Parliament spells out red lines in EU battle over green finance

Frans Timmermans (R), the EU commission vice-president for the European Green Deal, is seen in the foreground during his confirmation hearing in the European Parliament, on 8 October 2019. MEPs Pascal Canfin (Renew) and Bas Eickhout (Greens) look ahead in the background. [© European Union 2019 - Source : EP]

Senior lawmakers have expressed concerns about the EU’s proposed sustainable finance taxonomy rule book, raising the possibility that an unruly cross-party majority might emerge to reject the proposal in the European Parliament.

Albeit for entirely opposing reasons, no one in Parliament seems happy with the European Commission’s draft implementing rules for the EU’s green finance taxonomy, tabled in November.

The draft rules – or “delegated acts” in EU jargon – are an essential part of plans to bring private finance onboard with the EU’s green transition. Put simply, they aim to establish a “gold standard” for sustainable investment by listing which economic activities can be considered “sustainable.”

But the proposal caused uproar among eastern and southern EU member states, which complained that natural gas had been denied “transition” fuel status in the draft guidelines, even when it replaces coal in power generation.

Faced with a threat of veto, the Commission was sent back to the drawing board, and asked its green finance advisors to provide a broader definition of “transition” activities under the taxonomy.

EU green finance advisors asked to clarify 'transition' to net-zero climate goal

The European Commission has asked advisors to rework the EU’s green finance taxonomy rules after member states rejected draft implementing guidelines, unhappy about the exclusion of gas as a “transition” activity towards net-zero emissions.

An updated proposal is now due in the coming weeks and will be submitted for scrutiny to the European Parliament and EU member state representatives in the Council of Ministers. They will face a binary choice to either adopt the rules or reject them as a bloc.

In other words, MEPs will have a veto, and many of those consulted by EURACTIV said they intend to exercise it.

“It was the right decision to postpone,” said Sirpa Pietikainen, a Finnish lawmaker from the centre-right European People’s Party (EPP) who co-authored the Parliament’s resolution on the green finance taxonomy regulation back in 2019.

“There were many comments and the Commission needed time to look into them,” she said. In particular, “the transition category was too strict or too unclear,” she told EURACTIV.

In the EPP, some MEPs were openly critical about the proposal, suggesting the European Parliament’s largest political group would have probably rejected the draft if the proposal had been submitted to a vote.

“What the Commission has designed is, as it stands, an ineffective plan” to support the green transition, said Anna-Michelle Asimakopoulou, a Greek MEP affiliated to the EPP. “The indirect carbon footprint thresholds are unrealistic and penalise energy-intensive industries that don’t have access to a fully decarbonised energy grid,” she said referring to the aluminium sector.

Worse, she added, the proposals would have penalised European aluminium producers who are already struggling with dumped imports coming from China.

“This lack of geopolitical foresight is dumbfounding,” she said at a parliamentary meeting in January. “The EU taxonomy has the potential to be a game changer but it must ensure a level playing field” both within Europe and globally, she said.

A classic left-right divide

In the European Parliament, it looks like a classic left-right divide. While Conservatives and right-wing groups warned the draft rules were too stringent and risked penalising whole sectors of the economy, the Socialists, Greens and leftists said they didn’t go far enough to spur investments into clean technologies.

“We were quite critical about the Commission’s draft delegated act, to be honest,” said Bas Eickhout, a Green lawmaker from the Netherlands who co-authored the Parliament’s resolution on the taxonomy regulation.

“With the taxonomy, Europe is supposed to develop the gold standard for green investment,” he told EURACTIV. “But if you read the proposal of the Commission, it’s becoming more and more political bargaining. And we are shifting away from the golden standard that we wanted to make.”

“I think I could have argued for a yes vote, but it would have been borderline, I have to say,” Eickhout replied when asked if the Greens would have backed the Commission’s first draft.

“If we now get further weakening, then it will become more and more difficult for us to vote yes,” he warned.

Gas and nuclear

The debate in Parliament has tended to centre around gas and nuclear energy. In October, a group of 51 MEPs from Eastern EU member states – mostly from the EPP – wrote a letter to the Commission, calling for the taxonomy to secure a “transition fuel” status for the most efficient gas technologies.

For the Greens, however, a further dilution of the taxonomy’s criteria for gas could be a step too far.

According to Eickhout, the Commission’s initial proposal was “already borderline” for the Greens because it still allowed some gas investments to be labelled as sustainable. “We certainly don’t want to see any further weakening there,” he said.

Similar warnings are coming from the Socialists and Democrats (S&D), the second biggest group in Parliament. “I would have given the original proposals by the Commission a passing grade, but only just,” says Paul Tang, a Dutch MEP from the S&D group.

“In areas like agriculture, or energy generation, the Commission should be careful not to weaken the criteria much further, else it loses sight of the level of ambition agreed upon in the Taxonomy Regulation,” he warned. “Particularly, changing the standards to allow investment in a fossil fuel like natural gas would fatally undermine the taxonomy,” he told EURACTIV in emailed comments.

The dispute goes far beyond gas, because the EU’s green finance rule book covers nearly every sector of the economy, ranging from agriculture to forestry, transport, energy, digital industries and even education and the media sector.

While nuclear power is being dealt with separately, forestry and agriculture have emerged as a sector of crucial importance for the EPP and Conservatives, who don’t want to upset farmers with new environmental standards.

However, like for gas, the Greens and Socialists warned against attempts to dilute the taxonomy’s criteria much further.

“On forestry, bioenergy and agriculture, the draft delegated act was already weaker than we had hoped, so how much weaker can we get?,” Eickhout said.

For Pietikainen, the issue for policymakers is to find the right balance. While the EPP generally supports natural gas as a transition fuel “for the next 10-20 years,” she also says “gas cannot be considered as green” in the long run.

“We need to phase out gas at the latest by 2050 if we want to become climate neutral by then. And that is what creates a transitional challenge,” she said.

According to her, a potential solution would be to consider gas investments as part of a company’s broader transition plan to aim for carbon neutrality.

“When a company has a reliable transition plan verified by a third party, that could be categorised as transitional. And therefore, they could be labelled green even though they are not green yet. That way we would allow more companies to be eligible. And if they don’t meet the target, they would be phased out from the category,” Pietikainen said.

Brussels postponed green finance rules after 10 EU states wielded veto

The European Commission was forced to delay publication of detailed implementing rules on the EU’s sustainable finance taxonomy because of the sheer number of comments received and a threat of blockage from eastern and southern EU member states, EURACTIV can reveal.

A broader ‘transition’ category

More generally, all MEPs consulted by EURACTIV said they would support a broader “transition” category in the taxonomy – including the Greens.

“At the moment, the taxonomy only defines green standards, so either you’re in or you’re out,” said Green MEP Bas Eickhout. “This is why we need a broader taxonomy with a third category for ‘in between’ companies. Otherwise you will always have this lobbying by companies that want to be on the green side.”

Pietikainen agreed, indicating that the creation of a broader ‘transition’ category “would indeed facilitate an agreement.” However, she also insisted on setting a clear transition pathway for industry, with clear objectives.

“The worst case would be to set the bar too low,” Pietikainen said. “Because otherwise, you invite industries to invest in technologies which may be considered green today but aren’t sustainable over time. That would send the wrong signal to industry front runners and would prevent them from moving forward.”

As often in Parliament, the swing votes on the taxonomy delegated acts may end up lying in the hands of the centrist Renew Europe political group.

Pascal Canfin, a senior Renew MEP, said the Commission’s initial proposal on the taxonomy delegated act had “raised questions” within his group because it “did not make it possible to capture the necessary transition of our society towards a carbon-free economy”.

“In too many sectors, the logic of alignment with our climate objectives was simply not present,” he said, underlining that an “all-and-only green now” logic does not have a majority in the European Parliament as it fails to capture the necessity to encourage a green transition among carbon-intensive industries.

Driving the transition “is the whole point of these delegated acts,” said Canfin, who chairs the European Parliament’s environment committee. “The taxonomy must make it possible to accelerate the ecological transition, without creating a fracture in our society,” he told EURACTIV.

According to Canfin, the European Commission’s green finance advisory group, must now put forward proposals allowing for a more “dynamic taxonomy” that takes the transition imperative into account.

“If we stay with this idea of a ‘green niche’, then we run the risk that the taxonomy is not widely used and covers only a marginal part of our economy,” he said.

Canfin’s words echo a study commissioned by Germany’s environment ministry, which concluded that only 1% of blue chip companies listed on the DAX stock exchange would be considered “sustainable” if the Commission’s draft delegated act had been applied in its initial form.

Without more nuance in the classification of companies, the taxonomy risked creating a “green bubble” that would see investors rushing to buy stocks from a handful of firms considered truly “sustainable” under EU rules, the study suggested.

By contrast, Canfin said a more inclusive taxonomy will make it possible to bring more people on board with the green transition. “This is another matter with the taxonomy: its use must be generalised, it must be the reference tool in the context of ecological transition,” he added.

However, the French MEP warned against the temptation to tinker with the higher pollution thresholds listed in the taxonomy delegated acts – those above which technologies are considered to be doing “significant harm” to the environment.

“Touching the ‘Do No Significant Harm’ thresholds is a very clear red line,” Canfin warned. “Withdrawing certain sectors from the delegated acts on the basis that an agreement is too complex to find is another,” he said, insisting that the taxonomy “must cover a very large majority of economic sectors to be relevant”.

How the EU taxonomy can be the tool for dynamic climate transition

The EU’s “sustainable Taxonomy” has been sometimes portrayed as a binary tool defining which economic activities are sustainable and which ones are not. In fact, it can benefit a wide cross-section of Europe’s economy, writes Nathan Fabian.

[Edited by Josie Le Blond]

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