The EU sustainable finance taxonomy and its contribution to climate neutrality

ABSTRACT

The EU Taxonomy is the first standardised and comprehensive classification system for sustainable economic activities. It covers activities responsible for up to 80% of EU greenhouse gas emissions and may play an important role in channelling investments into low-carbon technologies by helping investors to make informed decisions. However, especially in transition sectors much depends on the stringency of the technical performance thresholds that the Taxonomy applies to economic activities that are not yet ‘green’. This paper shows that for several sectors, the thresholds are not yet on track to support the transition towards climate neutrality. To this end, we analyse a large-scale public consultation with detailed responses to the specific thresholds from a variety of stakeholders. Especially for emission-intensive sectors, two distinct use cases of the Taxonomy can be distinguished: For new investments, criteria should be stricter than for current activities of companies. We also argue that for the sectors not covered by the Taxonomy, there is a need to differentiate between low-emissions activities and high-emission activities, which are incompatible with a low-carbon future.

KEYWORDS:

• EU Taxonomy
• sustainable finance
• classification system
• Green investments

JEL CODES:

• G00
• G14
• G18
• Q01
• Q54
• Q56

Acknowledgements

We thank Karsten Neuhoff for helpful comments and suggestions. We also thank Marc Blauert, Katharina Erdmann and Lucie Bioret for excellent research assistance.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 For most activities, there were either no or minor changes between the thresholds in the interim and the final report released in March 2020. Results are publicly available at https://ec.europa.eu/eusurvey/publication/teg-report-taxonomy?surveylanguage=en.

2 Since many organisations commented on several activities, the total number of responses is higher than the total number of respondents.

3 See https://ec.europa.eu/transparencyregister/public/consultation/statistics.do?action=prepareView&locale=en#en (numbers as of 09 November 2020).

4 NACE is the classification of economic activities in the European Union. Level 1 is the first layer of sectors consisting of 21 sectors, indicated by the letters A to U. Level 2 is the second layer of sectors, indicated by two-digit codes from 01 to 99.

5 These sectors are indirectly covered by the taxonomy, because transport activities of households are covered via the threshold for the production of passenger cars. Heating activities by households, on the other hand, are covered via the construction and renovation of buildings activities.

6 Transport is responsible for 11% of EU greenhouse gas emissions (see Figure 4). It is the only major economic sector in the EU where emission are still rising and are above 1990 levels. Direct emissions for the heating of residential buildings alone constitutes nine per cent of EU emissions (Figure 4). If indirect emissions (e.g. electricity and district heating) and emissions from the heating of commercial buildings is considered, this share rises significantly – in Germany, direct and indirect emissions of all buildings account for roughly a quarter of total emissions (Stede, Schütze, and Wietschel 2020). The production of basic materials accounts for around 25% of global CO₂ emissions and 16% of European GHG emissions (Neuhoff et al. 2019), of which direct and indirect emissions of cement alone are eight per cent of global emissions (Andrew 2018).

7 The explicit reference to a declining value to zero by 2050 has been removed in the draft of the Delegated Acts (European Commission 2020b).

8 In contrast to passenger cars, the rest of the transport sector has no clear pathway: Many of the thresholds will be reviewed in 2025, either because relevant European directives are reviewed (such as the freight transport services by road), or because the technology for zero-emission vehicles is not yet commercially available (e.g. interurban scheduled road transport, see TEG 2020).

9 This assumption is more justified for vehicles powered by electricity, as renewable electricity is expanded across (Europe, leading to a declining carbon intensity of electricity). Hydrogen may also be produced by electricity through electrolysis (‘green’ hydrogen), however it may also be produced from natural gas via steam reforming (‘grey’ hydrogen), which is far more emissions-intensive.

10 In practice, the difference is even larger, since the Taxonomy threshold is based on the Worldwide Harmonised Light Vehicles Test procedure (WLTP), while Directive 2019/631 foresees a replacement of the fleet performance thresholds (which were so far based on the New European Test Cycle, NEDC) for 2021. It is expected that the maximum fleet emissions under Directive 2019/631 will rise by around 20% under WLTP (BMU 2020).

11 In a recent study for the European Commission, renovations that reduce energy consumption by 30% are on the margin of ‘light’ renovations (Ipsos and Navigant 2019).

12 In Germany, buildings with a consumption of 75–100 kWh/m²a are labelled as energy efficiency class C. Any consumption below 50 kWh/m²a belongs to class A, buildings with a consumption below 30 kWh/m²a are labelled class A+.

13 Any off-site energy generation must be limited to district heating and cooling systems and local renewable energy sources (TEG 2020).

14 The manufacture of hydrogen is an exception to this rule. It is set at 5.8 tCO₂e/t of hydrogen, while the ETS benchmark is at 8.85 tCO₂e.

15 The EU has also acknowledged the need for more frequent updates of these benchmarks, which will be updated twice in the years 2021–2030 (phase 4 of the EU ETS), in order to avoid windfall profits and reflect technological developments since 2008. https://ec.europa.eu/clima/policies/ets/revision_en (accessed 12 November 2020).

16 Approximately two-thirds of the emissions from the cement production stem from process emissions during the clinker production (decomposition of limestone), with the remainder of CO₂ emissions being due to combustion of fuels. These emissions can only be fully avoided by carbon capture and storage or use, although they can be partly offset by substituting clinker by other mineral components in cement and concrete (IEA 2018; Neuhoff et al. 2014).

Additional information

Funding

The authors acknowledge funding from the Stiftung Mercator via the project ‘Rahmenprogramm Sustainable Finance’ [grant number 19026202] and the German Federal Ministry for the Environment [grant number FKZ UM19145150]. Bundesministerium für Umwelt, Naturschutz, Bau und Reaktorsicherheit.