The Paris Agreement legally binds countries: they must therefore make plans for companies to achieve the temperature targets. For industrialized countries, that means a 50% reduction in 2030 compared to 1990 and zero emissions in 2050! Countries are not there yet with their climate plans, but a large number is working on tightening up. The EU wants to go from 40% to 55% by 2030 and become climate neutral by 2050. Half of the EU’s CO2 emissions, from industry and energy, are already covered by the mandatory EU CO2 Emissions Trading System (ETS). The ETS budget is getting smaller and smaller to meet the CO2 target. But there is still a lack of sufficient reduction in other sectors and global action.
In the case that Dutch NGO Milieudefensie brought against Shell with others, the Dutch judge therefore says that the fact that countries make progress does not relieve a company of its own responsibility. It does so with reference to human rights that could be violated. Shell therefore must get to work with its global emissions. It may, however, make use of compensation by reducing emissions elsewhere. On the one hand, the Climate Agreement and the regulation for large companies mainly is a task for politicians. On the other hand, it is positive that Shell is being encouraged to make absolute reductions.
From the judgement: RDS does not have to adjust its policy due to the indemnifying effect of the ETS system. What applies to the ETS system also applies to other existing and planned ‘cap and trade’ emission schemes elsewhere in the world.
What does the verdict mean for Shell?
- Shell must have reduced international scope-1 and scope-2 CO2 emissions by 45% by 2030 compared to 2019; think of the refineries, methane from its own fields, and purchased electricity: there she has a “result obligation”;
- For the other indirect international emissions, scope 3, of CO2, but also methane emissions, from third-party oil platforms, transport to the petrol consumption of motorists, Shell has a “best efforts obligation,” whereby it can be expected that it will take the necessary steps to mitigate the serious risks as a result of the CO2 emissions they generate and use its influence to minimize any ongoing consequences”. This is because there are fewer hard numbers for these scope-3 emissions and Shell does not have 100% control.
- The extra CO2 obligation does not apply to CO2 emissions that fall under the EU ETS; there is already an obligation (see quote above). If there is also such an obligation in another jurisdiction, such as in the ETS in California, this indemnity also applies.
- Shell is also flexible in how it will achieve that net target. She may make use of compensation with financing reductions elsewhere or purchasing carbon credits: think of forest protection, cookstoves or carbon farming projects. In my opinion, this means that it is insufficient to make the motorist pay for compensation. Shell must do that itself. And it means that Shell must avoid double counting of credits: because Shell now has a legal obligation, credits will not also be allowed to also contribute to the CO2 target of the country in which this compensation takes place. Agreement. Countries still must make agreements about this at the upcoming Climate Summit in Glasgow in November. This does not apply to voluntary CO2 compensation.
- Use may be made of CO2 storage (CCS) and negative emissions such as CCS after co-firing biomass (BECCS) and direct air capture (DAC).
- As far as oil and gas and drilling are concerned, the judge gives an advice: “A consequence of this weighty obligation may therefore be that RDS forgoes new investments in the extraction of fossil raw materials and/or limits its production of fossil raw materials.”
In short: more ambition and an absolute CO2 obligation are required of Shell, but they also get more flexibility to achieve the target.
What does the verdict mean for climate policy?
- All companies in all sectors must commit to a Paris Proof absolute CO2 reduction target. Many of Climate Neutral Group customers already do that if they want to be ‘Climate Neutral Certified’.
- Companies that have significant ‘indirect CO2 emissions’ in the (international) supply chain (so-called scope-3 emissions) must also achieve CO2 reductions there. The judge sees a ‘best efforts obligation’ there. In any case, the company must try. This can be done in cleaner production, but also in cleaner transport or packaging, sustainable kerosene and investing in sustainable agriculture.
- I expect that it will become also easier for more companies to get financing for these investments, because it is mandatory to reduce CO2; for the construction of, for example, a sustainable kerosene factory or recycled carbon black, it will no longer be necessary to have 5 years of forward contracts.
- No more categorically rejection of techniques like compensation, biomass, CCS, BECCS and Direct Air Capture: the Dutch Courts accepts those to help meet the targets (see quote below). Sustainability requirements will of course have to be applied. So, more ambition in exchange for more flexibility.
From the judgement: it is generally accepted that the reduction pathways discussed above contain net goals, which leave room for the compensation of CO2 emissions. This follows from the SR15 report (see 220.127.116.11 and 18.104.22.168) and the circumstance that the EU and the Dutch State leave room for the compensation of CO2 emissions in their most recent plans. For instance, the explanatory memorandum to the Dutch Climate Act states the following:“The definition used for the emission of greenhouse gases also implies the involvement of negative emissions. This concerns processes that extract greenhouse gases from the atmosphere, such as a combination of capturing biomass and storing CO2 (Carbon Capture and Storage – CCS). The monitoring mechanism ordinance contains the method with which these negative emissions may be subtracted from the greenhouse gas emissions.”
What adjustment is needed specifically in the Netherlands’ Climate Agreement?
- The ETS emissions should be removed from the Dutch climate agreement. These already have an EU obligation that will be tightened for the -55%. And the ETS approach guarantees a level playing field and a limitation of costs, provides funds for innovation. And the ETS prevents the leakage of CO2 emissions to importers abroad without CO2 obligations through the ‘carbon leakage provision’ and the forthcoming EU ‘carbon border adjustment mechanism’ (CBAM).
- Stop the national CO2 tax for ETS companies. The court considers the ETS obligation for those emissions to be sufficiently in line with the Paris Agreement. I have already indicated that a national CO2 tax only for the Dutch will put our industry at a disadvantage and is counterproductive in terms of net CO2 emissions.
- The focus should be more on absolute reductions for individual companies that do not fall under the EU ETS and for sectors such as transport, data centres, offices, but also forestry and agriculture. This is possible through voluntary agreements, legislation or CO2 pricing.
- Providing insight into the international carbon footprint of the Dutch economy. Tropical deforestation for animal feed and meat must be prevented. That is precisely where reduction opportunities lie that the Netherlands can count on. In general, the Netherlands can achieve part of the additional CO2 reductions via the global CO2 market. Countries such as Norway, Sweden and Switzerland are already doing this. The Supreme Court implicitly allowed the use of carbon credits in its judgment of Urgenda. In the Shell judgment, the judge explicitly supports the use of compensation.
The government and politicians will have to take the initiative and demand concrete reductions from companies. That is more efficient and effective than waiting for the next individual verdict. And with the application of flexibility, a greater ambition becomes feasible and affordable.