Court of Appeal quashes order against Shell to reduce emissions

In brief

The Dutch Court of Appeal has overturned a landmark judgment requiring Shell to reduce its net carbon emissions by 45%
The Court’s reasoning cites insufficient expert consensus on how global climate goals should be translated into targets for individual companies.
Yet the decision also reaffirms key principles from the original judgment, notably that companies subject to Dutch law have an obligation to prevent dangerous climate change.
Join us for a webinar at 12:00pm on 2 December 2024, where we'll be discussing the case with Milieudefensie's Eline Zeilmaker.

Background: the first instance judgment

In 2021, a case brought by six NGOs led by Milieudefensie (Friends of the Earth Netherlands) against Shell plc made legal history: the District Court in The Hague ordered the oil giant to cut net carbon emissions across its entire corporate group by 45% by 2030 compared to 2019 levels. Such a ruling was unprecedented worldwide.

The Court held that if Shell failed to meet the target, it would be in breach of the “social duty of care” enshrined in Article 6:162 of the Dutch Civil Code.

This provision of Dutch tort law requires a private actor to repair the damage flowing from its violation of a “rule of unwritten law pertaining to proper social conduct”.

The Court interpreted this duty of care to incorporate respect for human rights, which had become “a global standard of expected conduct for all business enterprises”.

The Court found that it was well established that climate change posed a serious threat to human rights. Businesses were consequently required to assess the adverse effects of their carbon emissions and take necessary steps to prevent them.

More specifically, the Court deemed the unwritten standard of care to incorporate the goals of the Paris Agreement to keep global warming “well below 2°C in 2100” and strive for “under 1.5°C”.

To achieve the 1.5°C goal, the Court found there was broad consensus that global carbon emissions must be reduced by net 45% by 2030 and must reach net zero by 2050 (in each case compared to 2010 levels). This target also applied to Shell, although it was permitted to use its 2019 emissions as a baseline, because that was what the claimants had requested.

Finally, the Court specified the nature of Shell’s reduction obligation: this was an “obligation of result” as regards emissions generated by Shell’s own activities (i.e., so-called Scope 1 and Scope 2 emissions) and a “significant best efforts obligation” as regards the emissions generated by Shell’s suppliers and customers (i.e., Scope 3 emissions, which make up the vast majority of Shell's carbon footprint, including the emissions generated by the combustion of the oil and gas it sells).

The Court of Appeal judgment

Shell appealed and the Court of Appeal delivered its highly anticipated judgment in the case on 12 November 2024, annulling the emissions reduction order against Shell, without awarding any alternative remedy.

The Court of Appeal reached this decision despite concurring with key findings of the first instance judgment. Notably, it confirmed that:

“[There] can be no doubt that protection from climate change is a human right”.
While Governments are primarily responsible for safeguarding human rights, those rights inform the social standard of care under Dutch law that companies must respect.
The social duty of care imposes an obligation on companies to “contribute to the mitigation of dangerous climate change” in line with the Paris Agreement.
The “content and scope” of that duty “may vary from one company to another, depending on [its] contribution to climate change and its capacity to counter climate change”. More can therefore be expected from Shell than other companies.
Companies’ compliance with existing environmental laws and regulations does not preclude courts from imposing further obligations based on the social standard of care.
Companies' obligation to limit carbon emissions and mitigate the risks of catastrophic climate change applied "even if the obligation is not explicitly laid down in (public law) regulations of the countries in which the company operates."
It is "plausible" that keeping the Paris Agreement goals in reach will require "limiting the supply of fossil fuels" and therefore “Shell's planned investments in new oil and gas field may be at odds with this."

Nonetheless, the Court held that the claimants had failed to establish an imminent risk of Shell breaching the social standard of care:

In relation to Shell’s Scope 1 and 2 emissions, the Court decided that there was no cause of action because Shell already had credible plans to reduce those emissions by more than 45% by 2030.

In relation to Scope 3 emissions, the Court found that there was insufficient expert consensus on how the global reduction goals should be translated into targets for individual companies such as Shell. As a result, it held that the District Court had been wrong to apply the global target of 45% to Shell without adjustment.

In addition, the Court agreed with Shell’s argument that obliging the company to reduce its Scope 3 emissions would be ineffective: if Shell were to restrict its sales of oil and gas, the Court found that customers would nonetheless continue to use those products and their demand would simply be met by a different supplier.

Comment

At first glance, the Court of Appeal decision appears like a setback for corporate climate litigation.

However, the Court of Appeal in fact confirmed the District Court’s groundbreaking finding of law: that the duty to prevent dangerous climate change applies not only to states, but to corporate actors as well, at least under Dutch law. Future claims will no doubt build on this finding.

The Court of Appeal’s reluctance to grant any remedy may therefore appear surprising.

The first reason for this was the lack of expert consensus on quantifying Shell’s emission pathway. However, every day, courts and tribunals make reasonable decisions based on contested expert reports. They also have the power to order experts to confer to bridge their differences. It is unclear whether the Court of Appeal availed itself of these powers.

The second reason is more troubling. The Court of Appeal found that ordering Shell to sell less oil and gas risked being ineffective because its competitors would simply make up the difference. The District Court had rejected this argument both factually (based on economic evidence to the contrary) and as a matter of public policy, holding that “[due] to the compelling interests which are served with the reduction obligation, this argument cannot justify assuming beforehand there is no need for [Shell] to not meet this obligation”.

The more principled approach of the District Court is closer to the position in Common Law jurisdictions. The New Zealand Supreme Court recently addressed the same argument in a strike-out application against a climate case brought by Mr John Smith, a tribal leader, against seven energy and mining companies in the country (Smith v Fonterra & ors). The Supreme Court roundly rejected the argument: where multiple parties contributed to the same nuisance, it was not necessary for all of them to be before the court, nor should one defendant’s responsibility be discharged by the equivalent wrongdoing of others.

The issues above may lend themselves to an appeal to the Dutch Supreme Court, on the basis that the Court of Appeal made an error of law or procedure in denying the claimants a remedy, despite the clear finding that Shell owed them a duty to reduce its impact on climate change.  While it is not yet clear if the claimants intend to apply for permission to appeal the decision, they have three months in which to do so (i.e., by 12 February 2025).

On any view, the Court of Appeal judgment is unlikely to put a brake on future climate litigation. The widening gap between what the science tells us is necessary to safeguard a liveable, equitable future for all, and what current corporate strategies are delivering, is likely to continue to fuel strategic litigation, in the Netherlands and beyond..

Webinar with Milieudefensie

To further discuss the decision and its implications, Mishcon Purpose will be hosting a webinar with Milieudefensie's Senior Legal Counsel, Eline Zeilmaker, from 12:00-12:30 on Monday, 2 December 2024.