When the EU uses taxonomy as part of its attempts to attain net-zero emissions by 2050, it is a phrase that has sparked fervent discussion and controversy. According to the EU Taxonomy's definition, "green" economic activities are those that qualify for EU financing. Following its initial proposal in March 2019, the taxonomy issue swiftly turned into a fight amongst EU member states.

Campaigners for environmental protection believe that their inclusion contradicts the EU's net-zero emissions plan, while those worried about energy security support for their inclusion. Last month, as the deadline for a decision drew near, environmental campaigners gathered in Brussels to hold a mock funeral for the fear that the European Commission would accept their inclusion. After all, the commission presented draft recommendations on New Year's Eve allowing for the inclusion of gas and nuclear, provided certain requirements are met.

What's the big deal? For investors, firms, issuers, and project promoters in Europe, the EU Taxonomy is a "tool" to assist them to negotiate the transition to a low carbon, resilient and efficient economy. With this initiative, the goal is to "protect private investors from greenwashing, assist enterprises in becoming more climate-friendly, reduce market fragmentation, and aid investments in shifting to where they're most required." That's why attaining net-zero emissions by 2050 is so important to the EU.

Photo by Guillaume Périgois on Unsplash

Goals For The Environment

The system is meant to be adaptable so that businesses will be encouraged to follow its regulations. The EU Taxonomy also establishes requirements for "transitioning" operations; in other words, for those firms who are attempting to achieve the green definition of what it means to be environmentally friendly. Although cement production has traditionally been a carbon-intensive process, the EU Taxonomy specifies that if CO2 emissions fall below a particular level, the process may be termed "green." These green credentials are vital to a cement producer because, with this Green Deal funding, it will be able to finance its firm at favorable rates.

Consequently, the EU Taxonomy effectively determines which industries and firms get green financing, which incentivizes them to continue down the road to net zero. When it comes to assessing financial market risk and implementing a green bond program, several governments and bodies, including the EU, will use taxonomy criteria. When it comes to deciding which firms to invest in for pension and other investment funds, asset managers will follow the taxonomy. The Sustainable Finance Disclosure Regulation, which compels them to disclose how much of their income derives from investments in green enterprises, is also directly relevant to these businesses.

Taxonomy criteria are evaluated every three years and may be changed if required. This flexibility comes from the taxonomy's review procedure. Environmentalists, on the other hand, believe that the EU Taxonomy has already seen far too much flexibility and that this might undermine its very purpose. "Billions of euros are at danger of being redirected towards fossil fuels, nuclear energy, and industrial farming, aggravating the climate and ecological problems," the WWF stated in a statement published in conjunction with the Brussels mock funeral performed last month. EU taxonomy is likely to be "greenwashed" in the near future.

Debates

While the EU Taxonomy was originally intended as an environmental policy, it has become a political issue for EU member state governments, who are under pressure from their constituents due to rising energy prices, rising living expenses, and worries of energy outages. The French government authorized new nuclear plants in early 2021. France had to work out an agreement with Germany to include gas in the taxonomy instead of nuclear after Germany decommissioned all of its nuclear reactors after the Fukushima tragedy.

Getting a taxonomy approved by the EU Council would likely need a nuclear-for-gas compromise, according to Energy Monitor's analysis. This would be a "fatal blow to taxonomy," according to the WWF. EU Green Deal, EU sustainable finance leadership, and climate/nature issues would all suffer grave effects.

This would be a step backward for the EU's climate leadership position, according to the climate change think tank E3G. It would also be damaging to the EU's brand and lead to a loss of confidence, the group believes.

Taxonomy In The EU Falls Behind

For the financing of renewable energy sources, it is the most stringent since it does not include fossil fuels such as natural gas or liquefied natural gas. Financial institutions and enterprises in China's onshore markets utilize this taxonomy primarily for the issuing of green bonds, with varying disclosure requirements for various kinds of green bonds.

Common Ground Taxonomy was developed after China and the EU compared their different systems in detail. If this becomes a worldwide standard for sustainable finance, other nations might use it to establish their own green taxonomies.

EU suggestions for limiting investment in new gas projects have been mirrored by Russia's nomenclature. Meanwhile, South Korea seems to be reversing its own regulations in light of the EU's taxonomy woes. It has been clarified by E3G that the Korean environment ministry's decision not to ban unabated gas power from its "green" list was affected by the ongoing discussion over this issue in Europe, but nuclear power is still prohibited.