UK Funding of Mozambique Gas Project Challenged For Being Incompatible With Paris Agreement

Background

On 15 March 2022, Lord Justice Stuart-Smith and Mrs Justice Thornton, handed down their judgment in the case of R (on the application of Friends of the Earth Ltd) v Secretary of State for International Trade/Export Credits Guarantee Department (UK Export Finance) [2022] EWHC 568 (Admin).

Friends of the Earth (“FoE”) challenged the decision of the Secretary of State / UK Export Finance (“UKEF”) to provide up to USD 1.15 billion in export finance and support for a liquefied natural gas project in Mozambique (“the Project”). The Project was to be operated by Total E&P and funded by a financing company, who were both interested parties to the claim.

This is one of number of recent judicial review challenges brought on the basis that the decisions made by the UK government were not compatible with the Paris Agreement.

The Background

UKEF is a government department which essentially operates like a financial institution, carrying out banking and insurance business and ensures that no viable UK export fails for lack of finance or insurance from the private sector. As part of its decision making process, UKEF routinely assesses the statutory basis for support, the export case, the credit risk and environmental, social and human rights considerations.

Whilst there was no obligation or mandate to ensure that the emissions were in line with the Paris Agreement temperature goals, UKEF decided (partly in reaction to the Heathrow Airport¹ challenge) that climate change impacts ought to be taken into account.

UKEF duly prepared a climate change report, which concluded that it was compliant with obligations under the Paris Agreement.

FoE argued:

1. UKEF’s decision was reached without regard to essential information including, amongst other things, the Scope 3² emissions of the project.
2. that UKEF’s decision was based on an error of law or fact as the funding was not compatible with the Paris Agreement and/or did not assist Mozambique in achieving its own commitments under the Paris Agreement. One key contention was it cannot be considered compatible with Article 2(1)(c) of the Paris Agreement – “Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate resilient development”.

The High Court Decisions

First, the court considered what is the appropriate scope of enquiry when a decision maker decides to take something into account in the course of the decision-making process.

Giving the lead judgment, Lord Justice Stuart-Smith highlighted the Tameside duty of sufficient enquiry is one of rationality not of process; i.e. could a rational decision maker take the decision without considering particular facts or factors.

He went on to say “UKEF was entitled to a significant margin of appreciation on the facts of the present case. It was conducting an exercise of assessing climate change in the context of a long-term foreign project. It was the first UK Government Department to do so. At the time there was no established or internationally recognised methodology for evaluating the climate change impacts of a project like the one under scrutiny as one amongst many policy-laden public interest features contributing to a governmental decision […] Furthermore, it is plain that UKEF was operating in an area where there is room for reasonable experts to disagree: it is not the role of a court in judicial review proceedings to resolve conflicts in expert evidence.”

In his judgment no quantification of Scope 3 was necessary because it was implicit, obvious and accepted that the development of a major LNG field would lead to high levels of emissions. Quantification would not advance arguments and in any event, UKEF could rationally take their decision without having quantified estimates of Scope 3 emissions.

Second, should the Court entertain submissions and decide questions of interpretation of the Paris Agreement?

Stuart-Smith LJ derived a number of principles from the authorities.

1. First, there is no general rule that a national court shall never determine a question of interpretation of an unincorporated international treaty;
2. That said, a national court should be cautious about trespassing into the separate plane and legal system of international law where it has no authority to decide questions of interpretation and where its intervention may be positively unhelpful for the mechanisms that are in place for resolving dispute;
3. The Court should adjust its approach by reference to where in the spectrum from the broad and largely political or aspirational, or statements of high principle, to the rigidly precise and prescriptive the provisions in question lie. Where the provisions lie towards the broad, political or aspirational (described in the Heathrow v HM Treasury case as “the softer end of the spectrum”), “tenability” is likely to be the appropriate approach for the court to take.

The judge considered that the Paris Agreement does not give rise to hard-edged free-standing obligations but should be seen as a composite package of aims and aspirations. The aims of the Paris Agreement were “in tension or frankly irreconcilable” and so “UKEF’s approach, which involved recognition of those conflicting aims and aspirations and an evaluative balancing exercise in order to come to a conclusion, cannot be criticised”.

The dissenting judgment of Mrs Justice Thornton

In her dissenting judgment, Mrs Justice Thornton agreed with the legal principles outlined by Stuart-Smith LJ, but was of the view:

1. 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;
2. The failure to quantify Scope 3 emissions, as well as other 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.

Thornton J agreed that UKEF had a “broad margin of discretion” and that it only needed to show that its interpretation of the Paris Agreement was “tenable”.

Mrs Justice Thornton however found that having regard to the facts and circumstances of the case – including that the House of Commons Environmental Audit Committee had specifically advised in July 2019 that Scope 3 emissions are essential for calculating the full emissions impact of a project – the UKEF failed to discharge its duty of enquiry in relation to a key consideration in the decision making.

Where next?

Climate change litigation is on the rise. The government is keen say its projects and policies are compliant with its obligations under Paris Agreement. In doing so, it leaves itself vulnerable to legal challenges. The courts will afford the government a broad margin of discretion, but one judge in this case concluded that a high level qualitative review is unreasonable.

FoE has already indicated that it has been granted permission to appeal to the Court of Appeal; its decision will be instructive in future cases for those seeking to challenge the scientific rigour and process carried out by government in assessing its compliance with the Paris Agreement.

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¹[2020] UKSC 52

²Scope 3 emissions are all the other indirect emissions that occur in a company’s value chain, including downstream emissions from distribution, storage and use of the product generated by the project in question. It is one of the three types of emissions found in the Greenhouse Gas Protocol, which Total’s expert said was a “widely recognised and widely applied framework”.