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.
