In its efforts to achieve the EU’s climate and energy targets for 2030 and 2050, and to involve the financial sector in stimulating environmentally sustainable sectors, the European Commission has written up its first draft of the EU Taxonomy regulation (2020/852). On paper, the idea is fairly simple. Providing a list of economic sectors and activities, the taxonomy framework is intended to reorient and ensure capital for the benefit of reducing the emission of greenhouse gases.
At present, Member States and financial institutions identify sustainable economic activities through different evaluation schemes, hindering the transnational redirection of capital towards more environmentally sustainable activities. As pointed out in the impact assessment underpinning the taxonomy, one of the biggest obstacles to scale up green investments is the lack of a horizontally agreed framework. Such a framework would ideally provide a common language on how different techniques in, for example, manufacturing, agriculture, and energy resources should be considered sustainable.
Non-binding regulation clarifying a framework
It is worthwhile noting that the EU taxonomy will not be a binding regulation. There are no provisions in the regulation preventing Member States to adhere to other classifications or criteria than the ones that will constitute the taxonomy. Nor would businesses be subject to sanctions in the event of activities not being environmentally sustainable. Making sure that the taxonomy becomes a trusted and broadly accepted framework is key. Indeed, the very success of the taxonomy depends on the public and scientific recognition it can gain. Only when activities included in the taxonomy are perceived as environmentally sustainable by the public will financial institutes be prone to stick to the taxonomy and disregard various national frameworks that deviate from the classifications agreed on EU-level.
The EU Taxonomy is aimed at delivering a robust, science-based framework that aligns with the EU’s objective of putting in place an economy with net-zero greenhouse gas emissions, e.g reaching climate neutrality by 2050. A notable positive from the Taxonomy Regulation, is that large companies and financial market participants will be subject to additional requirements of collecting and disclosing information or sustainable progress. This will for example increase the transparency of how much a company invests (capex and opex) in sustainable activities and, as a result, put greater pressure on green washing actors, e.g actors marketing financial products as ‘green’ or ‘sustainable’, when in fact they do not meet basic environmental standards.
The six objectives by which two Technical Expert Groups (TEG) have evaluated 67 activities are provided as follows. If an activity was considered to contribute substantially to at least one of the objectives, it was classified as environmentally sustainable. An essential criterion was, however, that no activity was eligible for the taxonomy if considered to cause significant harm to any of the very same objectives. If strictly applying this do-no-significant harm principle (Art.17), this would entail that no activities, even those that are making a substantial contribution to climate change mitigation or adaptation should be eligible unless significant harm can be avoided:
1. Climate change mitigation
2. Climate change adaptation
3. Sustainable use & protection of water
4. Circular economy, waste prevent & recycling
5. Pollution prevention and control
6. Protection of healthy ecosystems
For the EU taxonomy, the classification of activities based on the technical screening criteria gives that an activity is either eligible for the taxonomy or it is not. A third category of activities, imposed with consistently decreased emission thresholds is yet considered acceptable during a transitional period. According to the proposed classification, only wind and solar power would qualify as eligible for the taxonomy whereas hydropower would normally be classified as a ‘transitional’ activity.
Future of Hydropower at Stake
In the EU, hydropower accounts for a third of all renewable energy production and has played a decisive role in the European energy transition as the second largest renewable energy source. In Member States such as Sweden and Austria, hydropower serves as the backbone in the natural energy system and stands for around one third of the electricity generated.
Although referred to as one of six renewable energy sources by the IPCC, hydropower has also been subject to notable criticism by environmental groups pointing at the detrimental impact hydropower plants, including small hydros, have on the landscape and the natural habitat. By balancing other renewable intermittent energy sources, hydropower is nevertheless recognized as a crucial component in the interplay between renewable electricity technologies such as wind power and solar photovoltaics (PV). This due to its capability to adapt its production to sudden fluctuations in supply and demand, providing flexibility to the European grid.
Why hydropower, in contrast to wind power and solar photovoltaics, was excluded in the taxonomy may be explained by the composition of the Technical Expert Groups. When the first TEG was appointed to draft the proposal for technical screening criteria - ie the actual classification of activities for the first two objectives (climate change mitigation and adaptation), it was almost exclusively composed by representatives from the finance sector and environmental groups. On the basis of the input received from the TEG, the Commission submitted its draft to delegated act on 20 November. For the objectives two to six, the drafting was assigned a constellation of 58 members and 10 observers establishing the ‘Sustainability Finance Platform’. Whilst 19 members from environmental organisations took part in the drafting, only three members, OMV (Austria), Eon (Germany) and Iberdrola (Spain), were brought in from the energy sector.
Conclusions and recommendations: the final taxonomy
The EU taxonomy framework will entail a classification by which investors and financial institutes will be able to make more informed and valid decisions when determining if an activity should be deemed sustainable.
In mid-2021, the technical screening criteria will be adopted by the Commission in a ‘delegated act’ which will enable the Commission to supplement or amend ‘non-essential parts’ of the Regulation. After adoption by the Commission, the European Parliament and the Council can only approve or reject the proposed amendments.
However, in my opinion, the efforts made by the Commission to reduce incredibly complex questions to a kind of binary sustainability rating, where the answer is always yes or no, tend to be blunt. Ideally, the technical screening should have taken into account how the classifications will affect the system as a whole. Instead of scrutinising each economic activity in isolation, the sustainability criteria should entail a complete system-wide picture with respect to how different operators may collaborate to achieve significant reductions in CO2 emissions.
Production of electricity from hydropower is a complex issue which is why all ecologically relevant mitigation measures must be implemented when new projects and reinvestments are prospected. In the context of wind power and solar being on the rise, however, hydropower must be considered as an increasingly important renewable energy resource, providing large quantities of electricity and contributing to flexibility when demand and supply fluctuate. If recognising the urgency of realising a green energy transition, the Commission must amend the technical screening criteria for hydropower, and include hydropower in the EU taxonomy.
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