The judge in the case ruled that companies "may be obligated to take preventive measures" to counter their emissions, according to a statement from the higher regional court in Hamm.
"If the polluter definitively refuses to do so, it could be determined, even before actual costs are incurred, that the polluter must bear the costs in proportion to their share of the emissions," the court concluded.
The ruling supported arguments made by Saul Luciano Lliuya, who claimed that RWE, a global energy company headquartered in Germany, should pay towards the cost of protecting his hometown of Huaraz from a glacial lake swollen by melting snow and ice.
RWE has never operated in Peru, but the 44-year-old farmer argued that, as one of the world's top emitters of carbon dioxide, the firm was partly responsible for the flood risk.
The court, however, rejected Lliuya's claim against RWE, saying there was "no concrete danger to his property" from a potential flood.
Lliuya, who did not attend the presentation of the verdict in person, said in a statement he was "disappointed" the court had not overall ruled in his favour.
But speaking to journalists in a video call from his hometown, the farmer said he was "very happy with the precedent" set by the ruling.
Lliuya's lawyer Roda Verheyen said the court's reasoning showed "that large emitters can be held responsible for the consequences of their greenhouse gas emissions".
The outcome of the case would "give a tailwind to climate lawsuits against fossil fuel companies, and thus to the move away from fossil fuels worldwide", she said.
- 10-year legal fight -
RWE said in a statement it had "always considered such civil 'climate liability' to be inadmissible under German law".
Establishing such a liability could make it hard to do business in Germany, "because it could ultimately allow for claims for climate-related damages being asserted against every German company anywhere in the world", it said.
RWE had "always operated its plants in compliance with applicable law", it said.
"It would be an irreconcilable contradiction if the state permitted CO2 emissions, regulated them in detail and in some instances even required them, but at the same time retroactively imposed civil liability for them."
Lliuya first filed a lawsuit in 2015 at a court in the western city of Essen, where RWE has its headquarters, demanding 17,000 euros ($18,400) towards flood defences for his community.
The Essen court dismissed the case, but in 2017 the higher district court in nearby Hamm allowed an appeal.
Lliuya based his claim on a study that concluded that RWE, which today uses a variety of power sources including wind, coal and gas, has been responsible for 0.38 percent of all global carbon emissions since the start of the industrial era.
In Wednesday's ruling, however, the court said the chances of Lliuya's home being flooded in the next 30 years was "only about one percent" and that high waters would "not be able to endanger the structure of the house".
The court in Hamm said the ruling was not open to appeal.
Despite going no further, the verdict in the farmer's case "adds strength to a growing field of climate litigation", said Joana Setzer of the Grantham Institute for Climate Change and the Environment at the London School of Economics and Political Science.
"Over 60 cases around the world are currently seeking to hold companies liable for climate-related losses and damages," Setzer said.
The decision by the court in Hamm would "a powerful precedent to support those efforts", she said.
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