The European Commission’s plans to label fossil fuel projects as ‘green’ in the taxonomy might hamper the EU’s clean energy transition
9 June 2022 - Ahead of the European Parliament’s vote on the Taxonomy Delegated Act, Nina Seega, from Centre for Sustainable Finance and Ursula Woodburn from the European Corporate Leaders Group explain why labelling fossil fuel projects as ‘green’ in the EU taxonomy might hamper the clean energy transition.
The EU Taxonomy Regulation published in 2020 aimed at creating a science-based transparency tool that investors can use to orientate their investments in projects and economic activities that have a substantial positive impact on climate and the environment. It was therefore expected to play a key role in channelling private investments towards economic activities that aim to contribute reducing emissions by at least 55% by 2030 and are fully compatible with the EU’s climate neutrality objectives.
To follow up on the EU Taxonomy Regulation, the European Commission published three Delegated Acts to set the conditions under which an economic activity can be qualified as environmentally sustainable. These Delegated Acts highlight and follow the “100g CO₂ e/kWh threshold” which was calculated by the dedicated Expert Group as the limit on the intensity of greenhouse gas (GHG) emissions produced from the generation of electricity, heat and power. However, the most recent delegated act, which was published on 31 December 2021 and currently under scrutiny of the European Parliament and the Council of the EU, includes fossil gas in the “environmentally sustainable (green)” category and introduces several exemptions to the 100g CO₂ e/kWh threshold.
This does not only go against the initial thinking behind the EU taxonomy to create a science-based transparency tool but also risks slowing down the EU’s much needed and urgent transition away from fossil fuels. The continuing devastation in Ukraine has reminded us once again that our overdependence on volatile, imported fossil gas, oil and coal is at the heart of today’s climate, energy and geopolitical crises. Now more than ever, the EU needs to provide a strong signal that fossil fuels will not be awarded or protected.
The recent REPowerEU plan published by the European Commission also aims to accelerate the clean energy transition, boost the roll-out of renewables and improve energy efficiency. These objectives, combined with the implementation of the Green Deal will require significant private financial flows for achieving climate targets and accelerating the clean energy transition, as the EU funds mobilized are clearly not enough to achieve the EU' new climate and energy targets.
It also risks creating competing approaches and a two-speed investment model where investors have to choose between the less ambitious taxonomy or more ambitious criteria defined by the European Investment Bank (EIB). In the recent European Parliament hearing on taxonomy, Nancy Saich, chief climate change expert at the European Investment Bank said that the level of emissions of fossil gas is not compatible with the investment criteria of the EIB. Indeed, the Institutional Investors Group on Climate Change have urged the Commission to align the taxonomy with net zero emissions, and with a science-based approach, while highlighting that including fossil gas in the taxonomy might hinders the capacity of investors to align their portfolios with net zero.
At a time when the finance industry is grappling with implementation, consolidation of frameworks around which practitioners and their clients can coalesce are key to speedy implementation. Creating rival frameworks within a jurisdiction feels counterproductive.
On top of it, a taxonomy that includes fossil gas in the sustainable category risks polluting public funding. A significant part of EU funds, such as Recovery Funds, already make reference to key taxonomy principles (Do no significant harm criteria), and many Member States have started using the taxonomy principles for domestic investment instruments. In an only worsening energy and climate crises, it is to the detriment of household energy bills and the environment that the EU allows billions of euros to be diverted away from green technologies, like wind and solar, to fossil fuels under this new ‘green label’.
As the European Parliament and the Council of the EU define their positions on the taxonomy, businesses and investors expect to see that EU leaders stick to their commitments to follow the science and to transition away from the fossil fuels which are at the centre of the geopolitical, energy and climate crises that we are facing.