Blog post June 18, 2021

A bad judgement in The Hague

The decision by a court in The Hague at the end of May that Shell is violating human rights and breaching both Dutch and European law by failing to reduce emissions in line with the requirements of the Paris Climate Agreement is bad for the company, for the energy industry, for the climate and for consumers.

The Agreement reached in December 2015 has been ratified by 191 countries and carries the status of international law. As the Agreement is in effect a Treaty between nation states, Shell argued that the responsibility for delivering on the targets set in Paris lies with Governments not corporations. The court disagreed.  Shell will have to cut the emissions for which the company itself and its products are responsible across the world by 45 per cent by 2030. Shell is already committed to reducing the carbon intensity of its operations by 20 per cent by 2030 and 100 per cent. The company announced last week that it would appeal but made clear that in the meantime it would accelerate its plans for decarbonisation in order to meet the court’s demands.

The problem for Shell lies not in reducing emissions but in how to challenge the court’s judgment that it is responsible for delivering the Paris Agreement while retaining its objective of being seen as a “green” company committed to serious decarbonisation of the global energy system, in line with the publicly stated objectives of both the European Union and the Biden Administration in the United States.

A lengthy legal argument could well see the verdict overturned – the law according to numerous experts is ambiguous.  But winning the legal case would be the most pyrrhic of victories. The judgement of responsibility might be withdrawn but in the process the company will be tarred as a defender of the continuing role of hydrocarbons.

To be on the right side of the line – green or black – is a key challenge for many companies. Public opinion expects business to find solutions and to deliver a low carbon world rather than constructing legal arguments against change.

What is “green” is ill defined. Shell and its senior management believe they are on the right side of the argument. For years the company has been investing in renewables such as wind and solar power, cutting its own emissions and funding research into the next generation of low carbon technology including the use of hydrogen. They also believe that a commitment to the energy transition is compatible with the continued development of oil and gas resources and with new exploration. Emissions from existing operations and from new oil and gas supplies can be gradually reduced. But the key dimension in all this is time. Transitions do not happen in an instant. Oil and gas will be needed for decades to come.

For climate campaigners the credibility of Shell’s green credentials is already thin. The company produces some 3.7 bn bbl of oil and gas each year and continues to invest in new exploration and development projects. A long drawn-out court case would put them back in the category of villain – a useful, highly visible target for campaigners but an awful prospect for management, staff and investors, especially given the company’s home base in Europe – where opinion on climate has hardened in favour of radical change.  

But the damage done to Shell does not mean that this is a victory for environmentalists. Numerous companies are seeking to reduce emissions, through improvements in efficiency, the reduction of losses such as methane leaks, and in some cases through the development of carbon capture and storage. All those are important and positive steps. But rapid reductions will inevitably require an exit from some activities which add to emissions. The problem is that those activities will not end but will be sold, usually on recent evidence to smaller companies, not subject to Dutch or European law, which are under less scrutiny and which can hold lower environmental standards than highly visible oil majors such as Shell. There is already considerable evidence of this occurring.

Then there is the wider challenge opened by the court in The Hague. If companies are responsible for reducing emissions are they also liable for reparations in respect of any damage done, now or in the future by climate change. Numerous law suits mostly running through US courts are attempting to secure a legal judgment of liability. They have not yet succeeded but the judgement in The Hague will provide encouragement for further legal challenges not least in Europe, including in the UK and Norway.

Liability will be hard fought but could well discourage investors conscious of the huge financial risks involved and could push some companies to end all new activity.

For some climate campaigners this would be a dream result. They should, however, be careful of what they wish for. As Ben van Beurden, Shell’s Chief Executive has said if Shell and others stopped producing oil and gas, the result would simply mean that global demand which shows every sign of continuing to grow especially in Asia will be met by others – in particular by the OPEC states and Russia. There is every likelihood that even with a strong growth in renewables and increasing numbers of electric vehicles oil demand will remain at something close to current levels of 90 to 100 million barrels a day for another twenty years.   

The state companies who would gain have little interest in reducing emissions and would enjoy full protection from their home Governments against any legal challenge. The result would be a net loss to the environmental cause – with more emissions for longer.

The final losers of course would be consumers which means all of us. Without the international industry the energy market would be controlled again by OPEC and others dependent on the revenues which oil and gas can bring. Their share of trade would grow and so would their power to manage prices.  The judgement of the court in The Hague takes no account of such complexities. The rule of law is indispensable in the modern world but when applied without reference to the real world consequences of the judgments being made it can also be highly dangerous. 

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