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The Energy Agenda

Climate – the next battleground will be in the courts 

What happens when climate activism is becoming a new normal, and protesters are tired of not being heard? Sophisticated methods of sounding the alarm and pushing for change are appearing, and new tools such as finance and the law are being explored in full. But what happens when the battlefield moves into the courtroom? ONS asks the questions, and Nick Butler, energy economist and visiting professor at Kings College, shares his insight.

Published:  
November 22, 2022

The challenge of climate change is unresolved. Declarations of intent about net zero have not yet changed the pattern of energy use. The use of hydrocarbons looks set to grow for at least another decade, and possibly longer. Emissions continue to rise and evidence of their impact grows. The situation is inherently unstable.  The energy industry, already distrusted, is likely to bear the brunt of the increasing sense of risk and frustration. Now, however, debate has moved into new territory as campaigners seek to attribute liability for any damage done. The battleground has moved into the legal system. This may not resolve the climate challenge but could fundamentally change the industry.

2022 is proving to be a year of disappointment for those who believed that with COP26 the world had taken a major step forward in combatting climate change.  The meeting in Glasgow, however successful in its own terms, did not alter the inconvenient facts about the world’s use of energy or halt the growth in emissions from the use of hydrocarbons. By the end of 2021 emissions had resumed the upward trend interrupted by the pandemic and were back above the levels of 2019.  2022 is likely to see emissions rise again.

This year emissions are being pushed up by the increased use of coal in Asia as economic activity recovered after the pandemic.  Growth this year has been further increased by a switch from natural gas to coal driven by the sharp increases in global gas prices.  Sanctions on Russia will further increase prices over the next year as Europe fulfills its commitment to reduce imports of Russian oil and gas and is forced to compete for supplies in a market which is already tight with only limited spare capacity. Fears of a shortage of supply coupled with high prices is encouraging new development of both oil and gas around with Governments in Europe and North America pushing companies to increase investment.  Around the world from the Eastern Mediterranean to East Africa to the US shale producing regions such as Texas and North Dakota additional production of hydrocarbons is likely to be brought onstream in the near future.

The age of hydrocarbons is far from over ​

Renewables, led by wind and solar are growing and providing an increased share of demand, with reduced costs making them more economic even if the costs of intermittency and the requirements for back supplies are taken into account.  But wind and solar still account for less than 5 per cent of final energy consumption across the world and the world energy mix remains dominated by hydrocarbons.

In 2021 over 80 percent of global energy consumption was accounted for by coal, oil and natural gas – the same percentage as in 2001. Fossil fuels still account 80 percent of energy consumption in Germany and the UK – both countries which like to consider themselves client leaders. In Europe emissions are likely to continue to decline as they have over the last twenty years but Europe accounts for only 10 percent of the global total and any reductions achieved will be easily out weighted by the emerging economies of Asia. At the global level although the mix should now slowly begin to change there is little sign of the use of hydrocarbons peaking when measured in absolute terms.

Climate Change remains an unresolved challenge ​

End climate injustice

The result is an inherently unstable situation. We already see extreme weather conditions and rising concerns about substantial areas becoming uninhabitable. Commitments to net zero have not in most cases been matched by detailed funded plans for the transition required. There is yet no clear path to climate safety. As the physical impact of climate change becomes more obvious frustration at the lack of progress is likely to cause conflict between countries moving at different speeds and between campaigners and the energy industry.

Protest campaigns will no doubt continue and will be focused on companies who continue to develop and sell hydrocarbons despite the fact that they have accepted the reality of climate change and the dangers associated with the use of fossil fuels.

The challenge to the energy industry ​

For the industry such campaigns have become the new normal – with all the associated costs in terms of security and diminished reputations. Several, led by the energy majors located in Europe – including BP, Shell and Equinor have begun to diversify away from oil and gas and to develop new low carbon supplies. Some have limited new oil and gas exploration activity and have made specific commitments to raise the low carbon share of annual capital expenditure over the next decade – a process which will be set back by the current demands for more oil and gas development to replace supplies from Russia.

For the moment however the overwhelming majority of capital expenditure is still devoted to hydrocarbons. The industry’s transition to a low carbon world has begun but the pace of change is not likely to satisfy campaigners.

Street protests and disinvestment have had only a limited effect. Campaigners are therefore seeking more sophisticated means of achieving their goals – taking the challenge to the companies involved in the sector and putting in jeopardy their fundamental business model. Their tools are finance and the law.

The new dimensions of climate activism  ​

The financial challenge to the fossil fuel sector has grown steadily in both scope and scale over the last decade. The challenge consists of both a carrot and a stick. The positive side is exemplified by the offer of access to capital for decarbonisation as set out in the Glasgow Financial Alliance for Net Zero which brought together over 250 financial institutions responsible for $ 80 trillion dollars in assets.

The stick is based on the work of the Task Force on Climate Related Financial Disclosures established after the Paris meeting in 2015. Seven years on in the words of Mark Carney ‘virtually the entire financial sector demands TCFD disclosures and over 2000 major companies around the world are responding’.

The legal challenges ​

Alongside these financial steps an increasingly active legal campaign has been established over the last few years. According to the authoritative analysis produced by the Sabin Centre for Climate Law at Colombia University over two thousand cases are being pursued through courts around the world on different aspects of climate change, over 1300 of which are in the United States at federal and state level. In Europe the case which has attracted most attention was the judgment of the district court in May 2020 in The Hague which ordered Royal Dutch Shell to reduce its global carbon emissions by 45 per cent from the 1990 level by 2030 and insisted that the company was responsible for emissions from its suppliers and customers.

The legal challenges are supported and coordinated by groups of legal specialists such as Client Earth – an environmental charity working in 50 countries and committed to using the law ‘to protect life on Earth’. As with the financial challenges the scope and scale of the legal issues being raised has grown and is now entering territory which poses fundamental risks to the established energy industry, including the international oil and gas companies.

[ ...] over two thousand cases are being pursued through courts around the world on different aspects of climate change.
Nick Butler

The question which brings together the legal and financial issues is that of liability – can the companies who provide and sell oil and gas be made liable for the danger done to the environment and to particular communities by climate change?

In one of the best known continuing cases a Peruvian farmer, Saul Lusiano Lliuya, backed by environmental groups, is challenging the German energy company RWE over its long term contribution to emissions and to the damage done to his home community in Huarez which is threatened by the prospect of a glacier lake overflowing. In another case the local authorities in San Francisco, Oakland County and other areas in California have sued multiple oil companies over the damage being done by rising sea levels.

All the issues raised by the numerous legal actions will be vigorously defended by the companies who will argue that they were acting within the law at all times, but their case is jeopardised by the fact that they have acknowledged the reality of climate change and the contribution to emissions made by human activity through the burning of fossil fuels.

The possibility of new legal action ​

The legal position has yet to be resolved but the possibility that laws can be changed to incorporate the concept of liability is real. Individual national governments or US state authorities could decide to pass new legislation which attributes some share of responsibility for damage resulting from climate change and therefore a proportion of the costs, to the energy industry. The strength of green opinion in areas such as Germany and California could provoke a change in the law imposing liabilities which if not retrospective could be tied to future corporate activity with the action of continuing to produce and sell such products to be judged as an act of knowing, wilful damage.

The impact of the issue of liability casts a shadow over the energy industry even before any legal judgments are made. The possibility of liability being applied in the future adds to the sense of unsustainability which characterises the industry today. Investors in particular will be more wary if the possibility of a successful legal claim has to be factored into corporate valuations. The nagging and growing concern that the assets they believe they hold could turn into liabilities implying vast payments to innumerable claimants will discourage long term investors.

Investors in particular will be more wary if the possibility of a successful legal claim has to be factored into corporate valuations.​ Nick Butler

The parallel with tobacco industry is tempting but inadequate. The consequences in the energy world would be much more profound. Oil and gas are more important than cigarettes and as the last few months have shown us the continuity of secure supplies is inextricably linked to economic activity and geopolitics.

The irony of the current situation is that the new challenges to the role of oil and gas sector come just their importance has become more obvious. Events in Ukraine have reminded the world of the importance of energy security and of the industry on which that security depends. Reliance on hostile or unstable regimes for supplies of essential resources carries risks. If supplies from offending countries cannot easily be replaced, sanctions and trade restrictions can rapidly become acts of economic self harm.

The risks involved have served to demonstrate the value and importance of the energy businesses, particularly the oil and gas majors who alone have the capacity to deliver supplies from multiple sources. Their role and function as agents of energy security has been re-emphasised echoing the history which saw many of the companies develop in the 20th century as extensions of the national interests of their home states. In the UK in 1914 Churchill, as First Lord of the Admiralty bought a crucial stake in BP six weeks before beginning of the First World War to secure oil supplies for the Royal Navy. In the 1970s Statoil – now Equinor – was created by the Norwegian government to ensure that the resources of the North Sea would be treated as a national asset.

Now in the 2020s the reality is that the oil and gas industry is needed but not wanted.

The exit of few – and a power hand-over? ​

The exit of any or even all of the major companies from the sector would, however, do little to alter the climate equation. Total demand for oil is unlikely to fall significantly below current levels over the next twenty years.

The major privately owned European and American international oil companies account for only 15 per cent of current production. Even if they all chose to drop out of the oil market the resulting demand would soon be picked up by others. OPEC and other producers would be more able to manage production to sustain relatively high prices – effectively imposing a resource rent tax on consumers.

Now in the 2020s the reality is that the oil and gas industry is needed but not wanted.​ Nick Butler

For obvious reasons the targets of the legal actions promoted by Client Earth and others do not include Saudi Aramco or the leading Russian energy companies such as Rosneft. They and the many others typically state-owned companies who provide the bulk of current oil supplies will remain immune to legal action and will benefit financially as they continue to supply a world which has not moved away from oil and gas. A successful legal campaign could remove some producers from the market but would hand over power and trade to those least likely to support the energy transition. That is hardly the best definition of climate justice.

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The challenge of climate change is unresolved. Declarations of intent about net zero have not yet changed the pattern of energy use. The use of hydrocarbons looks set to grow for at least another decade, and possibly longer. Emissions continue to rise and evidence of their impact grows. The situation is inherently unstable.  The energy industry, already distrusted, is likely to bear the brunt of the increasing sense of risk and frustration. Now, however, debate has moved into new territory as campaigners seek to attribute liability for any damage done. The battleground has moved into the legal system. This may not resolve the climate challenge but could fundamentally change the industry.

2022 is proving to be a year of disappointment for those who believed that with COP26 the world had taken a major step forward in combatting climate change.  The meeting in Glasgow, however successful in its own terms, did not alter the inconvenient facts about the world’s use of energy or halt the growth in emissions from the use of hydrocarbons. By the end of 2021 emissions had resumed the upward trend interrupted by the pandemic and were back above the levels of 2019.  2022 is likely to see emissions rise again.

This year emissions are being pushed up by the increased use of coal in Asia as economic activity recovered after the pandemic.  Growth this year has been further increased by a switch from natural gas to coal driven by the sharp increases in global gas prices.  Sanctions on Russia will further increase prices over the next year as Europe fulfills its commitment to reduce imports of Russian oil and gas and is forced to compete for supplies in a market which is already tight with only limited spare capacity. Fears of a shortage of supply coupled with high prices is encouraging new development of both oil and gas around with Governments in Europe and North America pushing companies to increase investment.  Around the world from the Eastern Mediterranean to East Africa to the US shale producing regions such as Texas and North Dakota additional production of hydrocarbons is likely to be brought onstream in the near future.

The age of hydrocarbons is far from over ​

Renewables, led by wind and solar are growing and providing an increased share of demand, with reduced costs making them more economic even if the costs of intermittency and the requirements for back supplies are taken into account.  But wind and solar still account for less than 5 per cent of final energy consumption across the world and the world energy mix remains dominated by hydrocarbons.

In 2021 over 80 percent of global energy consumption was accounted for by coal, oil and natural gas – the same percentage as in 2001. Fossil fuels still account 80 percent of energy consumption in Germany and the UK – both countries which like to consider themselves client leaders. In Europe emissions are likely to continue to decline as they have over the last twenty years but Europe accounts for only 10 percent of the global total and any reductions achieved will be easily out weighted by the emerging economies of Asia. At the global level although the mix should now slowly begin to change there is little sign of the use of hydrocarbons peaking when measured in absolute terms.

Climate Change remains an unresolved challenge ​

End climate injustice

The result is an inherently unstable situation. We already see extreme weather conditions and rising concerns about substantial areas becoming uninhabitable. Commitments to net zero have not in most cases been matched by detailed funded plans for the transition required. There is yet no clear path to climate safety. As the physical impact of climate change becomes more obvious frustration at the lack of progress is likely to cause conflict between countries moving at different speeds and between campaigners and the energy industry.

Protest campaigns will no doubt continue and will be focused on companies who continue to develop and sell hydrocarbons despite the fact that they have accepted the reality of climate change and the dangers associated with the use of fossil fuels.

The challenge to the energy industry ​

For the industry such campaigns have become the new normal – with all the associated costs in terms of security and diminished reputations. Several, led by the energy majors located in Europe – including BP, Shell and Equinor have begun to diversify away from oil and gas and to develop new low carbon supplies. Some have limited new oil and gas exploration activity and have made specific commitments to raise the low carbon share of annual capital expenditure over the next decade – a process which will be set back by the current demands for more oil and gas development to replace supplies from Russia.

For the moment however the overwhelming majority of capital expenditure is still devoted to hydrocarbons. The industry’s transition to a low carbon world has begun but the pace of change is not likely to satisfy campaigners.

Street protests and disinvestment have had only a limited effect. Campaigners are therefore seeking more sophisticated means of achieving their goals – taking the challenge to the companies involved in the sector and putting in jeopardy their fundamental business model. Their tools are finance and the law.

The new dimensions of climate activism  ​

The financial challenge to the fossil fuel sector has grown steadily in both scope and scale over the last decade. The challenge consists of both a carrot and a stick. The positive side is exemplified by the offer of access to capital for decarbonisation as set out in the Glasgow Financial Alliance for Net Zero which brought together over 250 financial institutions responsible for $ 80 trillion dollars in assets.

The stick is based on the work of the Task Force on Climate Related Financial Disclosures established after the Paris meeting in 2015. Seven years on in the words of Mark Carney ‘virtually the entire financial sector demands TCFD disclosures and over 2000 major companies around the world are responding’.

The legal challenges ​

Alongside these financial steps an increasingly active legal campaign has been established over the last few years. According to the authoritative analysis produced by the Sabin Centre for Climate Law at Colombia University over two thousand cases are being pursued through courts around the world on different aspects of climate change, over 1300 of which are in the United States at federal and state level. In Europe the case which has attracted most attention was the judgment of the district court in May 2020 in The Hague which ordered Royal Dutch Shell to reduce its global carbon emissions by 45 per cent from the 1990 level by 2030 and insisted that the company was responsible for emissions from its suppliers and customers.

The legal challenges are supported and coordinated by groups of legal specialists such as Client Earth – an environmental charity working in 50 countries and committed to using the law ‘to protect life on Earth’. As with the financial challenges the scope and scale of the legal issues being raised has grown and is now entering territory which poses fundamental risks to the established energy industry, including the international oil and gas companies.

[ ...] over two thousand cases are being pursued through courts around the world on different aspects of climate change.
Nick Butler

The question which brings together the legal and financial issues is that of liability – can the companies who provide and sell oil and gas be made liable for the danger done to the environment and to particular communities by climate change?

In one of the best known continuing cases a Peruvian farmer, Saul Lusiano Lliuya, backed by environmental groups, is challenging the German energy company RWE over its long term contribution to emissions and to the damage done to his home community in Huarez which is threatened by the prospect of a glacier lake overflowing. In another case the local authorities in San Francisco, Oakland County and other areas in California have sued multiple oil companies over the damage being done by rising sea levels.

All the issues raised by the numerous legal actions will be vigorously defended by the companies who will argue that they were acting within the law at all times, but their case is jeopardised by the fact that they have acknowledged the reality of climate change and the contribution to emissions made by human activity through the burning of fossil fuels.

The possibility of new legal action ​

The legal position has yet to be resolved but the possibility that laws can be changed to incorporate the concept of liability is real. Individual national governments or US state authorities could decide to pass new legislation which attributes some share of responsibility for damage resulting from climate change and therefore a proportion of the costs, to the energy industry. The strength of green opinion in areas such as Germany and California could provoke a change in the law imposing liabilities which if not retrospective could be tied to future corporate activity with the action of continuing to produce and sell such products to be judged as an act of knowing, wilful damage.

The impact of the issue of liability casts a shadow over the energy industry even before any legal judgments are made. The possibility of liability being applied in the future adds to the sense of unsustainability which characterises the industry today. Investors in particular will be more wary if the possibility of a successful legal claim has to be factored into corporate valuations. The nagging and growing concern that the assets they believe they hold could turn into liabilities implying vast payments to innumerable claimants will discourage long term investors.

Investors in particular will be more wary if the possibility of a successful legal claim has to be factored into corporate valuations.​ Nick Butler

The parallel with tobacco industry is tempting but inadequate. The consequences in the energy world would be much more profound. Oil and gas are more important than cigarettes and as the last few months have shown us the continuity of secure supplies is inextricably linked to economic activity and geopolitics.

The irony of the current situation is that the new challenges to the role of oil and gas sector come just their importance has become more obvious. Events in Ukraine have reminded the world of the importance of energy security and of the industry on which that security depends. Reliance on hostile or unstable regimes for supplies of essential resources carries risks. If supplies from offending countries cannot easily be replaced, sanctions and trade restrictions can rapidly become acts of economic self harm.

The risks involved have served to demonstrate the value and importance of the energy businesses, particularly the oil and gas majors who alone have the capacity to deliver supplies from multiple sources. Their role and function as agents of energy security has been re-emphasised echoing the history which saw many of the companies develop in the 20th century as extensions of the national interests of their home states. In the UK in 1914 Churchill, as First Lord of the Admiralty bought a crucial stake in BP six weeks before beginning of the First World War to secure oil supplies for the Royal Navy. In the 1970s Statoil – now Equinor – was created by the Norwegian government to ensure that the resources of the North Sea would be treated as a national asset.

Now in the 2020s the reality is that the oil and gas industry is needed but not wanted.

The exit of few – and a power hand-over? ​

The exit of any or even all of the major companies from the sector would, however, do little to alter the climate equation. Total demand for oil is unlikely to fall significantly below current levels over the next twenty years.

The major privately owned European and American international oil companies account for only 15 per cent of current production. Even if they all chose to drop out of the oil market the resulting demand would soon be picked up by others. OPEC and other producers would be more able to manage production to sustain relatively high prices – effectively imposing a resource rent tax on consumers.

Now in the 2020s the reality is that the oil and gas industry is needed but not wanted.​ Nick Butler

For obvious reasons the targets of the legal actions promoted by Client Earth and others do not include Saudi Aramco or the leading Russian energy companies such as Rosneft. They and the many others typically state-owned companies who provide the bulk of current oil supplies will remain immune to legal action and will benefit financially as they continue to supply a world which has not moved away from oil and gas. A successful legal campaign could remove some producers from the market but would hand over power and trade to those least likely to support the energy transition. That is hardly the best definition of climate justice.

FLERE SAKER
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