Criticism towards EU taxonomy
By: Towards Sustainable Finance
Tags: Eu, Esg, Taxonomy, Sustainable Finance

Why the EU taxonomy has the potential to turn bad

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What is sustainable? The answer is not as clear-cut as we wish. Still, financial products market themselves as “green” or “socially responsible”. That said, the EU’s policymakers see the need to act and get closer to a definition. With a definition at hand, products becomes comparable and policies directed and formulated clearly. The taxonomy is a tool to define what actions are considered sustainable and what actions are not. This helps investors to make better financial decisions.

Summary

The EU taxonomy sets the framework for green labels of financial products. This could increase transparency and reduce greenwashing. However, stakeholder across industries like the aluminum and natural gas sector lobby openly to soften requirements for sustainable labels. This will allow fossil fuels to have a green label which runs counter to what private investors expect from a sustainably labelled financial product. Also nuclear energy remains a controversial topic between countries. In the end, the taxonomy is at danger to become less meaningful when it allows for loopholes.

Why does it matter (for the EU) ?

The EU is an investor. Every year it grants funding to hundreds of European projects. The distribution of EU funding is mostly defined by certain criteria that need to be fulfilled. If you want to shift the focus of the whole procedure to certain areas, for example circular economy, you have to change the criteria. This is where the EU taxonomy comes into play. By having a clear idea on what is “green” and what not, the EU can distribute funds to projects that meet sustainability requirements. The taxonomy might increase funding to endeavors like such as clean energy and circular economy.

The challenge

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How do you define sustainability? A simple question with an intricate answer for each of us. Now imagine you define it for 447 Million people (population of the EU). This is challenging in many ways and gets more complicated with conflicting interest across stakeholders. Therefore, each stakeholder will lobby to have a definition of sustainability according to their terms.

Heavier than aluminum

Take for instance the aluminum industry. It accounts for 1.1 billion tons of CO2 each year globally. For sure they play and important role to achieve the Paris climate goals, let alone the EU Green Deal. Some might argue that this industry cannot be sustainable in any way and should not be funded by green money. This is why it should not receive money from the EU’s sustainable investment funds. Others might argue that heavy industries just need more money to emit less carbon with new technologies. Finally, these opposing standpoints will shape the EU taxonomy, reaching a compromise.

The case with the aluminum industry exemplifies how tricky things can become. Aluminum production requires a lot of electricity. Therefore, the location of a producer and its co-located energy provider directly controls how much carbon dioxide is emitted. So any company located in a country with a green energy profile is automatically at an advantage. This is why the aluminum industry openly lobbies to change the EU taxonomy. What implications this will have on other use cases remains open.

“Green” Energy

Talking about aluminum probably does not raise some emotions. In contrast, you might have stronger opinions about nuclear power. Baby boomers remember the nuclear catastrophe of Chernobyl. Generation Y heard the stories from their parents. However, they witnessed the nuclear disaster of Fukushima. The EUs technical expert group (TEG) discussed the case of nuclear energy and reached no agreement. They asked the Joint Research Center (JRC) for guidance which is the science and knowledge service of the European Commission. The come up with a 387 page report. The conclusion: “ The analyses did not reveal any science-based evidence that nuclear energy does more harm to human health or to the environment than other electricity production technologies “. According to this research the EU should treat nuclear power as sustainable within their taxonomy. It would qualify for the green finance label that the EU is planning. At this point (25th April 2021) there is no final decision on this.

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On a note about nuclear disasters, the JRC points out that “ evaluating the effects of such impacts is not in the scope of the present JRC report, although they are important for understanding the broader health implication of an accident.”. The report assesses no accident risks and the costs associated with it . This is why the report alone cannot lead to a conclusive result. Nevertheless, it influences decision making of the EU commission.

Greener Energies

Another controversy unfolds around natural gas. Natural gas emits half of the amount of CO2 than coal for electricity produced. Some consider it as renewable since it can be sourced from landfills or wastewater. However, with most renewable natural gas production there will also be methane involved. Methane is considered a major driver of climate change.

These arguments give natural gas a place as a transition technology already for several years. The taxonomy should also reflect that. Additionally, the EU planned to impose a strict limit that no more than 100 gram co2 per kilowatt hour can be emitted during production to get labeled as green. However, ten EU member countries complained and abandoned the limitation on 100 grams. Also labelling natural gas as a transition technology has vanished.

Expectation meets reality