The EU Sustainable Taxonomy was designed to provide a classification framework for investors, to ensure a clear and consistent understanding of investments that could be considered ‘green’ or ‘sustainable’. Launched in conjunction with the EU’s climate target of 55% emissions reduction by 2030, it is in effect a sustainability label aligned with European Green Deal plans to facilitate at least a trillion euros in investment in the coming decade.
The debate about what to include in the Taxonomy is about money: while economic activities outside the Taxonomy will not be banned, they will be excluded from easy access to flows of sustainable and climate finance, green deal funds, and possibly even Environmental, Social, and Governance (ESG) fund flows. Labels have a purpose as they provide an easy way to gauge suitability for different types of investment – so muddying the waters of what that means is counterproductive.
A sustainable Taxonomy should not only give investors confidence that their investment fits sustainability criteria under the Sustainable Finance Disclosure Regulation (SFDR) but also provide a shared market shorthand enabling the rapid scale-up and deployment of green finance. By providing a tool driving the realignment of capital, the Taxonomy could be an enabler of the US$3-5 trillion that has been estimated as necessary to meeting global climate goals.
A solar beneficiary
The solar sector could be a major beneficiary of a sustainable taxonomy. The International Energy Agency (IEA) reported that new renewable generation capacity hit almost 280GW in 2020, up 45% on 2019, the highest year-on-year increase since 1999. More than every third power plant installed in 2020 was solar-powered and solar PV is expected to add an average of over 125GW of capacity per year from 2021-2025. There is a major economic and transition opportunity as well, as SolarPowerEurope projects that the solar sector could create 4 million jobs by 2050.
Scaling up will require finance, not simply for the energy industry but also for the deployment of solar technologies across industries, from construction, heating, agriculture, and more. The advent of transparent sustainability labeling could enable investors to determine exactly which companies, portfolios, and funds are compliant with the Taxonomy and therefore accelerate the deployment of funds to those opportunities that meet the criteria. If capital investment could be directed to replicate the cost curve seen in solar PV over the last decade, the next decade could prove transformational.
Yet lobbying for the established energy industry, and fossil fuels have been widespread amongst states. Politicians appear focused on shoring up the status quo, rather than taking an opportunity for transformational economic growth provided by the energy transition. Instead of focusing on renewable energy, storage, efficiency, and new energy system models, and despite concerns about path dependency, the carbon budget, and the short time frame for effective climate action, the Commission has decided to include gas and nuclear within the Taxonomy.
The challenge in the development of the EU’s Sustainable Taxonomy has been driven by two things: a concern that solar and wind will not be able to provide sufficient low carbon power within Europe in the short to medium term; and the concern of Member States about their own energy industries and economies. As Harald Heubaum, Deputy Director and Co-Founder of the Centre for Sustainable Finance at SOAS, University of London says, “France, Germany and other member states have so far played politics with the taxonomy rather than committing to a purely science-based approach. This does not inspire confidence in the taxonomy as a ‘gold standard’. We have two blocs, one pro-nuclear and one pro-gas. Neither side has been willing to budge. Germany’s new traffic light coalition had initially voiced its opposition to nuclear and gas to be included in the taxonomy but has since toned down its rhetoric.”
A quiet release
The first elements of the EU’s Sustainable Taxonomy came into force on Jan. 1, 2022, covering criteria for how renewable energy, car manufacturing, shipping, forestry, and bioenergy can be considered ‘sustainable’. It included the notion of “transitional activities”, such as shipping for example, which will see tighter decarbonization criteria from 2026, as well as a “technology-neutral” benchmark for new energy investments of 100g of CO2 per kWh. Many Member States objected to the new rules, even though the most controversial elements regarding gas and nuclear were removed from the debate.
How these should now be categorized is the topic of the proposal released quietly on New Year’s Day. Unlike the first part of the Delegate Act, this is not open to public consultation but responses from the Platform on Sustainable Finance and the Member States Expert Group on Sustainable Finance are due by Jan. 12. If successful, the proposal would enable nuclear and gas investments to count as “sustainable”, undermining the goal to realign capital investment towards a more sustainable future. In its proposal, the Commission states, “It is necessary to recognise that the fossil gas and nuclear energy sectors can contribute to the decarbonisation of the Union's economy.” While this may be true, the outstanding question is whether that recognition should be enshrined within a sustainability classification.
Looking at nuclear and gas as long-term energy options doesn’t appear to make sense, as low (or lower) carbon isn’t necessarily the same as sustainable. Nuclear energy has historically suffered from high capital costs and budget overruns and has a major issue with fuel waste. While there is a lot of excitement about the potential in small modular reactors, and even nuclear fusion, they are still a long way from commercialization. Sean Kidney, chief executive of the Climate Bonds Initiative says that while nuclear is undoubtedly low carbon, using existing nuclear technology doesn’t make sense from a risk perspective, not least of which is financial.
Natural gas faces its own challenges, not least of which is that new investments today will result in infrastructure in place in 30 years. Given that 2020 saw gas power plants overtake lignite power plants to become the single largest contributor to power sector emissions in the EU Emissions Trading System, that is a significant concern. Kidney says, “The real existential threat we face is from fossil fuels, and with gas we have a huge problem in that the transitional reductions we could achieve are not enough – and methane leakage is now so vast that it largely negates the benefits.”
Despite the ‘technology neutral’ threshold of new energy investments of 100g of CO2 per kWh, to qualify as sustainable under the proposal, new natural gas investments must only emit less than 270g of CO2 per kW and replace other fossil fuels. It’s not simply the disconnect between two different sets of energy emissions criteria that’s a problem, but also the fact that such a move fails to line up with the EU’s own climate targets or the goals of the Paris Agreement. Any power plant that emits more than 270g CO2 e/kWh complicates reaching the Paris Agreement targets enormously and will require other sectors to deliver deeper emissions reductions.
Obviously, emissions abatement is expected to contribute significantly to the natural gas sector in the future, but there are also major challenges with this. Carbon capture and storage has yet to be fully commercialized despite decades of investment. Expectations are high that green hydrogen will be blended into the gas mix but as over 95% of hydrogen today is generated from fossil fuels, this seems counterproductive. Significant investment is going into the development of green, low-cost hydrogen, usually in conjunction with renewables, but the latest Taxonomy proposal is non-specific on these terms. Once again, support for the status quo is delaying action by relying on some future “silver bullet” which will solve our problems.
The IEA said that 2021 needed to mark the end of investment in new fossil fuel supplies if we are to have a 50% chance of keeping global warming limited to 1.5 degrees. Despite a 2009 G20 commitment to addressing fossil fuel subsidies, the market continues to be distorted. The United Nations Development Programme (UNDP) reported that 2020 saw $423 billion spent on direct subsidies alone, through tax breaks and price caps. Including the cost of externalities, from sickness and early deaths to environmental impacts, the International Monetary Fund (IMF) has estimated that the cost rises to $5.9 trillion, or 6.8% of global GDP.
At the same time, the inclusion of natural gas, and nuclear in the Sustainable Taxonomy ignores growing risks around legal liability, carbon price, as well as consumer and market concern about externalities and impact. Sandrine Dixson-Declève, co-president of the Club of Rome and member of the European Commission advisory Platform on Sustainable Finance said, “Natural gas should not be classified as ‘green' and should not be included in the EU Taxonomy Climate Delegated Act. The moves to label natural gas as a transitional activity … is completely misleading, may lead to a serious mis-selling of risk, and will undermine the EU’s efforts to transform its economy.”
There are those who believe that gas and nuclear must be part of the energy mix moving forward – but that doesn’t mean that they should be labeled as sustainable. The realignment of capital is a major task, especially when you consider the weight of capital already invested in the fossil fuel sector.
Few would argue that EU Member States face a variety of energy challenges and that support will be needed for the energy transition. But labeling nuclear and gas as sustainable undercuts the very purpose of the Sustainable Taxonomy. With capital requirements in the trillions of dollars annually, it is vital that investors are provided with clear signals about what constitutes environmentally and socially positive investment.
The EU’s Sustainable Taxonomy provided an opportunity to provide global leadership and align with calls for action from the private sector – confusing sustainable with transitional in the Taxonomy complicates its goals, weakens its utility, increases the risk of stranded assets, and opens up the investment process to further accusations of greenwashing. It appears like nothing more than a politically driven excuse to delay concrete action and a missed opportunity for effective investment engagement with climate change.
The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.
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