The new EU Taxonomy aims to classify whether or not investments are green and substantially contribute to climate neutrality. Given the power of capital to drive technology development, the concept is to be commended.
But the early interpretations of the first draft proposal raise significant questions about both mature and emerging climate-friendly technologies that must be addressed—and fast.
What is green investment, exactly?
Designed to answer the question of ‘what is green?’, the EU Taxonomy is a classification tool that defines the environmental performance of economic activities across a wide range of industries. It sets requirements that corporate activities must meet to be considered sustainable.
It is designed for investors, companies and financial institutions to make investment decisions that will substantially contribute to at least one of the six environmental objectives as defined in the regulation, do no significant harm to any of the other five environmental objectives, and meet minimum global safeguards.
The taxonomy builds on the UN Sustainable Development Goals. While these have been widely embraced around the world, their qualitative nature inevitably leads to differences in interpretation. The quantitative taxonomy should go beyond strategy and influence financing in the capital market, including how attractive such financing is for investors and financial institutions. In practice, activities which fall outside the taxonomy will be more expensive to finance, even harder to find investors and especially public funding.
In late November, the release of the EU’s draft proposal led to confusion in the energy world. The lack of nuance when considering renewable energy projects and a confusing classification of any projects related to oil and gas despite their inherit benefits could cripple investment opportunities at a time when they are most needed.
Is hydropower ‘green’?
A debate around technologies related to the oil and gas industry is understandable, but hydropower also appears to have been singled out as doing “significant harm” to the environment. This could mean hydropower projects—including upgrading, modernizing and extending existing ones—will become much more expensive.
It’s true that hydropower projects can do environmental harm due to the flooding of existing land, loss of aquatic habitats and the potential impact on fish and biodiversity. The devil is in the detail though, as the taxonomy includes outdated criteria for assessing greenhouse gas emissions and environmental impact from hydropower and additional requirements beyond the already established Water Framework Directive, which is designed to ensure good ecological status in hydropower rivers.
Decades of research on hydropower has reduced the environmental impacts significantly and will continue to do so in the future. The EU-funded FIThydro project has developed decision support tools and innovative methods to mitigate negative impacts and to help developers make greener decisions.
Many countries, including Norway, have invested in substantial hydropower infrastructure to supply baseload electricity for decades. In fact, around 95% of Norway’s domestic electricity production is from hydropower. If the EU now decides that hydropower is not as green as wind or solar, then this green foresight could be punished by poorer financing conditions and a lack of available capital for new projects and the refurbishing and modernizing of the relatively old hydropower fleet, just as new interconnectors would allow Norway to become an even more significant contributor to system flexibility and energy storage for Europe.
The issue was raised in the Norwegian Parliament last week. Norway’s minister of climate and the environment Sveinung Rotevatn has met with the European Commission’s vice president Frans Timmermans about the issues, while Europe-wide industry associations are known to be concerned and plan to submit feedback.
Important drivers for the energy transition should be reconsidered
But hydropower is not the only issue. Technologies related to oil and gas infrastructure are automatically deemed to be not green even if the exploration itself contributes to reducing greenhouse gas emissions.
Take floating offshore wind power aimed at replacing gas turbines running on natural gas as an example. The global potential for offshore wind generation is enormous and outstrips the total energy demand of today. Yet to even reach a fraction of that potential, substantial investment in R&I to scale up capacity is required. Spending money now to develop floating wind farms that could power today’s oil and gas platforms will mature the technology for when we need to implement it at scale, although locking in fossil energy supply to the European market.
CCS decision highlights the issue
It’s pleasing to see that carbon capture, transport and storage (CCS) technologies have been deemed green. CCS is a critical climate positive measure as it is the only way to remove emissions from otherwise hard-to-abate sectors and suck carbon dioxide out of air for a net removal of CO2. But it can also be used to produce ‘blue hydrogen’ from natural gas as a key step towards a hydrogen economy, which when fully developed will use renewable-energy powered electrolysis as the main method of production.
Blue hydrogen requires an ongoing supply of natural gas, so the importance of building CCS infrastructure during the transition has been recognized by the EU. IEA findings maintain that 14% of cumulative emission reductions should come from CCS if we are to reach the goals of the Paris climate agreement.
Yet this makes it even harder to understand the confusing stance on the development of floating wind to power offshore platforms. If natural gas with CCS is seen as an important part of the energy transition, then the electrification of the extraction process should be just as relevant.
The bigger picture must be considered
Besides climate, the taxonomy focuses on other parameters including contributing to a circular economy, protecting biodiversity, zero pollution, preservation of ocean and water as well as respect for social standards. It is not productive to dismiss some key activities on the basis of just one of these factors, when they will keep up the pace of development of the wind power, solar, tidal and climate positive technologies we will need if we are to meet the climate goals.
As Europe is adopting a mission-oriented policy it is key that this is also reflected in the framework designed to promote such policies. If the mission is to become the first climate neutral continent by 2050 then we should be agnostic about how that is achieved. Even though there are only 30 years to 2050, we need to have credible transition pathways and use private and public capital wisely to achieve these targets.
Many technologies needed for the energy transition are under developed and under financed. Further hampering resources for these solutions will certainly lead to delayed action, slower development and difficulties in meeting Europe’s ambition to become climate neutral.
More than just public money is needed
Sectors that can show zero emission potential throughout their value chain including where climate positive technologies are required, should not be disfavored in these critical moments of designing a credible transition to climate neutrality.
Public money can only go so far. We need to mobilize the private sector and point all our efforts towards the mission of the Green Deal, a climate neutral Europe and an economy that works for people.