High Court split over climate change requirements of the Paris Agreement for government-funded energy projects
Issue 8 of the Energy and Natural Resources Case Law Update
R (on the application of Friends of the Earth Limited) v Secretary of State for International Trade/Export Credits Guarantee Department (UK Export Finance), Chancellor of the Exchequer1 concerned the legal implications of the Paris Climate Change Agreement 2015 (Paris Agreement) on public body decision- making relating to export finance provided to fossil fuel projects. In this case, two judges sitting as a Divisional Court of the Administrative Court heard a challenge by NGO Friends of the Earth against UK Export Finance’s (UKEF) decision to provide up to USD1.15 billion export finance to a liquified natural gas project in Mozambique (the Project).
Key takeaways
The court dismissed Friends of the Earth’s challenge. The court confirmed that UKEF has a wide discretion to assess the climate change impacts of the Project, and that the decision under challenge required a relatively low intensity review by the court.
Although in agreement in respect of the scope of a judicial review enquiry and the approach to interpretation of the Paris Agreement, the two judges, Lord Justice Stuart-Smith and Mrs Justice Thornton, disagreed when it came to applying the relevant principles to the facts, in particular whether the defendants had properly discharged their duty of inquiry in relation to calculating the Scope 3 emissions impact of the Project, as required by the Paris Agreement.
The judges being in disagreement, the judicial review challenge failed. Friends of the Earth have been granted permission to appeal to the Court of Appeal.
Facts
UKEF operates akin to a financial institution supporting UK exports and investments. UKEF’s mission is to ensure that no viable UK export fails for lack of finance or insurance from the private sector, while operating at no net cost to the taxpayer. It was asked to support the Project, which involves the development of offshore deepwater gas production facilities in northern Mozambique, connected to an onshore gas receiving and liquefaction facility.
UKEF officials prepared a climate change report setting out the climate change matters considered as part of its funding analysis, including (i) that the potential Scope 3 emissions from the use of the Project’s exported liquid natural gas would be “very high” (although it did not quantify those emissions), and (ii) that it was unlikely that Mozambique would attract international investment into renewables without first investing in natural gas. The challenge before the court ultimately turned on whether that climate change report constituted an adequate assessment of the climate change impacts of the Project.
In June 2020, the decision to provide up to USD1.15 billion export finance to support the Project was taken by UKEF (co-First Defendant) under delegated powers from the Secretary of State for International Trade (co-First Defendant) and approved by the Treasury/Chancellor of the Exchequer (Second Defendant).
Friends of the Earth challenged the compatibility of the decision with the UK’s commitments under the Paris Agreement, which contains a commitment to keep the global average temperature rise to “well below” 2°C above pre-industrial levels, to pursue efforts to limit the increase to 1.5°C and to reach net zero greenhouse gas emissions in the second half of the century. In doing so, Friends of the Earth argued that UKEF failed to give proper consideration to the climate impact of the Project.
Friends of the Earth argued that:
- the decision to fund was based on an error of law or fact, being that the Project and its funding was compatible with the UK’s commitments under the Paris Agreement and/or assisted Mozambique to achieve its commitments under the Paris Agreement; and/or
- UKEF's decision was otherwise unlawful in so far as essential relevant considerations were overlooked in reaching the view that funding the Project aligned with the UK and Mozambique's obligations under the Paris Agreement.
The court’s decision
Matters of consensus between the judges
The court confirmed that UKEF has a wide margin of discretion to assess the climate change impacts of the Project, owing to the complexity of the task, competing public interests at play and the fact it is a predictive exercise.
The court also held that the decision under challenge required a relatively low intensity of review by the court, given that UKEF’s decision involved a novel exercise of assessing climate change risks, in an area where there is room for reasonable experts to disagree. UKEF’s decision was essentially political rather than technical.
The court also considered the proper interpretation of international treaties, contrasting provisions that are rigidly prescriptive with provisions that are more broad, political or aspirational. Where provisions fall into the latter category, as in the Paris Agreement, the court must be satisfied that the decision- maker has adopted a view that is “tenable” (but not necessarily correct).
The court found that the defendants’ view that supporting the Project was in alignment with both the UK and Mozambique’s obligations under the Paris Agreement was at least tenable. Mrs Justice Thornton summarised the defendants’ interpretation as follows: in order for UKEF to demonstrate compliance with Article 2(1)(c) of the Paris Agreement (making financial flows consistent with low greenhouse gas emissions), it had to demonstrate that funding the project is consistent with a pathway towards limiting global warming to well below 2°C and pursuing efforts to 1.5°C. The broad wording of the provision affords UKEF discretion in how it does so.
Application of the relevant principles to the facts
Lord Justice Stuart-Smith held that the scope of the defendants’ duty to inform themselves was defined by the nature of the decision they had to take. The decision to be taken by UKEF was whether it should, in accordance with its stated mission, provide export finance support so as to maximise UK content in a project that was going to proceed anyway, regardless of UKEF support. That decision would have no material impact on the emissions generated by the Project. There was no legal or policy obligation to carry out a full-blown climate change assessment to quantify Scope 3 emissions in such circumstances. Accordingly, Lord Justice Stuart-Smith held that the challenge should be dismissed.
Whilst Mrs Justice Thornton agreed that UKEF has a wide margin of discretion, when applying that principle to the facts of the present case, she reached a different conclusion, namely that:
- UKEF failed to discharge its duty of inquiry in relation to the calculation of Scope 3 emissions. Its judgment that a high-level qualitative review of the emissions impact was sufficient, was unreasonable; and
- the failure to quantify Scope 3 emissions, as well asother flaws in the climate assessment, mean that there is no rational basis on which to demonstrate that the funding for the Project is consistent with Article 2(1)(c) of the Paris Agreement.
Given the lack of consensus between the judges, the claim was dismissed.
Comment
This case is notable in that it is the first case to challenge a public authority’s consideration of the requirements of the Paris Agreement in its decision-making. The court was required to engage with the question of what public bodies are required to do or consider in practice to demonstrate compliance with the Paris Agreement.
Although the judges agreed that UKEF was only required to adopt an interpretation of the Paris Agreement that was “tenable,” they reached very different conclusions as to whether UKEF had satisfied that test in practice, including over the adequacy of UKEF’s climate change assessment (amongst other things) and therefore whether UKEF had acted rationally in approving the funding of the Project. This divergence in views has led to Friends of the Earth being granted permission to appeal to the Court of Appeal.
At present, the case reflects the uncertainty in the energy sector regarding the implications of the Paris Agreement on current and future projects. It is anticipated that the Court of Appeal will provide some much-needed guidance as to the factors public bodies are required to consider under the Paris Agreement when deciding to support projects with potential climate change impacts. The Court of Appeal will also need to consider the proper approach to the interpretation of the Paris Agreement, including the discretion to be afforded to the decision-maker’s interpretation, and whether the correct test is whether the public body has formed a “tenable view” of its obligations. The Court of Appeal’s judgment is likely to have significant, potentially global, implications for future energy projects, which businesses in the energy sector will no doubt be awaiting with interest.
