Lawyers reveal German coal law lets companies “hold government to ransom” on climate action

Media release

22 June 2020

Environmental lawyers at ClientEarth have issued an urgent warning to the German government over its contested draft coal law and the expensive closure contracts with lignite operators at its heart.

New legal analysis has revealed that by tying itself into these agreements with lignite company owners now, the government is exposing itself to later attack by those companies. If Germany wanted to ratchet up climate ambition and phase out coal earlier, this could trigger vast claims for further compensation by coal companies alleging a ‘breach of contracts’.

Compensation contracts agreed so far already amount to €4.35 billion.

In a letter to economics minister Peter Altmaier and Environment minister Svenja Schulze, the lawyers point to two new legal analyses, which reveal several fundamental legal issues with the phase-out law, notably the dangers of pursuing these private agreements with lignite operators.

ClientEarth lawyer Ida Westphal said: “From a legal perspective, we need to abandon the idea of a coal exit law with industry negotiations at its heart. The primary goal of this law is to exit coal, to protect the climate. That means acting as fast as is feasible, and prioritising climate targets.

“What we’re seeing instead is a colossally expensive agreement, based on private deals with business owners, which would also be a disaster for the climate. Billions of Euros in taxpayers’ money are being gift-wrapped for lignite companies, for them to effectively continue business as usual – and hold the government to ransom on climate action later on.

“The government is tying its own hands with these contracts. Our ministers need to put something much more credible on the table, which serves the public interests, not purely coal companies’ wishes.”

The lawyers are urging the government not to conclude its negotiations with operators, and revert to a legislative approach – or they say the law will achieve little to no change. Regulation is a legally secure approach that eliminates the risk of later compensation claims. This option is open to the government, as per the recommendations of its expert ‘coal commission’.

Westphal said: “Ultimately, the only acceptable solution is to see the phase-out clearly defined in a regulation on top of the law and not by behind-the-scenes business arrangements. The only reason these contractual agreements exist is to appease coal operators, who have long known that their days are numbered.”

The new reports detail a number of vital issues with the coal exit law and the contractual agreements with coal operators:

– The phase-out is based on contractual agreements, an untested instrument that contradicts the government’s objective of achieving legal security through the phase-out
– These contractual agreements were negotiated behind closed doors with industry and are therefore as yet unjustified and currently unchallengeable
– The contracts expose the government to claims of contract breach if it wants to accelerate the coal phase-out – which could result in vast and unplanned additional compensation payments for coal companies
– The law risks keeping coal plants online longer than under a business as usual scenario, especially in the face of developing economic and climate realities
– The law contravenes the EU’s Electricity Market Directive with a ‘security reserve’ developed for coal company LEAG
– It relies on billions in compensation from the public purse, promised by the government to coal operators – despite ample legal evidence suggesting the payments would not stand up to EU legal scrutiny
– The law is set to fail in its primary aim to cut carbon from coal in line with international climate imperatives

Lawyers Hartmut Gaßner and Georg Buchholz, from Gaßner, Groth, Siederer & Coll., who authored the legal study on contractual agreements, said: “The future will show whether these contractual arrangements will reduce the risk of legal conflict. Lignite operators might not be seeking legal protection against the coal exit law – but they’ll try to formulate the contracts in such a way that any future change to the law that puts them at a disadvantage could be seen by a court as a violation of the agreement.

“So while the operators haven’t started any legal disputes for now, the way is open for those later on – because if a future government and future legislators want to push for an accelerated phase-out, lignite operators could claim it’s incompatible with the lignite exit contracts.”

The coal law is currently expected to be passed by the parliament in its final form before the parliamentary summer break.

The draft law, and the recommendations of the Coal Commission, state that the German government may legislate to secure the coal phase-out (instead of relying on contractual agreements) if these agreements have not been finalised by June 30, 2020.

ENDS

Notes to editors:

Letter from ClientEarth to the Ministers for Environment, and Economic Affairs (German only)
• Briefing on contractual agreements with lignite operators and legal analysis from Prof. Dr. Hartmut Gaßner und Georg Buchholz (GGSC): Braunkohleausstieg durch Vertrag – Bindungswirkung und Demokratieprinzip (German only)
• State aid analysis on legality of compensation for LEAG: in English and German

Background to the contracts

The German government has been negotiating contractual exit agreements with coal companies for the past year and a half. The contracts would cement compensation amounting to €4.35 billion, while a regulation would allow for compensation payments only as far as appropriate. No information has been made publicly available about the nature of those contract negotiations in that time, including how the compensation sums are actually being calculated.

Thinktank E3G has recently published a critique that points out that a coal phase-out that stretches beyond 2030 will fall apart as economic realities come to bear on coal, leaving people and the economy in dire straits:
“If the coal exit law is implemented as planned, there is a high risk that it will not be possible to react flexibly to economic and political changes. This must be prevented in the interests of employees and regions.”

Meanwhile, multiple studies have reported the collapsing economics of coal worldwide, made exponentially worse by the coronavirus pandemic.

Compensation for inaction

LEAG operates four major coal power plants in Germany: Lippendorf, Boxberg, Jänschwalde and Schwarze Pumpe. These four plants make a total of 12 units. Based on ClientEarth’s analysis, the current phase-out arrangement means six of these units would actually go offline later than LEAG states in its 2016 projections.

ClientEarth’s new report on the legality of compensation payments to LEAG expands on a previous report by the same authors (No money for old lignite, 2019), which reminded the government, and coal companies, that there was no guarantee vast ‘compensation’ sums to coal operators would be found legal under EU State aid law. If those compensation payments were indeed not possible, it would pull the rug out from under the whole German phase-out.
Germany is not following the more pragmatic precedent of other countries. The Netherlands just shuttered coal plant Hemweg, paying the operator around €50 million, due to the extremely short notice. All of the UK’s remaining coal plants will close before 2025, with no compensation. Meanwhile in Germany, each operator could receive billions, despite over a decade’s notice.
Further controversies

Germany’s coal phase-out, currently scheduled to get coal offline by the distant date of 2038, includes the opening of brand new and highly controversial coal plant Datteln IV, and the eviction of several thousand people from villages to make way for many thousands of tonnes more lignite to be mined from the ground under their homes.

ClientEarth “Anwälte der Erde” and Greenpeace Germany published a blueprint for a possible coal phase-out law that would achieve its environmental mission, in 2019. The suggestions were not taken up by the German government.

About ClientEarth

ClientEarth is a charity that uses the power of the law to protect people and the planet. We are international lawyers finding practical solutions for the world’s biggest environmental challenges. We are fighting climate change, protecting oceans and wildlife, making forest governance stronger, greening energy, making business more responsible and pushing for government transparency.

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