The ECOS guide to the EU Taxonomy of climate-proof activities for sustainable investments
In March 2020, the sustainable finance technical expert group (TEG) established by the European Commission published its final report, giving recommendations for technical screening criteria for economic activities that can make a substantial contribution to climate change mitigation or adaptation, while avoiding significant harm to the environment.
This report received massive attention worldwide, as it could lead to deep changes in the financial sector. Its technical annex lists 70 activities deemed to “significantly contribute to climate mitigation”, from sectors responsible for 93% of the EU’s greenhouse gas emissions. It also develops rules to assess the resilience to climate change of an economic activity, and an implementation guidance to facilitate the use of the taxonomy by the financial sector.
What does the report put forward?
This final proposal from the TEG has addressed key demands from environmental NGOs, including ECOS. These are:
- The exclusion of several environmentally harmful activities, such as nuclear energy and incineration of waste, on the basis of the “do no significant harm” assessment.
- The tight greenhouse gas emissions threshold for the production of electricity, heat and cool, which makes it practically impossible for fossil fuels to be eligible.
- New criteria for the production of plastic, allowing to promote reusable alternatives, in line with ECOS comments of the previous TEG report. As a result, in order to be eligible to green investments, at least 90% of the produced plastic must be recyclable or used for reusable products. While this criterion could have gone even further in promoting reusable alternatives (for instance in separating the single use and recycling threshold), this sets a very promising precedent, as it requires product manufacturers and investors to look at the overall value chain, including the final use of the intermediate goods.
However, not everything in the report is worth praising, and some major issues remain unaddressed. These include:
- The much higher threshold for the manufacturing of hydrogen Although the report states that the new threshold is “in alignment with energy thresholds in the taxonomy”, our calculations show that it is substantially higher than the threshold applied to all other energy activities, and consequently should be revised.
- The high threshold applying to refrigerants used in electric heat pumps. Although they play a central role in the decarbonisation of the heating sector, electric heat pumps contain fluorinated gases that can undermine emission savings if released into the atmosphere. It is therefore crucial to use refrigerants with a low global warming potential (GWP). Such alternatives do exist and are widely applied in the sector. However, the TEG report provides a GWP threshold for heat pumps which was multiplied by 67,5 (!), making it much higher than the bans applying to similar products under the EU F-Gas Regulation.
- The inclusion of livestock production, a highly carbon-intensive and polluting industry.
- The inclusion of carbon capture and storage (CCS). The report recognises CCS as an “abatement technology”, which can be used to reach the CO2 emissions reduction. We strongly believe that the taxonomy should focus primarily on channelling investments towards activities emitting less, rather than those increasing artificial carbon sinks, as already highlighted in our 2019 position paper.
- The inclusion of combustion engines in the transport sector (trucks and ships). If criteria applying to passenger cars are ambitious, other transport activities still contain loose criteria, difficult to operationalise. Trucks and ships are included in the taxonomy if they use renewable fuels. However, there is practically no way to ensure that this requirement is met.
What are the next steps for the EU Taxonomy?
The European Commission is now expected to adopt a legislation based on the input received from the TEG. From 23 March till 27 April, the Commission gathered feedback on the legislation adoption plan (read ours here), and will adopt a list of economic activities substantially contributing to climate change mitigation or adaptation by the end of the year.
The delegated act is expected to enter into force by the end of 2021. In practice, this means that as from that time, investors will be obliged to disclose the environmental performance of their portfolio by indicating how taxonomy compliant their investments are.
This does not mean, however, that the work will be done: in parallel to the delegated act process, this autumn will see the creation of a new Platform on Sustainable Finance, working on a list of environmentally sustainable activities covering the other four environmental objectives identified in Article 5 of the Taxonomy Regulation:
- sustainable use and protection of water and marine resources;
- transition to a circular economy;
- pollution prevention and control;
- and protection and restoration of biodiversity and ecosystems).
To better understand our position on the activities contributing to the transition to a circular economy, read our article here.
Finally, once the work on the green taxonomy is completed, the EU needs to focus on the development of a “brown taxonomy”, identifying the most environmentally harmful activities. Although the environmental finance sector is growing fast, it still represents only a minority of private investments. The big bulk of so-called “brown” and “grey” investments needs to be clearly identified, in order to encourage ambitious divestment strategies.