Heathrow ruling endangers projects globally

Introduction

Originally published by Petroleum Economist – Energy Transition Newsletter

The Court of Appeal of England and Wales’ unanimous ruling on February 27, 2020 that the National Policy Statement (NPS) providing for the construction of a third runway at Heathrow Airport was invalid could have wide ramifications for all carbon-intensive industries.

The Airports National Policy Statement: new runway capacity and infrastructure at airports in the south east of England (ANPS), was ruled invalid and its designation as a NPS unlawful on several grounds involving climate change. In particular, the ruling referenced the failure to take into account the UK government’s commitment to the provisions of the 2015 Paris Agreement.

The Heathrow case is a landmark decision with potentially broad implications for the approval and financing of large infrastructure projects around the world, including projects within the energy and natural resources sector.

The Heathrow decision

The court found that in preparing the ANPS, the Paris Agreement ought to have been taken into account, and an explanation given as to how this was done. This is because the Planning Act 2008 (UK) provided that the reasons for the policy must include an explanation of how it “takes account of government policy relating to the mitigation of, and adaptation to, climate change”.

At the relevant time, the UK had legislated a 2050 target of achieving at least an 80pc reduction in its greenhouse gas emissions from 1990 levels under the Climate Change Act 2008.

The secretary of state took this target into account but, on legal advice, chose not to consider the more ambitious long-term target under the Paris Agreement. The court, however, determined that the UK government’s commitment to the Paris Agreement was clearly part of “government policy” by the time of the designation of the ANPS in 2018 because the UK government had ratified it and relevant ministers had made “firm statements reiterating government policy of adherence to the Paris Agreement”.

The designation of the ANPS was found to be unlawful because the secretary had failed to ask the question of whether he “could” consider the Paris Agreement pursuant to his obligations under the Planning Act.

The Heathrow case is a landmark decision with potentially broad implications for the approval and financing of large infrastructure projects around the world.

Had that question been asked, the court stated that the only reasonable view open to the secretary was that the Paris Agreement “was so obviously material” that it had to be taken into account.

The secretary’s failure to consider the Paris Agreement was also held to be a breach of the duty to undertake a lawful strategic environmental assessment, which required the Secretary to consider unincorporated international agreements relevant to the programme or plan.

While the ANPS is not necessarily incompatible with the UK’s commitment to reducing carbon emissions and mitigating climate change under the Paris Agreement, the court held that the secretary must undertake a review of the ANPS in light of the Paris Agreement.

This includes consideration of the non-CO2 effects associated with the ANPS, which are expected to be twice that of the CO2 effects, in accordance with the precautionary principle.

Potential implications

The Heathrow decision clearly will have significant implications for other projects in the UK. Although the UK government has stated that it will not challenge the decision, a spokesperson for Heathrow announced that the airport intended to appeal the decision as an interested party.

Reportedly, the UK government also remains supportive of the expansion plan notwithstanding the legal difficulties. Should the UK Supreme Court agree to hear an appeal then there will be an opportunity to see how the UK’s most senior court regards an instrument of international law in light of government’s historic and current policy. Any development on this issue will be of substantial interest to project sponsors, contractors and lenders alike.

It is possible there will be further challenges mounted to the UK government’s approach for other NPSs for failing to adequately consider climate change implications.

Such challenges have been mounted even prior to the Heathrow decision. In Claire Stephenson v Secretary of State for Housing and Communities and Local Government [2019] EWHC 519 (Admin), a challenge was brought on behalf of an anti-fracking organisation against the secretary of state challenging the National Planning and Policy Framework (NPPF) and, in particular, the section concerning shale gas extraction.

The High Court held that a clause in the NPPF was unlawful on the basis that it did not take into consideration the scientific and technical evidence of the impacts of fracking on climate change commissioned by the Department of Energy and Climate Change during the consultation stage and therefore failed its due process. Subsequently, the secretary of state announced the government would remove the offending language from the NPPF.

It is unclear the limit at which a court will deem that the government has ‘taken into account’ its obligations under the relevant international standards.

The key question is whether the Heathrow and Claire Stephenson decisions indicate a growing trend in climate change litigation in the English courts. It is no coincidence that a fresh legal challenge against the UK government’s decision to approve the high-speed rail network (HS2) was commenced in early March in the wake of the Heathrow decision.

The claimants in that challenge are expected to argue that the UK government’s decision to follow the advice of the Oaktree Review failed to properly take account of the UK’s commitment under the Paris Agreement. Crucially in that case, however, the UK government’s environmental statement for HS2 was published in 2013, prior to the government ratifying the Paris Agreement on November 24, 2016. But will there be more to come?

There are 12 designated NPSs, which set out government policy on infrastructure across the energy, transport and utilities sectors. These include NPSs for Fossil Fuels (EN-2), Renewable Energy (EN-3) and Oil and Gas Supply and Storage (EN-4). It was clear from the court’s reasoning in the Heathrow decision that English courts will consider the UK government’s obligations at the time the NPS was entered into.

It is, however, unclear the limit at which a court will deem that the government has “taken into account” its obligations under the relevant international standards. It will be important for the courts to develop some clarity in this area if challenges to fossil fuel and natural resource projects become more commonplace.

Australian interpretation

There are two main differences about Australian policy and law which cast some uncertainty as to how the Heathrow decision may impact project approvals in Australia.

First—although Australia, like the UK, has ratified the Paris Agreement and there is no domestic law incorporating it into Australian law—unlike the UK, the Australian federal government has not committed to a 2050 net-zero emissions target.

In addition, commonwealth environmental legislation, the Environment Protection and Biodiversity Conservation (EPBC) Act 1999, does not expressly require the consideration of climate change impacts arising from the carrying out of a project.

However, the EPBC Act is under review. Moreover, its terms of reference already expressly include consideration of “Australia’s international environmental responsibilities” and the accompanying discussion paper identifies climate change as a key pressure on Australia’s environment and growing economy.

Second, most planning and environmental approval decisions are made at the subnational level and each Australian state and territory has either an aspirational or a binding target for net zero emissions by 2050. Accordingly, to the extent the relevant state or territory’s planning framework requires consideration of climate change policies, greater scrutiny is likely to be applied to decision-makers' consideration of these policy commitments in line with the Paris Agreement going forward. But the weight given to those commitments will always remain a matter for the decision maker.

It is, however, worth noting that—in an Australian first—Justice Preston of the Land and Environment Court of NSW took the Paris Agreement into account in determining not to grant development approval for the Rocky Hill coal mine last year.

He stated that developed countries “such as Australia have a responsibility, including under the Climate Change Convention, the Kyoto Protocol and the Paris Agreement, to take the lead in taking mitigation measures to reduce [greenhouse gas] emissions”.

This was a different type of proceeding to the Heathrow litigation, being an appeal of the merits of the project rather than an administrative challenge to the legal validity of the original decision, but the court’s reasoning was widely reported nationally and across the globe and has caused ripples of concern among key industries about its implications.

Canadian perspective

In 2008, the Canadian Federal Court rejected a multi-billion-dollar Canadian energy project based on Heathrow-type climate change reasons, albeit referencing the Kyoto Protocol rather than the Paris Agreement.

Since then, climate change-based legal challenges have not proceeded, and regulatory opposition on that basis has failed. The post-2015 federal cabinet (but not the courts), however, has insisted on higher carbon emissions performance from certain major energy projects than otherwise prescribed by domestic law. To date, none of those projects have been constructed.

In the 2008 litigation, a coalition of environmental non-governmental organisations successfully challenged the Joint Federal-Provincial Review Panel approval of Imperial Oil’s (70pc owned by ExxonMobil) Kearl oil sands project, on the basis that the decision to approve the project did not adequately explain how the “significant adverse effects” of the project’s carbon emissions on the environment would be mitigated, if at all.

At the time, the project’s emissions were estimated to be equivalent to 800,000 passenger vehicles, or 0.5pc of Canada’s total carbon emissions. Imperial Oil had pledged to adhere to the local provincial “emissions intensity” climate change regime. This regime amounted to a carbon tax with little connection to the federal Kyoto Protocol commitment or—critically in the view of the court—any sort of ceiling otherwise.

As a result of the challenge, the project was stalled, and the Joint Review Panel was required to issue additional reasons focusing on the project’s carbon management efforts and addressing the larger climate change context.

Subsequent regulatory approvals of major Canadian energy projects have invariably been challenged in the courts, typically on the basis of rights held by indigenous peoples and project-specific environmental effects. Climate change based opposition has generally been unsuccessful, in part because Canadian carbon policies have evolved rapidly in both federal and provincial spheres.

The current Canadian federal government, elected in 2015, took steps shortly after election to implement a pan-Canadian carbon tax designed to meet Paris Agreement commitments by either imposing a price on carbon, validating satisfactory provincial efforts, or displacing provincial schemes deemed too lax. That legislation is currently being challenged before the Supreme Court of Canada. Multiple provinces argue that it is a constitutional overreach.

Between 2015 and 2020, despite federal carbon tax legislation and comparable provincial carbon tax regimes, the Canadian federal government has also required ‘bespoke’ carbon emission mitigation efforts from major energy projects. Specifically:

• The federal environmental approval conditions of the C$25bn Pacific Northwest LNG project (PNW), led by Petronas, included both an absolute emissions “cap”, and a very low “emissions intensity” standard. These conditions were on top of a provincial LNG tax, a “compliant” provincial carbon tax, “world leading” provincial emissions intensity standards, and the scrutiny of a new “downstream emissions” assessment report. The project was cancelled amid other environmental challenges, and Petronas subsequently took a 25pc stake in the nearby LNG Canada project.
• TC Energy, then TransCanada Pipelines, cancelled its C$16bn “Energy East” project, a proposed several thousand kilometre heavy oil pipeline, almost immediately after the federal National Energy Board likewise injected a “downstream emissions test” into the review process.
• The Trans Mountain Pipeline Expansion Project (TMX) also faced downstream emissions review scrutiny by the federal cabinet. While it successfully completed that review, the proponent Kinder Morgan Canada signalled that it was prepared to walk away from its investment in the face of significant litigation, including opposite the province of British Columbia. The Canadian federal government subsequently purchased the TMX project. The federal cabinet’s approval of TMX received significant court challenges, on the grounds of both its environmental effects and indigenous rights.
• Teck Resources recently withdrew its application for the C$20bn Frontier oil sands mine after spending eight years and reportedly C$1bn on the application process. Final approval from the federal cabinet had been rumoured to be imminent, sparking protests from backbench members of government. Amid subsequent rumours of either project rejection or pyrrhic climate-related approval conditions akin to the PNW LNG experience, Teck withdrew its project with a letter critical of Canada’s general inability to reconcile economic growth with climate change policy.

Teck Resource’s withdrawal letter succinctly set out the problem many major energy projects believe they face in Canada—investors and customers are looking for jurisdictions to have in place a legal and regulatory framework that reconciles resource development and climate change and other social commitments. But this framework is not yet settled in Canada and so debate around these issues continues. This unfortunately puts projects at the nexus of much broader issues that need to be resolved socially and politically—which means projects face greater risk of challenges.

International impact

The Heathrow decision is an important one for large infrastructure projects, obviously within the UK but its implications have also reverberated around the globe. It is emblematic of a trend across multiple jurisdictions evidencing the tension between development of major projects and alignment with climate change goals and commitments of both governments and corporate actors.

Globally, societies and markets are changing at a rapid pace in response to multiple overlapping pressures—including climate change, the rapid advancement of disruptive technologies, along with other economic and political variables. In the absence of settled legislative regimes, some of the resulting issues are being played out before national courts. The key question, however, is not just what sort of societies we want, but whether instead of late stage judicial road blocks to major (and often essential) infrastructure projects there should be a political balancing between competing goals.