Wednesday, 11 May 2022

How can law repower Europe? Ending fossil fuels and the Sustainability Directive


Ewan McGaughey, Reader in Law, King’s College London

Photo credit: Geopolitical Intelligence Services, via Wikicommons


With Putin’s criminal war on Ukraine, the RePowerEU and UK government initiatives will end Russian fossil fuels in Europe, and the US president aims to end fossil fuels completely. For ‘national security and for the survivability of the planet, we all need to move as quickly as possible to clean, renewable energy’, said Biden, and ‘the days of any nation being subject to the whims of a tyrant for its energy needs are over.’ This recognises that switching from one aggressive dictator’s fossil fuels to another’s won’t work. We need to stop coal, oil and gas as fast as technology allows – a recognition of everyone’s universal right ‘to share in scientific advancement and its benefits’. The Sustainability and Due Diligence Directive proposal has already been hotly criticised for its many shortcomings. And this is a text that arrived even before our new geopolitical reality. The RePowerEU communication (8 March 2022) focuses on changing import sources, turning down thermostats, and investing more in wind and solar. But it does not yet engage and capitalise upon a vast range of legal options.


            So this blog post asks, how can corporate law and regulation repower Europe to achieve the goal: 100% clean energy? This draws upon extended analysis of the law in my new book, Principles of Enterprise Law: the Economic Constitution and Human Rights (Cambridge UP 2022). It will explain EU law, but most analogues for the UK are also found in the model Green Recovery Act. First, this post examines the reasons to replace coal, oil and gas as fast as technology allows. Second, it identifies where EU legislative changes with the greatest strategic impact (that are often neglected) can be made, and explains the limits of the Sustainability Directive proposal. Third, it concludes with a call to shift from distant targets like 2050 or 2030, to move as fast as technology allows.


1. Reasons to replace coal, oil and gas as fast as technology allows

The Ukraine war makes us realise that ending coal, oil, and gas is an environmental and a geopolitical imperative. First, countries whose exports are the most fossil fuel intensive are most likely to be dictatorships because of the ‘resource curse’. The markets for oil and gas extraction have very high barriers to entry, and foster territorial monopoly. With this concentration, political elites can capture inordinate wealth. They use that wealth to suppress their populations, and launch aggressive war. So, finding fossil fuel resources has rarely been a blessing. More usually fossil fuels curse people with oligarchy, dictators and conflict. Clean energy makes politics more democratic, and private enterprise more plural and competitive, because nobody can monopolise the sun, the wind and the rain. The materials to utilise these clean and natural resources are cheap, dispersed and abundant.

            Second, all fossil fuels fill the air with toxic filth, in the UK costing the NHS £6 billion and killing 40,000 people every year. If that’s not enough, fossil fuels drive global burning and flooding. This isn’t climate ‘change’. It’s apocalyptic climate damage. Shell, Exxon, Total, RWE, Gazprom and the rest profit from it. This is the worst negative ‘externality’. The polluters externalise the costs of their production, try to make us pay, say it’s what we want, and greenwash and lie about what they do. Remember, every week UEFA ran Gazprom ads until March. 

            Third, the best way to stop negative externalities is usually through bans. Damages or taxes may help, but can also be a distraction. While much economic theory focuses on Pigouvian taxes, or Coase’s evidence-free theory that the only real cause of market failure is transaction costs, the empirical reality is that carbon taxes have failed, and bans work. Bans galvanise political coalitions with moral clarity. After years of unsuccessful calls for ‘regulation’ of the evil, the bans on slavery, aggressive war, and nuclear testing largely succeeded. History’s most successful international environmental law, the Montreal Convention, banned CFCs and HFCs (with very few exceptions) and has healed the hole in the ozone layer. Fortunately, the production areas where coal, oil and gas can not be easily and profitably replaced are now largely limited to planes, cargo ships, cement and steel. And all of these have solutions in development. They will come clean with enough R&D investment, and the necessity of technology, given the impending bans: “Vorsprung durch Verbote, und Technik.”


2. Repowering Europe

So, how can corporate law and regulatory reforms repower Europe? The easiest method is to focus on the sector-specific emitters, namely energy extraction and generation, transport, agriculture and buildings. Then, we can examine corporate and financial laws, which have cross-sector effect. Ironically, to understand how corporations really behave, corporate law alone leaves us in the dark. We must expand our view across the seamless web of rules in which corporations are embedded: in short we must learn the law of enterprise.


Energy extraction and generation

The RePowerEU plan identifies that the EU annually imports 155 billion cubic metres of gas from Russia (and 387 bcm in total) plus 27% of our total oil, and 46% of our total coal imports. The plan proposes switching imports to the US, and Qatar – a quick fix – and there are plans to speed up wind and solar capacity deployment. We will go much faster if all Member State regulators and energy companies actively played a part in driving up capacity. A critical fact is that coal, oil and gas are more expensive than clean energy, even without the cost of climate damage factored in. There’s no “clean coal”. Oil is black muck, not “gold”. Gas is a poison, not a “transition”. The Taxonomy Regulation proposal to count fossil gas as ‘sustainable’ must go.

            Three examples of reform follow. First, the Electricity Directive 2019/994 needs a new article 8a, imposing duty on Member States to ensure all electricity undertakings to convert all their supply to wind, solar or other clean energy, for instance at a rate of 33% a year. Second the Gas Directive 2009/73/EC needs a new article 5, with a duty on Member States to phase out all gas as fast as scientifically possible, and redeploy infrastructure and staff wherever possible to hydro-storage facilities. This world map identifies the best energy storage locations: you pipe and pump water up a hill or a mine, and let gravity do the rest. Third, the Hydrocarbons Directive 1994/22/EC, article 2 should be replaced with a new duty on Member States to eliminate all fossil fuels, and place corporations that refuse to convert into a public insolvency procedure.


Working vehicles and auto-makers

As the shift to 100% clean energy generation is underway, transport will change too. Business behaviour and vehicles are far easier to shift than consumers – whose cars are parked 96% of the time in any case, and who are not so often making rational cost-benefit calculations. The most impactful emission reductions are in delivery vehicles, taxis, buses and rail: working vehicles constantly in use. On the demand side, in the Bus Passenger Rights Regulation 2011 (EU) No 181/2011, a new article 6a should have a duty on Member State bus licensing authorities, and companies, to electrify their fleet, for instance at a rate of 33% a year. There should also be a duty on Member States to identify and implement electric bus routes to replace as much traffic as possible. The Railways Directive 2012/34/EC, article 17(4A) should similarly have a new duty, as a condition of licensing, to electrify all rail as fast as technology allows, in cooperation with infrastructure owners. Subsidies for rail should be provided that will eliminate any flight-path of comparable speed (e.g. London to Paris). Analogous provisions on electrification should be written for all taxi and private hire vehicle corporations, and furthermore for all business vehicles. In particular, tax deductions should only exist for fully electric vehicles: this is how we convert massive fleets of postal operators, supermarkets, police or ambulances. All tax breaks for petrol, diesel or hybrid vehicles must scrapped, because the medium term total operating costs for non-electric transport is far higher: electricity is far cheaper than petrol, and clean energy costs are declining logarithmically. The more we subsidise fossil vehicles, the more we damage European business.

            On the supply side, Europe’s automakers need to stop dragging their heels and step up to 100% electric, especially in Germany. In World War Two, the US government told its automakers that it needed all factories to retool for planes, and the corporate executives replied their demands were impossible: only 10-15% of production could be switched a year. But the US government insisted, and it was done at incredible pace. We are at war now. Ukrainians are being tortured, mass raped and massacred by war criminals. Saudi Arabia is run by another sadistic war criminal who chops up journalists, and starves Yemeni children. The list goes on.

            So we need to amend the Vehicle Emissions Regulation (EU) No 459/2012/EC with a new Annex, and a new Euro 7 standard, that has zero emissions: all vehicles electric. Similarly, the Emission Performance Regulation (EC) 443/2009 article 4 should require all new vehicles are zero emissions, and prohibit shareholder dividends or director bonuses, and impose executive pay cuts, until this is achieved. After “Dieselgate”, the automakers have a moral duty to convert to electric now. But more than this, if hard law does not pick up the pace, Europe’s carmakers will be overtaken by Asian and American competition. Markets work, but they are slow. It took 50 years for cars to replace horses, even though they were obsolete, and we do not have time. Not driving electric, again, is costing European business, and us, the Earth.


Agriculture and buildings

Our food and homes are the next biggest users of toxic fossil fuels. The Common Agricultural Policy presents huge potential, since it is over a third of the EU’s total budget: that money should go back to its original purpose of achieving social goals, not enriching agri-businesses that decimate nature. The Direct Payments Regulation (EU) No 1307/2013 article 9 should require all ‘active farmers’ to plant trees and enhance biodiversity, and articles 45 and 46 should be amended to progressively raise the ‘ecological focus area’ requirements from 5% to 25%. In the Management and Financing Regulation (EU) No 1306/2013 a new article 91a should have conditions for farmers to eliminate unnecessary machinery, the practice of no-tilling to revive soil and retain carbon, and use of robot weedkillers instead of huge herbicide sprays. To solve rural poverty and boost investment, all employers in receipt of money should be required to pay living wages and recognise independent trade unions, and the Rural Development Regulation (EU) No 1305/2013 article 5 should be require installation of electric charging points, and provision of electric public transport, just like the great New Deal programmes in the Rural Electrification Act of 1936.

            For buildings, the Energy Performance of Buildings Directive 2010/31/EU articles 2(2) and 7-9 should change from a duty for ‘nearly zero-energy buildings’ to ‘negative energy buildings’ following the motto ‘every building a power station’. Article 14 on ‘inspection of heating systems’ should include a ban on all new gas heaters, and create a duty to replace existing heaters in public and commercial buildings, then homes, with heat pumps or electric boilers.


Corporate, banking and trade

A final group of changes cut across all enterprise sectors. First, there is a growing body of cases that hold governments and companies responsible for climate damage. Urgenda v Netherlands (2019) held the Dutch government had to cut emissions by 25% by 2020, and the Klimaschutz case (2021) held the German government had a duty to speed up climate measures so as to not place all burdens on younger generations. The courts held that without action there would be breaches of the European Convention on Human Rights, article 2, on the right to life. If these Member State courts are right (hard to doubt) this binds the whole EU, even the UK. Also, in Milieudefensie v Shell (2021) the Dutch Civil Code section 162 on tort was interpreted, in light of the right to life, to require Shell to reduce all direct and indirect emissions by 45% by 2030. Further in Lliuya v RWE AG (2017) a German Upper State Court is gathering evidence on whether to award damages in tort for 0.47% of flood defence costs for a Peruvian community, against RWE AG, which itself is responsible for 0.47% of all historic greenhouse gas emissions. We should not have to wait for the courts. We should codify these tort principles in EU law. We should also amend the Accounting Directive 2013/34/EU article 6 to require all companies account for the cost of reversing climate damage, and the Company Law Directive 2017/1132/EU article 45 to require all companies with significant greenhouse gas emissions to aside reserves for climate damage liability. This will likely push most polluters to convert their businesses, or go out of business.

            In terms of macro-structure, the European Central Bank Statute, article 1, should clarify that ‘price stability’ entails reducing inequality and ending climate damage, because inequality of income and wealth concentrates risk and drives depression, and the wild fluctuations of gas, oil and coal prices – driven by dictators now as in the 1970s – is a prime cause of inflation. Then we have to overhaul the GNI Regulation (EU) 2019/516, and replace ‘Gross Domestic Product’ as a measure of economic performance with objective factors that do not count harm to the environment, human health, and ‘loss of our natural wonder’ as positive. The Inequality-Adjusted Human Development Index, with real wages and working time replacing GDP is a simple option.


Directors duties’ and the Sustainability and Due Diligence Directive

How does this all compare to the SDDD proposal, released a day before Putin’s criminal invasion? The proposed Directive would require companies turning over €150 million, or €40 million in ‘critical sectors’, to prevent ‘potential adverse impacts’ on a list of international human rights and environmental norms (arts 2-3, 7 and Annex). If ‘the adverse impact’ (that is, human rights abuse and environmental damage) ‘cannot be brought to an end’, says article 8(2), ‘Member States shall ensure that companies minimise the extent of such an impact.’ Article 15 says large companies should have a ‘business model and strategy... compatible with the transition to a sustainable economy’ (not defined) and  ‘limiting of global warming to 1.5 degrees’, and report their plan on climate risk. Then article 25 says directors have a duty to ‘take into account the consequences of their decisions for... human rights, climate change and environmental consequences’. This replicates the Companies Act 2006 section 172 but without the directors’ defence of good faith.

            The main problems with this proposal are that it is laden with greenwashed jargon that diverts responsibility from executives of coal, oil and gas corporations (‘adverse impact’, climate ‘risk’, or ‘combating’ climate change). It’s “blah, blah, blah” and the filthy fingerprints of the fossil fuel lobby are everywhere. Instead of saying “do no harm” article 8(2) gives companies a licence to pollute, violate labour and human rights, and argue over it in court if the wrongs ostensibly ‘cannot be brought to an end’. Presumably Gazprom would have been arguing that its environmental damage or NordStream2 just could ‘not be brought to an end’ but they could plant some trees to ‘minimise the impact’. BP executives would be inventing a new paper trail saying they took environmental consequences into account before Deepwater Horizon exploded – woops! – so no breach of duty. But is this proposal better than nothing? Yes it is extraterritorial. But given Putin’s invasion of Ukraine, perhaps it is worse, because it made everyone feel like they are doing something when they were not, as the dictator funded their next aggressive war. As well as stripping article 8(2), and a dozen other changes, article 25 should instead create a duty of every director to shift to clean energy supply as fast as technology allows, divest from all fossil fuels, and make products of lasting and durable quality to minimise material throughput. This duty should be enforceable by investors, employees and other groups with a sufficient interest in the company.


Act now, and ditch distant targets

If this war makes us realise anything, it’s that the lies and inaction must end. In 1977, Exxon Corp did internal research finding that ‘mankind is influencing the global climate through carbon dioxide release from the burning of fossil fuels’. Then, instead of shifting to be a network renewable company, its executives lied to the world about climate damage, and so did all the rest. In 1997, Putin wrote a masters thesis on how Russia could be great again if it exploited its resources, particularly fossil fuels, and after he turned his country into a petro-state, he became the world’s biggest climate denier. We cannot wait till 2050 or 2030 to end this psychopathic economic and geopolitical system. Those dates are not really targets later, but licences for coal, oil, gas and dictators to keep going now. Science does not tell us what we should do, it only says what is happening. Every puff of smoke, every slick of oil, every lump of coal is doing us damage, and once we understand that we see the cost of inaction is immense. Any rational, thoughtful person sees that we must end fossil fuels as fast as technology allows. And what we can win is so much greater: clean air, a plural economy, a more democratic polity, a more just society, and peace.


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