Scope 3 emissions: a regulatory cloud soon to lift?

The decision in Mullaley Gas and Pipeline Accord Inc v Santos NSW (Eastern) Pty Ltd [2021] NSWLEC 110 (MGPA v Santos) on 18 October 2021 has further developed the law regarding Scope 3 emissions and is relevant to the assessment of future fossil fuel developments.

In this article, we consider the regulatory frameworks related to Scope 3 emissions in Australia and discuss the evolution of the case law in this area. A detailed summary of the decision in MGPA v Santos, including its implications for proponents of fossil fuel developments and other major projects is available in our previous insight.

There is currently no requirement in Australia for companies to offset Scope 3 or ‘downstream’ greenhouse gas (GHG) emissions of a project as a precondition to obtaining planning approval for that project. In fact, there is little regulatory oversight for Scope 3 emissions whatsoever. Many companies do not record and report Scope 3 emissions as they are not required to under the Commonwealth Government’s National Greenhouse and Energy Reporting scheme.

As governments and companies around the world propose enterprising net zero targets, increased scrutiny has been placed on Scope 3 emissions, particularly where those emissions are ‘exported’ overseas.   

Readily acknowledging the practical difficulties associated with targeting Scope 3 emissions, the lack of clear regulation and policy in this area has created considerable uncertainty for the environmental assessment of major projects, in particular, fossil fuel developments. This uncertainty impacts investment, increases litigation risk and erodes public confidence in meeting emissions-reduction targets through climate conscious decision-making.  

Current regulation of Scope 3 emissions

Scope 3 emissions occur upstream or downstream of an organisation’s value chain.  For example, emissions generated by the burning of coal for energy are the Scope 3 emissions of the facility from which the coal was extracted. A business also generates Scope 3 emissions when it sends its employees on commercial flights.

Scope 3 emissions differ from:

• Scope 1 emissions – direct emissions related to a facility, such as methane emissions from a landfill; and
  
  
• Scope 2 emissions – indirect emissions caused by the consumption of energy, such as the use of electricity produced by the burning of fossil fuels elsewhere.

It is important to remember that the classification of emissions as ‘Scope 1, 2 or 3’ is simply an accounting and reporting tool, and there is overlap between each.  For example, the Scope 3 emissions of a coal mine can also be the Scope 1 emissions of a power station that burns the coal, and the Scope 2 emissions of a factory that sources electricity generated by the power station.

Nevertheless, Scope 3 emissions can be significant in the overall context of a government’s or company’s carbon footprint. On a corporate level, Scope 3 emissions have been found to comprise up to six times more emissions than those generated by a company’s direct operations. This is also true on a national level where, in 2017, Australian exports of coal and gas accounted for around 3.6% of global GHG emissions, far greater than the 1.4% of global emissions that Australia generated domestically.   

This understanding creates a ‘responsibility problem’, particularly in a planning and environmental approval context:

1. How should Scope 3 emissions that are attributable to a proposed fossil fuel development be considered in the assessment of the overall environmental impacts of the project; and
   
   
2. Whose responsibility is it to mitigate the Scope 3 emissions of a project, if anyone’s?

In Australia, although there is some movement on the issue, laws generally do not resolve this responsibility problem and it is left to individual planning approval bodies to reach their own conclusions.  This creates significant uncertainty for project proponents and the community alike, which erodes investment confidence, increases litigation risk and hampers progress towards developing consistent climate-conscious decision-making.  Further, while Australian courts have often held that Scope 1 and 2 emissions must be taken into consideration in the assessment of environmental impacts of a fossil fuel development project, the position on Scope 3 emissions has been far less clear.  

The table below sets out the broad position of each Australian jurisdiction on Scope 3 emissions, noting that the position varies depending on the nature of the project being considered for approval:

Should developments offset their Scope 3 emissions in NSW?

In the absence of significant regulatory and policy change, the most significant, recent developments in issues concerning the assessment of the climate change impacts of a GHG-generating project have occurred in NSW courts.

The courts have held that, despite there being no specific legal requirement for a consent authority to consider Scope 3 emissions when assessing a development application for a project (other than in the context of projects being assessed under the Mining SEPP), the projected GHG emissions of a project, including Scope 3 emissions, can be relevant during the assessment process. In some cases before the courts and other consent authorities, Scope 3 emissions have been a contributing factor in decisions to refuse particular projects.

This issue has become particularly relevant since the ‘Rocky Hill’ case in 2019,[13] where the Court held that Scope 3 emissions were clearly relevant to the consideration of the environmental impacts of the project and considerations of the public interest. The proponent in Rocky Hill offered no specific carbon offsets, arguing that others were doing enough to offset the project’s GHG emissions. The Court did not agree on the basis that there was no evidence that this would occur.  

This does not, however, amount to a legal requirement that all new fossil fuel development includes carbon offset proposals. Rocky Hill was a determination by the Court acting as a consent authority. The decision was made in the context of the merits of that particular project, and therefore has no precedent-setting value.

Notwithstanding the limited precedential value of the decision, it was quickly seized upon by the NSW Independent Planning Commission (IPC), particularly in the assessment of Scope 3 emissions. 

In August 2019, the United Wambo coal mine extension was approved, but with conditions related to Scope 3 emissions, including a requirement to prepare an Export Management Plan that sets out how the proponent will '“use all reasonable and feasible measures” to ensure that coal will only be exported to signatories of the Paris Agreement.

A month later, a differently constituted IPC panel adopted a vastly different approach to Scope 3 emissions when it refused the Bylong Coal Project. The IPC stated that, distinguishing between direct, indirect and downstream emissions was essentially irrelevant in the context of stated policies to reduce emissions in NSW and globally because “all of the direct and indirect GHG emissions of the Project… will adversely impact the NSW environment”. The IPC also determined that the proponent had failed to identify adequate measures to offset Scope 3 emissions and this failure was relevant to its decision to refuse the project.

Elements of this decision were challenged in judicial review proceedings in the Land and Environment Court[14] and then in the NSW Court of Appeal.[15] On both occasions, the proponent’s arguments that the IPC misapplied clause 14 of the Mining SEPP were rejected on the basis that it was open for the IPC to reach the conclusion that the project would need to make attempts to minimise Scope 3 emissions to be acceptable on environmental grounds, even though the legislation does not specifically require this to occur.

The proponent has filed an application for special leave to appeal the NSW Court of Appeal’s decision in the High Court.

While the Bylong Coal case was making its way through the Courts, the IPC approved the extension of Whitehaven’s Vickery coal mine in Boggabri. In relation to GHG emissions, the IPC said it was relevant that, as most of the coal produced would be exported, the project’s Scope 3 emissions would not contribute to Australia’s agreed contribution under the Paris Agreement and that, in this context, there was no policy basis to consider imposing conditions related to downstream emissions.

This is not to say that Scope 3 emissions were irrelevant to the IPC’s decision. The IPC acknowledged the significant contribution of Scope 3 emissions to climate change, but said that, when weighed against other benefits of the project, the impacts associated with GHG emissions “are acceptable and consistent with the public interest”.

As the above history illustrates, there has been considerable uncertainty and differences of opinion applied by various decision-makers when considering the environmental impacts of fossil fuel projects.  Much of this uncertainty centres around the treatment of Scope 3 emissions, for which there is no clear legislative or policy guidance.

The decision in MGPA v Santos advances the law in this area. In this case, a group challenged the IPC’s approval of the Narrabri Gas Project. Three of the four grounds of challenge concerned the IPC’s consideration of the GHG emissions of the Project. This included a claim that the IPC erred when it decided that the Scope 3 emissions of the Project are outside the direct control of Santos and therefore not able to be reasonably restricted or regulated by a development consent condition for the Project.

Significantly, the Court held on this point:

• All references to ‘greenhouse gas emissions’ in clause 14 of the Mining SEPP refer to all three scopes of emissions, Scope 1, 2 and 3;
  
  
• The IPC considered all three scopes as it was required to by law;
  
  
• A consent authority can impose conditions related to Scope 3 emissions, but it may not always be appropriate to do so, particularly where the proponent lacks control over the downstream emissions generated by a fossil fuel development; and
  
  
• It was open to the IPC to conclude that it was not reasonable to impose a condition of consent requiring Santos to minimise to the greatest extent practicable the Scope 3 emissions, as those emissions “were outside the direct control” of Santos and hence “not able to be reasonably conditioned”.

The decision provides guidance to proponents of fossil fuel projects and consent authorities assessing the environmental impacts of such projects, particularly where their Scope 3 emissions constitute a significant proportion of the project’s overall carbon footprint. Following the Court of Appeal’s judgment in the Bylong Coal case, it also clarifies the scope of clause 14 of the Mining SEPP, particularly in relation to the conspicuous absence of any reference to ‘downstream emissions’ in clause 14(1).

MGPA v Santos did not invite the Court to make further comment on the framework (or lack thereof) for the regulation of Scope 3 emissions in NSW, including in relation to carbon offsets. It does, though, potentially broaden the potential application of clause 14 of the Mining SEPP.  

It should also provide a degree of certainty to proponents and investors of fossil fuel developments about the requisite level of attention that must be given to GHG emissions in an environmental assessment process which, while required to be robust and fulsome, does not need to go beyond the text of clause 14 of the Mining SEPP to be considered legally reasonable.  

Impending Reform?

Despite the difficulty of targeting indirect emissions, we can foresee regulators placing increased responsibility on emitters to control and mitigate their output.  

Even in the absence of regulation to this effect, it is clear that decision-makers and the community expect clear consideration of the impacts of downstream emissions, including Scope 3 emissions, and consideration of how such emissions can be minimised, where practicable and to the greatest extent possible, which will vary depending on how and where such emissions will be generated.  

This pressure is being brought, not just in environmental assessment processes and courtrooms, but also in the board room through shareholder activism and as a consequence of trade pressure, which can only be expected to increase following COP26 later this year. In these circumstances, industry, investors and the community would all benefit from clear and consistent national policy guidance on the assessment and management of Scope 3 emissions.  

One way or another, pending the adoption of appropriate measures, proponents of major projects, particularly those which produce considerable Scope 3 emissions, would be wise to consider all options to manage those emissions in line with best practice and Australia’s net zero objectives in line with our Paris Agreement commitments.