NETHERLANDS Trends and Developments Contributed by: Davine Roessingh, Sebastian Hinse and Tom van der Rijt, De Brauw Blackstone Westbroek
nature and require co-ordinated international govern - ance. At EU level, the same logic applies: while the EU has extended the scope of the EU Emissions Trading System (ETS) to cover aviation and, more recently, maritime transport, this has been done through spe - cific legislative instruments – not by folding these sec - tors into EU member states’ national reduction targets under the Effort Sharing framework. The court’s Bonaire decision is hence also difficult to reconcile on this point with the structure of both EU law and international climate law and their underlying considerations. This too may have a distorting impact on the functioning of climate policies within the EU, and the level playing field in, and functioning of, the internal market. Taken together, these two points show the risk of fundamental misconceptions of the design of climate policies. They add to legal uncertainty and undermine legislative effectiveness. This, in turn, risks market responses from corporates, which will now be dis - cussed. Corporate Responses to Climate Policies In the search for effective climate policies, due regard should be given to corporate market behaviour. With - out embarking on an exposé of, among other things, the fiduciary duties of companies and their boards, the widely accepted notion is that private undertakings are, at a minimum, obliged to promote the success and viability of a company and should not embark on deliberate value destruction and financial distress. Cli - mate policies widely take this into account and seek to calibrate climate change (mitigation and adaptation) obligations within the already existing legal framework to avoid directly conflicting obligations. These dynamics and interests do not benefit from fragmentation across regulatory frameworks. This increases compliance costs and creates incentives for companies to transfer activities towards jurisdictions with lighter climate regulation (regulatory arbitrage). Four dynamics merit particular attention, as follows. Asset divestiture If a company retires emission-intensive assets early (certainly if it does so as a result of climate policies),
it may divest those assets to buyers in less regulated jurisdictions who will continue exploiting them, result - ing in no reduction – and potentially an increase – in overall real-world emissions. This concept of asset partitioning should be anticipated in climate policies to ensure that these policies do not have such a det - rimental impact on the competitiveness of companies falling within their ambit that the companies are forced to work around them. Carbon leakage A second factor to take into account is carbon leak - age. Companies exposed to the EU ETS may seek to relocate to third jurisdictions with less stringent climate policies. The EU has sought to address this risk through free allocation of emission allowances to highly exposed sectors and through the Carbon Border Adjustment Mechanism (CBAM). In addition to this, and as a matter of principle of course, the EU cannot ignore market dynamics outside the EU. Fol - lowing the Draghi report, focus on the EU’s competi - tiveness has increased. Disclosure Disclosure asymmetry adds a third dynamic. Compa - nies subject to lighter disclosure obligations may gain a competitive advantage over those subject to stricter requirements, creating information asymmetries and diminishing first-mover incentives. This is certainly so where the disclosures cover topics that are not, or not directly or easily, translated into quantification of financial risk. Markets and investors will not act on such information in the same manner in which they act on information that represents (quantifiable) risk. Conflicting obligations A fourth – and increasingly problematic – issue is that of conflicting obligations. Regulatory fragmentation, in part as a result of decisions of national courts, can give rise to conflicting legal obligations for multina - tionals, heightening legal uncertainty. This can make it increasingly difficult and, at times, impossible for large globally operating companies to reconcile their obligations in, for example, the EU, with their obliga - tions elsewhere, such as the US. Against this backdrop, companies seek to manage their climate risk exposure, although this is structurally
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