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By Flora Curtis & Acland Bryant
On 13 January, the Court of Appeal handed down its judgment R (Friends of the Earth Ltd) v Secretary of State for International Trade [2022] EWCA Civ 14. The case concerned the decision of UK Export Finance (“UKEF”), an export credit agency whose mission is to ensure that no viable UK export fails for lack of finance or insurance from the private sector, to provide funding to a liquefied natural gas project (“the Project”) in Mozambique – a decision which was said to amount to one of the largest single financial packages ever offered by UKEF to a foreign fossil fuel project.
In the Divisional Court, Stuart-Smith LJ and Thornton J had been unable to agree as to whether UKEF’s decision was lawful. The Court of Appeal ultimately concluded that it was, although for different reasons than those given by either judge in the Divisional Court. Perhaps unsurprisingly, the Appellant Friends of the Earth (“FoE”) on 23 February 2023 lodged an application for permission to appeal to the Supreme Court.
In that context, this series of two blog posts seeks to summarise the conclusions reached by the Divisional Court and the Court of Appeal respectively for readers interested in following the progress of the case in the Supreme Court. This first post addresses the factual background to FoE’s claim, and the opposing views reached by Stuart-Smith LJ and Thornton J in the Divisional Court.
Factual Background
UKEF was first approached about funding the Project in 2014, but at that stage considered that there would be insufficient procurement of British goods and/or services (“UK Content”) to justify providing funding. In 2019, the Project’s promoters identified additional UK Content, and UKEF became involved in the Project again.
While UKEF was considering funding the Project, two important events occurred:
- In June 2019 the House of Commons Environmental Audit Committee reported on the scale and impact of UKEF’s support for fossil fuel projects – including the Mozambique Project. The Committee concluded that it was essential that UKEF calculate the scope 3 emissions generated by such projects to fully understand their emissions impact.
- In July 2019, the UK Government issued the Green Finance Strategy, in which it committed to ensuring that any UK investment support for fossil fuels affecting emissions would be in line with the Paris Agreement (“PA”).
In March 2020, a report on the Project’s likely emissions impact was produced by consultants Wood Mackenzie. The Wood Mackenzie report concluded that the Project’s emissions impact was uncertain, but that there was scope for the gas produced to displace coal power generation in China, India and Indonesia. This would, Wood Mackenzie said, potentially have the effect of reducing greenhouse gas emissions.
In May 2020, UKEF produced a climate change report (“the CCR”) which concluded that the Project would align with the UK Government’s obligations under the PA. UKEF stated that gas from the project would represent an important contribution to the energy transition of Mozambique away from coal, in line with its NDC submitted under the PA. This would further the UK Government’s own commitment to support developing countries to respond to the challenges and opportunities of climate change.
After being briefed by UKEF, the Secretary of State for International Trade (“SSIT”) and the Chancellor agreed with UKEF’s decision to fund the Project in June 2020. Interestingly, funding had been opposed on climate grounds by the Secretary of State for Business, Energy and Industrial Strategy, the Secretary of State for International Development, and the Secretary of State for Foreign and Commonwealth Affairs. UKEF then briefed the Prime Minister, informing him that the gas produced by the Project would likely displace higher polluting fuels such as coal and oil, leading to a net decrease in emissions. No estimate was given to the Prime Minister of the scope 3 emissions of the project, with UKEF informing the Prime Minister that it was not possible to accurately estimate those emissions. Based on this information, the Prime Minister indicated that he was content for the project to proceed.
Following this, officials at the Department for Business, Energy and Industrial Strategy indicated concerns as to the credibility of the CCR, due to the absence of any assessment of scope 3 emissions in that report. A rough modelling exercise was undertaken, which gave an estimate of 805.75 MtCO2 in scope 3 emissions from the Project over the lifetime of the Project. (1) This figure was never shown to the decision-making ministers.
In his evidence to the Court, UKEF’s CEO indicated that he was cautious about placing any reliance upon the figures and, in any event, they did not contradict the position that had been set out in the CCR, namely that the Project’s scope 3 emissions would significantly exceed its scope 1 and 2 emissions. He therefore gave the necessary approvals, in exercise of his delegated powers, for the UK Government to invest in the Project without commissioning any further detailed analysis of the Project’s scope 3 emissions on 30 June 2020.
Immediately following this decision, on 1 July 2020 the Commonwealth Development Corporation, now known as British International Development, (whose shares are wholly owned by the UK Government) issued a climate change strategy document, in which it committed to making no new investments in the fossil-fuel sector where it classified those investments as misaligned with the PA. The strategy indicated that this included standalone upstream gas exploration and production. On 12 December 2020 the Prime Minister announced to the Climate Ambition Summit that before COP26, the UK would end direct government support for the fossil fuel energy sector overseas, including natural gas projects, with very limited exceptions.
The PA and Article 2(1)(c)
Central to the arguments before the Divisional Court and the Court of Appeal were the provisions of the PA and their interpretation.
FoE placed particular reliance upon Article 2 of the PA. Article 2 sets out the well-known temperature goals, by which Parties have committed to holding the increase in global average temperatures well below 2oC above pre-industrial levels, and pursuing efforts to limit the temperature increase to 1.5oC above pre-industrial levels.
The aims set out in Article 2 are, however, broader than this. Notably, Article 2(1)(c) provides as follows –
“This Agreement, in enhancing the implementation of the Convention, including its objective, 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.”
Ensuring that finance flows are in line with emissions mitigation and adaptation is therefore one of the central aims of the PA. The PA also refers to ‘climate finance’. Article 9(1), for example, provides that developed country Parties should provide financial resources to assist developing countries in their mitigation and adaptation efforts. Under Article 9(3), developed countries are required to take the lead in mobilising climate finance from a wide variety of sources, with Article 9(4) explaining that these financial resources should achieve a balance between adaptation and mitigation efforts.
Divisional Court
Before the Divisional Court, FoE argued that:
- The decision to finance the Project was based on an error of law or fact, namely that its funding was compatible with the UK’s obligations under the PA and/or assisted Mozambique in achieving its own commitments under the same; and/or
- UKEF’s decision was otherwise unlawful insofar as it was reached without regard to essential relevant considerations when concluding that the decision was compatible with the UK/Mozambique’s obligations under the PA.
The Divisional Court could not agree on the outcome. FoE’s application for judicial review was dismissed, with permission to appeal to the Court of Appeal granted. The reasons given by each judge are set out below.
Lord Justice Stuart-Smith concluding the funding decision was lawful:
First, the scope of the Government’s duty to carry out sufficient inquiry prior to making its decision was circumscribed by the nature of the decision in question. The decision here was fundamentally concerned with the financing of a project that was already underway, in line with UKEF’s aim to ensure that no UK export failed for lack of funding. UKEF had a wide degree of latitude in deciding what further inquiry it should make into matters such as climate change. This was particularly so given that UKEF’s decision in this case involved wide-ranging, complex, scientific and predictive policy judgments.
Second, it was not essential to quantify scope 3 emissions from the Project to understand its climate impact. There was no legal or policy requirement to do so, and it was already obvious that the development would lead to very high levels of emissions. While the CCR did not go into the detail that might be expected in e.g. an Environmental Impact Assessment, it was not obliged to do so. In this case, quantification would not have added anything to the qualitative assumptions that were being made for the purposes of (i) assessing the UK and Mozambique’s compliance with the PA or (ii) taking the decision whether to fund the Project.
Finally, there were doubts about whether the PA could or should be interpreted by a domestic court. It contained “somewhat opaque language” and “contains numerous aims or aspirations that may prove to be in tension or frankly irreconcilable on the facts of a given case, this being a paradigm example.” UKEF’s understanding that financing the Project accorded with the PA was therefore “tenable”, given thePA’s flexibility in seeking to deliver differing objectives that may not be reconcilable.
Mrs Justice Thornton concluding that UKEF’s decision was unlawful
Current science on climate change indicated that its effects could be potentially catastrophic. Both the Intergovernmental Panel on Climate Change and courts around the world acknowledged the need to reduce emissions using carbon budgets. A major part of the climate impact of the Project would be the end use emissions of the Project which, according to Thornton J’s estimates, exhaust 0.2% of the remaining carbon budget within which the world must stay for a 66% chance to limit global temperature increases to 1.5oC.
In principle, Stuart-Smith LJ was correct that UKEF need only adopt a “tenable” interpretation of the PA. However, it was possible for the Court to interpret Article 2(1)(c) by looking to its ordinary meaning and in light of its object and purpose (i.e. in line with the Vienna Convention). Article 2(1)(c) set out a core aim for delivery of the PA temperature goals. It was therefore necessary for UKEF to demonstrate that the funding of the Project was consistent with a pathway towards limiting global warming to well below 2°C and pursuing efforts to 1.5°C.
There were many flaws in the assessments that had been produced by UKEF to inform the decision whether to fund the Project. UKEF relied on Wood Mackenzie’s conclusion that it would not be possible to quantify scope 3 emissions despite both its own experts (and those of the promoter of the Project) advising that such a calculation would be possible. The CCR relied on Wood Mackenzie’s assumption that the Project would displace other dirtier fossil fuels, even though it had described those conclusions as unreliable and inconclusive. The conclusions reached in the CCR were inconclusive and had therefore misled both SSIT and the Chancellor. Despite scope 3 emissions ultimately being calculated, the CCR was not updated or returned to Ministers for reconsideration.
Overall, although considerable latitude should be afforded to UKEF, Thornton J concluded that:
- 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 was unreasonable, and
- 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 PA.
1 - To put this into context, this is nearly as high as the volume of greenhouse gas emissions permitted for the whole of the UK for the period 2033-2037 under the sixth carbon budget. Research by FoE and the New Economics Foundation estimated that the lifetime emissions from the Project would be more than the annual emissions of all 27 EU countries combined.
Richard Honey KC and Conor Fegan appeared on behalf of the defendants in this matter. They have not been involved in the drafting of this post.
Flora Curtis is a barrister at Francis Taylor Building specialising in environmental, public and planning law.
Acland Bryant is a barrister working at Friends of the Earth and a PhD Researcher at the University of East Anglia.