What is the future for the energy sector?

Our key takeaway: Human rights-based court cases against oil majors have started, and the latest one against Shell was successful. We are just seeing the tip of the iceberg until major transformation of energy business models occurs (plus, the Paris Agreement and the UNGPs apply to companies, whether or not they are translated into national laws).

On 26 May 2021, the Hague District Court ordered Royal Dutch Shell (RDS) to reduce the CO2 emissions of the Shell group by net 45% in 2030, compared to 2019 levels, through the Shell group’s corporate policy. Key points from the decision:

• • It’s not enough for companies to monitor developments in society and comply with national regulations: they have an individual responsibility to achieve the reduction targets under the Paris Agreement, which extends to emissions they control and influence. The court found that although there was uncertainty regarding how states and society as a whole would “manage to achieve the goals of the Paris Agreement”, this point does “not absolve RDS of its individual responsibility regarding the significant emissions over which it has control and influence.” The court remarked on the “broad international consensus that each company must independently work towards the goal of net zero emissions by 2050.” The court remarks that RDS’ responsibility differs as follows: “[o]n RDS rests an obligation of results as regards the Scope 1 emissions of the Shell group as well as a significant best-efforts obligation as regards the business relations of the Shell group” (which includes end-users). For its business relationships, Shell is “expected to take the necessary steps to remove or prevent the serious risks ensuing from the CO2 emissions generated by them, and to use its influence to limit any lasting consequences as much as possible.”
  • There is an unwritten standard of care ensuing from Dutch tort law that can be interpreted following the right to life, the right to respect for private and family life of Dutch residents and the UN Guiding Principles on Business and Human Rights (amongst other components). The court found that RDS has an obligation, “ensuing from the unwritten standard of care” pursuant to Dutch tort law “to contribute to the prevention of dangerous climate change through the corporate policy it determines for the Shell group.” The court specifically remarks that although human rights apply “in relationships between states and citizens”, the court will “factor in the human rights and the values they embody” as it interprets this standard of care that applies to companies, because of “the fundamental interest of human rights and the value for society as a whole they embody.” The court further remarks that the UNGPs serve to interpret the unwritten standard of care, regardless of whether RDS has committed to the UNGPs “[d]ue to the universally endorsed content of the UNGP.”
  • The company’s responsibility to respect human rights means taking responsibility for scope 3 emissions, and moving away from carbon intensity to absolute emissions. The court found that although there is no “legal obligation for energy companies to reduce Scope 3 emissions in absolute and uniform steps”, “it is internationally endorsed that companies bear responsibilities for Scope 3 emissions.” Therefore, RDS’ responsibility “extends to the CO2 emissions of … the end-users of the products produced and traded by the Shell group” (Scope 3). The court underscored the need for companies to “genuinely take responsibility” for these Scope 3 emissions, especially for a company like Shell “where these emissions form the majority of a company’s CO2 emissions.” The focus is on absolute emissions – the absolute measure of carbon emitted – rather than carbon intensity – a measurement of carbon per megajoule of energy sold. Although this “reduction obligation will have far-reaching consequences for RDS and the Shell group”, “the interest served with the reduction obligation outweighs the Shell group’s commercial interests.”

For more, see MilieuDefensie vs Royal Dutch Shell PLC (Judgment of 26 May 2021, C/09/571932 / HA ZA 19-379)

See also FT, Dutch court orders Shell to accelerate emissions cuts (26 May 2021)

FT, Shell case puts spotlight on energy groups’ role in climate change (11 January 2021)