Climate Change Regulation 2023

The Continuing Growth of Climate Change Law and Regulation

This year heralded another highly dynamic evolution of domestic climate change regulatory developments. Many countries continued to publish bespoke climate change framework or sector-specific laws, with a recent trend being to bolster domestic green growth and jobs, and enhance the local manufacturing and supply of green technologies. In this sense, climate laws are no longer simply the purview of introducing mitigation and adaptation policy goals, but they are a means through which government can look to enhance domestic productivity, and shore up green technologies and supply chains through various financial subsidies and incentives. This is particularly the case with the United States Inflation Reduction Act, but we are likely to see similar measures through the EU’s proposed Net-Zero Industry Act and laws that respond to the EU’s Carbon Border Adjustment Mechanism (CBAM).

This assimilation again demonstrates that climate law is no longer the purview of environmental law but transcends it to almost all areas of law. This year, trade, tax, fiscal systems and corporate disclosures became increasingly prominent focal areas of this intersection. However, climate law also transcends multiple other areas of practice, including competition, insurance, environmental, immigration, water, energy and property law, as well as administrative, criminal, corporate, human rights, constitutional and administrative law. 

We have seen climate change legislative frameworks developed apace that seek to account for this intersectionality and accommodate co-operative climate governance, embed mitigation and adaptation policy ambitions and use fiscal measures to enhance green technologies and low carbon activities. However, the picture has not, of course, been uniform. Law can also be used to hinder progress. This is observable in, for example, the attempts by some jurisdictions to develop legislation that prevents institutional investors from taking climate and environmental considerations into account during decision making.

We continue to see a similar dynamic in the courts. Climate suits relating to the arrest of protestors, direct actions against corporations to reduce their emissions, “greenwashing” cases, actions against boards of directors for climate risk mismanagement, and climate-related human rights cases have also gone in different directions.

These developments are deeply consequential for the private sector. Not only are companies facing regulatory limits on their greenhouse gas (GHG) emissions, but they are required, amongst other things, to: engage with the impacts of changes in global trade, particularly the CBAM; account for mitigation and adaptation as new developments are planned; reconfigure their supply chains and contractual relations within a net-zero world; navigate fiscal measures to respond to climate change; and harness market opportunities to reduce or offset their emissions. Similarly, they must remain abreast of new technical and scientific information and operate in the context of a highly volatile energy market. They must do this all whilst engaging with the transitional risk of new laws and policies designed to respond to climate change at a national, regional and global level.

In this year’s issue, we grapple with these developments through a regulatory lens, looking to see both how countries are interpreting, engaging with and applying their international commitments under the United Nations Framework Convention on Climate Change (UNFCCC) and Paris Agreement, and also the domestic laws that give effect to national climate priorities.

As this year’s issue demonstrates, countries are increasingly embedding their mitigation and adaptation policy ambitions into framework laws, and also building new due diligence obligations into these laws, as is the case for Switzerland and Portugal. Some countries are still in the infancy of this process whilst others, such as New Zealand, are building on a legal regime that has been in place since 2002. What is clear is that, while there are similarities in many of the approaches, each has devolved a unique regulatory response to accommodate country-specific circumstances and needs.

The use of fiscal measures to respond to climate change has also continued in prominence. This can be seen in heavily criticised local green taxes in Mexico, the use of financial incentives in Sweden, as well as Italy’s comprehensive renewable energy law.

With the coming into force of the CBAM in the EU, we see both European and non-European jurisdictions grappling with the new regulations, notably those whose economies are more heavily oriented towards the export of carbon intensive goods, such as South Africa. Some countries are also firming up their climate disclosure obligations, for instance many EU countries are in the process of implementing EU Directives relating to ESG and, soon, the Corporate Sustainability Reporting Directive. Another interesting example is New Zealand that has passed legislation making climate-related disclosures mandatory for large publicly listed companies, insurers, banks, non-bank deposit takers and investment managers.

Contributors also looked into the question of director liability or shareholder liability, with most expressing academic views on how this could potentially be argued in court using existing legislation, given that there is little precedent of this taking place. We await with some interest, however, the outcome of the appeal lodged by ClientEarth against the decision to dismiss its action against the directors of Shell in the United Kingdom for alleged climate risk mismanagement. 

As the risks associated with non-compliance with climate-related legal obligations rise, so have acquiring entities sought to include climate change considerations within due diligence processes for corporate transactions. In some cases, this includes not only legal non-compliance, but due diligence on issues that may pose a reputational or other financial risk. This primarily voluntary approach is driving greater levels of awareness within the private sector of climate change regulatory requirements, and the inclusion of climate change-related conditionalities and contractual terms within transactional documents. The chapters in this report assess national trends in this regard, and briefly comment on the types of considerations that are canvassed within due diligence reports.

Lastly, the international carbon market has increased in both size and value, and we also see countries looking to more firmly establish their domestic regimes for the carbon market, whilst simultaneously looking to regulate potential future evolutions in the market under Article 6 of the Paris Agreement. Unsurprisingly, most countries are still in the early stages of determining how to reconfigure their carbon markets, not only to accommodate Article 6, but also in light of the CBAM and the likely phasing out of the EU-ETS in the next decade. Some are looking at the role of the voluntary market in this space, often through guidelines.

This voluminous publication demonstrates that the breadth and complexity of climate legislation and jurisprudence is increasing. As climate disasters become more frequent and severe, we are likely to witness this regime mature into more detailed regulation, and increasingly novel forms of litigation. We may also see dedicated climate provisions in hitherto untouched fields of law, such as immigration and health. Undoubtedly, governments will continue to face legal challenge, for the adequacy of their climate change plans and laws. Moreover, as the extent of climate-induced loss and damage experienced by public and private entities increases, parties will also seek to transfer this risk and seek compensation, including through contract and insurance, as well as litigation against carbon majors and other GHG-emitting industries. We anticipate seeing not only more frequent and complex forms of litigation on these fronts, but also bespoke regulatory developments to respond. 

The trend in the international regime has been to increasingly pull in the private sector as a means to not only entrench net-zero targets but also to enhance sources of finance and reform the global climate finance architecture. This remains equally true in the national context, and the private sector has a crucial role in the evolution of domestic laws. Heightened levels of awareness of physical and transition risk, due diligence, compliance and careful planning, will be expected not only of corporate actors, but also their directors, and the law is likely to evolve to respond to this. We will continue to see both developed and developing countries embed their NDCs within domestic laws, including adaptation and mitigation targets, underscoring the imperative for the private sector to be intimately aware of global, regional and national developments.

In this highly diverse context, this publication seeks to extend the awareness and knowledge of global and national legislative climate developments and encourage a cross-pollination of ideas on what has worked and why. We remain continuously grateful to the diverse body of authors who shared their time and insights in compiling these thoughtful contributions.