The available figures “do not provide the Court with sufficient support” in this regard. The claims of Milieudefensie et.al. are therefore dismissed.
Effectiveness of a reduction obligation
Having already dismissed the claims, the Court of Appeal still discusses, in an important passage, the effectiveness of a reduction order in general. The Court is not convinced that a reduction obligation imposed on one company will have a positive effect on combating climate change: the (discontinued) trading activities of Shell in this case would simply be taken over by another company. Therefore, overall emissions would not decrease. The Court of Appeal, thus, concluded that Milieudefensie has no interest in its claim because it has not been shown that the reduction obligation will lead to reduced CO2 emissions.
This argument seems particularly relevant for future climate litigation. Indeed, a substitution argument, as in the Shell case, will always be able to come into play when only one company in a sector is sued.
A potential ban on new investment in oil and gas or a production cut?
The ruling further contains considerations that may prove relevant in the future for companies whose activities have a significant impact on the climate (change), and this without Milieudefensie et al. seeming to have insisted on this. Remarkably, the Court warns that new investments by Shell in oil and gas fields may be at odds with the social standard of care, as they may lead to a so-called "carbon lock-in". This effect occurs when investments in fossil products prevent the transition to low-carbon alternatives due to their long payback periods. In addition, the Court of Appeal also hinted at an alternative to reduction obligation, namely a production cut. The Court briefly suggests that such a production limitation could indeed be causally related to an emission reduction. However, the Court does not comment further on this issue.
Should you have any questions about climate litigation or potential implications for your business, do not hesitate to contact us.
