Sustainable Finance

Here is How EU's Sustainable Finance Taxonomy Works to Tag Gas and Nuclear Plants as 'Green'

Published on: 7 July 2022 06:15 PM
by KnowESG
Reed-Smith-headquarters-in-Pittsburgh-Pennsylvania

The EU recently reached a consensus to recognise investments as environmentally responsible in gas and nuclear power projects.

According to its supporters, it is the most ambitious green investment guideline in the world and could divert enormous sums of money toward combating climate change. Critics assert that this "greenwashing" initiative threatens the European Union's climate change objectives.

So, what is the EU's taxonomy for sustainable finance?

What is the taxonomy?

The EU taxonomy is a comprehensive classification of economic sectors that may be marketed as sustainable investments. It consists of economic activities as well as specific environmental requirements that each economic activity must meet to receive a green label. This year, regulations covering investments like steel factories, electric vehicles, and building improvements went into effect for the majority of industries.

The standards for gas and nuclear energy, however, have been delayed for a long time due to heavy lobbying by countries with differing opinions on whether the fuels contribute to climate change mitigation.

What does this mean for natural gas and nuclear power?

In February, the European Commission proposed adding gas and nuclear power facilities to the taxonomy if they met specific conditions. On Wednesday, the European Parliament voted in favour of this plan, clearing the way for it to become law and take effect in 2023. Twenty of the EU's 27 member states can veto the measure, but this is considered doubtful.

Under the recommendation of the Commission, a gas-fueled power plant must release no more than 270 grammes of CO2 equivalent per kilowatt-hour, or an average of 550 g CO2e/kW over 20 years, to be considered environmentally friendly. Additionally, it must pledge to switch to low-carbon gases by 2035.

The first proposal for gas issued by the Commission in 2020 featured a lower 100g CO2 limit. It was revised in response to objections from nations such as Poland and Bulgaria, which argued that gas investments are required to replace more polluting coal. Others, such as Denmark and Luxembourg, argue that labelling gas, a fossil fuel, as green is not credible.

What’s the taxonomy for?

The taxonomy does not prohibit investments in activities that are not labelled "green," but restricts the activities that companies and investors claim are environmentally harmless. The EU's ambition to eradicate its net emissions by 2050 will need massive investments, the majority of which will come from private money. The taxonomy aims to make sustainable activities more apparent and appealing to investors.

The regulations also aim to eliminate greenwashing, in which companies overstate their environmental credentials, among so-called environmentally friendly investment goods.

Who is it applicable to?

In the EU, suppliers of financial goods, including pension providers, must declare which investments meet the climate requirements of the taxonomy. 

For each investment, fund, or portfolio, the proportion of underlying investments that comply with the requirements must be disclosed. 

Large corporations and publicly traded enterprises must additionally declare what percentage of their revenue and capital expenditures comply.

That means that polluting firms might be recognised for their green investments. For instance, if an oil corporation invested in a wind farm, it could identify that investment as environmentally friendly.

What makes an investment "green"?

The regulations categorise three types of environmentally responsible investments. First, those that significantly contribute to green objectives, such as wind farms.

Second, those that facilitate other environmentally friendly activities, such as facilities that can store renewable electricity or hydrogen. 

Third, transitional activities that cannot be made totally sustainable but have emissions below the industry average and do not lock in polluting assets or impede the development of greener alternatives.

The construction of gas and nuclear power facilities is classified as a transitional activity.

What's taking so long?

The gas and nuclear standards have been the subject of strong lobbying from EU governments and companies for more than a year. Policymakers in the EU had wanted to complete the climate rules by 2020. 

Finally, the EU published a set of standards covering most sectors in April 2021, but the gas and nuclear requirements were postponed until this year. 

The criteria are based on expert adviser suggestions and are intended to conform to science-based goals for combating climate change. However, other advisers believe that scientific criteria were overlooked in the EU's political wrangling over the standards.

What else is in the taxonomy?

To be considered green, an action must significantly contribute to one of six environmental goals while not harming the other five. So far, the guidelines encompass two objectives: combating climate change and adapting to its consequences. Criteria for the others will be announced later this year.

Source: The Indian Express

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