Shell begins appeal against controversial Dutch emissions ruling [Gas in Transition]

Shell started its appeal on April 2 against a controversial Dutch court ruling made in 2021 that ordered the major to almost halve its greenhouse gas emissions, including those associated with the end use of its products, marking the latest development in a bellwether legal case for the oil and gas industry.

Environmental groups have turned to legal action in recent years to force the oil and gas industry to commit to deeper cuts in emissions. While leading producers have adopted targets to cut their Scope 1 and 2 emissions, relating to emissions that they own or control directly, and indirect emissions from purchased energy, many have avoided commitments to address their much larger Scope 3 emissions. This final category relates to emissions up and down a company’s value chain, including those that result from the consumption of their products – namely fuels and natural gas.

In Shell’s case, Scope 3 accounts for about 95% of its overall emissions, which came to 1.232bn tonnes of CO2 equivalent in 2022.

The Hague District Court ruled three years ago that Shell would have to cut its absolute Scope 1, 2 and 3 emissions by 45% by 2030, in a case lodged by Friends of the Earth Netherlands and other environmental groups. It was the first time that a court had ever ordered an oil and gas company to cut its emissions in line with 2014 Paris Agreement objectives.

This far exceeded Shell’s own goal at the time, which was to lower its net Scope 1 and 2 emissions intensity by 20%. The company later pledged to also halve absolute Scope 1 and 2 emissions by the end of the decade, but it has not set a Scope 3 target. Furthermore, whereas Shell’s targets use 2016 emissions as a baseline for cuts, the court-ordered reduction is based against emissions in 2019, which were lower, making it harder to achieve.

Shell has even watered down its Scope 1 and 2 targets since then, only last month lowering the reduction goal to 15-20% instead of 20%, attributing its decision to surging gas demand and uncertainties in the energy transition. Many of its peers have done the same in the wake of the global energy crisis, which pushed global oil and gas prices to record highs and led to greater attention on energy security and affordability among policymakers.

Shell’s defence

Shell’s position is that the court ruling obstructs, rather than supports the energy transition. While the world urgently needs to tackle climate change, “where we have a different view is in how that goal should be achieved,” a company spokesman said in an emailed statement to NGW.

“We are appealing the ruling because we do not believe it is the right solution in the energy transition. Without changing demand and the way in which customers use energy, this could effectively mean handing over retail and commercial customers to competitors,” the representative continued. “This will not help to reduce global emissions. It is ineffective and even counterproductive to addressing climate change, and there is no legal basis for it under Dutch law.”

"Divestment would really be Shell's only option to reach the court-ordered emission reduction targets," Allen Good, director of equity research at Morningstar, told NGW.

The fastest option for Shell to deliver on the 45% target would be to divest assets, and the biggest source of its Scope 3 emissions is its fuel retail business, where it sells fuels it has not necessarily produced, but the use of which adds to its emissions. But divestments alone would not lead to lower emissions.

“If Shell stopped selling kerosene for aviation or petrol for cars, people would not fly or drive less, customers would simply turn to other suppliers,” the company representative said. “This could even lead to an increase in global emissions if other suppliers who take Shell’s place in meeting continued demand for oil and gas have higher emissions intensities than Shell.”

A sale of its fuel retail business would not be a major financial loss to Shell as the segment, which includes the sale of road fuels, lubricants and low-carbon products, as well as electric vehicle charging, accounted for only 11% of the company’s cash flow last year. Three-quarters of cash flow, meanwhile, came from its upstream operations.

The company is a significant investor in the energy transition, with a spend of $10-15bn assigned for low-carbon energy solutions between 2023 and the end of 2025, the spokesperson said. Halting fuel sales “could also prevent companies like Shell from playing a meaningful role in the energy transition by discouraging investment and innovation in low-carbon products and solutions, and therefore could be counterproductive to combating climate change.”

Shell's natural gas business is unlikely to be impacted by the court result, "given its relative size and value in Shell's portfolio and difficulty in divesting," Good said. "Natural gas will also play a key role in reducing emissions through coal substitution."

What next?

Shell and Friends of the Earth will put forward their cases in the appeal over four days until April 12. A verdict is expected in the second half of the year. The losing side is then expected to appeal the decision at The Hague Supreme Court, dragging the process on for longer.

If Shell ultimately loses, it could spur environmental NGOs and activists to take more oil and gas companies to court over their perceived failure to combat climate change. Last year BNP Paribas, one of Europe’s largest financial institutions, was sued in France by Friends of the Earth and two other NGOs for not doing enough to phase out fossil fuel financing – the world’s first climate lawsuit against a commercial bank. Friends of the Earth Netherlands announced in January it was also starting a lawsuit against Amsterdam-based bank ING, demanding that it cut its emissions, including those from its financing activities and stop “contributing to dangerous climate change in the future.”

Last month, one Belgian farmer sued France’s TotalEnergies for compensation for climate change-related damage to his farm, while seeking a legal order for the company to halt oil and gas investments.

The proceedings in the Netherlands will be closely watched, as a potential harbinger of what is to result from other such cases across Europe and elsewhere.