Legal eagles focus on gas [NGW Magazine]

Many in the gas industry believe that, as a transition fuel, gas has a future at least in the short and medium term. The recently-agreed EU targets of 32% for renewable energy, 32.5% for energy efficiency and 40% target for reduction in greenhouse emissions after 2030, as well as the agreement reached on the capacity mechanism from that date, suggest that legislation will be adopted to ensure gas’ role in the transition to a zero carbon economy.

But what if the recently adopted targets are not ambitious enough? What if more radical policies will be adopted in the next two to five years to keep global warming way below 2 °Celsius above pre-industrial levels, a Paris Agreement commitment confirmed in Katowice last December?

The negotiations leading up to the adoption of the above targets were fraught and revealed the divisions both between EU countries, and between the Council of Ministers and the European Parliament. While most of western and northern Europe called for a 35% target for renewables by 2030, Germany together with the UK and many central and eastern European countries backed a much weaker 30% goal. This resulted in a 32% target being adopted as a compromise.

The negotiations regarding the new greenhouse emissions target revealed an even more complex situation. At the insistence of Germany and other northern European countries in August 2018 the DG Commissioner for Climate Action and Energy Miguel Arias Canete called for the EU greenhouse emissions target to be raised from 40% to 45% by 2030.

However the general elections in Germany in September brought about a change in Germany’s position to these targets and to the role of coal-fired power stations. So  for purely domestic political reasons the EC abandoned its call.

The battle over the nature and scope of the capacity mechanism after 2030 was the most heavily fought. Capacity mechanisms have been seen as an important way of ensuring that electricity supply is available as it becomes less predictable because of the higher penetration of renewables into the grid.

No safe passage for gas

For this and other reasons the gas industry had supported the EC’s proposals, especially regarding the exclusion of power plants emitting 550 or more grams CO2/kWh from being eligible for capacity payments from 2030. The industry sees its future rising if coal use in power generation is suppressed.

An agreement was eventually reached between the presidency of the Council of Ministers and the representatives of the European Parliament December 19, just days before the end of the Austrian presidency of the Council. The price for reaching the agreement along the lines of the EC’s original proposal was the inclusion of a grandfathering clause which allows capacity contracts signed before 31 December 2019 to be excluded from the 550 g emissions cut off.

There is little doubt that the targets adopted by the EU result from political horse trading both between the various EU governments, and between the governments and the EC itself. The position of each EU state seems largely dictated by political interests at home, rather than the science and the obligations agreed under the Paris Agreement, as confirmed at the COP 24 meeting Katowice.

In October 2018 the Intergovernmental Panel on Climate Change (IPCC), the global body of the world’s leading climate scientists, warned that based on the current targets the world is set for 3 °C of warming above pre-industrial levels. Even allowing warming to reach 1.5 °C above pre-industrial levels, the scientists said, would have grave consequences, including the die-off of coral reefs and devastation of many species.

Extrapolating from the IPCC’s findings, the world has little more than a decade to bring emissions under control and halve them. This would not stop climate change but would help stabilise the climate.

The COP 24 meeting saw countries agree on most of the tricky elements of the “rulebook” for putting the 2015 Paris Agreement into practice including the way in which governments should measure, report on and verify their efforts to cut down emissions.

However, with many governments in denial and many others lacking the political will to take action, the courts have become the new front line of climate change action. The last few years have seen an increase in the number of cases brought against states and energy companies for inter alia failing to reduce CO2 emissions, misleading shareholders regarding climate change and contributing to climate change.

The most famous case is the Urgenda case brought by 900 Dutch citizens and the Urgenda Foundation against the government of The Netherlands. In May last year, the appeal court upheld the decision of the district court which found that The Netherlands had an obligation under Article 8 of the European Convention on Human Rights to reduce carbon emissions and it had failed to adopt sufficiently ambitious targets for CO2 reduction by 2020, relative to the 1990s. The court ordered it to reduce CO2 by 25% by 2020.

The Dutch government announced in mid-November last year that it would not appeal the decision and that it would in early 2019 publish a forecast of carbon emissions for 2020.

If that forecast revealed that the court-imposed target would not be reached, it undertook to take new measures to meet the target.

A similar case was brought in August last year against EU institutions before the Court of Justice of the EU in respect of targets adopted for after 2030 discussed above. 

ECHR gives support

These cases follow in the footsteps of numerous cases brought in Strasbourg before the European Court of Human Rights in which individuals have successfully brought claims against EU member states and other states that are signatories to the European Convention on Human Rights for breach of the right to private and family life under Article 8 of the Convention.

By way of example, Spain was found guilty by the ECHR of breaching Article 8 for failing to take steps to stop serious pollution from a waste treatment plant operated by a private company in Lopez Ostra v. Spain; Turkey was found guilty of granting a permit to operate a goldmine using the cyanidation process in Taşkın and Others v. Turkey;and Italy for failing to provide the affected individuals with information about the serious pollution risk they faced from a nearby factory in Guerra and Others v. Italy.

The difference is, however, that the recent cases seek to impose obligations on states to take actions to reduce carbon emissions by requiring the adoption of more ambitious targets.

It is quite likely that courts in other states of the EU will follow the approach taken by the Dutch as similar cases are brought there. This means that the industry should expect more ambitious targets to be adopted much sooner than expected and possibly such that will not leave unabated gas as much room for manoeuvre as had been assumed.

At the same time, and possibly as a result of the discussed cases, banks and international financial institutions are changing their approach to the funding of energy projects.

Banking on the precautionary principle

Dutch bank ING told a conference in London last November that it had calculated its carbon emission obligations based on the Paris Agreement commitments and its approach to funding of energy projects would ensure that it meets its obligations. In other words, not only will gas companies need to consider the carbon footprint of their projects but also that of the financial institutions which they are looking to fund them.

In addition, the gas industry is likely to face legal cases brought against it for contributing to climate change and/or failing to take steps to reduce carbon emissions. The court proceedings which ExxonMobil is facing in numerous states in the US, including for misleading its shareholders regarding climate change, as well as the case brought by the Peruvian farmer from Huarez, Saul Luciano Lliuya against RWE before the German courts for RWE’s contribution to the melting of the glacier above his village, are just two examples of legal challenges facing energy companies.

Another example is the UK charity ClientEarth, which has challenged the 1-GW Ostrołęka C coal power station project, which was approved by the Polish government earlier this year in anticipation of the adoption of new capacity mechanisms discussed above.    

Given climate change-related litigation, the risks are rising that projects will have to be abandoned in the future as more ambitious targets are imposed by courts and that companies which undertake them will be sued for their contribution to climate change.

The fact that states continue to provide incentives for coal and fossil fuel projects, including the recently agreed grandfathering clause in respect of coal plants that emit more than 550 g CO2/kWh may not give sufficient comfort to the industry going forward.

This is especially so, now that it is clear that the financial and insurance sectors are changing their approach to assessing climate change risk.

And with their shareholders demanding the right to know how they will adapt their business models so that they hit the moving targets for carbon emissions reduction, 2019 will be a challenging one for gas companies.