This article was originally posted on the Oxford Business Law Blog on 20 July 2021.
By Gerhard Wagner
The warming of the planet as a consequence of large-scale emissions of greenhouse gases poses a serious threat to mankind. The changing climate will displace large numbers of people who now live in coastal or low-land areas, it will diminish the food-base in arid areas of the globe, and it will change the ecological balance everywhere, with unpredictable consequences for human well-being.
Over the course of the last century, scientists slowly became aware of the problem, and since a few decades, the problem has reached politics. The United Nations Framework Convention on Climate Change of 1992 was a first major effort of the international community to address the problem. The Kyoto Protocol of 1997 and the Paris Agreement of 2016 were further milestones. But these milestones do not seem to be enough. Climate conditions are worsening more rapidly than the IPCC scientists anticipated. And the public in Western countries gets a sense of what global warming actually means through heat waves, rampant fires, water shortages, rapidly changing plant populations etc.
In this intellectual ‘climate’, some courts have begun to take to action. Most prominently, the German Federal Constitutional Court struck down the German Climate Protection Act (Klimaschutzgesetz) for its failure to set clear targets for the reduction of greenhouse gas emissions beyond the year 2030. The goal of the Climate Protection Act to reduce greenhouse gas emissions by 55% until 2030 was found wanting, given the goal of the Paris Agreement to prevent a rise in average global temperatures of more than 1.5 to 2°C. The Paris Agreement however, does not define the contributions of the various countries, which remained highly controversial. In essence, the Court itself determined the size of Germany’s contribution, and placed the federal government under a constitutional obligation to deliver on its—undefined—promise.
A few weeks later, the Rechtbank Den Haag issued its judgment in the Shell case, ordering the defendant to reduce the greenhouse gas emissions caused by itself and its customers (!) by 45% by 2030. The major difference between the German and the Dutch case lies in the status of the defendant: The judgment of the Federal Constitutional Court was directed against the government, the Rechtbank Den Haag targeted a private corporation. In substance, the two judgments are surprisingly similar: both break down the goal of the Paris Agreement, defined in terms of temperature, to an emissions budget and then calculate the share to be borne by Germany, as a nation, or Shell, as a corporation.
The Democratic Process: Unfit for the Battle against Global Warming?
It is impossible to portray the judgments in the Netherlands and in Germany as outcomes compelled by the law. The tort law of the Netherlands does not require the government or a corporation domiciled there to drastically reduce greenhouse gas emissions, any more than the German constitution forces the government to comply with an undefined promise made in Paris. Obviously, the judges wanted to develop the law in a new direction. The motive to do so seems to be based on the conclusion that the political process is ill-equipped to successfully tackle a long-term problem like climate change. Politicians, the theory goes, act myopically, with a view to maximising their chances at the next elections. Another, perhaps more important factor is the delusion of voters. No one wishes for the destruction of the planet but far fewer people are prepared to accept the diminution of personal welfare that is an inevitable corollary of a steep reduction in energy consumption. It has been said, and with some justification, that some sort of eco-dictatorship is needed. Well, the courts in Germany and the Netherlands do not behave like dictators, but they sure walk into the direction of eco-paternalism.
Suits against Governments: Disenfranchising Voters
With a view to claims against governments, the judgments of the German Constitutional Court pick one policy objective—emissions reduction to combat climate change—and remove it from the political process. Ordinarily, judicial review of legislative action accepts the policy goals of the legislature as given and only asks whether the means employed are constitutional, namely suitable, necessary, and proportional. Where a court demands more action to protect the climate, this goal is elevated to a higher ground. The legislature is no longer authorised to rank the protection of the climate within the hierarchy of policy objectives as it sees fit. Rather, climate change must be accorded priority. Those who welcome ‘climate protection by court order’ (see Wegener (2019)) remove central issues from the democratic process and the mechanisms and institutions designed for this purpose.
Would the same reasoning apply to risks of other catastrophes? The COVID-19 pandemic, for instance, was readily foreseeable, but governments across the globe failed to prepare for what was to come. Had an individual sued the government demanding more efforts towards the development of vaccines and the preparation for mass production—would this claim have been upheld based on the same theory? Who is to say which risk is most important and deserves the greatest attention, and which ranks lower and thus allows for inaction?
Lawsuits against Private Entities: Demanding the Impossible
Even more questionable than lawsuits against governments are claims directed against corporations. They come in two different forms: The Shell case is representative of claims for injunctive relief, where the court orders the reduction of greenhouse gas emissions below a certain threshold. The second category of cases involves claims for compensation of harm possibly caused by climate change. The lawsuit brought against the German energy company RWE pending before the Higher Regional Court (Oberlandesgericht) Hamm is representative of the latter category.
While states are in command of a broad menu of measures to steer society away from carbon fuels, this is not the case for corporations (Sutherland (2017)). A private organisation cannot plan and implement efforts at climate neutrality at the national, European and international levels. Take Shell and the traffic sector: The replacement of the combustion engine by electric power requires a host of macro-economic and infrastructural measures that no single corporation can successfully orchestrate or implement. First and foremost, the switch will generate climate benefits only if there is enough green energy available. Building up the necessary supply requires a coordinated national (or international) effort. As the US 9th Circuit Court of Appeals put it in a recent judgment: ‘any effective plan would necessarily require a host of complex policy decisions entrusted, for better or worse, to the wisdom and discretion of the executive and legislative branches’.
Liability law does and should have a preventive effect (for a general exposition cf Shavell, Foundations of Economic Analysis of Law (2004), 177 ff; specifically on climate protection through liability law, see Hinteregger (2017), 245 ff). The threat of ex post liability for damages generates the incentive to take care ex ante or to reduce the amount of the harmful activity. In the case of greenhouse gases, this would involve avoiding the escape of CO2 into the atmosphere through filtering techniques (precautions) or switching to non-carbon energy sources as well as limiting energy production and consumption overall (limiting activity levels). While pecuniary incentives to reduce emissions are absolutely necessary (Tirole, Economics for the Common Good (2017), 216 ff), the starting point should not be past emissions, but current and future activities. Carbon taxes of any sort must apply to today’s emissions, not those of yesterday.
In contrast, the attribution of climate-related harm to activities of the past has no preventive effect at all (Hinteregger (2017), 247 ff). Imposing liability for losses that became foreseeable only in hindsight is no meaningful contribution to the reduction of CO2 emissions.
Distortion of Competition
Attributing the costs of climate change to a corporation puts this company at a competitive disadvantage compared with other companies. Indeed, national courts lack the competence to level the playing field and impose the same duties on large foreign emitters. However, foreign states and corporations are obviously responsible for the vast majority of global CO2 emissions. Making domestic companies pay to avoid emissions or to compensate for climate change related harm has the same effect as a tax, which the company in question cannot reduce or avoid by adjusting its current behaviour.
In the same way, burdening national economies with obligations to meet targets for the reduction of emissions that do not apply elsewhere, disadvantages the goods and services produced in this jurisdiction vis-à-vis competing goods and services produced elsewhere.
Unilateral Action and the Tragedy of the Commons
The possibility of relocating production to other countries with laxer standards of emissions reduction is well-known and has been labelled ‘carbon leakage’ (Posner et al (2007)). Ultimately, carbon leakage is based on the economic characteristics of the climate problem itself. The global climate is a common good, as nobody can be excluded from use or be made to pay for it (non-exclusivity), and the use of the resource by one party does not preclude the use of the resource by other parties (non-rivalry). It is one of the undisputed insights of environmental economics that the protection of the commons cannot be achieved by the voluntary restraint of individuals (Tragedy of the Commons). If, for example, a deep-sea fisherman refrains from catching a school of tuna in order to secure the stock in the long term, he must expect that another deep-sea fisherman will seize the opportunity presented to him and bring in the catch. The two fishermen find themselves in a prisoner's dilemma (Ostrom, Governing the Commons: The evolution of institutions for collective actions (1990); Hacket, Environmental and Natural Resources Economics (4th ed, 2011), 110 ff) from which it is almost impossible to escape – without the help of Leviathan (Ostrom (1999), 279 f; Hacket, Environmental and Natural Resources Economics (4th ed, 2011), 184 ff).
The same applies to climate: Nobody can be excluded from using the atmosphere as a carbon sink, and emissions by one party do not preclude or impair emissions by other parties. A global Leviathan who would limit emissions in the interest of the common good is dearly missing. In such a situation, there is no alternative to international cooperation. Individual states and corporations that restrict their own CO2 emissions achieve no (climate) benefit at all if the resultant reduction is promptly compensated by other actors (Tirole, Economics for the Common Good (2017), 200). This is likely to happen: The loss of the demand attributable to fossil fuel consumption in one jurisdiction leads to a drop in the price of coal, oil and gas, which makes these commodities more affordable for businesses and consumers in other jurisdictions. Conversely, ambitious emissions standards drive up the price of relatively ‘green’ goods and services. Consequently, demand for these products falls.
The German and Dutch courts seem to hope for the positive effect of ‘leading by example’. Given the structure of the commons problem, it must be doubted that this effect will occur (for a more optimistic view, see German Council of Economic Experts, ‘Setting out for a New Climate Policy’, Special Report 2019, p 25 ff, para 38 ff). It is likely that the commitment of individual countries to enforce climate targets will reduce the pressure for all other countries to act. The idea that countries like Saudi Arabia, Venezuela, Russia, China, Brazil, or even the United States under a president like Donald Trump will change their own emissions behaviour because courts in Europe think this necessary is unrealistic. If so, the courts have weakened domestic economies without advancing climate action.
It is telling that even the Swiss, who live in an abundance of wealth and nature, the latter quite vulnerable to climate change, voted down an initiative to increase efforts to reduce greenhouse gas emissions. If Switzerland does not follow the example of the virtuous, who will?
‘Not every problem posing a threat—even a clear and present danger—to the American Experiment can be solved by federal judges’. This statement of a US appellate court can be generalised. In a democratic state, the courts are not the right authorities to combat climate change. The difficult balancing decisions required in this context must be made at the political level and ultimately be sanctioned by the electorate. Moreover, because of the global nature of the problem, climate protection policy must start at the international level and involve a large number of actors. It is true that this has not been achieved satisfactorily to date. However, it must be doubted that measures directed at a single government or corporation will make a difference. Unfortunately, the tragedy of the commons cannot be resolved by unilateral action—which is precisely why it is called a tragedy.
Gerhard Wagner is the Chair for Private Law, Commercial Law and Law and Economics at the Law Faculty of Humboldt University, Berlin.
This post is based on contributions to and the discussion at the 5th Annual Oxford Business Law Blog conference on ‘Business Law and the Transition to a Net Zero Carbon Economy’ which took place online on 25 to 27 May 2021. This post is forthcoming in Andreas Engert, Luca Enriques, Georg Ringe, Umakanth Varottil and Thom Wetzer (eds), Business Law and the Transition to a Net Zero Carbon Economy (CH Beck - Hart Publishing 2021) (forthcoming).
Event: Business Law and the Transition to a Net Zero Carbon Economy (25 - 27 May 2021)