“Climate compliance”: After the German Federal Constitutional Court and the District Court of The Hague, ECJ increases pressure to act

Following the most recent decisions of the German Federal Constitutional Court and District Court of The Hague, the European Court of Justice, with its ruling handed down on 3 June 2021, is now also massively increasing the pressure on governments and companies to act and adapt.

In the recent past, a series of court decisions on climate protection law have attracted widespread attention: First, the German Federal Constitutional Court declared central components of the German Climate Protection Act to be incompatible with the constitution of the Federal Republic of Germany (Constitution) in a decision published on 29 April 2021. Shortly afterwards, on 26 May 2021, in a decision that is not yet legally binding, the District Court of the Hague (Rechtbank Den Haag) obliged the company Royal Dutch Shell to reduce its CO2 emissions by 45 per cent by 2030 compared to 2019. Finally, in a decision of 3 June 2021, the European Court of Justice ruled in infringement proceedings that the Federal Republic of Germany had failed to fulfil requirements under Directive 2008/50/EC of the European Parliament and of the Council of 21 May 2008 on ambient air quality and cleaner air for Europe by failing for many years to take sufficiently effective action against exceedances of limit values for the air pollutant nitrogen dioxide (Case C-635/18).

These three decisions have given climate protection law new significance practically overnight. The massively increased pressure on governments and companies to act and adapt as a result of the decisions is examined in more detail below, following an analysis of the Federal Constitutional Court’s decision on the German Climate Protection Act.

Key findings in the decision of the German Federal Constitutional Court

Key regulatory content of the German Climate Protection Act

In order to classify the decision of the German Federal Constitutional Court, it is necessary to first recap on the key regulatory content of the German Climate Protection Act (in its not yet amended version). The declared purpose of the German Climate Protection Act is to provide protection from the effects of worldwide climate change by ensuring achievement of the national climate targets and compliance with the European targets. The German Climate Protection Act is intended to provide a framework for this by setting binding targets for the reduction of CO2 emissions in Germany or regulating a procedure in which the reduction targets are determined. The concrete measures to achieve the reduction targets will be regulated in specific sectoral laws. The basis of the law is the Paris Agreement on Climate Change (“Paris Agreement”) and the goal contained therein of limiting the increase in the average global temperature to “well below 2 degrees Celsius, preferably to 1.5 degrees Celsius, compared to pre-industrial levels”.

The German Climate Protection Act’s regulatory logic fundamentally differentiates between the period up to 2030 and the subsequent period until climate neutrality is achieved in 2050. For the period up to 2030, the Act contains a binding reduction path with annual emission caps for the energy, industry, buildings, transport, agriculture, waste management and other sectors, as well as land use, land use change and forestry.

The German Climate Protection Act does not contain specific annual emission caps for the period after 2030. Instead, for this period the Federal Government is authorised and obliged to regulate the reduction path by enacting legislation for “further periods” in 2025 at the latest. The enabling act merely stipulates that the reduction by enacting legislation must be consistent with the achievement of the climate protection targets set out in the German Climate Protection Act and with the requirements of EU law.

Legal assessment by the German Federal Constitutional Court

The key findings of the German Federal Constitutional Court’s decision are easier to understand if the premises on which the Court based its decision are considered.

The German Federal Constitutional Court first of all states that the Paris Agreement – based on the state of the art in science and technology established by the Intergovernmental Panel on Climate Change – obliges the states that have ratified the Agreement to achieve climate neutrality by 2050. Based on this objective, the German Advisory Council on the Environment has derived a “German” remaining CO2 budget that is available at most until climate neutrality is achieved. The German Federal Constitutional Court assumed that this remaining CO2 budget was the inspiration for the regulation of the reduction path in the German Climate Protection Act. The German Federal Constitutional Court also assumed that every amount of CO2 produced in German irreversibly reduces the remaining CO2 budget. The Court then stated that the emission quantities permitted in the German Climate Protection Act up to the year 2030 correspond to almost the entire remaining CO2 budget to which Germany is entitled. Finally, it is of decisive importance for the classification of the key legal findings of the German Federal Constitutional Court that the Court assumed that the reduction of CO2 emissions could only be achieved through adjustments that would be accompanied by profound interventions in fundamental rights.

Based on these premises, the German Federal Constitutional Court held that the legislator had specifically defined its climate protection mandate resulting from Article 20a of the Constitution for the Federal Republic of Germany (Constitution) and bound itself by declaring the reduction target of the Paris Agreement to be the basis for its action. It also stated that the reduction targets contained in the German Climate Protection Act were, however, in line with the government objective of climate protection. In this respect, the Court emphasised the legislator’s broad legislative freedom and margin of discretion and took into account the uncertainties associated with the necessary forecasts.

The German Federal Constitutional Court stated that in addition to the government objective of climate protection resulting from Article 20a of the Constitution for the Federal Republic of Germany, the German Climate Protection Act also had to be measured against the complainants’ fundamental rights. In principle, the Court stated that fundamental rights could have a preliminary effect and had to be taken into account in the legislative reaction to future circumstances (“intertemporal safeguarding of freedom”). Measured against this basic assumption, the Court held that the reduction path regulated in the German Climate Protection Act has preliminary effects similar to an infringement of rights, because the irreversible production of CO2 permitted until 2030 corresponded to almost the entire remaining budget available to Germany until it achieves climate neutrality. In the Court’s opinion, this infringement of fundamental rights was not justified because and to the extent that the envisaged reduction path created risks of impairment of future fundamental freedoms. The use of almost the entire remaining CO2 budget available to Germany until 2030 was disproportionate because it postponed unavoidable impairments of freedom almost entirely into the future.

As a result, the German Federal Constitutional Court ruled that the German Climate Protection Act was incompatible with the Constitution for the Federal Republic of Germany insofar as it lacked a projection of the reduction targets for the periods from 2030 onwards that contradicted the grounds of the judgment. The Court required that by 31 December 2022, the legislator must regulate the updating of the reduction targets from the year 2030 in accordance with the grounds of the judgment. The grounds of the judgment contain three central requirements: First, sufficient precautions must be taken to alleviate the reduction burden from 2030 onwards; second, a planning horizon must be created that promotes development; and third, the reduction path must be defined in greater detail. Correspondingly, the German Federal Constitutional Court declared the authorisation of the Federal Government to determine the reduction path from the year 2030, as provided for in the German Climate Protection Act, invalid because the content, purpose and extent of the authorisation granted were not sufficiently defined.

The Federal Government has already reacted to the decision of the German Federal Constitutional Court. On 12 May 2021, it adopted a draft amending law in which it attempts to implement the requirements of the German Federal Constitutional Court. Although the German Federal Constitutional Court did not expressly demand a tightening of the reduction path, the amendment to the German Climate Protection Act provides for precisely this: It is now planned to reduce greenhouse gas emissions by 65 instead of 55 per cent by 2030 compared to 1990. For the year 2040, a new interim reduction target of 88 percent reduction is envisaged. The tightening of the reduction path comes as little surprise, because it will at least make it considerably easier to shape the path to climate neutrality after 2030 in conformity with fundamental rights, if not perhaps even make it possible in the first place in purely factual terms.

Massive pressure on government and companies to act and adapt

The consequences of the German Federal Constitutional Court’s decision are fundamental and far-reaching. Precisely because it was issued at the same time as important decisions of the European Court of Justice and the District Court of The Hague, the decision gives climate protection law new, unprecedented significance.

The state’s climate protection measures have become litigable

Probably most significant from a legal point of view is the finding that climate protection has become litigable. Every citizen entitled to fundamental rights – the German Federal Constitutional Court does not recognise any altruistic right of action of environmental associations – can put the legislator’s climate protection measures to the test before the German Federal Constitutional Court. While it is true that the German Federal Constitutional Court is obviously willing to allow the legislator appropriate discretion to act by repeatedly emphasising the legislator’s legislative freedom and prerogative of assessment, this discretion finds its limits in the fundamental rights and the obligation to safeguard the intertemporal freedom resulting from them. Legally, but even more so in terms of legal policy, the legislator – and above all, of course, the Federal Government – will see itself exposed to constant pressure to justify itself, which is likely to lead to climate protection measures being approached and implemented with a new consistency in the future.

The German government faces additional pressure to act from the European Commission and the European Court of Justice: With the decision published on 3 June 2021 on the inadequate implementation of Directive 2008/50/EC of the European Parliament and of the Council of 21 May 2008 on ambient air quality and cleaner air for Europe, the European Court of Justice has made it clear that it is no longer willing to accept the Federal Republic of Germany’s negligent handling of climate protection requirements under EU law.

In contrast, a decision such as the one made by the District Court of The Hague on 26 May 2021 is still difficult to imagine in Germany. The Dutch court ordered Royal Dutch Shell to reduce its CO2 emissions by 45 per cent by 2030 compared to 2019. The decision is not yet legally binding, but has understandably already attracted a lot of attention. A similar decision is not to be expected in Germany in the foreseeable future, since climate protection law here is based on fundamental rights and government objectives, as the decision of the German Federal Constitutional Court shows. However, fundamental rights and government objectives primarily bind the state, not private companies. The possibility that in the future the generally recognised third-party effect of fundamental rights between private parties will mean that private companies can also be successfully sued by citizens for certain climate protection measures is not entirely ruled out, but at this point in time it is extremely unlikely.

This does not diminish the significance of the Federal Constitutional Court’s decision. It is merely the path that is different than (possibly) in the Netherlands. For the time being, the focus will be on the state, which must implement climate protection measures in line with fundamental rights and government objectives.

Unprecedented pressure on companies to act

The decision of the German Federal Constitutional Court will indirectly exert unprecedented pressure on companies to align their actions more closely with climate protection goals. This pressure to adapt will come from numerous specialised laws that will follow the amendment of the German Climate Protection Act. Specific measures to reduce CO₂ emissions will be laid down in these sectoral laws. Shortly after the decision of the German Federal Constitutional Court, numerous proposals were already circulating. The cabinet’s decision to amend the German Climate Protection Act was also accompanied by a decision in which initial approaches for more stringent climate protection measures are already outlined.

The new pace in the implementation of climate protection measures will be accompanied by numerous subsequent challenges. If, for example, legally mandated climate protection measures lead to the utility value of private property being largely eroded, the question of compensation arises. In the case of the phase-out of lignite-based power generation, the legislator decided to compensate plant operators for the early closure of their plants. However, it remains to be seen whether and to what extent this will happen in the future. It is possible that the financial scope for compensation will be limited if the structural change that is being driven forward no longer affects only individual companies, but potentially entire sectors of the economy. The legislator and the Federal Government may then be forced to take an in-depth look at the question of where the limits of climate protection requirements that can be accepted without compensation lie.

“Climate compliance” as a due diligence audit aspect of its own

Given the effects described above, it is foreseeable that “climate compliance” will increasingly determine the value and actions of companies. In light of this, there is a foreseeable trend in transaction practice that “climate compliance” will in future become an aspect of its own to be examined as part of due diligence. This will also involve identifying the climate protection regulations that may only be applicable to the company to be acquired in the future and recognising a possible investment backlog at an early stage. After all, in the financial sector, ESG criteria (environment - social - governance) have long been a recognised and increasingly important yardstick for evaluating investments. The decision of the German Federal Constitutional Court will also strengthen the trend to attach greater importance to climate protection valuation aspects.