Shell v Milieudefensie: Sowing the Seeds for Future Climate Litigation against Fossil Fuel Producers

The Hague Court of Appeal's ruling in Shell v Milieudefensie was, strictly speaking, a win for Shell: it overturned the specific emissions reduction target imposed on Shell by the District Court of The Hague. However, the appeal judgment also sows the seeds for future litigation against fossil fuel companies.

Background

The case was brought by a group of environmental NGOs led by Milieudefensie (Friends of the Earth Netherlands) in 2019, claiming that Shell had committed a tort by breaching an unwritten social standard of care, as defined by the Dutch Civil Code, by failing to reduce its emissions consistently with the goals of the Paris Agreement. Milieudefensie sought an order that Shell be required to reduce its emissions by 45% relative to 2019 levels by 2030. Importantly, the claim encompassed not only the emissions associated with Shell's own operations (scope 1 and 2 emissions) but also the emissions 'embodied' in the petroleum products it sells to customers (scope 3 emissions). Shell's scope 3 emissions represent around 95% of the company's total (scope 1, 2 & 3) emissions.

In a landmark decision, the District Court granted the order in 2021, interpreting the unwritten standard of care in light of European and international human rights standards, principles of business responsibility for human rights, and various international norms pertaining to climate change mitigation. Shell appealed.

A corporate climate duty of care

The Court of Appeal had to rule, first, on the existence, scope and specific content of the duty of care that the District Court had imposed on Shell. Importantly, the Court of Appeal accepted that companies including Shell have a general duty of care to contribute to mitigating climate change under Dutch civil law. Like the District Court, the Court of Appeal interpreted that duty in light of international human rights and climate change standards. However, the Court ruled that no specific emission reduction target for a single company could be derived from those international standards, and consequently upheld Shell's appeal.

Nonetheless, the Court's findings on the existence and content of the duty may well be persuasive in other 'corporate framework cases' involving similar open-ended duties of care in other jurisdictions, such as the pending trial in Smith v. Fonterra in New Zealand.

The scope of the corporate climate duty of care for fossil fuel producers

The Court of Appeal made some interesting remarks about the scope of the general duty of care. First, the Court accepted that the duty of care owed by companies encompasses at least a duty to reduce the company's own emissions. Second, the Court expressed the view (obiter dicta) that, for fossil fuel producers like Shell, this responsibility might well extend to restricting their investments in new fossil fuel production projects:

To keep the climate goals of the Paris Agreement within reach, emissions will have to be drastically reduced by 2030. The court of appeal deems it plausible that this will require not only taking measures to reduce demand for fossil fuels, but also limiting the supply of fossil fuels. The social standard of care, interpreted on the basis of Articles 2 and 8 ECHR and soft law such as the UNGP and OECD guidelines, requires producers of fossil fuels to take their responsibility in this respect. It is reasonable to expect oil and gas companies to take into account the negative consequences of a further expansion of the supply of fossil fuels for the energy transition also when investing in the production of fossil fuels. Shells [sic.] planned investments in new oil and gas fields may be at odds with this. ... [7.61]

Ultimately, the Court did not decide this point as the order defended by Milieudefensie was not framed in terms of Shell's planned investments in fossil fuel production per se. Rather, the order addresses Shell's petroleum production only indirectly, via Shell's scope 3 emissions—only some of which are attributable to the oil and gas Shell produces itself. This distinction turned out to be significant to the outcome of the case.

The effectiveness of the reduction obligation in light of 'market substitution' effects

It is common for fossil fuel companies, in climate litigation challenging specific fossil fuel production (or associated infrastructure) projects, to argue that the project would have no significant impact on the climate because, if the project were not to proceed, the demand for fossil fuels would remain, and the fuels would simply be provided by other producers. This type of argument has come to be known as a "market substitution" argument.

In the present case, the question of market substitution applied not to a single project, but to the full suite of activities of an international oil major. Nonetheless, the issues were similar in principle, and Shell indeed argued that the reduction obligation would be ineffective due to substitution of its products by other producers and sellers.

The likely extent of any market substitution associated with changes in fossil fuel supply is a complex question of fact that necessitates evidence about the behaviour of producers and buyers in energy markets in the context of a multifaceted and uncertain low-carbon energy transition. (Disclosure: the author of this blog post was engaged by Milieudefensie to provide expert evidence on these matters, which resulted in two coauthored letters—available here and here —submitted by Milieudefensie to the Court of Appeal.)

The Court of Appeal dealt with this issue relatively briefly. Promisingly, from a climate accountability perspective, the Court accepted that a restriction in the production of oil and gas by Shell may result in a meaningful reduction in global aggregate greenhouse gas emissions. This finding is consistent with our evidence that a production restriction, by increasing the price of oil/gas, would result in a reduction in the quantity of oil/gas demanded and that, on average, this would tend to result in either lower energy demand or substitution toward lower-emissions energy sources, and hence overall lower greenhouse gas emissions.

However, only about one-third of the scope 3 emissions attributable to the petroleum products Shell sells comes from petroleum Shell produces; the remaining two-thirds comes from petroleum produced by third parties, which Shell on-sells to customers. Shell argued, and the Court accepted, that (i) it could achieve the 45% reduction obligation (were it to be upheld) simply by ceasing to sell third-party-produced petroleum and (ii) that this change would have negligible impact on the price of (and hence demand for) petroleum.

We argued (pp. 9-10) that Shell's exit from this market would increase the price of petroleum products, pointing to the high margins Shell receives for the oil it trades. Unfortunately, the Court concluded—with questionable logic—that it was not satisfied that a reduction in Shell's sales of third-party-produced petroleum would increase fuel prices for (and thus reduce the quantity of fuels demanded by) consumers (at [7.107]-[7.108]). Accordingly, the Court ruled that, even if the specific emissions reduction obligation were upheld, it could be achieved by Shell in a way that would not cause the reduction in global emissions that would protect Milieudefensie's interests.

Still, the Court's finding that production restrictions may lead to emission reductions is significant when read alongside its remarks about the scope of the duty of care for fossil fuel companies. Together, they suggest that fossil fuel producers—and potentially banks and other investors—should be on notice that their extensive planned investments in new fossil fuel production projects may be in breach of their duty of care. In this way, the judgment edges us closer to a global norm against new fossil fuel projects.

Author:

Dr Fergus Green is an Associate Professor in the Department of Political Science and School of Public Policy at University College London. He has published widely on the climate-motivated governance of fossil fuel production, including in journals such as Science, Climatic Change, and Global Environmental Politics , and is a three-time co-author of UNEP's Production Gap Report. He is the co-creator of the Redline Database—a curated library of scholarly materials relevant to questions of fact arising in climate-related fossil fuel litigation. He provided expert evidence on behalf of Milieudefensie during the appeal stage of its climate case against Shell. Dr Green is also a trained lawyer and a member of the International Expert Group (UK) of BIICL's Global Toolbox on Corporate Climate Litigation.