New Gold Standard: will we move towards a legally binding carbon negative target?

NewGround Law ESG NEWsletter: New Gold Standard: will we move towards creating a legally binding carbon negative target?
By: Harry Swindin and Erwin Noordover

At NewGround Law, we recognise the importance of Environmental, Social and Governance (ESG), both to our firm and our clients. We are not the only ones who think this. The values and principles relating to the three aspects of ESG are already significantly altering capital flows, stakeholder engagement as well as national and international regulation. We vow to stay ahead of these trends. We believe that doing so will place us in an optimum position to capitalise on these changes as they materialise. Hence, the experts at NewGround Law have created a weekly newsletter to help those around us stay on top of the: key developments shaping the ESG landscape across Europe.

Dutch Government proposes Green Hydrogen Purchase Obligation
The Dutch government is planning to introduce a new purchase obligation for green hydrogen within the hydrogen market to ensure that the Netherlands achieves its expected binding target under the EU’s Fit-for-55 package. This obligation was announced within the Dutch climate policy program, published by climate and energy minister Rob Jetten last week.[1]

The policy program states that the obligation would function similarly to the annual Energy for Transport obligation, where companies are provided with tradable certificates to demonstrate their compliance. Under the current policy, participants in the hydrogen market will be provided with certificates for purchases of hydrogen from renewable sources (aka ‘green hydrogen’).

According to the government, the obligation is necessary to give market parties (particularly those involved in the supply chain) greater certainty about the demand for green hydrogen. Furthermore, it expands the government’s current toolbox to achieve a binding target on hydrogen beyond its current subsidy scheme. The current target is for green hydrogen to provide 500MW in 2025.

A detailed policy plan as well as future targets for the hydrogen market will be published by the government later this year. The government expects that the purchase obligation will come into force from 1 January 2026.

More details on the development of green hydrogen as well as the differences between grey, blue, and green hydrogen can be found in the second edition of NGL’s ESG Newsletter [link provided].[2]

German Judges Visit Peruvian Lake in Ground-Breaking Climate Change Litigation Case
Judges from a German Court have, this week, travelled to Peru to meet with experts in a ground-breaking case which could be game-changing for climate litigation.[3] In a case which bears resemblance to the (successful) case against Royal Dutch Shell[4] by environmental activists in The Hague, a farmer and a mountain guide from Peru are claiming compensation from Germany’s biggest energy provider RWE over its contribution to climate change, which has placed them in danger.

The primary focus of the case is Lake Palcacocha which is located in Peru’s Cordillera Blanca mountain range. A scientific study has shown that the lake has grown 34 times in volume in the last 50 years as a result of human-induced climate change which has caused the glacier above the lake to melt.[5] The study also identifies the substantial flood risk that the lake poses, the results of which would be devastating for the nearby city of Huaraz. Both of the plaintiffs and their families live in the flood path of the lake and are claiming for the costs of preventing damage from an increasingly likely flood.

The plaintiffs have asked for RWE – a major multinational energy company based in Germany – to pay €17,000. This figure is 0.5% of the total repair cost if a flood were to take place and is based on the Institute of Climate Responsibility’s estimation that RWE is responsible for 0.5% of GHG emissions from 1751 to 2010. The money would be invested in flood defences for the nearby population.

The legal challenge began in 2015 and was initially rejected after a judge found that the plaintiffs had no legal basis. However, in 2017, the plaintiffs appealed the decision. At an initial hearing, the case was found to have merit. As a result, the case is currently being heard by the German higher regional court.

If the outcome of the case goes in favour of the plaintiffs, it could lead to a waterfall of other cases against large GHG emitting companies. While the present scenario is a relatively unique one in which the plaintiffs live beneath a glacial lake, if successful, this case could lead to claims from far more common events linked to climate change, such as flooding and other extreme weather events.

Report by Financial Services Firm Deloitte outlines the Costs of Climate Action and Climate Inaction
A report produced by Deloitte’s newly launched Center for Sustainable Progress has highlighted the striking differences in the future of global economies between two different scenarios; climate action and climate inaction.[6]

In scenario A of the report, the impact on economies is examined as if climate change is not mitigated and as a result global warming reaches 3°C by the end of the century. In this eventuality, global GDPs will suffer US$178 Trillion between 2021 and 2070. Six key pathways through which climate change affects the economy are identified as causing this decline: the labour force, productive land, productivity, health and well-being, the flow of global currency (tourism/travel) and agriculture.

The report also maps out the differing economic impacts of climate change between different geographic areas under scenario A. Four main areas were identified by the report: Asia Pacific, Europe, Americas and the rest of the world. Out of these regions, Europe stands to lose the least in GDP by 2070 (-$10 trillion), whereas the Asia Pacific stands to lose the most (-$96 trillion).

Scenario B examines the impacts of decarbonisation to the extent that global net-zero is achieved by 2050. While the report explains that this will still be a costly path due to the ‘industrial revolution’ required to achieve it, the world economy will be $43 trillion larger in net present value between 2021 and 2070 compared to the same time period under scenario A. Under this scenario, Europe will benefit from a relatively low-cost transition. It shall increase regional GDP by 1.8% in 2070 compared to scenario A. This percentage will continue to grow beyond 2070.

A key finding by the report is the so-called ‘turning point’. As economies transition under scenario B they will initially have lower economic activity – compared to scenario A – due to the costs associated with decarbonisation. However, as economies progress under scenario B they will begin to realise the return on investment of decarbonisation, while also avoiding many of the additional costs of climate damage (e.g. stranded assets). This will create a turning point in which growth becomes higher for the economy than it would have done if it had continued under scenario A. This model may also be an interesting way for companies to consider their own long-term profitability and decarbonisation efforts.

Finland Close to Creating a Legally Binding Carbon Negative Target
The Finnish Parliament has voted to enact a new Climate Change Act which, if approved by President Sauli Niinistö, will commit the nation to carbon neutrality by 2035, and carbon negativity by 2040.[7] The Nordic country has also increased its absolute emissions reduction targets (reduction of total quantity of emissions – not including emissions absorbed/offset) so that it reduces emissions by at least a 60% reduction by 2030 and 80% by 2040, as compared with 1990 levels. The commitments are a result of a scientific investigation into the countries nationally determined contributions (NDCs) to the Paris Agreement.[8]

These proposed targets have gained significant attention as a result of their commanding ambition in comparison to the European and global norm of net-zero by 2050. Furthermore, Finland will become the first nation to create a legally binding carbon negative target. This is in stark contrast to the majority of other countries which are still yet to adopt a legally binding net-zero target.

Some commentators have been quick to coin the Finnish model as the ‘new gold standard’.[9] While it is inevitable that nations will eventually adopt carbon negative targets, the political and economic ambition required to commit to carbon negativity makes it unlikely that a landslide of nations will follow Finland.