So far, 2023 has seen three claims in the English courts involving the treatment of scope 3 greenhouse gas (GHG) emissions, two involving judicial review, and one involving a derivative action against the board of directors of Shell. Scope 1 concerns direct emissions from sources that are fully or partly owned or controlled by the organisation (such as a refinery). Scope 2 is for indirect emissions from third-party sources from which the organisation has purchased or acquired electricity, steam, or heating for its operations. Scope 3 includes all other indirect emissions resulting from activities of the organisation, but occurring from greenhouse gas sources owned or controlled by third parties such as other organisations or consumers, including emissions from the use of third-party purchased crude oil and gas.
1. R (Friends of the Earth Limited) v. The Secretary of State for InternationalTrade/UK Export Finance [2023] EWCA Civ 14
The main issue before the Court of Appeal was whether the UK Government acted unlawfully in deciding to approve UKEF’s £1.15 billion investment in a liquified natural gas project in Mozambique. UKEF’s final climate change report on the project (the CCR) concluded after a detailed analysis that “[g]as from the [project] is … considered by the Government of Mozambique to be an important contributor to the energy transition of Mozambique in line with its NDC [nationally determined contribution] and its Paris Agreement commitments” and that “[t]his aligns with the UK Government’s commitment to support developing countries to respond to the challenges and opportunities of climate change as part of its own Paris Agreement obligations”. The CCR concluded that the project’s Scope 3 emissions would significantly exceed its Scope 1 and Scope 2 emissions. The case involved three issues:
i) Was the UK Government required to adopt the correct, rather than merely a tenable, meaning of the Paris Agreement?
ii) Had the UK Government behaved irrationally in concluding that the decision was compatible with article 2(1)(c) of the Paris Agreement?
iii) Had the UK Government breached its duty of enquiry by failing to quantify the project’s Scope 3 emissions? These are all indirect emissions from the gas extracted by a project not included in Scope 1 (direct emissions) and Scope 2 (indirect emissions from the generation of purchased electricity).
On the first two issues the Court of Appeal found that the Paris Agreement was pre-eminently an unincorporated international treaty that did not give rise to domestic legal obligations. The respondents here chose, but were not compelled by domestic law, to take into account the UK’s obligations under an unincorporated treaty. The question of whether funding the project was aligned with the UK’s international obligations under the Paris Agreement was accepted to be justiciable. The Paris Agreement was, however, only one of a range of factors to which the respondents decided to have regard in reaching the decision.
The Court held that there had been no error of law in that it was tenable for UKEF to reach the view that funding the project was aligned with the UK’s obligations under the Paris Agreement. Article 2(1)(c) contains the aims and purposes of the Paris Agreement, including “holding the increase in the global average temperature” and “making finance flows consistent with a pathway towards low greenhouse gas emissions”. However, it did not create an obligation on the UK to demonstrate that its overseas funding was was consistent with a pathway towards limiting global warming to well below 2°C and pursuing efforts to 1.5°C. The CCR’s view was that on balance it appeared more likely than not that, over its operational life, the gas from the Project would at least replace some and/or displace some more polluting fuels, leading to some net emissions reduction. Therefore, it could not possibly have been irrational for the respondents to decide to provide finance for the project, when they were being advised that the project could, in some scenarios, align with the UK’s obligations under the Paris Agreement. That was at least a tenable view.
On the third issue the Court of Appeal held that the UK Government had not breached its duty of inquiry because it was not possible to say that it was irrational to take the funding decision without quantifying the Scope 3 emissions. UKEF’s decisions as to the quantification of the Scope 3 emissions and the adequacy of the Climate Change Report it had obtained were well within the substantial margin of appreciation allowed to the decision-makers.
2. Greenpeace Ltd v (1) Secretary of State for Business, Energy and Industrial Strategy and (2) the Oil and Gas Authority; and Uplift v (1) SSBEIS and (2) the OGA (North Sea oil and gas licensing)
In October 2022 the NSTA, pursuant to its powers under Part 1 of the Petroleum Act 1998, launched the 33rd Offshore Oil and Gas Licensing Round. This is expected to result in the grant of a further 100 licences. In December 2022 separate claims for judicial review were launched by environmental charities Greenpeace and Uplift. In April 2023 both claims were granted permission to proceed to trial. Both challenges include arguments on the assessment of end-use emissions, i.e. from when the oil and gas is ultimately used, for example in fuelling cars.
The challenges will potentially be impacted by outcome of the appeal in R (Finch on behalf of the Weald Action Group & Others) v. Surrey County Council (& Others) which the Supreme Court will hear on 21 June 2023. In 2019 Surrey County Council’s granted planning permission to Horse Hill Developments Limited to expand an existing site to add four new wells for the production of crude oil hydrocarbons over a 20 year period. The developer’s environmental statement provided an assessment of the direct (scope 1 and 2) greenhouse gas (GHG) emissions associated with the project but not its scope3 emissions, those would subsequently be produced as a result of using the product. The claimant argued that SCC’s failure to consider these emissions in determining whether to approve the project was a breach of the UK’s obligations under European Union Law (Directive 2011/92/EU, the EIA Directive) as implemented in domestic law by the EIA Regulations, and also that scope 3 emissions should have been considered in relation to the UK’s net zero target. At the end of 2020 the High Court dismissed the case on the basis that the assessment of scope 3 emissions was as a matter of law incapable of failing with the scope of the EIA. In February 2020 the Court of Appeal by a 2-1 majority upheld the dismissal, finding that the decision maker had a discretion whether or not to include scope 3 emissions in the EIA.
3. ClientEarth v Shell Plc and others [2023] EWHC 1137 (Ch))
On February 9, 2023, ClientEarth filed a derivative action against Shell’s Board of Directors alleging mismanaging of material and foreseeable climate risk and breach of company law. The claim alleged that Shell’s 11 directors had breached their legal duties under the Companies Act by failing to adopt and implement an energy transition strategy that aligns with the Paris Agreement. Shell claims that its “Energy Transition Strategy,” which includes a net zero emissions plan with a 2050 target, is consistent with the 1.5°C temperature goal of the Paris Agreement. ClientEarth, based on a third-party assessment done by Climate Action 100+, claims that the strategy excludes short to medium-term targets to cut the emissions from scope 3 emissions despite these accounting for more than 90% of the company’s overall emissions.
The High Court has now refused ClientEarth permission to bring a derivative action against Shell’s directors, and found that ClientEarth had not demonstrated a prima facie case that either Shell’s directors had breached their duty of care to the company or the remedy sought from the court – mandatory injunctions specifying actions to be taken by the directors – would serve a useful purpose. It was for the company’s directors, acting in good faith, to determine how best to promote the success of a company for the benefit of its members as a whole. A court would not generally look behind this unless there is a prima facie case that the directors could not reasonably have determined that their decision was in the best interests of the company as a whole.
