The Shell Case: A Viable Path to Establish Corporate Climate Responsibility?

by | Dec 13, 2023

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About Alexander Baumann

Alexander Gian-Carlo Baumann holds degrees in Law and Economics and International Management from the Universities of St.Gallen and Sydney. He worked in Sydney and Munich in the areas of sustainability, human rights and international taxation, and in Zurich at a district court and two business law firms. He is a Research Assistant at the chair of Prof. Dr. Klaus Mathis at the University of Lucerne and the Associate Director of the Lucerne Graduate Academy for Law and Economics. He is completing his doctorate at the University of Lucerne and Erasmus University Rotterdam on the Law and Economics of transnational corporate responsibility, and is currently a Visiting Researcher of the Human Rights Entrepreneurs and Incubator Clinic at Harvard Law School.

On 26 May 2021, The Hague District Court in the Netherlands ordered energy giant Shell to reduce the CO2 emissions of the Shell group by net 45% in 2030 relative to 2019 levels (Judgement HA ZA 19-379, Court-issued English translation). This groundbreaking decision raises a pressing question: is the approach chosen a viable path to establish corporate climate responsibility? An interdisciplinary analysis from a Law and Economics perspective reveals that the Shell case is indeed a promising approach to do so, offering both a sound legal reasoning and a solid economic foundation to build upon.

To reach this conclusion, it is indispensable to understand the regulatory essence of the Court decision. Milieudefensie et al. (a group of associations, foundations, and 17,379 individuals) invoke the right to life and the right to respect for private and family life (under Articles 2 and 8 ECHR, and Articles 6 and 17 ICCPR), and base their claim on a remarkable Dutch tort provision. Book 6 Section 162 of the Dutch Civil Code allows for a rather broad interpretation of a tort (violation of proper social conduct according to unwritten law [2]), while it specifies that such accountability can also arise from generally accepted principles, the so-called common opinion [3]. In order to determine the common opinion on the question at issue, namely, whether Shell has the obligation to reduce its CO2 emissions, the Court followed a key guideline: the size of Shell and its influence as the parent company.

The Court also grounded its reasoning on climate science and the accompanying international standards, focusing on the Paris Agreement, the European Convention on Human Rights, the International Covenant on Civil and Political Rights, and the UN Guiding Principles on Business and Human Rights; notably none of which impose binding obligations on corporate actors. Due to their fundamental value, the Court still decided to include human rights in the assessment, highlighting that human rights also entail the protection from anthropogenic climate change. In determining the corresponding corporate responsibility, the Court concluded that much may be expected of Shell. It is a major emitter of greenhouse gases, exceeding the emissions of many States, and it exercises a dominant policy-setting position within the Shell group. Therefore, the Court concluded further that Shell has an obligation of result to reduce the direct CO2 emissions of the Shell group (Scope 1). With regard to the emissions of its suppliers (Scope 2) and its end-users (Scope 3), the Court lowered the duty to a significant best-effort obligation, taking into account Shell’s limited influence on these emissions.

Traditional legal doctrines reach their limits when deployed as a methodology to analyse the nature of this novel judgment. Instead, deploying a Law and Economics perspective turns out to be more useful, shifting the ex post judgement to more comprehensive ex ante considerations. From an economic point of view, CO2 emissions represent an externality: the vast costs caused by burning fossil fuels are not borne by the emitter and are not included in the market price. The implication is twofold: the externality leads to an inefficient allocation of resources, while the cost burden remains with the general public, more precisely, with those most vulnerable in the world.

With this in mind, the Court decision can be seen as an attempt to prevent the externality from arising. If this end is desirable, however, depends on the means employed. The Court expects Shell to achieve the reduction of its direct emissions (obligation of result for Scope 1). For the indirect emissions, Shell is only expected to do the best it can (best-effort obligation for Scope 2 and 3). Taking into account transaction cost economics, this differentiation turns out to be crucial. It not only retains a considerable scope, lowering future regulatory costs arising from corporate inaction, but it also interferes with business operations as minimal as necessary, granting the biggest possible entrepreneurial leeway.

Going beyond traditional legal doctrine, one can discover a promising regulatory approach worth developing further: such an example can be found in the Shell case. By applying an interdisciplinary perspective, the Court’s decision appears to be in line with basic economic considerations, contributing both to environmental interests and to market efficiency.

Further in-depth analysis can be found in Baumann, Alexander Gian-Carlo: Milieudefensie et al. v. Royal Dutch Shell – Law and Economics of Corporate Responsibility, in: Peter Nobel/Alexander Gian-Carlo Baumann/Elias Aliverti (Eds.), Law and Economics in all seinen Facetten. Festschrift zu Ehren von Klaus Mathis, Berlin 2023, pp. 179–202.

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