EU green finance rules must be politically sustainable

The EU is rightly recognised as a green policy pioneer. Its members invented financial subsidies that helped to kick off today’s global renewable energy industry. It is home to the world’s first major carbon market. It made some of the earliest and boldest pledges to cut carbon emissions, even if the UK and other large economies will be announcing moves this week to accelerate reductions linked to the two-day summit convened by US President Joe Biden.

Being first can be fraught, however, which the EU is finding as it tries to finalise a contentious guide to what does and does not count as an environmentally-friendly economic activity. Brussels must find a way to finish this work that is both scientifically and politically sustainable, not least because whatever it does will influence wider efforts to tackle climate change.

The EU has calculated that to meet its goal to become the world’s first climate-neutral bloc by 2050, it will need €1tn of sustainable investment over the next decade. This cannot come from the public sector alone. Private investors must be involved, but to do that they need to know where to put their money, and what greenwashing dodges to avoid.

Enter the clunkily-titled EU taxonomy, a list of activities deemed to be environmentally sustainable. The European Commission has spent more than three years working on this classification system, prompting heated controversy throughout. 

Atomic energy advocates say excluding nuclear power from the list is unscientific and unfair. Countries such as Poland want natural gas to stay on it, as they plan to use the fuel to help cut their emissions as they shift away from coal, a dirtier fossil fuel. Climate campaigners say they are dismayed by the taxonomy’s relaxed rules for forestry and burning wood for energy — an important source of power in Nordic countries.

Meanwhile, influential thinkers in the green finance field argue the taxonomy is so purist it will exclude too many investments. It should instead be aiming for “50 shades of green”, says Mark Carney, the former Bank of England governor.

Some of this criticism has already been taken on board. Criteria developed for the taxonomy divide activities into three categories — low carbon, enabling and transition — that acknowledge the zero-carbon shift will not happen overnight. 

Activities in the low carbon category, such as solar farming, are already climate neutral. “Enabling” activities, such as making solar panels, are contributing to that neutrality. The transition category covers areas such as high-tech cement making that do not yet comply but are economically important and lack low carbon alternatives. This category is to be regularly reviewed.

Doubtless much else will require review as well. But the EU, and indeed any country or organisation with a net-zero emissions target, cannot ignore the scientific calculation at the heart of the climate problem the taxonomy is trying to address.

The world has taken so long to develop adequate green financing and emissions reduction policies that it is running out of time. UN science reports show global emissions should fall by around 45 per cent by 2030 to have a reasonable chance of meeting the safest global temperature goal in the 2015 Paris climate agreement. There is no sign of anything approaching this fall at present. New investment in fossil fuels such as gas will be all but impossible if that target is to be met.

The EU controversy is just a forerunner. Other countries are now eyeing their own green taxonomies and many will look to Brussels for guidance. If it ends up with a system that allows the greenwashing it is supposed to prevent, the consequences will be felt well beyond the bloc itself.