Last Thursday the EU Taxonomy Regulation became law when its final review period expired. It now sets the criteria for Climate Change Mitigation and Adaptation objectives in more than 60 economic activities.
This is an incredibly important milestone in the development of a regulatory environment that will help mobilize capital for climate action.
The Taxonomy, a common language for sustainable activities, gives investors, issuers, governments, and regulators confidence in green investment. It provides clarity on how an economic activity is contributing to meeting the EU’s environmental objectives, such as an emissions cut of 55% by 2030. The criteria on mitigation and adaptation demonstrate to the wider economy how to align their business with the EU’s net zero target and Paris goals.
The EU Taxonomy’s scientific criteria provide assurance against green washing
Taking a technology agnostic approach, the Taxonomy implements a key recommendation of the EU’s Technical Expert Group on Sustainable Finance: an electricity generation threshold of 100g CO2e/kWh, declining every three years until 2050. This would require carbon capture and sequestration as well as life cycle measurement of emissions.
The IPCC AR6 report and the IEA Net-Zero Roadmap have shown that the EU emissions budget has no room for new, unabated fossil gas. Even in the most efficient plants, unabated fossil gas power has a carbon intensity which more than doubles the 100g CO2e/kWh threshold.
This provides clear guidance to the electricity sector on how to align with net-zero and has been replicated in other national taxonomies.
The adoption of the 100gms threshold and many other important thresholds in the Delegated Act ensure the Taxonomy is seen as a credible and scientific assessment of economic activities’ Paris alignment.
The European Commission must now continue this strong approach as it develops the rest of the Taxonomy
The recent announcement by The Glasgow Financial Alliance for Net Zero (GFANZ) that over $130 trillion of private capital is committed to transforming the economy to net-zero demonstrates that investors are eager for credible, Paris-aligned green investments.
The power of the Taxonomy rests in its ability to provide a common understanding of Paris-aligned action. It uses a science-based approach consistent with Europe’s 2030 targets.
The Taxonomy is not perfect; there are areas that need further work, such as forestry and agriculture. But it’s a crucial step towards a net-zero economy.
The European Commission’s adoption of the Taxonomy is a welcome sign that the EU is taking its climate commitments seriously. Maintenance of this clear definition of low-carbon electricity generation will be crucial for the continued credibility of the EU Taxonomy and the EU’s place as a global climate leader.
Disclosure: Climate Bonds CEO Sean Kidney was a member of both the EU Technical Expert Group on sustainable finance (TEG) and its successor, the EU Platform on Sustainable Finance.
