Shining the light on climate liability risk

According to the Paris Agreement, the rise of global temperature should be kept “well below” 2 degrees Celsius. Two degrees will already be a major challenge as global greenhouse gas (GHG) emissions are stabilising at best. If countries comply with their nationally determined contributions (NDCs) under the Paris Agreement, global temperature will rise by at least 2.6 degrees Celsius.

A swifter transition towards renewable energy is vital. Most states and many enterprises should be more ambitious in reducing their GHG emissions; enterprises are encouraged to put lower energy-consuming products and services on the market.

No doubt enterprises will reduce – and would already have reduced – their emissions and will take other steps towards carbon neutrality if they know their legal obligations. For the time being, they are in the dark about these obligations as the law is insufficiently clear. That also affects investors; they cannot ascertain whether enterprises meet their obligations.

The state of play

The current situation is unsatisfactory for two reasons: first because it is unlikely that we can keep global warming “well below” 2 degrees, and secondly because it increasingly exposes enterprises to the risk of liability for damages. As things stand now, it is impossible to provide a well-founded assessment of the liability risk due to many uncertainties, such as:

1) the appetite of victims and NGOs to issue claims for damages;

2) the potential targets of such claims;

3) the willingness of courts to deliver plaintiff-friendly judgements.

As to 1: for the time being the number of claims for damages is limited. There is a fair chance that this will change over time as climate change-related losses will increase.

As to 2: in the short term, the fossil fuel industry will probably be plaintiffs’ main target. More likely than not, other parts of the business community will follow at some stage.

As to 3: this is unpredictable. In the short term, many courts may be reluctant to issue damages awards; to that effect they could harp on a series of legal arguments. Even in the short term, other courts may well be willing to issue such awards. As time progresses and the losses become increasingly cataclysmic, even reluctant courts might change their position.

The cost of liability

Will liability be affordable? That depends on the losses caused by climate change (they will be very significant), the recoverable losses (the heads of recoverable damages, the scope of liability in time and space – is an enterprise in country X liable for the losses suffered in countries A, B and C; is the enterprise liable for present day losses only, or also for losses suffered in the future and, if so, is there any time limit?)

The law provides a series of techniques to keep the floodgates shut. Will these techniques be applied in the near and more distant future? Any answer is no more than speculation. It cannot, however, be taken for granted that crushing liability will be avoided.

For enterprises, the main trick lies in potential liability for past emissions and the uncertainty about their present day legal obligations. That makes it impossible to know whether these obligations are met, and by the same token, to avoid liability for possible non-compliance. Enterprises will learn their obligations when courts decide liability cases, which may well last more than 10 years from now onwards.

Liability and investors

Wide-spread liability will also hugely affect investors.

It follows that investors and enterprises would be best served to advocate clarity about the obligations of enterprises in the face of climate change. A clear and binding international agreement containing very precise obligations would be the best solution, preferably coupled with an exemption from liability, also for past emissions, if an enterprise complies with these obligations.

In the meantime, investors and enterprises should consider whether there is a sound reason to believe that the enterprises comply with their obligations. To that effect, the Principles on Climate Obligations of Enterprises might provide some guidance, although these principles do not contain binding rules (they are the drafters’ interpretation of the law as it stands or will likely develop). Compliance with these principles, or alternatively upscaling the reduction of GHG emissions and putting more energy-efficient products and services on the market will lower the liability risk.