10 Jun 2021

Royal Dutch Shell ordered to reduce CO2 by 45% by 2030

By Kathryn Pacey

The Shell case is unlikely to be directly applicable in Australia, but it could encourage court action here about implementing more ambitious reduction targets.

The Hague District Court has ordered for the first time that a corporation reduce its CO2 emissions.

The Court order is as follows:

“Orders RDS, both directly and via the companies and legal entities it commonly includes in its consolidated annual accounts and with which it jointly forms the Shell group, to limit or cause to be limited the aggregate annual volume of all CO2 emission into the atmosphere (Scope 1, 2 and 3) due to the business operations and sold energy-carrying produces of the Shell group to such an extent that this volume will have reduced by at least net 45% at end 2030, relative to 2019 levels”.

The decision has attracted media attention world-wide, and is a significant decision concerning a Court's ability to order application of internal policies of a “non-state” entity.

The decision however must be understood in context.  There are a number of unique features to the decision that must be considered before drawing conclusions about its repercussions for other companies and other jurisdictions.

Why The Hague?

The proceedings were commenced in The Hague District Court on the basis that Royal Dutch Shell (RDS), as the parent company of the Shell group, is established in the Netherlands.

Who was the class?

The proceedings were commenced by way of class action on behalf of the interests of current and future generations of the world’s population. The Court found that this was not appropriate, and limited the class to “the interests of current and future generations of Dutch residents and of the inhabitants of the Wadden Sea area, a part of which is located in the Netherlands.”

Why does it affect all of Shell’s business?

The Court found that RDS set the policy for the whole of the Shell Group, and therefore the emissions of the whole of the Shell group, and the policy set by RDS was considered as part of the proceedings.

What was the legal basis of the action?

The Court found that the obligation ensues from “the unwritten standard of care laid down in Book 6 Section 162 Dutch Civil Code”. The effect of this section is that “acting in conflict with what is generally accepted according to unwritten law is unlawful”.

The Court applied this as meaning that when determining the Shell group’s corporate policy, RDS must observe the due care exercised in society and that this calls for an assessment of all circumstances of the case in question.

What were the factors considered?

In determining the application of "the unwritten standard of care", the Court ultimately considered 14 factors, including:

  • the policy-setting position of RDS in the Shell group
  • The Shell group’s CO2 emissions
  • The consequences of CO2 emissions for the Netherlands and the Wadden Sea Area
  • what is needed to prevent dangerous climate change
  • The ETS system and other cap and trade systems that apply to the Shell group around the world
  • The responsibility of States and society
  • The onerousness of the obligation
  • The proportionality of RDS’ reduction obligation.

Key findings

The key findings of the Court are as follows:

  • RDS determined the general policy of the Shell group
  • the Shell group is a major player on the worldwide market of fossil fuels, noting that 85% of the Shell group’s emissions are Scope 3
  • The temperature rise in the Netherlands has so far developed about twice as fast as the global average (1.7’C as opposed to 0.8’C). The climate change caused by CO2 emissions will have serious and irreversible consequences for the Netherlands and the Wadden region
  • The Court found that the ETS systems should be considered in orders for reduction of emissions, but that the ETS systems only covers a small part of the Shell group’s emissions. Only for those emissions RDS does not have to adjust its policy due to the indemnify in effect of the ETS systems
  • The Court considered the internationally propagated and endorsed need for companies to genuinely take responsibility for Scope 3 emissions, and may be expected to identify adverse impacts either through their own activities or business relationships.

So what does it mean for Australia?

The case turned on a number of key factors, most importantly being:

  • The “unwritten standard of care” as provided for in Dutch Law;
  • RDS’ particular structure, including its policy setting role across the Shell group and its business relationships;
  • The influence of the Shell group on the worldwide market
  • The particular vulnerability of the Netherlands and the Wadden region to climate change impacts.

The case is unlikely to be directly applicable in Australia, and is confined to its own facts. However, we can expect to see the Courts being invited to consider under Australian law, whether companies (or non-State entities) can be required to implement policies directed at more ambitious reduction targets.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.