Milieudefensie et al. v. Shell:
Analysis and Commentary of the Hague Court of Appeal’s Decision
By Jolene Lin
Published on 18 November 2024
On 12 November 2024, the Hague Court of Appeal handed down its much-anticipated decision in Milieudefensie et al. v. Shell (commonly referred to as the ‘Shell climate case’). The case revolves around the question: Is Shell required by law to reduce its carbon dioxide (CO2) emissions by 45% by 2030 relative to 2019 levels? In 2021, the Dutch District Court had answered ‘Yes’. In overturning the District Court’s ruling, the Court of Appeal’s answer was ‘No’.
The Court of Appeal’s ruling has been widely reported by media outlets around the world, including the Financial Times, the New York Times, the Guardian and Al Jazeera. The ruling has been cast as a victory for Shell, a huge step backwards for the fight against climate change as well as an indication that climate litigation against companies is less effective than climate litigation against states. CNN’s headline ‘Court rules this major oil company can continue to pollute’ might have generated many clicks. It is, however, not only misleading. It is simply wrong.
This blog post aims to provide a concise analytical commentary of the Court of Appeal’s decision which, it is argued, is a ground-breaking legal precedent. A careful reading reveals the nuanced nature of the Court of Appeal’s decision which unequivocally affirms that companies have a legal obligation to reduce CO2 emissions to combat dangerous climate change.
Milieudefensie et al.’s claim
Milieudefensie et al. argued that Shell’s failure to reduce its CO2 emissions by 45% (or at least 35% or 25%) by 2030 relative to 2019 levels is a tortious act in violation of unwritten law pertaining to proper social conduct. It is therefore unlawful pursuant to Article 6:162 (2) of the Dutch Civil Code. It should be noted that by ‘emissions’, Milieudefensie et al. mean Scope 1, 2 and 3 emissions ‘associated with the business activities and sold energy-carrying products of the Shell Group’ (Para 4.1 of Judgment). The Greenhouse Gas Protocol defines the categories of emissions as follows:
Scope 1: direct emissions from installations that are owned or controlled in full or in part by the company;
Scope 2: indirect emissions from third-party installations from which the company purchases electricity, steam or heat for its business activities;
Scope 3: other indirect emissions not included in scope 2 generated in the company’s value chain, including emissions generated from the use or consumption of products the company supplies to third parties, such as other organisations or consumers.
In order to determine the nature and scope of Shell’s obligations to reduce CO2 emissions, the Court had to first determine what ‘proper social conduct’ required of a company like Shell.
The ‘Social Standard of Care’
What amounts to proper social conduct requires a judicial determination of the ‘social standard of care’. The Court, in determining this standard of care, looks to legislation, general legal principles, fundamental rights, case law and expert reports (Para. 7.2 of judgment).
Human Rights Law
The Court of Appeal examined landmark judgments from within and outside Europe including Urgenda, Verein Klimaseniorinnen Schweiz v. Switzerland, Leghari, Held v. Montana and the Indian Supreme Court’s Ranjitsinh decision. It also considered UN resolutions and reports that identify protection from climate change to be a human right.
Drawing the conclusion that ‘there can be no doubt that protection from dangerous climate change is a human right’, the Court goes on to say that the primary responsibility for addressing climate change falls on states, but this does not mean that private actors like Shell have no legal responsibility (Para 7.17 of the judgment). The main legal basis for corporate responsibility on climate change, in the Court’s view, is human rights law. While human rights law is primarily directed at states vis-à-vis their citizens, human rights law can inform the social standard of care that companies are required to meet. Given that contributing to climate change is contributing to the violation of human rights (Articles 2 and 8 of the European Convention on Human Rights), companies which do not reduce their CO2 emissions and continue to contribute to climate change are in breach of human rights law. and the social standard of care in turn.
Principle of Common but Differentiated Responsibilities (CBDR)
The Court of Appeal took the view that the social standard of care is likely to vary from one company to another, ‘depending on the company’s contribution to climate change and its capacity to counter climate change’ (Para 7.55 of judgment). In Shell’s case, the Court held that ‘more can be expected of Shell than of most other companies, as Shell has been a major player in the fossil fuel market for over 100 years and continues to occupy a prominent position in that market today’ (Para 7.55 of judgment).
Notably, the Court opined that ‘[i]n line with the common but differentiated responsibilities principle (CBDR principle), Shell could even be required to make a higher contribution to the global reduction target’ (Para 7.72 of Judgment). The CBDR Principle is a cornerstone of the international climate change legal regime. It is interesting that the Court of Appeal in the present case draws on international law principles to inform its decision. In fact, one can go further to point out that in drawing on human rights law, European Union law and international law—areas of law broadly within the public law sphere—to inform a legally binding standard of care in private law, the Court of Appeal has created a precedent that will provide guidance to courts interpreting the scope and nature of ‘duty of care’ or ‘standard of care’ across common law and civil law jurisdictions.
Compliance with Public Law Does Not Extinguish Private Rights
Pointing to the gamut of EU climate laws and regulations including the EU Emissions Trading Scheme, sustainability reporting and the Corporate Sustainability Due Diligence Directive, Shell argued that its climate actions are adequately regulated by law. Further, climate change is best addressed by legislation as the legislative process can undertake the necessary balancing of policy considerations. The courts are not equipped to do so, says Shell. The Court of Appeal did not directly respond to this argument. Instead, the Court considered that EU climate legislation is not exhaustive and EU member states have not said that companies that comply with EU laws are discharged from other obligations to further reduce their CO2 emissions. In short, public law and private law are different realms. They are different sources of legal obligations to reduce CO2 emissions. The Court rejected Shell’s argument that public law is the rightful and only source (Para 7.53 of the judgment). This is an important finding that keeps the door open to corporate climate lawsuits that are grounded in private law. It also sends a clear message to companies that they are legally obliged to reduce CO2 emissions and they can be held to account through private law and public law pathways.
The 45% by 2030 Target
Having decided that Shell had a legal duty to reduce its CO2 emissions and explained how this duty arises, the Court then went on to determine the scope of this duty. Specifically, the Court was asked to decide if the legal duty required Shell to reduce CO2 emissions by a specific amount, i.e. 45% by the year 2030.
The 45% by 2030 Target in relation to Shell’s Scope 1 and Scope 2 Emissions
As the parent company, Shell reports on the CO2 emissions from fossil fuels produced and sold by the Shell Group. About 5% of Shell’s reported emissions fall within Scope 1 and 2 (Para 3.24 of judgment).
Shell argued against the courts imposing a target for its Scope 1 and 2 emissions on the basis that it has set itself the goal of reducing these emissions by 50% by the end of 2030 compared to 2016. Shell further argued that there is no risk that it will not comply with this goal. As there is no risk of an impending breach of legal obligations, the court ought not to grant an order (as per Milieudefensie et al.’s claims) aimed at preventing a future violation (Para 7.65 of Judgment).
Milieudefensie et al. countered that such an order is necessary because there is a risk of an impending violation of legal obligation. Shell has, in the past, watered down targets and reversed its climate policies. Interestingly, the Court placed a high level of importance on Shell’s public announcements to stakeholders including its investors and the Securities and Exchange Commission (SEC). Further, by 2023, Shell had already reduced its Scope 1 and 2 emissions by 31% compared to 2016. The Court took these ‘concrete plans’ and measures as indicative of Shell’s commitment to fulfil its goal to reduce its Scope 1 and 2 emissions. The Court therefore ruled that there was little risk of an impending breach of legal obligation and granting the order to impose a target could not be justified. With due respect to the Court, this reasoning is troubling to the extent that Shell in March 2024 weakened its 2030 emissions target and scrapped its 2035 target completely. In May 2024, a majority (about 78%) of Shell’s shareholders voted in favour of the revised energy transition strategy under which Shell will cut emissions more slowly than previously planned. These are not insignificant developments that indicate a certain direction of travel. They should not have been dismissed as ‘[t]he mere fact that Shell has previously watered down targets cannot in any event justify that finding’ (Para 7.65 of Judgment).
The 45% by 2030 Target in relation to Shell’s Scope 3 emissions
About 95% of Shell’s reported emissions fall within Scope 3 (Para 3.24 of judgment). Of the Scope 3 emissions, about one-third comes from Shell’s own production. The remaining two-thirds are from oil and gas produced by third parties, which Shell resells (Para. 7.100 of Judgment). From these figures alone, it is not hard to see why the Court’s decision on whether Shell is legally required to reduce its Scope 3 emissions by 45% by 2030 assumed central importance. Reducing Scope 3 emissions is challenging enough for most businesses. For a company like Shell, whose business is to sell the very products that are the main cause of global warming, reducing Scope 3 emissions requires it to sell less and change the business model that has made it one of the most profitable companies in the world. In short, an order to reduce Scope 3 emissions has implications for Shell (and other companies in the fossil fuel business) that are nothing short of revolutionary. These implications also bear on the future of life on Earth.
Having ruled that there was no justifiable basis for the Court to grant an order to compel Shell to reduce its Scope 1 and 2 emissions, the Court then turned its attention to Shell’s Scope 3 emissions. The court begins its deliberations by recalling that, while existing climate law does not impose specific CO2 emissions reduction targets for individual companies or sectors, ‘it is conceivable that there is consensus in climate science on specific reduction standards that should apply to a company such as Shell’ which is legally obliged to ‘make an appropriate contribution to the climate goals of the Paris Agreement’ (Para. 7.67 of Judgment).
The Court of Appeal focused on the question of whether such a scientific consensus existed. There were two main prongs to the Court’s reasoning on this issue.
The first was concerned with whether it was appropriate to base a specific target for a company on the 45% by 2030 target which is an average target applicable to all sectors across the world. It is also an average percentage that relates to all greenhouse gases, not just CO2. Milieudefensie et al.’s claim, with the 45 by 2030 target, is mainly based on the reports of the Intergovernmental Panel on Climate Change (IPCC), the International Energy Agency (IEA), Science Based Targets initiative and the Race to Zero Initiative. (Para. 7.69 of Judgment). Milieudefensie et al. deduced from the reports that the percentage of 45 by 2030 should also be applied to the energy sector and subsequently also to individual companies. Since there is no agreement on how the reduction goal is to be divided among companies, Milieudefensie et al. believe the obvious approach is to apply the 45% target to all companies. ‘This is the only way to ensure that every company makes its proportionate contribution so that the 45% reduction target can be achieved’ (Para 7.72 of Judgment). The Court concluded that it was problematic to derive a specific target for Shell based on global averages. The Court gave the example of how, based on the CBDR principle, it may well be that Shell is expected to go beyond the global average of 45%.
The Court then proceeded to the second prong of its enquiry, which was to see if it was possible to derive a more precise target, one that was specific to the oil and gas sector which Shell is part of. The Court was presented with several pieces of expert evidence. In the Court’s assessment of the evidence, there was significant divergence in the recommended sectoral targets, and the data was not always comparable. There was also disagreement amongst the expert witnesses. The Court reached the conclusion that there was insufficient scientific consensus on the appropriate CO2 reduction target for it to make a legal order against a specific company. It is on this basis that the Court overturned the most well-known aspect of the District Court’s decision, i.e. the imposition of a 45% CO2 reduction target on Shell.
The Court of Appeal was not ready, on the expert evidence put before it, to impose a CO2 emissions target on Shell. However, it is a matter of time that more accurate data on sectoral CO2 emissions reduction pathways will be available. In that not far off future, the Court of Appeal’s decision suggests that it is conceivable that major CO2-emitting companies can be held to specific CO2 reduction targets.
New Investments in Oil and Gas
Without ruling on whether planned investments in new oil and gas field amount to a breach of the social standard of care as it did not have to answer this question, the Court opined that ‘oil and gas companies are expected to take into account the negative consequences for the energy transition when investing in new oil and gas fields as these investments will expand the supply of fossil fuels’. Paragraph 7.59 of the decision contains an eloquent explanation of the ‘carbon lock-in effect’ when investment decisions to expand the supply of fossil fuels ‘can seriously slow down the energy transition’. This part of the Court’s reasoning, while it could not support granting any part of the claim, provides fertile ground for legal accountability strategies that aim to halt large scale investments in new oil and gas fields.
Conclusion
The Court of Appeal was clear as crystal in articulating its central message: ‘[C]ompanies 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’.
Where it parted ways with the District Court was on the question of whether the courts saw that there was ‘sufficient scientific consensus’ to set a specific CO2 reduction target for Shell. The race to generate robust, science-based sectoral CO2 reduction pathways for the oil and gas industry is on. It would be misguided for companies and their legal advisors to read the Court of Appeal’s decision as an endorsement of ‘business as usual’.
The Court was bound by its duty to weigh the evidence before it. It reached the conclusion that it did on the basis that the evidence was not of sufficient probative value. The Court of Appeal’s decision lends further to the emerging jurisprudence on corporate legal duties to address climate change. While it is a step back from the District Court’s decision to impose a target on Shell, this commentary has sought to show that the Court of Appeal’s decision remains a powerful precedent and a milestone in the quest for corporate climate accountability.
Jolene Lin is an Associate Professor at the Faculty of Law, National University of Singapore and Director of the Asia Pacific Centre for Environmental Law. Her publications include Litigating Climate Change in the Global South (Oxford University Press, 2024) and Climate Change Litigation in the Asia Pacific (Cambridge University Press, 2020).