Milieudefensie vs Shell plc: What’s next? (part 2)

After the first court case verdict in 2021 I wrote an article (part 1) arguing that the required 45% reduction of Shell’s emissions was not possible to achieve in a way that would also be effective in speeding up global emission reductions. And I suggested an alternative way forward.

On November 12th a court of appeal concluded more or less the same:

“While it follows from the foregoing that Shell may have obligations to reduce its scope 3 emissions, this cannot lead to the award of Milieudefensie et al.’s claims on this point. The court of appeal has come to the conclusion that Shell cannot be bound by a 45% reduction standard (or any other percentage) agreed by climate science because this percentage does not apply to every country and every business sector individually. The court has answered in the negative the question whether a sectoral standard for oil and gas can be established on the basis of scientific consensus. This entails that based on the available climate science, it cannot be said that a 45% reduction obligation (or any other percentage) applies to Shell in respect of scope 3. In addition, it could not be established that an obligation on Shell to reduce its scope 3 emissions by a certain percentage is effective, so that, at any rate, Milieudefensie et al. have no interest in their scope 3 claim.”

In simple words: a requirement of 45% reduction cannot be applied to Shell, and it also appears likely that such a reduction would not be effective as Shell may have to sell or end some of their trading activities which are likely to be taken over by competitors and therefore the climate (global emission reductions) may not benefit. Legally speaking that means the claim would not be effective and Milieudefensie would therefore have “no interest in their scope 3 claim”.  

I have seen quite a few responses to the verdict on my timeline. Some oil and gas supporters hope that this is the end of the scope 3 issue which many of them prefer not to engage with. But that is unlikely as the judge clearly stated that Shell does have a responsibility also for scope 3. And although both sides agree that Shell won there also are quite a few people now declaring it a ‘pyrrhic victory’.

The main reasons to be hopeful are that the judge confirmed that Shell also has a responsibility for the impact of their products (scope 3) and that new oil and gas production could be in conflict with their duty of care.

So now the hunt is on. If not 45, 35 or 25% reduction, what is the correct target for companies like Shell to comply with? And is it really possible to give an objective (or science-based) answer to this question?

Some scientists have already declared that they can solve the problem and come up with actionable targets and enforceable norms.

The appeal court came to a different conclusion. Key sentences in the verdict for me are:

“The court has answered in the negative the question whether a sectoral standard for oil and gas can be established on the basis of scientific consensus.” 

“The court is of the opinion that no sufficiently unequivocal conclusion can be drawn from all these sources regarding the required reduction in emissions from the combustion of oil and gas on which to base an order by the civil courts against a specific company.”

They looked at all the evidence provided and concluded that it is not possible to define an enforceable standard (absolute emission reductions) either at sector level or for a specific company.

What does that mean? And are there alternative ways to set standards that could be enforced through orders by civil courts?

In this article I intend to answer these questions by discussing:

1.       Why it is so difficult to set absolute emission reduction targets for sectors or companies

2.       What this could mean for Science Based Targets Initiative and CSDDD/CSRD

3.       Criteria for alternative targets

4.       Suggested (by others) alternative targets and approaches

In a follow-up article (part 3; hopefully before the end of the year) I intend to use these new insights to review and revisit the ‘climate first’ approach I proposed in my 2021 article, and to present updated recommendations on what should be next, including suggestions for reasonable and effective targets for oil and gas companies. Hopefully, by that time the draft SBTi (Science Based Targets initiative) sector standard for oil and gas industry will be published so that I can include that also as input for proposing a way forward.  

Why it is so difficult to set absolute emission reduction targets for sectors or companies

All roads lead to Rome, but there are also many, many roads that lead to Paris.

That really is the fundamental problem when trying to set any enforceable science based target for emission reductions (sector, company, country). The IPCC has identified hundreds of scenarios that are compatible with the Paris goals to keep global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees. Some of these scenarios have very limited overshoot and others rely on large scale carbon removals to get back into the 1.5 to 2 degree temperature range by the end of this century.

If you take a subset of these scenarios that stay close to 1.5 degree Celsius and that have limited or no overshoot, then the average global reduction in emissions has to be around 45% in 2030. But even in this subset of scenarios there is a range of possible reduction percentages.

As I said: there are many roads that lead to Paris. Companies will argue that they are Paris-compliant and are on a road that starts with lower reductions in 2030 and more reductions and removals later. The court concludes:

“Apparently, there are ample differences of opinion among experts on the percentages to be used and the methodology to be applied for the various calculations”.

It is important to emphasize that this is not primarily because experts disagree on safe remaining carbon budgets, but primarily because they have different opinions on the preferred and achievable scenarios: they disagree on which road to take to Paris. And different roads can lead to very different percentages.  

Having said all that, many countries have taken these average global targets and used them as a basis for their NDCs (nationally determined contributions) and emission reduction targets. Why can’t we use the same targets for large companies? Some of which are larger than countries?

Below I will try to give some concrete examples why this is difficult.

Country differences: The term CBDR (common but differentiated responsibilities) is used to explain why wealthy countries (that have already emitted a lot of CO2) should set more ambitious reduction targets than developing countries whose economies are still growing. Typically that results in reduction percentages of 30 to 80% by 2030 in developed countries and in promises to peak emissions before 2030 in developing countries. Target Net Zero years vary between 2040 and 2080. Companies that have a lot of activities in wealthier countries therefore should also adopt more ambitious targets than companies that primarily operate in developing countries.

Sector differences: Even in a theoretical average Paris-compliant scenario, there are big differences between the speed at which different sectors need to reduce their emissions. The power sector is typically moving more quickly, and aviation, shipping and agriculture move more slowly. Different sectors should therefore have different targets. That is why SBTi (Science Based Targets Initiative) also has sector specific standards for many sectors.

Product differences: As many people have pointed out coal, oil and gas are not phased down at the same rate in Net Zero scenarios. Typically, coal is phased down much more quickly than oil and gas. In some scenarios (with large amounts of CCS) fossil gas even grows and remains fairly constant for a while before declining.

Company differences (multinationals): Different companies (even if in the same sector) have different mixes of products, activities and different geographical spreads. Some companies have already reduced their emissions significantly and would argue that that means they need to do less than competitors that have not done much at all yet.

Company transition strategies: Different oil and gas companies will make different choices on how to change their activities during the energy transition. Some may diversify and include renewable energies, some may simply produce oil and gas but wind down their business (returning money to investors), and some may choose to continue with fossil fuels and invest in CCS and CDR to get to Net Zero on time. Carbon management in the IEA Net Zero scenario is expected to be a very sizeable business opportunity that could be used by oil and gas companies to reach their net zero goals. Technically, all strategies can be consistent with the Paris agreement goals. For these different strategies the emission reduction pathways (net emissions) can be fairly similar but there will be large differences in the amounts of fossil fuels still produced.

Policy differences: Different countries have made (and will make) different policy choices. And sometimes these choices will change over time. Policies can incentivize or ban certain technologies that are sometimes considered controversial, like nuclear, bio-energy, CCS, CDR, onshore wind, etc. The use of fossil gas as a transition fuel (to enable a more rapid phase out of coal power for example) is also a policy choice that many western countries have made in the past successfully but that has become more controversial. This example was also referred to in the verdict. If countries like China, India, Indonesia, South Africa would choose to replace some of their (new) coal power with gas power plants then this would have a big impact on how fast global gas demand can and will decline and on the need for new gas production (as noted in the verdict also). It is clear that there still is a huge policy gap. Current polices scenarios will not get us to Paris. But it is very unclear if, when and how this gap will be closed around the world. This creates a huge amount of uncertainty and risk for companies that want to (or are forced to by court order) move ahead with emission reduction projects and investments in new technologies.

In conclusion: There are many different roads (scenarios) that lead to Paris but all these roads lead to different global emission reduction percentages in 2030 (and after that also).

And on these different roads there are different actors that move at different speeds. As the court concluded (7.73):

“This means that there are sectors and companies in countries that need to reduce more and there are sectors and companies in countries that are required to reduce less.”

What could this mean for Science Based Targets Initiative and CSDDD/CSRD

This year I was a member of the Expert Advisory Group for the SBTi Oil and Gas sector standard. The draft report is not published yet so I cannot share detailed information. However, it is very obvious that the whole premise of SBTi is that: a) It is indeed possible to define a standard for ‘science-based targets’ (SBTs) at sector level, b) It is reasonable to assume that each company in that sector will have to comply to this same standard to get approval for their emission reduction targets.

Typically, the starting point is to choose a scenario that keeps temperature increases below 1.5 degree Celsius with minimal overshoot. The chosen scenario has to have enough detailed information to derive sector specific data that can then be used to set sector specific goals and targets. It is a very thorough process. I was very impressed by the attention to detail and the broad expert engagement also.

SBTi has often used the IEA Net Zero scenario for this purpose.  The court says the following about using this scenario to set a legally binding standard for a company (7.92):  

“The court of appeal could choose to take as a starting point a percentage that does not originate from the experts hired by the parties, namely the percentage of the IEA. But by doing so, the court of appeal would not only disregard the doubts that Milieudefensie et al. themselves have raised about the creation of the IEA’s prognosis, but, more importantly, by doing so, the court of appeal would elevate that prognosis to a legally binding standard for a specific company. That was never its intended purpose and, moreover, that standard is, as noted, subject to change. An order for Shell to achieve a fixed reduction percentage in the period up to 2030 would be incompatible with that fluctuating nature.”

This is quite a fundamental objection on two important points. First of all, the court correctly points out that the intended purpose of the IEA Net Zero scenario is not to set company-level specific standards. Secondly, the IEA’s Net Zero report is updated every two years and the required reduction percentages in 2030 are updated and changed also in that process, making it incompatible for use as a company standard.

SBTi will have to explain why they think these objections do not apply to their process of setting targets that can be applied to individual companies. SBTi is of course a voluntary organisation and their target setting rules and standards have no legal status at the moment. Therefore, they could argue that while their process may not be sufficient for setting legally binding standards, it is a best effort to set science-based standards on a voluntary basis.

Further, the implicit suggestion often is that if a company does not have SBTi approval for their targets that these targets then probably are not ‘science-based’. However, as discussed, a company can be on a different road to Paris then the one selected and used by SBTi in their target setting process. So although SBTi may be able to argue that their approval for a company’s targets does indeed confirm these targets are ‘science-based’ this does not mean the reverse is true, namely that targets that are not approved by SBTi are not ‘science-based’.

Which leads us to the CSDDD (Corporate Sustainability Due Diligence Directive). The CSDDD includes a requirement for companies to have a Climate Transition Plan that includes time-bound targets in five-year increments from 2030 to 2050 based on 'compelling scientific evidence'. The plans have to be in line with 1.5 degree Celsius scenarios and the EU’s net zero ambition for 2050. This raises the question on who will determine (and based on which criteria) whether the time-bound targets are 'sufficient' and whether the scientific evidence used is ‘compelling’ enough. The use of SBTi sector standards could have been an option, but companies now have the arguments used by this court to argue against targets (like used by SBTi) based on global averages in a specific (IEA) Net Zero scenario. Every company is different, especially when you include worldwide scope 3 emissions. There is a real risk of this becoming a very time consuming (lots of reports, lots of expert opinions, lots of court cases) requirement with ultimately little to show for it. Also, because in the end it remains an obligation of means as observed by the judges in this court case:

“Such requirements should be understood as an obligation of means and not of results. Being an obligation of means, due account should be given to the progress companies make, and the complexity and evolving nature of climate transitioning. While companies should strive to achieve the greenhouse gas emission reduction targets contained in their plans, specific circumstances may lead to companies not being able to reach these targets, where this is no longer reasonable.”

In the verdict the court did seem to suggest that the CSDDD route (individual company plans being reviewed and approved by competent authorities) was a better route to what Milieudefensie was trying to achieve, namely to order companies to take more responsibility. The issue of ‘effectiveness’ however, does not go away completely. Government agencies responsible for approving these plans will be grappling with the same challenges as the lawyers and judges in this court case. How to address this and how to make Climate Transition Plans deliver value for money is the topic of an article I wrote earlier this year.

In conclusion: This verdict will make it more difficult (if not impossible) to maintain that all companies in a sector or country have to meet the same fixed reduction percentage to meet their duty of care under the Paris agreement. This raises questions also on the initiatives like SBTi and the mandatory Climate Transition Plans under CSDD, which are based on the same assumption, namely that science-based targets can be determined and applied to inidividual companies.  

Criteria for alternative targets

This verdict should be seen as a warning that company-level enforceable emission reduction targets are difficult to establish objectively. The verdict, and the above analysis of why it is so difficult to determine company-level legally binding emission reduction targets do give some indications though of what criteria to keep in mind when considering alternative targets, obligations and standards. 

Reasonable: As a rule, the law does not require taking measures that cannot reasonably be achieved. This is very important. And appeared to have been overlooked by the judge in the original verdict. A company cannot be expected to take measures that will threaten the economic continuity of the company. Some temporary negative impact on financial results may be considered acceptable by some courts, but anything that threatens continuity or has a significant negative impact on shareholder interests will be difficult to justify. It can even be argued that directors that take bold climate action face more risk of litigation than directors that do not make such efforts.  Standards also have to be reasonable from a legal point of view. For example, for courts to require that companies close down still profitable producing fields, power plants or refineries is probably not legal as typically it would be up to governments to make or approve such decisions. Also, it would be in conflict with their fiduciary duty to shareholders. Similarly, it is legally easier to argue that a company has a responsibility for the waste (emissions) of their products, than to require a company to start producing or selling different energy products (for example requiring investments in renewable energy).  And finally, companies are dependent on many other changes that need to take place for them to be able to progress their emission reduction projects. These changes can all present barriers and cause delays outside of the control of these companies. For example infrastructure developments (electricity, storage, hydrogen, CO2, heat), permitting procedures, policy changes, can all influence the speed with which a company can proceed with their emission reduction plans.  

Science-based: Although this term is more and more subject to inflation and misuse, I do think it goes without saying that if the court should decide to place an additional requirement on a specific company (or country) that that target should be based on sound, scientific assessment of what that company would need to do to contribute sufficiently to the goals of the Paris agreement. Considering that there are many roads leading to Paris, this will always be a challenge (and a source of disagreements). What is often still missing is science-based information on the possible negative impacts of setting more or less ambitious emission reduction targets. Many experts can agree on huge negative impacts of the two extremes. Stopping all oil and gas production tomorrow would cause serious disruption to society including high mortality. Not doing anything about climate change would also over time lead to very high impacts, damages and mortality. Somewhere in the middle there will be an optimum with the lowest possible negative impacts on people and nature. It would be a great coincidence if that optimum would result in exactly a 1.5 degree Celsius temperature increase.  

Effective: A very important conclusion in the verdict is that Milieudefensie et al have ‘no interest’ in their claim for scope 3 emission reductions(7.111):

“…it could not be established that an obligation on Shell to reduce its scope 3 emissions by a certain percentage is effective, so that, at any rate, Milieudefensie et al. have no interest in their scope 3 claim.”

Basically, the court is saying that unless it can be shown that a claim will reduce not only Shell’s but also global emissions, there is no case and no claim to be made. For any alternative target this will probably be the most difficult criteria to satisfy. Almost by definition these court cases are trying to get individual companies to do more than what they are legally required to do. This court has validated that by saying (7.27):

“ In summary, the court of appeal is of the opinion that companies 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, even if this obligation is not explicitly laid down in (public law) regulations of the countries in which the company operates. Companies like Shell thus have their own responsibility in achieving the targets of the Paris Agreement.”

For example, if the latest IEA figures from their Net Zero scenario would be used that would mean a 28% emission reductions target for oil and 23% for gas. At the same time the IEA predicts in their World Energy Outlook report that based on current policies oil demand will be slightly higher in 2030 and LNG demand will increase significantly. This means almost inevitably that putting a very strict requirement on one company will not be effective, as other companies will still be allowed and even encouraged by their governments to fill the gap and ensure that supply continues to meet demand. This is a critical point. A policy gap cannot be filled by going after individual companies. It is not effective. And it may not be reasonable either to expect a company to forego commercial opportunities that competitors are still allowed to pursue. People would like companies to do ‘more’ and to bet on governments filling the policy gap soon, but even if that would be a likely scenario, it is very difficult to predict how and when the policy gap will be closed. Therefore running ahead could be risky (if you gamble on the wrong policies) and very importantly, it would not be effective. Almost by definition.

Another fundamental issue is the mechanism that is assumed by Milieudefensie and others to argue that emission reduction targets will be effective. It is assumed that reducing oil or gas production and sales (even by one company) would restrict global supply, leading to higher prices, which would lead to lower demand (meeting the restricted, lower supply). I will discuss this in more detail later on in this article when I discuss the ‘no new production’ pro’s and con’s. Shell of course argues that the market will absorb any one company lowering production and any price increase will at most be very temporary. What I am intrigued by is the link between effectiveness and higher prices. It raises two issues for me. First of all, considering the social and economic impacts of higher energy prices should this be decided in a court case against a specific company in a specific country (considering the global implications) or should this be a political decision? Secondly, as far as I know oil and gas prices always go down in ambitious Net Zero scenario’s. In IEA’s NZ scenario oil and gas prices go down quickly already in 2030 and even more thereafter. The lower prices are a logical result of lower demand due to the rapid growth of renewable energy. Lower prices lead to lower production. Milieudefensie has basically been arguing that ambitious scope 3 emission reduction targets are effective because they constrain supply and therefore prices increase leading to lower demand. But, just as sure as lower prices lead to less production, higher prices will lead to more production. It is hard to see a way out of this ‘effectiveness’ challenge.  It will be interesting to see if the EU’s attempt to force many companies at the same time to go beyond regulatory compliance with meta-regulations like CSDDD and CSRD will be effective. And what that means for the position of European companies in the world. As argued in my article on Climate Transition Plans, I have my doubts about that.

Effectiveness can further be enhanced if a reduction order will have a signalling effect to other companies. In this case the court concluded that this was unlikely (7.109):  “A potential signalling effect of a reduction order on other fossil investors is too speculative, and too far removed from Shell’s alleged unlawful conduct to serve as an interest in the reduction order.”

Flexible: Ideally, targets would be flexible enough to be robust in a range of different Paris-compliant scenarios and also for a range of different technology choices and mixes. Enforceable targets should further not have to be adjusted every couple of years (see comment court on the changing IEA-derived targets) depending on progress with the transition, economic developments, technology developments, geopolitical developments, etc. Companies cannot make business plans and approve investments based on targets that are continuously changed and updated in an unpredictable manner.

Simplicity and transparency in monitoring progress: Some targets are easier to measure and track than others. In general, the further you go down the fossil fuel value chain the more difficult and complicated it becomes. Production and traded volumes are fairly easy to monitor and report and therefore set targets for. But there are literally millions of smaller and larger emission sources along the value chain and the end users. And scope 3 emissions are still not well established (exact scope, how to determine) and most companies therefore rely on simple standard factors for different product categories rather than supplier based verified data. The vast majority of emission data is also not independently verified yet. This makes it difficult also to claim reductions in scope 3 emissions (no proper baseline). And finally, scope 3 emissions tend to be double, triple, and more counted by many companies in the value chain. This does not help with assigning accountability for these emissions. Experts in emission accounting are therefore pointing out the limitations of scope 3 accounting for performance improvement targets. Having said that, the only sector for which scope 3 emissions are relatively easy to determine accurately is the oil and gas industry as their scope 3 emissions are dominated by the burning of the supplied fuels. Around 100 companies worldwide are responsible for almost 80% of all fossil fuel emissions (coal, oil, gas producers).

Economic efficiency: In general, there is fairly broad consensus among economists that market instruments (forms of carbon pricing for example) lead to lower total costs for emission reduction and the energy transition than standards and regulations. Politically however, it has been difficult in most countries to introduce meaningful (high enough) carbon taxes. The EU has taken the lead with ETS-1 where the industry as a whole (including power plants) have to reduce emissions. Individual companies can and will choose to move more or less quickly than the average required emission reduction target for all ETS-1 companies combined. Tradeable emission allowances are used to ensure all companies contribute fairly. The court correctly observes that these systems are not compatible with company or installation level targets (7.35):

“It is worth noting here that the EU ETS system cannot easily be reconciled with the claims of Milieudefensie et al. It does not fit well with the EU ETS system that Shell would have to reduce its ‘European emissions’, for which it obtains and then surrenders emission allowances, by 45%. The EU ETS system does not achieve the reduction of CO2 emissions by forcing companies to reduce their emissions by a certain percentage. The goal is achieved through an emissions cap combined with freely tradable emission allowances.”

So-called flexible regulations, where targets are set sector level and companies can trade compliance certificates to demonstrate compliance, are increasingly used to ensure timely progression towards national targets. They tend to be more acceptable politically than a simple carbon tax, and they tend to be more effective also in actually reducing emissions. They are economically more efficient than company- or product-level standards and regulations. Asking every individual company in the Netherlands to halve their emissions by 2030 (like Milieudefensie and others did a few days after the verdict) does not fit well with this approach, as it would cost more and ultimately not lead to more emission reductions. Large companies in the EU already have to reduce scope 1 and 2 emissions to net zero by 2040 under ETS-1 and for scope 3 emissions the climate benefits are questionable (as concluded also in this verdict). In the same way, it is unlikely to be economically efficient to impose the same sector-level standard on each individual company in that sector (as SBTi does).

In conclusion: Alternative targets should be (as much as possible) reasonable, science-based, effective, flexible, simple and (economically) efficient.

Suggested alternative targets and approaches

The fact that the court confirmed that Shell has a responsibility for scope 3 emissions that goes beyond simple regulatory compliance, but that 45% was not the answer, has led to many articles and blogs on other targets or standards that could be imposed via future court cases.

I will discuss a few of these below. But let’s start with the 45% claim (and the alternatives of 35% and 25% that were also on the table). Why was this not a good target? The main reasons are that 45% was not reasonable, not science-based and not effective. The court also did not want to use lower percentages (25 or 35) that would be closer to the IEA-derived estimates because the IEA estimates are not intended to be used as company-level targets, and they are updated every 2 years, making them unsuitable for an enforceable standard ordered by a court.

The main alternatives being discussed can be divided in three groups: more granular calculations of company specific emission reduction targets, carbon intensity targets, and more specific bundled obligations. I recognise these approaches from the discussions that we had in the Expert Advisory Group for the SBTi Oil and Gas standard. Until there are more concrete proposals it is of course not possible to evaluate these approaches in detail, but based on the criteria discussed before it is possible to assess the main strengths and weaknesses of these approaches.

Company specific emission reduction targets

Some researches are hopeful that they will soon be able to bridge the gap between global emission reduction goals and specific actionable targets for companies. And theoretically it could be possible to determine a range of emission reduction requirements (for different Paris compliant scenarios) for a specific oil and gas company. A magic formula may be developed taking into account the different sectors, the relative amounts of oil and gas projects and products in the portfolio and the geographical spread of the company. This could lead to a required total reduction for Shell specifically of for example 15 to 30% reduction in 2030. An argument could then be made that at least the minimum percentage would be a reasonable claim. Personally, I think it will be difficult to find that magic formula (that will hold up in court). Also, for a typical multinational company the portfolio changes continuously (countries, sectors, oil vs gas, projects) and therefore the global reduction percentage would need to be updated also continuously. These changes come on top of the already discussed changes when scenarios (like the IEA Net Zero scenario and IPCC scenario’s) are updated. Such a target will also not score well on flexibility (requiring almost annual updates to reflect changes in company portfolio and changes in the scenario’s used) and on simplicity (the definition of a magic formula is likely to lead to expert disagreements that are difficult for courts to resolve). And very important of course, making the scope 3 emission reduction target more science-based will not resolve the issue of effectiveness. To address this issue Milieudefensie had proposed to include a requirement that emission reductions achieved by selling assets and/or scaling down trading activities could not be counted towards the emission reduction target (because these activities would likely be continued by other companies). The court did not consider this, probably because it was not part of the original claim. I do not think it would have made a big difference because with that additional demand the reduction target would probably no longer be considered reasonable and therefore denied on that basis. It is legally impossible for companies to close down oil or gas production and/or refineries prematurely (for climate reasons). Ultimately, in most countries, it is governments that decide on levels of oil and gas production, and on issuing permits and on approving cessation of production. Most governments will not approve cessation of production if there are still recoverable reserves. It would also have a severe negative impact on share prices, etc, if a company would start closing down profitable assets like refineries to reduce scope 3 emissions. There would be no credible path to reduce scope 3 emissions sufficiently without threatening the economic continuity of the company. Ergo, not reasonable. Finally, it can be argued that the CSDDD will in fact make this approach mandatory for companies, and therefore additional claims are not needed. Each company will have to analyse their portfolio and argue for their own specific emission reduction targets and why they think those targets are ‘Paris-aligned’. Governments will have to review and approve these plans and targets.

Carbon intensity targets

Companies have always preferred carbon intensity targets (CO2 emitted per unit of energy). Would it be easier to set reasonable, effective, science-based carbon intensity targets that hold up in court? The two main objections against CI targets are that it is uncertain how fast a reduction in CI will lead to a reduction of absolute levels of emissions (which is what matters for the climate), and that companies could ‘simply’ reach their targets by acquisition of a few large renewable energy companies and do little or nothing about their fossil fuel emissions. These are fair concerns. The second one is easy to address by making the CI targets for fossil energy sales only. The first one has become less of an issue now that most companies have net zero targets. The only way to get to net zero carbon intensity is to reduce absolute emissions to net zero also. CI’s have as advantage that they are more flexible. Less adjustments are needed in case of economic up- or downturns. However, this will make it more difficult to prove that CI targets are science-based and Paris compliant. Total emissions until the Net Zero year can be very different in scenarios with continued energy demand growth than in scenarios where energy demand plateaus (due to energy efficiency increases and electrification) and fossil fuel use has declined significantly by the Net Zero year.

Bundled obligations and targets

Some experts and researchers are less confident that the magic formula to determine a company specific target can indeed be found. Also, they worry that that still leaves the effectiveness challenge. They are suggesting that: “… an alternative formulation of a duty of care for major emitters would be to conceptualize it as a bundle of duties, rather than a single duty. This approach would reflect the complex business activities in which major emitters engage, articulating corresponding obligations, e.g. for their financial investments that result in carbon “lock in” effects, their separate production, wholesale and retail activities as well as how they market their products (with the new EU Green Claims Directive having considerable impact). Such an approach might focus on production limitations rather than emission reductions that result in sale limitations, as hinted at by the Court”.

They give the example of the Milieudefensie claim against the Ing bank which is basically a set of obligations for Ing and her largest clients to make and implement ‘sufficient’ climate transition plans and for Ing to cease financing clients who refuse to do so. As the authors themselves observe though “…the “sufficient plan” risks becoming an empty signifier if the Court cannot find broad scientific consensus on minimum absolute emissions reductions for industries”. Typical issues that are on the wish list for bundled obligations for oil and gas companies include: no new projects, ending continuous flaring, and ending or minimizing methane emissions. The last two issues are important but will not get oil and gas companies close to Paris goals, and do not impact scope 3 emissions. Also, flaring and venting really needs to be dealt with by regulations and enforcement and therefore it would be far more effective to take governments to court over these issues (rather than oil and gas companies). That leaves the ‘no new projects’. Most commentators agreed that the court hinted at this by saying:

7.106 “There may be a causal relationship between a production limitation and emission reduction, as assumed by the district court (cf. section 4.4.50 of the district court’s judgment)”

7.107 “Moreover, a production restriction is less easily absorbed by other market participants than a sales restriction.”

7.61 “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. Shell’s planned investments in new oil and gas fields may be at odds with this.”

Note that the court was not asked to form an opinion on this (production restrictions) in this specific court case, and therefore also did not (have to) come to any conclusions on this issue.

7.61: "In these proceedings, however, the court of appeal does not have to answer the question of whether Shell’s planned investments in new oil and gas fields are in violation of its social standard of care. At issue in these proceedings is whether an obligation can be imposed on Shell to reduce its scope 1, 2 and 3 emissions by 45%, 35% or 25%."

And it is true of course that IEA has famously said that if the world would follow their Net Zero scenario then ‘no new projects’ would be required. In that scenario oil and gas prices would rapidly decline (due to demand declines) and the world would become increasingly dependent on OPEC+ countries as the lowest cost producers with the largest proven reserves. Even before the war in Ukraine people questioned the geopolitical realism and energy security implications of these assumptions. IPCC has said something similar about new projects in their latest summary for policy makers: “The continued installation of unabated fossil fuel infrastructure will ‘lock-in’ GHG emissions.” Note that the phrasing by IPCC would indicate that installation of abated fossil fuel infrastructure (meaning with CCS) could be considered acceptable.

The hard reality is of course that the world is not following IEA’s nor IPCC’s Net Zero scenarios with limited overshoot, and that most experts agree that 1.5 degrees is therefore no longer achievable. Only scenarios with massive carbon removal (starting soon and continuing the rest of the century at high levels) can still hope to get temperatures back to a 1.5 degree Celsius increase by the end of the century. In these scenarios new oil and gas production will still be needed the coming decade.

Decisions about domestic oil and gas production in general requiring balancing many important and conflicting goals and priorities. So far only countries with limited or no fossil fuel resources have committed to stop development of new projects. Some countries with small (remaining) resources have committed to ending production before their committed Net Zero year (and not produce more than they consume in the mean time), but the vast majority of countries that have fossil fuel resources intend to keep producing. Democratic wealthy countries like United States, Canada, Australia, UK and Norway account for more than half of new projects planned. No wonder that countries in Africa and South-America feel they have a right also to develop their fossil fuel resources. Oil and gas projects can be a gamechanger for a developing country and very popular also if the money is spent wisely and shared with the population.

A ‘no new projects’ claim to force companies to stop all new production (while most governments continue to encourage and permit such developments) is by definition sensitive to the substitution effect. From that perspective, court cases against governments are more likely to be effective. I do have a lot of sympathy though for the more principled position that other judges have taken on the ‘substitution issue’, namely that the fact that substitution may take place (if the project is halted) does not make the environmental impact any smaller of the planned new project and therefore this needs to at least be taken into consideration when deciding on a new permit (including scope 3). But if the stopping of a project is highly likely to not lead to less global emissions then the court order would not be effective and therefore that is ground for refusal. Many reports have been presented by both sides on the substitution effect for new projects. They tend to be economic analyses of supply and demand curves and resulting prices impacting (or not) demand. The reality is that global oil and gas prices are not only determined by supply and demand but also (and some would say primarily) by geopolitics and cartels like OPEC+. Swing producers (like Saudi Arabia for oil, and shale gas producers in the US) will reduce production when prices go low, and increase production when prices go high. These dynamics will be more important than a few companies or countries deciding (or being ordered by a court) to not do any new projects anymore. Substitution will always take place in relatively open, global markets like for oil and gas and LNG. If a large project or country stops all (new) production then it may take a bit longer for the other players to make up the shortfall, but in general this will happen more within months than in years.

Restricting supply to increase prices is therefore unlikely to work, and if it would work it should be a political choice in which the broader implications can be weighed. We have seen when Russia invaded Ukraine that (much) higher prices will indeed lead to lower demand, but they also had serious negative impact on companies and people, in Europe but especially also in developing countries.  

Conclusions

There are many roads that lead to Paris and mandating a company to follow a specific road at a specific speed, while the rest of society may be following another road, or may not be heading to ‘Paris’ at all, is unlikely to be effective or reasonable. Nor can it be defended as ‘science-based’ since there are clearly many alternative scenarios that do comply with the Paris goals.

Based on the verdict it is possible to draw up a list of criteria that alternative targets should be evaluated against. For a future claim to be successful targets should be (as much as possible) reasonable, science-based, effective, flexible, simple and efficient.

Alternative claims that have been suggested so far are more precisely determined company level emission reduction targets, carbon intensity reduction targets and bundled obligations. None of them are likely to score well on each criteria.

It may be possible to overcome some of the identified challenges, but it will be difficult to convince a court that any ambitious (science based) claim will be ‘effective’ and ‘reasonable’.  

Global fossil fuels supply will only decline permanently if and when prices are low and unlikely to increase again. Taking out production or supplies from one company (or country) will at most lead to a very brief increase in prices. This may temporarily lead to a small dip in demand, but it will also lead to more production elsewhere which will bring prices down again into the comfortable range for the main (and swing) producers. This will make most (scope 3) claims ineffective.

There also is a challenge with demonstrating that a claim is ‘reasonable’ when the claim cannot be demonstrated to be (very) effective. Policy gaps cannot be resolved with claims against individual companies. Asking one company to run ahead of policies and regulations is not reasonable as the choice of policies (and support or not for specific technologies) will greatly impact the commercial viability of various emission reduction measures and new technologies, and because competitors will not have to take these first mover risks. Key stakeholders such as governments and shareholders will object to closing down and/or divestment of profitable assets.

Where does that leave us? What is next?

Unfortunately this article was getting way too long very quickly, and therefore I have to leave you now with a cliffhanger. I do conclude that ambitious traditional targets (that go far beyond current policies) are not effective nor reasonable when imposed on a single company. But that leaves the question of how to force companies to be more pro-active and to take up their responsibility for the impact of their products. As promised in the introduction of this article I intend to write a follow-up article soon in which I will discuss my ideas on how this can be done and how court cases could help to make this happen more quickly. I will re-visit my proposed ‘climate first’ way forward in the 2021 article on the original court case, and update it in the light of more recent developments, insights and court cases.

Please leave your comments and suggestions which I will use as input for my next article.