EU green finance rules at risk of deviating from science

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

The EU's green finance taxonomy is likely to encourage fossil gas to be blended with hydrogen in pipelines, which would incentivise a prolonged use of the fossil fuel, write Tsvetelina Kuzmanova and Sara Dethier. [Budimir Jevtic / Shutterstock]

Some of the draft emission thresholds contained in the EU’s sustainable finance taxonomy are not aligned with climate neutrality and deviate from scientific evidence, raising concerns about political and industry pressure, write Tsvetelina Kuzmanova and Sara Dethier.

Tsvetelina Kuzmanova is a policy advisor working on sustainable finance at E3G, a climate think tank. Sara Dethier is a researcher at E3G’s Brussels office.

On Friday, 20 November the European Commission published the Delegated Act on climate change mitigation and adaptation under the Taxonomy Regulation. This will now go through a four-week public consultation before adoption by the European Parliament and Council of the EU.

The draft raises concerns that some of the thresholds deviate from scientific evidence as a result of political and industry pressure. The Commission must ensure that the economic activities that make the list, together with their respective thresholds, are governed independently of political considerations to preserve the value and credibility of the taxonomy.

The taxonomy is growing in relevance

The EU taxonomy is a science-based tool for defining which activities are classed as ‘sustainable’ in terms of environmental and social impact. Its purpose is to set the ‘gold standard’ for identifying genuinely environmentally sustainable activities, helping to avoid greenwashing and increasing the flow of sustainable financing.

The taxonomy will gradually be embedded into European law and will also provide a classification system that can be used in a wide range of policy tools. This last point has become a hot and contested topic since the Commission first stated a desire to apply the taxonomy to the European budget and recovery funds – the Recovery and Resilience Facility (RRF) in particular.

Although its formal application is within Europe, the taxonomy has already significant international reach and is likely to act as an international benchmark. Many other jurisdictions are now developing their own taxonomies, for example last week the UK announced that it will create its own green finance taxonomy based on the EU taxonomy’s scientific metrics.

But concerns about the quality of the tool are rising

The taxonomy and its thresholds were developed through a two-year-long exercise of the Technical Expert Group (TEG) on Sustainable Finance. The taxonomy will now be regularly updated and reviewed by the Platform on Sustainable Finance, to broaden the scope of sustainable activities and to revise the technical screening criteria in line with the latest scientific and technological advances.

In the Delegated Act published on 20 November, each economic activity has two sets of thresholds, one that ensures a substantial contribution to climate objectives and one which ‘Do No Significant Harm’ (DNSH) to those objectives or to any of the other environmental objectives.

Yet the version of these criteria which is laid out in the Delegated Act includes several departures from the TEG recommendations, raising concerns about their environmental integrity.

For instance, the document risks causing a lock-in into fossil gas, thus impeding progress towards climate neutrality. The draft deviates from the TEG report in that it does not propose thresholds that decline over time to ensure progress towards European climate objectives.

Regarding infrastructure, there are now new categories that are likely to encourage fossil gas to be blended with hydrogen in pipelines, which would incentivise a prolonged use of fossil fuel.

Gas denied 'transition' fuel status in draft EU green finance rules

Power plants fuelled by natural gas will not be classed as “sustainable” or “transition” investments in Europe unless they meet emission limits which are so low that none are currently able to comply, according to draft EU rules seen by EURACTIV.

Electricity production from bioenergy, as well as agriculture and forestry thresholds, have also been weakened from the original recommendations.

Meanwhile, some thresholds in the construction, manufacture and agriculture sectors in the Delegated Act reflect the TEG recommendations but are not aligned with climate neutrality by 2050, due to the use of outdated benchmarks across European files which do not reflect technologies that would shift these sectors onto a pathway compatible with climate neutrality by 2050.

On the other hand, the draft Delegated Act has been strengthened in a number of areas. For example, in the energy sector, the thresholds for power generation meet the TEG recommendations and waste incineration – often criticised for its environmental impacts – has been removed from the list of activities considered sustainable. In the construction sector, life cycle analysis has been added as a requirement for the construction of new large buildings.

Political hurdles remain to a science-based taxonomy

The strength of the EU taxonomy is that it sets out science-based screening criteria as a safeguard against greenwashing. However, the draft Delegated Act demonstrates that in some instances these screening criteria can fail to rely on up-to-date data and established policy objectives.

Departing from the recommendations of the TEG raises the possibility that some of the thresholds could be watered down further following the public consultation.

Not all financial actors are supportive of the creation of a science-based EU taxonomy. Several incumbent industries have called for the taxonomy’s thresholds to be made weaker, notably in the areas of power generation, cogeneration and waste incineration.

Some member states are still to be convinced that the economic transition to net zero emissions will be viable without further investment in fossil infrastructure, notably in Central and Eastern Europe where gas is seen as a transition fuel.

Some actors in the Commission and the Parliament have also shown a tendency to support investment in new gas-fired power generation when the gas displaces coal.

On the other hand, civil society representatives – together with progressive institutional investors and representatives of low-carbon industries – have called for the thresholds to be made stronger to ensure alignment with science.

The latest science and technological realities suggest that for many end uses, fossil gas is no longer the “climate-optimal” solution. Fossil gas can actively hamper the transition to a climate-neutral energy system, by displacing or crowding out renewable heat and electricity deployment.

Without a basis in science the taxonomy will not fulfil its promise

If the EU taxonomy is to fulfil its promise of setting the standard for the sustainable industries and activities of the future, not only for Europe but for the world, then it will be crucially important that its rules are based on science and not on political convenience. The role of the Platform on Sustainable Finance will be pivotal in ensuring that this remains the case.

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