Milieudefense v. Shell on appeal: a judgement with consequences

By Nikki Nilwik & Frank Peters

What’s it all about?

Recently, on November 12 2024, the Court of Appeal of The Hague  ruled in the case of Milieudefensie[1] v. Shell. The loss of Milieudefensie will have escaped the notice of few. Headlines like ‘Shell defeats landmark climate ruling ordering cut in carbon emissions’ (the Guardian) were hard to miss. The question however is: does the ruling indeed reject Milieudefensie’s contentions? Or is it too early for Shell to be relieved?

In order to combat dangerous climate change the plaintiffs in the case (different environmental and climate organizations) want the court to compel Shell to reduce in absolute terms the total CO2 emissions attributable to its business. Plaintiffs have therefore asked the court to order Shell to align its emissions with targets derived from the Paris Agreement. Because this treaty contains direct, explicit obligations for States but not for companies, Milieudefensie based its claims on the open norm of Dutch civil liability law (article 6:162 Dutch Civil Code). Under this standard, the court must determine whether Shell is acting in violation of what is socially acceptable under unwritten law if it does not reduce its CO2 emissions (scope 1,2 and 3[2]) by 45% in 2030 compared to 2019. In other words, does Shell have a social duty of care that requires Shell to reduce its CO2 emissions by 45% in 2030 compared to 2019?

In 2021, the District Court of The Hague ruled that Shelll indeed has this social duty of care. The court ruled that it is generally accepted that companies must respect human rights and that this is an independent responsibility of companies, separate from what states do. This responsibility also extends to suppliers and customers. According to the court, this means that – although Shell has every freedom to fulfill the reduction obligation as it sees fit and to shape the Shell Group’s corporate policy – Shell must take as its guideline that the Shell Group’s CO2 emissions (Scope 1, 2 and 3) are 45% net lower in 2030 than the 2019 level. ‘Net’ refers to the total reduction in CO2 emissions across the entire Shell Group’s energy portfolio (Scope 1, 2, and 3). For Shell’s own operations, this is a result-based obligation. However, with respect to its business relationships, including end-users, it represents a stringent duty of effort. In this regard, Shell is expected to take all necessary measures to eliminate or mitigate the significant risks posed by the CO2 emissions it generates, and to use its influence to minimize any ongoing impact. The court ruled that fulfilling this demanding obligation may require Shell to refrain from making new investments in fossil fuel extraction and/or to limit its production of fossil resources.

Shell disagreed with this ruling and filed an appeal. Milieudefensie also felt that the first-instance ruling lacked sufficient clarity, as it was concerned that Shell could comply with the judgment by selling certain business units. While this would reduce Shell’s own emissions, the buyer might simply continue operating the polluting units.

On 12 November 2024 the Court of Appeal issued its decision. In line with the district court, the  court considered that the social duty of care standard implies that Shell has its own responsibility to bring its emissions targets in line with the Paris Agreement (and thus must reduce its emissions). However, the court of appeal did not see the possibility of attaching absolute reduction targets to this responsibility. The reasons for this are as follows:

1. According to the court of appeal there “can be no doubt” that protection from dangerous climate change is a human right.
2. Human rights have direct horizontal effect (between state and citizen), but can also affect private law relationships (between company and citizen) indirectly by giving substance to open standards, such as the social duty of care standard.
3. The court ruled that European laws and regulations in the field of climate change are not exhaustive and therefore, in addition to these rules, there may be an additional duty on companies to combat climate change. We believe that this has not been established in Dutch law before.
4. The court explains that for the interpretation of this social due diligence standard, several factors are influential, namely:
   1. The severity of the threat of a particular danger
   2. The contribution to the occurrence of the danger
   3. The possibility of making a contribution to combating the danger
5. According to the court, the first factor is particularly significant in this case as the court is convinced that climate change “is the greatest problem of our time”.
6. It is also established that the consumption of fossil fuels is largely responsible for this and that Shell has made a “significant contribution to the climate problem”.
7. Furthermore, the court notes that companies like Shell “have it in their power” to tackle climate change and can therefore contribute to combating the danger.
8. In addition, soft law instruments such as the OECD Guidelines and the UNGP (to which Shell has subscribed) emphasize that companies responsible for causing the climate crisis are also in the position to address it. They therefore have an obligation to protect other inhabitants of the planet from the dangers of climate change, which is considered a human right. This responsibility holds even if public law does not mandate such actions automatically
9. The court of appeal concludes: the social due diligence standard entails that companies like Shell have their own responsibility in achieving the objectives of the Paris Agreement. Moreover, more can be expected from Shell than from most other companies, “since Shell has been a major player in the fossil fuels market for more than a hundred years and still holds a prominent position in that market today.”

The concrete reduction commitment

That’s great in theory, but now the court faces the challenge of making concrete what this then means for Shell. Does this responsibility indeed imply an absolute emission reduction obligation of 45% for Shell, as Milieudefensie claims? The court rules that it does not.

1. For Shell’s scope 1 and 2 emissions, Shell is already doing what Milieudefensie is requesting in these proceedings, according to the court of appeal. Shell has a plan to reduce these emissions, in line with the goals of the Paris Agreement. The court concludes that Milieudefensie has not sufficiently proven that Shell will not implement these plans — the mere fact that Shell has often changed its plans in the past is not enough in the court’s view. Therefore, the court dismisses this part of the claims.
   Also with regard to Shell’s Scope 3 emissions, the court of appeal sees no grounds for a conviction.

2. We explained above that this case is particularly interesting as far as the Scope 3 emissions are concerned. After all, Shell’s scope 1 and 2 emissions are only a small part of its total emissions – the rest, over 85%, is Scope 3.
3. The first ground for rejection is that the court could not draw an unequivocal conclusion regarding the required reduction “on which to base a civil court’s condemnation of a specific company.” According to the court, there is too much disagreement among experts as to what the concrete standard should be for an individual company. In addition, the standards and reduction paths that exist are not intended to be binding legal norms. The court rules that it is not its role to set this norm itself.

4. The so-called “precautionary principle” does not change this either, according to the court, as the precautionary principle does not justify ignoring uncertainty at the expense of a private party and establishing a legal norm for that private party.

5. The court of appeal also addresses Shell’s argument that a reduction obligation in Shell’s scope 3 emissions would not effectively contribute to the interest of Milieudefensie (= the protection of the residents of the Netherlands and the inhabitants of the Wadden area against dangerous climate change due to CO2 emissions). Shell argues that it does not produce two-thirds of the fuels it sells to customers, but purchases them from third parties. Therefore Shell asserts that it could meet the 45% reduction in scope 3 obligation by ceasing to sell fossil fuels from those third parties. According to Shell, this fulfillment of that obligation would not lead to actual CO2 emission reductions because other market parties could then simply continue selling those fuels.

6. In the climate world, this effect is also called “the waterbed effect” or “whack-a-mole”. The argument is that “if I don’t do it, another company will, so it’s pointless to make me stop”. In support of this argument, Shell cites a report by economists who demonstrates, using a case study, that trading activities can be taken over by other traders within a few months. Milieudefensie, in turn, has referred to experts who disagree. The court considers:

1. 1. that Milieudefensie did not challenge in appeal that the district court ruled Shell has the freedom to decide how it fulfills its reduction obligation—and that Shell could choose to meet this by simply halting its sale of fossil fuels from third parties; and
   2. Milieudefensie has not demonstrated that such a sales restriction would indeed lead to an emission reduction (i.e., that the waterbed effect does not exist). Without this causal link, Milieudefensie has no interest in its claims.

Relief or disillusionment?

At this moment, there is no real relief for Shell (or other companies). The court has made it clear that Shell does have a reduction obligation and that it has a responsibility to protect people from the consequences of climate change. The court has thus established that the human right to protection from climate change exists, and this indirectly impacts what is expected from (large polluting companies like) Shell. This creates obligations.

The court also goes into detail about Shell’s new investments in oil and gas. Shell is expected to invest about €50 billion in oil and gas fields that currently do not produce oil and gas. Although the court states that this case does not assess whether these investments align with Shell’s corporate responsibility, it concludes that oil and gas companies can be expected to consider the negative consequences of their investments—and that Shell’s investments are therefore at odds with this expectation. This is in line with the first-instance judgment, which already ruled that a consequence of the substantial obligation on Shell could be that Shell refrains from new investments in fossil fuel extraction and/or limits its production of fossil fuels.

One might wonder what the court would have ruled if this question had been explicitly presented. In any case, this seems to be a subject worth considering in any future procedures.

It also seems that some of the court’s reasoning is inconsistent: on the one hand, the court recognizes that Shell has the power to contribute to solving the climate problem and that more can be expected from Shell than from most other companies, “since Shell has been a major player in the fossil fuel market for more than a hundred years and continues to hold a prominent position in that market”; on the other hand, the court accepts Shell’s waterbed effect argument: it would have no effect on Scope 3 if Shell ceased selling fossil fuels.

Takeaway: learning by doing
This is an extremely complex case, and as litigators, we are well aware of this. We have great respect for the skill and dedication of the team that assisted Milieudefensie. The clarity of the ruling makes the complexity somewhat fade into the background, but both parties to this dispute had to make numerous choices: which facts to present and from which sources? Which arguments were likely to succeed, and which could backfire? What would have been worth winning but awful to lose? Which less ambitious claims to include, without making it too tempting for the court to go for those, thus setting the bar too low for years to come? Add to this the dynamics of the hearing itself: what gets attention, what seems to resonate with the court, and what weakens your own argument?

The outcome is a judgment containing many valuable and useful considerations, offering inspiration for new litigation strategies against Shell and other parties. Unfortunately, none of these favorable conclusions ‘made it to the bottom line’: even if no order had been issued, a declarator judgment establishing Shell’s responsibility would have been welcome. This would have made it easier to initiate a summary proceedings to obtain (another) order.

Strategic litigation requires patience and a cool head. Milieudefensie and its supporters have both. We follow them with great confidence!

Footnotes:

[1] The co-plaintiffs in this case are Greenpeace, the National Association for the Conservation of the Wadden Sea, Foundation to Promote the Fossil-Free Movement, Both ENDS Foundation, Association for Young People’s Environment Active.

[2] Scope 1 are direct emissions from facilities that the company wholly or partially owns or has operational control over; Scope 2 includes indirect emissions from third-party facilities from which the company purchases electricity, steam or heat for its operations; Scope 3 covers the other indirect emissions (not included in scope 2) that arise in the company’s value chain, including emissions that arise from the use or consumption of products that the company supplies to third parties, such as other organizations or consumers.

Nikki Nilwik