A court has ordered Royal Dutch Shell to accelerate its strategy for the energy transition by making steeper and quicker cuts to greenhouse gas emissions than it had planned. The landmark ruling could spur legal cases against other oil and gas companies, as well as other big corporate polluters.
What was the ruling?
The judge in the district court in The Hague ruled on Wednesday that Shell must cut its net carbon emissions by 45 per cent by 2030 against 2019 levels on an absolute basis, in line with a global push to prevent temperatures rising more than 1.5C above preindustrial levels. The judge said the company had violated a duty of care obligation regarding the human rights of those affected by climate change.
The target is more aggressive than Shell’s own plan, which is to cut the carbon intensity of the fossil fuel products it makes and sells by 20 per cent by the end of the decade from a 2016 baseline, as part of a net-zero emissions goal by 2050.
Carbon intensity is a measurement of carbon per megajoule of energy sold, rather than an absolute measure of total carbon emitted, which is what the court has ordered and activists have long sought.
Why does it matter?
Previous climate cases have largely been focused on liability suits, forcing oil companies to pay damages for past behaviour. But Wednesday’s first-of-a-kind ruling demands a change in Shell’s strategy for the future, setting a precedent not just for energy companies but all big greenhouse gas emitters. It could herald a wave of this new style of litigation.
The judge said there would be “far-reaching consequences” for the company, both operationally and financially, with the order taking into account all of the company’s global businesses and products, not just its footprint in the Netherlands.
What now for Shell?
The Anglo-Dutch oil major plans to appeal the ruling in the next three months, with the process potentially taking several years.
Despite this, and the court’s view that Shell’s current carbon dioxide emissions are not “unlawful”, the company is obliged to act now on the judge’s decision. “The order will be declared provisionally enforceable,” the court said, adding that it was up to the company to “design” how it implements the emissions cuts.
Shell said it was “carefully reviewing the court’s written judgment and the questions it raises”.
Analysts at RBC Capital markets said a 45 per cent drop in emissions would mean Shell shrinking its total carbon footprint from the oil and gas it produced and sold, including that bought from third parties, from 1,650m tonnes to about 900Mt in 2030.
One route, they suggested, was for Shell to cut oil and natural gas production excluding LNG by 3 per cent a year. It would also have to reduce the sale of petroleum products by 30 per cent by the end of the decade, which would severely hit its trading arm. “To put this simply, this aggressive shift would have meaningful cash flow implications for Shell,” RBC said.
As the order refers to net carbon dioxide emissions, Shell can also seek to meet the requirements of the ruling through carbon offsets or capturing and storing these gases.
How will the ruling be enforced?
This is yet to be established, although Milieudefensie, the Dutch wing of Friends of the Earth that led the case against Shell, indicated it would file subsequent suits should the company not take sufficient action to meet the 2030 order.
“If our sense is they are not implementing the order, then we will file an execution order that will also include a financial sanction,” said Donald Pols at Milieudefensie.
Impact on the energy sector?
The ruling will add to mounting investor pressure on oil and gas groups to further accelerate their emissions reductions.
It follows a report from the International Energy Agency, saying a global drive to achieve net zero emissions by 2050 is only possible if all new investment and exploration in oil, gas and coal is halted from this year, that has created a sense of urgency.
“The Shell decision is a watershed for the oil and gas industry,” said Carroll Muffett at the Center for International Environmental Law. After Shell argued that it was not up to the company alone to solve climate change, Muffett said the ruling “made clear” that the group and all its peers “must take responsibility for reducing not only the direct emissions that arise from its own operations, but the far greater emissions that result from the burning of its products”.
What do shareholders think?
Shell’s share price has dipped just 1 per cent since the ruling. Lydia Rainforth at Barclays said there would be a “limited near-term impact on the group” despite the ruling highlighting the challenges of formulating and executing corporate strategy in the face of an uncertain energy transition.
Lisa Harlow, Emea head of investment stewardship at Vanguard, said: “Markets will price in the risk they see from the court ruling and other events. The important question for these companies is how are they managing transition risk.”
What about other corporate polluters?
Lawyers and energy analysts have said a precedent could be set, particularly in Europe, that exposes not only oil companies but all emitters of greenhouse gases to new legal suits.
Until now, governments have been in the line of fire but big corporate polluters such as miners, steel producers and airlines could face tighter scrutiny — and more litigation.
“The decision will undoubtedly embolden climate activists,” said Mark Clarke, a partner at legal firm White & Case’s dispute resolution department, who works on oil and gas lawsuits.
“The use of human rights-based arguments to compel private corporations to act on climate change has proven to be successful so we can expect to see increasing numbers of similar claims.”
“Other energy and fossil fuel companies will now have to think even more carefully about what meaningful steps they are taking to cut emissions,” he added.
Additional reporting by Attracta Mooney