Jason: Hi. I'm Jason Hatcher, managing principal of Navigator's Calgary office.
Lorne: And I'm Lorne Rollheiser, a partner with Gowling WLG in Calgary. Welcome to the third episode of The Energy Exchange. A podcast where Jason and I explore the energy transition in Canada and what it means for our industries, our climate change goals and for our future. We have a very interesting guest joining us for this episode as we explore international environmental litigation. On the 26 of May, 2021, the Hague District Court ordered Royal Dutch Shell PLC to cut its CO2 emissions by 45% in 2030, compared to its CO2 emission levels in 2019. This unprecedented ruling may trigger legal actions against other companies in, and maybe even outside, the Netherlands. Leone Klapwijk, partner and lawyer at Van Doorne, a law Firm in the Netherlands, to join us and shed light on this ruling and what it means for Europe. Leone advised network operators, supply and production companies in a regulated sector and companies in the chemical and industrial sectors, as well as governments. She has brought experience in solving problems in the field of regulated; that is heat, electricity, drinking water and gas, as well as non-regulated, primarily CO2 and fuels utility space. So thanks, Leone, for joining us. Really appreciate you taking the time and I thought, why don't we start with setting the table and getting some background in play, for people that might not have studied the decision that's been issued from the court in the Netherlands, and what it's general providence is and its impacts. Let's just start at the beginning which is what's the ruling and what has it meant at this stage? What can you tell us or inform us about it in regards to where we are today.
Leone: Thank you, Lorne. I'll explain the document a bit more and then hope to answer your question. In this Shell case, seven different environmental organizations started a public interest investigation against Shell. The court eventually ordered that Shell has to cut its emissions by 45% in 2030 compared to 2019. So that's a difference because we used to see 1990 as a reference but now it's 2019. Amongst other things, the court took into consideration that Shell's responsible for a significant amount of CO2 emissions all over the world and these emissions exceed the CO2 emissions of many countries, such as the Netherlands, and climate change will have serious and irreversible consequences for the Netherlands and especially the Northern region, its a region in the North of the Netherlands. A small group of islands with a lot of nature below sea level, and that is protected area in the Netherlands, and although human rights cannot be involved by the organization against Shell directly, the court ruled that these human rights do play a part in colouring the standard of care that Shell has taken into account, and the relevant human rights are, according to the court, the right to life and the right to respect proper life and pride with life. From the Urgenda case, that was the first climate case in the Netherlands in 2015, it can be derived that these human rights also grant protection against climate change. There's a bit list of arguments. You want me to continue?
Lorne: Before I let Jason in with some policy things, there are a couple kind of what I would consider sort of fundamental legal issues I wanted to make sure I understood. So one is what is the standard that Shell's required to comply with? Is it a best efforts standard in respect of meeting these reductions and emissions to a 2019 fix date? Is that a best efforts standard? I think adequate action is a phrase I've seen in trying to read some of the background on this. If you could help us with the standard and also what's the consequent of failing to meet the obligation? Are damages paid and if so to who? I'm quite curious in those kind of fundamental legal principles.
Leone: Yeah, it is a best effort so it's not a result obligation. It is a best effort and as far as damages are concerned, if Shell doesn't meet these standards, it's not that they can be held liable directly for damaged. So that's a big question mark thus far and until now the court has only imposed obligation to reduce the emissions but there's no damages involved once Shell does not meet those obligations. I think if they would not meet these obligations the Friends of Environment have to go to court again in order to get damages compensated.
Lorne: So that's a important thing to be cognizant of is that this is kind of Phase 1 of the litigation, is getting these obligations placed on Shell and how it conducts its business, and then depending on how that unfolds they're will be sort of a second phase, more of the damages and compliance phase is the way I'm thinking about it. Am I right that this is currently under appeal by Shell or do you have any updates as to its status in the courts?
Leone: You're right. It's under appeal but there's no update because that's not public information if you're not one of the parties involved. So we don't know what the exact stage of the appeal is.
Lorne: As far as policy and this sort of, I'll get out of your road in a second here Jason, as far as policy the basis of the action brought by the litigants is sort of a human rights, and here a term we would use frequently is ESG, or environmental social governance, being the trigger and I understand that there's some similarities in the Netherlands and Canada in respect of environmental or emissions regulation. We have a carbon tax. We have emissions caps. Those would seem to be sufficient at least at this stage for monitoring some of our environmental performance. If you can maybe, again for listeners that don't have the background in comparing and contrasting, what the existence of climate regulation looks like in the Netherlands and that may inform, or if you have thoughts about why this additional step of taking litigation against Shell was necessary, or viewed to be necessary by the litigants in this case.
Leone: We do, Lorne, we do have emission cap as well. We have the ETS, emission system, and we also have tax on products that are imported outside of the EU. So we do have similar systems in place but the thing is with the emission trading system, that you are allowed to emit a certain amount of greenhouse gas, and you get emission rights for that. But the thing with the Shell case is that the claimants said that was not enough. That the emission caps was not enough. That you have to do more to cut your emissions so the EU system only covers part of your emission and if you emit more you can just buy the rights. That's the thing. Even though the prices are skyrocketing for the emission rights at the moment, some companies are able to buy the rights instead of taking measures to reduce the CO2 emissions. So this was, I think, a clear statement of the court that the EU emission trading system is not sufficient, and also that the tax is not sufficient, and that more measures have to be taken in order to ensure that emissions are being cut down and are in compliance with the Paris Agreement, in the end.
Jason: Leone, a lot of Canadians would be very familiar with Shell. They have a lot of gas stations, a lot of oil production, gas production in Canada, but less familiar with this actual Dutch Court ruling. But one of the things that jumped out to me, and I was just wondering if the court addressed this, was the notion that non-binding international agreements can now form the basis of binding obligations on companies. I just wondered how the court addressed that.
Leone: They did that by just deciding. They said that even though they can't be involved directly but they are important rights and they colour the standard of care that Shell has to take into account in conducting its business. So it's sort of a more indirect way of incorporating those principles in Shell's business conduct. Probably the same in Canada. There's no direct possibility to invoke these rights but it's more of an indirect way. Also the court, that was interesting, because they said the UN guiding principles also mean that companies have responsibility to cut their emissions. That companies have the obligation to respect these human rights. So in a way it's very new. It was very unexpected in a way, to us, the court ruling indeed.
Jason: How did the court deal with what we call scope 3 emissions? Those emissions that are ultimately borne out by people using their cars or generating electricity for use in their daily life, as opposed to scope 1, which would look at production. So did this ruling apply responsibility to the oil producers on scope 3 emissions?
Leone: Definitely. It said that Shell has to make a corporate policy to also try to cut these emissions and to influence cutting these emissions as much as possible as well.
Jason: I find that fascinating, Lorne and Leone, that we have non-binding international agreements that are in place and then also those scope 3 which are really kind of, a lot of the producers would say, are beyond their capability of doing it but it's a fascinating piece of how this might roll out going forward.
Lorne: Yeah and I am curious, taking from that exact point, the now what of this because when I saw this and I read a little bit about this, that's the kind of question that's left in my mind is, now what? Where do we go? I wonder, Leone, if you've got reaction or feedback from other organizations and industries in the Netherlands that the may see this, particularly if scope 3 emissions are being attributed to Shell, what kind of reaction has this generally got? I'm certain that there are supporters, and I'm certain there are detractors, but I'm kind of most interested in commercial actors and businesses and what you might have heard in regards to their view on this decision.
Leone: We definitely did hear a lot though I think the road was paved in that case, in a way, because in that case the State of the Netherlands was hold liable to comply with the Paris Agreement to also impose emission reducing measures. So I think in that way it was not new. Shell was the first company, obviously, that got that obligation but the road was paved, as I said, and so there's been a lot of talks on this topic in the public opinion but I do think this judgment changed public opinion in a way as well. The summers are getting warmer in the Netherlands. Warmer and warmer so in a way it's difficult to deny climate change, I think, and also now cutting the emissions also means changing to other energy, to new energy, green energy. So to green hydrogen for example. I think also between Russia and Ukraine, where we depend on Russian gas for a large part of our energy supply, it also gives momentum for this court case in a way as well because this court case means that businesses have to switch to other ways of using and making energy to green hydrogen, for example, so I think the time is right for a case like this. Also, you see in Europe there's been more cases. In France there have been some climate cases, in Germany, so I think the time is there. I think it's not so much about the law anymore but it's also about public opinion and people wanting to change. The generation after me, the younger generation, they're all about climate change so I think the judge ruled this and the law wasn't ready yet, but the judge and the public opinion is. So I think this is a big instigator for all these changes that we might also see in law.
Jason: Putting aside public opinion, which is actually the realm I deal with all the time so it's funny for me to say that, but I just want to build off your last comments, Leone. When this judgment came about almost a year ago, it's about 10 months old now, the world was a very different place and you referenced the key reason why with Russia and the Ukraine, and the implications, putting aside the human rights for a moment and you can never put aside human rights, of course, and some of the tragedy that's going on over there, but looking at the practical implications from that energy standpoint, the question always comes about is, what if there's nothing to replace? We know these technologies exist. I was at ... Week last week, this great discussion around hydrogen, this great discussion around how to lower emissions through CCUS or CCS on the front. Did the judgment, at all, address what if there's nothing to replace or is it just a matter of producers have to reduce their emissions?
Leone: It's just that there was nothing in the judgment on replacement measures or possible replacement measures. So, no, I think the scope was just to cut down emissions and not how to cut down the emissions. The objection says nothing about that.
Jason: In North America we call that the elephant in the room that nobody's talking about the how. Everybody knows that we need to get there but it's the how. Do you think this will apply to other industries? We think of things like concrete which, of course, is being used around the world. It's fundamental to how we build. Whether that be infrastructure, or housing, or whatever the case may be but it's also can be very emissions intensive. We're seeing some progress so far just on some good work in this space. Do you anticipate or did the court address how this might apply to other industries beyond the production?
Leone: Yeah, definitely. The court didn't but obviously defense of the claimant send a letter to 29 other companies, and there was a pension fund and other companies as well, like the large consumers of energy, that they have to make a climate plan or else. Well, it was not so much or else. It just got an invitation from the Friends of the Earth, I think they call themselves, to make a climate plan and to cut their emissions as well. So that's something that's happening. Recently, on a European level, the European Commission proposed a directive on corporate sustainability due diligence. The so-called directive, Mandatory Human Rights and Environmental Due Diligence, the MHRTES, we call it. It's very difficult to pronounce. This directive has not been adopted yet but it will establish far-reaching due diligence requirements for large EU companies, and also for mid-size EU companies in high impact sectors such as the concrete producers for example, and obligations will have to be transpond in the laws of each Member State and they also contain obligations with respect to these human rights and ask you to cut down emissions, but it's broader scope, and also identifying actual and potential adverse impact on human rights, for example. So I think time is there for change, I think, and only cutting emissions is part of this but also on a European level we see this movement where things are starting to be laid down as a policy. So I think there will be some laws in time that will also enforce companies to take measures.
Jason: My observations that I'm curious if you see something similar or generally agree or disagree with, your comment about the court has indicated that change needs to be made but they haven't commented on how. I think that's very understandable why a court wouldn't indicate anything about how.
Leone: In a way.
Jason: That probably aligns quite closely, I would agree from where I stand, in regards to public opinion which is they want change and they're not particularly prescriptive as to the how. Clean is how and what clean specifically means is sort of up to the producers. But it's the investors, to me, that are the ones who kind of have the most say in this which is if we decide, hydrogen seems to have a bit of lift behind or if it's further advancement in solar and wind, whatever it is it's fundamentally got to come down to the people that are the investors and that provide the financing, and this has significant cost impacts because that's how these investment decisions are made. I gather that the directive of how to go about making this transition isn't specified by anybody in particular. They just want it better than it used to be. The support for increased costs, and the associated costs related to this investment, is something that's kind of broadly understood or accepted. Notwithstanding the inflationary environment we live in but I get the impression that people are kind of willing to pay the price and back this up. The world keeps changing and very rapidly in this day and age. But I don't know if you've got any kind of read on that, if that's something that you can sense from the papers or the people you talk to in the Netherlands, about people understanding there's going to be a significant cost to the transition, but that people are kind of willing to pay those costs.
Leone: The thing in the Netherlands, they always say the transition has to be affordable. Energy transition has to be affordable and anyone has to be able to go along and people should not pay too much. Now with the occurrence of natural gas prices it's almost cheaper to just go all electric because all electric, for example, used to be very expensive for quite some time. In a way I think time is on our hands and time is helping because the gas prices are rising. Another thing is that, as you might now, we just got a new government after the elections. It took us quite some time to form a new government but now we also have a Minister of Climate and Energy and Policy. He explained that we're going to have climate funds worth 30 billion for the energy transition. So a lot of big investments for infrastructure and everything, it can be paid from that energy fund and, of course, that's the basis for a transition. So maybe also some big city heating districts can be billed with this climate fund and obviously if you switch from natural gas to district heat, it's not so expensive because, yeah you do have to take some measures, but it would have cost debt mark. I mean for the civilians there's chances of the energy transition not being too expensive for them, I think, at the moment.
Jason: That's what I want to jump into here a little bit because it seems like a lot of this decision was based on human rights. You've talked about the price of energy going up as we go through this transition, and no doubt, there is going to be a period of difficulties especially for developing nations. But when I listen to, we talk about human rights, how does the court balance or how do you think this decision is going to impact balancing a human rights to heat their home, to cook their food, to make living vis a vis this as we go from transition, because we know a lot of the technologies are out there but they're just not at commercial scale and not deployable yet. How do we bridge those human rights in the interim, assuming we're able to get there?
Leone: That's a very interesting question for me. I don't have the answer yet. We'd like this big funds. I think a lot will be spent on the innovative technologies so to upscale those and, yeah, you also have a right to be able to pay your energy bill. So I fully agree but I think it's all about time and we just have to wait, I think. But to me it's inevitable in a way there will be a clash maybe of human rights because energy might become more expensive. For example, in Europe, they say prices are going to increase, are going to quadruple, because of the current situation so, in a way, you never know what's going to happen. There will always be conflict of human rights but I think it is inevitable to go through these change. And, yes, it will cost money I think.
Jason: Our listeners have heard me say this before, it doesn't just impact the price at the pump. That applies then to the farmers, to those that are shipping, etcetera, etcetera, and often we think a loaf of bread comes from the store, but in fact it originates in the field and there's a long way to go before it gets to you and I. So it's going to be interesting to see how that comes out. I think the other big challenge that's going to be interesting to watch is, of course, there's 20 countries that did the majority of the emissions. So then when we talk about human rights, how does that impact the rest of the world? Did the judge court look at this primarily from a Dutch standpoint? Or did they look at from an international standpoint beyond the actual international agreements?
Leone: No, just the Dutch standpoint but at the same time they said that Shell has to incorporate this policy through its whole group. So also to suppliers. So it is from the Dutch perspective but it has a broad impact and it goes along the whole Shell group.
Jason: I think that's the most interesting thing about that, because it was Shell, it had those international implications and that's why we're talking to you about this today as we unpack this.
Lorne: There's a piece of this, like on the cost part, because I'm quite interested in that. There's a phrase, I don't know if used in the Netherlands but certainly around here, which is the cure to high energy prices, is high energy prices, which happens to also be the cure for low energy prices, is low energy prices. The idea being that if it's high, people are going to start switching away from it and that will bring the price down naturally. If the price is low, people will stop investing in it and that failure to invest in it, which I would say is a thing we've seen since 2014 roughly, is what can create a price spike or a rise in prices, an increase. Those aren't the only variables but they're variables. It would seem to me that we're very much in a spot now where that's the cure to low energy prices, is low energy prices, being it's a call for a change or a reduction in an investment, which will eventually lead to a supply and demand imbalance getting more imbalanced and an increase prices. But I think if one wants to look at it as the glass being half-full is high energy prices, not only culling more energy investment from traditional energy sources, but certainly supports any kind of energy investment. I've said it in a couple of prior episodes that Jason and I have had about it, an all of the above strategy, which is a thing that's been discussed for a long time. When we're seeing energy prices that we're seeing nowadays, and what they look like for the foreseeable future, I think the comment you used is that there's a real support for or interest in starting to fund the energy transition in a serious way. This all supports that which is if you thought your cleantech energy project was cost prohibitive 6 months ago, using the math that was on the table then, that might have been the case but we're in a very different environment now. So it's, to my mind and I am an all of the above person when it comes to energy development, I'm a sort of let's advance this, but I certainly think that the table is set for those who want to pick and choose from where they want to make their energy investments, and if they want to do it in a traditional fossil fuel energy basis, or if they want to do it with green, or they want to do some of the combinations that we've seen or are seeing in respect of things like, here in Alberta, where blue hydrogen is significantly discussed and I think sort of an area that's ripe for investment. As I've said before, hopefully I'm not overly optimistic about what the present day looks like, but this does seem to be sort of a really well advance scenario that we're living in right now. That people recognize that though there's been a lot of discussion about energy and climate, I think it's now more of a discussion about energy, climate and security and a real will is coming up to make the investments, the significant costs that are going to come out of people's pockets. If you want to re-do the grid, or the way the grid is energized, these are large dollar, long-time investments and it does seem that we're right in the heart of the time that people are going to have the will to just kind of swallow the cost and make it happen. I suspect that Europe might be a little bit ahead of us in North America, just because of the circumstances in Europe are different than they are in North America, in regards to security and access to supply.
Leone: Yeah, I definitely agree. There's another thing. I mean it's the economic situation. We've been growing and growing our economy. COVID did not seem to have any impact and that's why our grids, for example, electricity grids are all congested. They're full. There is no transport capacity available so also they're about to do very large investments on that electricity grid, and while you're at it, might as well make it so that more people can go electric. That you have enough electric capacity to support those kind of developments. So I think it's another reason that time is the right for a perfect storm in that way for energy transition.
Jason: We've talked about the challenges around the new infrastructure required in one of our previous episodes and especially when you're dealing with well established housing and residency. It's easier to do when you're doing new builds, which you can do a little more in Canada than you can in Europe, perhaps. Maybe a question for the both of you guys. For Lorne and for Leone. First for Leone, where do you see is the next step kind of in the evolution of this legal precedent and what do you anticipate maybe coming to the Dutch courts in the future? And Lorne, for you, beyond the implications of what this means for Shell here in Canada, which obviously is something we watch closely here with their presence, but do you think this is a persuasive decision? Will it hold water in Canadian courts or do you anticipate similar challenges here? Maybe, Leone, you could start us off.
Leone: Yeah, I think the first step is like the Friends of the Earth sending this letter to 29 companies and they have to make a climate plan. So I think it all depends whether or not they're going to follow up on the invitation to make certain climate plan, because if they all do, there will be no more litigation. Not for them at least. But if they don't I definitely expect that they will take some of those companies to court again. So I think this is just the beginning of their mission to really persuade all of the big polluters, to start with, to change their ways and to cut on emissions and things.
Lorne: I think it's another impetuous but there's already a bunch of them. I would say that the local producers have been focused on ESG metrics for quite some time, I think, and with recent developments in Europe that has increased further. Which is there's been a lot of promotion of Alberta, in particular Alberta energy, as being the most cognizant of ESG metrics. I think this is sort of another item to add to that list of reasons why significant work is being done for emissions reductions, which there's been significant progress made over the last several years about reducing the emissions, for upstream emissions at least, for oil sands production in Canada. I think this is just another thing that's going to be stacked on top of that. Getting back to our carrots and sticks, this is a stick, unlike some of the carrots out there to try and get greener, and is it a stick that's needed? I'm not sure how much it's needed but it's certainly, I think, one that's going to be made note of and will just be that further push to drive along for trying to get a better energy balance and a reduced overall emissions intensity. So I think that's going to be the result of this all. It's just one more reason to start with the transition and, as I say, I think the real driver behind this isn't so much the will of the public or anybody in the community, it's let's do this in an economically responsible way so that we can ensure that energy costs don't have this significant negative impact on people's day to day transportation needs. Their food needs. Their heating needs. These are all things that are going to happen but it takes a lot of time and a lot of money and I think that this will just help continue to propel us down the path we're already moving down.
Jason: Lorne, I know it's obviously not a precedent for the Canadian legal system, but often judgments like this around the world are brought into bolster a case. What do you see the impact is? Do you think courts here in Canada will be looking at this judge decision?
Lorne: I think they will. The question becomes to what end it may be used. I am not on the litigation side of the business, and I'm thankful for that many days, but I do have partners that I work with that I discuss these issues with. I think they're, as people on all sides of the issue, looking at this and seeing how does this stack in with regulatory requirements that we have. If you want to take the Canada energy regulator and the changes that were introduced in Canada under Bill C-69. From that regulatory perspective, current incentivization plans, and we get out of those Provincial things like the strategy that Alberta released. I believe that was, now time comes together, but I believe that was the late summer of 2020, in respect of what I termed at the time as a refocus or return to our natural gas resources. Federal incentivization. I think all these things are going to be just brought together, from regulatory legislative and common law perspectives, as to how people are going to continue to leverage change. But again, I think it's change that's willingly undertaken. It's just to be responsibly undertaken in that we've already got inflation running high and that has a direct impact on the cost of living for everyone on a day to day basis.
Jason: Leone, it seems that this ruling is really kind of the tip of the iceberg, if you will. It's really going to start, and it sounds like things are going to happen quickly in a lot of jurisdictions in terms of these kind of rulings, or at least attempts to achieve these kinds of ruling in the very near future. It's been a great discussion.
Lorne: Thank you very much for your time. I really appreciate it.
Leone: Yeah, thanks, Lorne and Jason.
Lorne: That's the end of our third episode, folks. Jason and I want to give another huge thank you to Leone for taking the time to chat with us today and provider her perspective on environmental litigation. It will certainly be interesting to see what this ruling means for Canada and other emissions producing industries as we continue to see ways to lower emissions and mitigate climate change. I also want to say thank you to the team working behind the scenes, with Anne Derby and Ian Mondrow from Gowling and Catherine Moar, Kayla Doody and Zoe Keirstead from Navigator. Next week is our series finale and it'll be an episode you don't want to miss. Thanks for listening.