Split judgment as to lawfulness of UKEF decision to fund overseas gas project in finance related climate change case


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Friends of the Earth challenged the Secretary of State’s decision under the Export and Investment Guarantees Act 1991 that UKEF (the UK’s export credit agency) provide USD 1.15 billion in loans and guarantees to Total in relation to its development of a vast liquefied natural gas (LNG) project in Mozambique.  This is the first case (either in the UK or globally) in which a Court has had to consider the legal implications of Article 2(1)(c) of the Paris Agreement for a government decision to support fossil fuel production. Article 2(1)(c) addresses finance flows as a key goal of the strengthened response to climate change in the context of sustainable development and efforts to eradicate poverty, through making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.

The claim was brought on the basis that:

  • The decision was based on an error of law or fact, namely that the Project and its funding was compatible with the UK’s commitments under the Paris Climate Change Agreement and/or assisted Mozambique to achieve its commitments under the Agreement,and/or
  • The decision was otherwise unlawful in so far as it was reached without regard to essential relevant considerations in reaching the view that funding the Project aligned with the UK and Mozambique’s obligations under the Paris Agreement.

As the Court noted, Mozambique is a poor and under-developed sovereign state that is extremely vulnerable to climate change impacts. Friends of the Earth had pointed out that the Defendant’s own climate change report had recognised that investment in renewable energy ‘would offer a more environmentally sustainable pathway for Mozambique’s domestic energy needs and to meet the aims of the Paris Agreement’. The report went on to state that the same financial incentives as exist for this LNG project did not exist to attract investment into the renewables sector. Friends of the Earth had noted that the UK, like other developed states, is under an obligation under the Paris Agreement to support developing countries in making the transition to low carbon economy whilst also eradicating poverty.

In its judgment, the Court notes that the decision to fund the project was controversial and that the Foreign Secretary, the Secretary of State for International Development and the Secretary of State for Business had all opposed funding the Project on climate change grounds. The judgment makes clear however that the merits of the decision are not a matter for the Court which is concerned only with the lawfulness of the decision.

In a detailed analysis of the internal process undertaken for determining the application for funding, the High Court, despite two conflicting judgments, decided to dismiss the claim. The Court, being split, has unsurprisingly granted the claimant permission to appeal . The two judge Divisional court made opposing findings on key elements of the case, namely whether it was lawful for the Government to fund the LNG gas project without obtaining a quantified assessment of the ‘scope 3’ emissions that will be produced by the project and as to whether assumptions about ‘avoided’ or displaced emissions were a lawful basis for the decision.

Under international reporting guidelines, greenhouse gas emissions are categorised into three ‘scopes’: Scope 1 emissions are the direct emissions from facilities owned or controlled by the reporting company.  Scope 2 are the indirect emissions from the off-site generation of energy purchased for use by a particular project. Scope 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. In the context of a fossil fuel project, Scope 3 emissions dwarf Scopes 1 and 2.  Despite that, the Defendant argued that no quantification was necessary and that a wholly ‘qualitative’ assessment could be carried out. The Government’s own climate change report also recognised that the majority of the project’s Scope 3 GHG emissions will relate to international emissions; 95% of the LNG produced by the project would be sold for export and only 5 % used domestically.

Lord Justice Stuart-Smith held that there was: ‘no legal or policy obligation to quantify Scope 3 emissions.  Nor was quantification of Scope 3 emissions necessary for the purposes of the Defendants’ decision.  It was implicit, obvious and accepted that the development of a major LNG field would lead to very high levels of emissions.  Quantification (if it could be achieved) would not advance arguments in relation to the decision that the Defendants had to take…’(para 237). The Judge held that UKEF was entitled to form the view that the support for the Project was in accordance with its obligations under the Paris Agreement as properly understood (para 240).

Mrs Justice Thornton respectfully disagreed with the analysis of Stuart-Smith LJ in relation to the quantification of Scope 3 emissions and concluded that in the circumstances of this case:

(1)UKEF had 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, meant that there was no rational basis on which to demonstrate that the funding for the Project was consistent with Article 2(1)(c) of the Paris Agreement on Climate Change. (para 244)

Mrs Justice Thornton noted that UKEF was given clear advice by its own experts that a failure to quantify the Scope 3 emissions undermined the credibility of the climate assessment. (para 294)

The Judges also disagreed on the legality of the Government’s assumptions as to whether and the extent to which the project would lead to ‘avoided emissions’. Lord Justice Stuart-Smith held that the fact that the actual extent to which LNG might act as a displacement was uncertain, so that the exercise undertaken by the consultant and referred to in the climate report was no more than “indicative guidance”, did not render the exercise inappropriate or its use in the report irrational (para 206).

Mrs Justice Thornton held the climate assessment conflated Scope 3 emissions with avoided emissions and expressed inconsistent views on the global emissions impact. As such, it provided an unclear evidential basis for the view that the Project can be expected to lead to a net reduction in emissions.  The Judge noted that in the context of the Paris Agreement, there is a material difference between avoided emissions and overall emissions impact because displacement of a certain quantity of higher emitting fuels does not equate with a reduction of emissions.  Since there is a direct correlation between emissions and temperature rise, if the overall impact of the project is to increase global emissions, then it will not be in alignment with the Paris Agreement.

The Judges agreed that the parts of the claim relating to a failure by the Defendant to consider other issues including the risk that the project will result in stranded assets, the lock-in of high emitting infrastructure and the failure to consider UNEP’s Production Gap report did not succeed.

Jessica Simor QC, Kate Cook and Anita Davies acted for Friends of the Earth in this case.