Shell exempt from CO2 reduction – a setback for climate protection?

When the British oil and gas company Shell Plc (“Shell”) was ordered by a Dutch court in 2021 to roughly halve its CO2 emissions by 2030, there was great excitement in the industry. The central question on everyone’s mind at the time was: Can private companies be directly obligated to reduce greenhouse gas emissions in line with the Paris Agreement? Now that the Dutch court of appeal has overturned the first-instance decision, there is renewed excitement as it remains unclear what will happen next. The following article offers some guidance.

At a glance
In 2021, a Dutch court ordered the oil and gas company Shell to reduce its CO2 emissions by 45% by 2030, sparking widespread debate about whether companies could be directly obligated to reduce greenhouse gases in line with the Paris Agreement. After the court of appeal overturned this decision on November 12th, 2024, it remains unclear what will happen next. However, the court confirmed that states have a human rights obligation to reduce emissions and that citizens can also assert this against companies. Nevertheless, it ruled that no specific reduction percentage could be imposed on Shell, as it had already taken voluntary steps to reduce its CO2 emissions. The case sets a precedent and could pave the way for further legal action against companies. At the same time, the new EU requirements on corporate responsibility illustrate how legal and judicial measures on climate regulation are also necessary to push companies towards sustainability.

1. The first-instance ruling

Never before has a court ruling on climate protection been as strict as the one in 2021: A Dutch court ordered Shell to reduce its CO2 emissions by a net 45% measured from 2019 to 2030.

According to the plaintiff – the Dutch environmental organization Milieudefensie – Shell is acting unlawfully. The organization labels the company, alongside China, the USA, and India, as one of the largest climate polluters, holding it responsible for climate change due to its high CO2 emissions. Climate change, in turn, endangers human lives, thus constituting a violation of human rights. The obligations that states undertook in the Paris Agreement in 2015 also apply to companies. Therefore, Shell should also adhere to the commitments made under the Paris Agreement.

According to the company’s position, there is no direct obligation for companies to reduce pollutants under the Paris Agreement. Such a responsibility, according to Shell, can only be imposed by a government, not a court. In addition, consumers themselves decide which and how much energy they use, so the company could not be held legally responsible for the CO2 emissions of its customers.

What was particularly remarkable about the first-instance ruling was that, for the first time, a court held a company accountable and imposed specific emission reduction targets on it, in line with the Paris Agreement.

2. Reasons for the annulment

Three years later, on November 12th, 2024, the court of appeal in The Hague overturned the first-instance ruling and dismissed the environmental organization’s lawsuit.

The decision, described in the media as a victory for Shell, nevertheless contains several positive aspects for climate protection:

Among other things, the court of appeal confirmed that there is no doubt that states have a human rights obligation to reduce emissions and that citizens can also assert these obligations against companies such as Shell. Furthermore, the ruling referred to EU legislation, such as the Corporate Sustainability Due Diligence Directive (CSDDD), which requires large companies to reduce emissions in alignment with the Paris Agreement (keyword: Climate Transition Plan).

The court also rejected Shell’s argument that such obligations cannot be enforced against individual companies and reiterated that the national level of protection could be higher than the EU level.

The judges acknowledged that Shell has a duty to contribute to international climate protection; however, the company cannot be mandated to reduce its CO2 emissions by a specific percentage. The court noted that reducing natural gas production could lead to a global increase in coal production, which would significantly harm the climate. According to its own plans, Shell is already on track to reduce CO2 emissions and aims to achieve a voluntary reduction of 50% by 2023.

3. What’s next?

Even before the verdict was announced, the environmental organization Milieudefensie announced that it would go all the way to the highest court. The case sets a precedent: Milieudefensie is using the proceedings as a test case for its action against other large corporations, including banks.

While the appeal ruling is a step backwards in the fight against climate change, it does not diminish the fundamental significance of the case. Since 2021 – the year in which the first-instance ruling was issued – the number of climate lawsuits has skyrocketed.

The clear statements from the court of appeal, which assign legal responsibility to companies for climate damage, could prompt companies to voluntarily increase their efforts to reduce their carbon footprint, thereby accelerating the implementation of effective climate protection. In particular, such corporate lawsuits could help achieve the goals of the “Green Deal,” which aims for climate neutrality by 2050.

The Shell case is no longer an isolated example. In January 2024, Milieudefensie filed a lawsuit against the major bank ING in the Netherlands, demanding that the bank stop financing fossil fuel projects and terminate its cooperation with environmentally harmful companies. ING is reportedly the largest financier of fossil energy projects in the Netherlands. Similar lawsuits are pending in New Zealand, the United States, Italy, Germany, Belgium, and France.

The decisions in these cases could provide more clarity on the extent to which companies can be forced by society to take climate protection measures. It can be assumed that, in addition to legislation, case law will also play a decisive role in the fight against climate change in the future.

4. Climate protection requirements from the CSDDD

However, not only the recent ruling, but also the CSDDD illustrate the growing pressure on companies to take responsibility for sustainability and climate change. The true victory for enhanced climate protection occurred even before the Shell ruling, when the CSDDD established the obligation for companies to reduce emissions in alignment with the Paris Agreement. Companies covered by its scope are required to implement a plan to mitigate the impacts of climate change, ensuring they do everything within their power to align their business models and strategies with the transition to a sustainable economy and the global temperature-limiting goals of international agreements.

The Shell ruling shows how courts could hold companies directly accountable in the future, while the CSDDD establishes legal due diligence obligations for companies regarding environmental protection and human rights in their global supply chains. Both underline the need for companies to be driven towards greater sustainability and responsibility in a global context not only through voluntary measures, but also through legal and judicial requirements.

Our experts in the field of ESG and sustainability will be happy to support you on the path to greater climate justice.

 

14. November 2024

 

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