Friends of the Earth v UKEF: Court of Appeal clarifies the approach to the Paris Agreement and Scope 3 emissions when making investment decisions

In R (on the application of Friends of the Earth Ltd) v Secretary of State for International Trade/UK Export Finance (UKEF) [2023] EWCA Civ 14, the Court of Appeal rejected Friends of the Earth’s application for judicial review of the UK Government’s decision to provide $1.15 billion in export finance for a liquified natural gas project in Mozambique. This ruling continues a trend of UK courts declining to find that emissions-intensive projects are unlawful, and follows the Supreme Court’s rejection of Friends of the Earth’s challenge to the Heathrow Airport expansion in 2020.

In this case, the Court unanimously found that the Government was only required to reach a “tenable” view that funding the project was aligned with the UK’s obligations under the Paris Agreement, and that it was not irrational for the Government to conclude that the investment decision was compatible with the Paris Agreement. In addition, the Court considered that the Government was not required to obtain a quantification of the indirect emissions (besides purchased energy) occurring in the project’s value chain (Scope 3 emissions) before making its investment decision.

Background

At first instance, the Administrative Court was split and the judges could not agree on the outcome of the case. The Administrative Court therefore dismissed Friends of the Earth’s application for judicial review.

Friends of the Earth appealed, arguing that:

1. the Government was required to adopt a view that its decision was aligned with the UK’s obligations under the Paris Agreement that was more than merely tenable, and that there was no rational basis on which the respondents could conclude that the investment decision was compatible with the Paris Agreement (the Paris Agreement challenge); and
2. the respondents failed in their duty of enquiry to obtain a quantification of the project’s Scope 3 emissions (the Scope 3 challenge).

Paris Agreement challenge

The Court noted that the Paris Agreement is an unincorporated international treaty that does not give rise to domestic legal obligations. It found that Article 2 of the Paris Agreement, which provides that the Paris Agreement aims to “strengthen the global response to the threat of climate change, in the context of sustainable development and efforts to eradicate poverty, including by: … (c) making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”, is declarative of the treaty’s purposes (which relate to obligations set down in other articles). Article 2 did not create an obligation on the Government to demonstrate that its investment decisions were consistent with a pathway towards limiting global warming to well below 2°C and pursuing efforts to 1.5°C.

At the time of the investment decision, the Government considered that the project was aligned with the UK’s obligations under the Paris Agreement because it would help Mozambique transition away from more damaging fossil fuels in line with its Nationally Determined Contribution and Paris Agreement commitments. The gas from the project would replace some more polluting fuels and there would therefore be some net reduction in emissions. While the Court was not prepared to give a definitive interpretation of the provisions of the Paris Agreement or their legal effect, it found that the Government’s view that its decision was in alignment with the UK’s obligations under the Paris Agreement was tenable, and that was sufficient.   

The Court gave a number of reasons for this:

1. The Government chose to take into account the UK’s obligations under the Paris Agreement when making its investment decision, but was not obligated to do so by domestic law. Further, there is a lack of clear guidance as to how unincorporated treaties such as the Paris Agreement should be construed as a matter of domestic law.
2. The Paris Agreement was one of a range of factors which the Government considered when reaching its investment decision. The Court considered that courts should not allocate weight as between competing factors.
3. The question of whether it was an error of law for the Government to have concluded that funding the project was aligned with the UK’s obligations under the Paris Agreement must be judged by considering whether it had adopted a tenable view of that question.
4. The fact that the Government said that it had concluded that its decision was compliant with the UK’s obligations under the Paris Agreement did not affect this conclusion. The Court said that “it must be open to the executive to say that it wants to comply with an unincorporated treaty, even though there may be different views as to what precisely it means. It must also be able to say, without successful challenge, that it thinks on balance and in good faith that a particular decision is compliant, even if it later changes its policy or is shown to have been wrong in the view that it took”.

The Court considered that the Government’s view that the investment decision was aligned with the UK’s obligations was tenable (i.e. within the margin of reasonable decisions that could be taken, given the circumstances, rather than necessarily the correct decision), and that it was therefore not irrational for the Government to decide to finance the project:

1. The Court did not accept Friends of the Earth’s argument that the investment decision was irrational because the Government later acknowledged that the financing of the project did not align with the UK’s obligations under the Paris Agreement.
2. Because of the uncertainty and complexity around the project, the Government could not predict a precise outcome with respect to the project’s emissions. In that situation, the Government had to make a decision taking into account all relevant and material factors, including the UK’s obligations under the Paris Agreement.
3. The correct standard to be applied was whether the Government’s view that the decision aligned with the UK’s obligations was tenable when it was taken. There was no domestic law requirement for it to be certain that the decision complied with those obligations.

Scope 3 challenge

The Court held that the Government was not required to obtain a quantification of the project’s Scope 3 emissions:

1. The question for the Court was whether it was irrational for the Government to have made its investment decision without quantifying the Scope 3 emissions.
2. The Court noted that, despite the Scope 3 emissions not being quantified, it was always understood that they would be significantly larger than the Scope 1 and 2 emissions. In addition, quantifying the Scope 3 emissions would not answer “the far more difficult question” of whether, and to what extent, gas from the project would replace more polluting fossil fuels and over what timescale.
3. The Court concluded that the Government’s decisions as to the quantification of the Scope 3 emissions and the adequacy of the project’s climate change report were “well within the substantial margin of appreciation allowed to the decision-makers”. A failure to make an estimate of the Scope 3 emissions as part of a multifaceted decision-making process did not itself render the decision irrational.

Comment

This decision provides helpful guidance regarding the extent to which the Government should consider the Paris Agreement and Scope 3 emissions when making investment and project decisions, as well as the standard of review that a court will apply when considering decision-making by public bodies.

Going forward, we expect to see further legal challenges against both private and public sector actors over the development and financing of new carbon-intensive projects. Several such cases are already in progress: in the UK, Friends of the Earth earlier this month brought a legal challenge against the UK Government’s decision to grant planning permission for a new coal mine in Cumbria; further afield, German and Dutch environmental groups are challenging plans for a new gas field in the North Sea.