January 21. 2021. 11:14

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EU Taxonomy: What future for industry in Europe?

In a bid to accelerate the energy transition, the European Commission (EC) recently published its draft proposal to establish an EU Taxonomy of environmentally sustainable investments. The initiative aims to classify investments making a substantial contribution to the European Union’s (EU) fight against climate change. Yet, skimming through the proposal, industrial players and investors may find that one element is missing: the very notion of “transition” or what transitional activities should actually mean.

Among the flagship criteria proposed by the EC to be labelled environmentally sustainable is the one-size-fits-all emissions threshold of 100g CO2e/kWh for energy production. That limit applies to sectors listed in climate change mitigation activities but is so low that nearly no energy solution can currently comply.

European industry such as the chemical, food and drink, pulp and paper and alumina sectors, would be left with no or very limited choices to secure their energy needs. For example, the most advanced clean and efficient cogeneration units which are used to supply industry with heat and power, would not meet this threshold. Even when these units reduce emissions of natural gas to a minimum.

European policymakers should ensure that industry will be able to finance its energy transition and remain competitive. Meeting the flagship 100g CO2e/kWh limit should be required when renewable or decarbonised fuels like hydrogen will become widely available and competitive.

The EU Taxonomy Regulation does calculate for situations where there are no technologically and economically feasible low-carbon alternatives. It stipulates that these should qualify as so-called “transition activities”. Specific requirements are set to qualify as a transition activity.

The problem is that the EC’s proposal currently requires these transition activities to meet the 100gCO2e/kWh emissions limit as well while it is clear they cannot – and should not. This basically leaves industry with no clear perspective to finance itself in an affordable way nor to be rewarded for investing in the best available solutions.

Furthermore, the EC has set another emissions limit of 270gCO2e/kWh to “do no significant harm” (DNSH) to the environment. In a scoping paper recently shared with EU member states, the EC explains that the existing EU legislation represents a suitable starting point for defining DNSH criteria. The problem is that no such a threshold at present exists in EU legislation, not to mention that electricity generators running on natural gas may find it challenging to meet this emission limit too.

Just one year ago, the Emissions Performance Standard of 550gCO2/kWhe for electricity generation units participating in the capacity mechanisms entered into force. This threshold will be implemented by EU Member States and is yet to deliver its benefits.

The emission limit of 550gCO2/kWh for electricity would constitute an appropriate starting point for DNSH. It could accelerate a switch from coal to natural gas, recognised as a transitional technology by the European Council on 18 December 2020. Considering that using natural gas halves emissions produced by coal, one can hardly argue that a switch from coal to gas is doing significant harm to the environment. Looking at reality, this number is fair. The EC recently estimated that the average EU wide CO2 emission factor is 670g/KWh[1] with some EU countries emitting much more than this average.

In a recent call, many industrial players asked for the future EU Taxonomy to guarantee a better transitional, evidence-based and pragmatic approach. Better consistency with existing EU legislation is among their asks. They believe the EC proposal departs from EU legislation in a way that creates uncertainty for immediate and short-term investments.

The EU Taxonomy may also be a problem for governments which designed and already submitted their National Energy and Climate Plans for the 2020-2030 period and may now find it difficult to finance the projected investments.

With its rigid and strict approach, the EC may well prevent, rather than accelerate, investments in sectors where they are urgently needed. This would run against the intended goal of helping the European economy become more sustainable. The EU Taxonomy proposal is expected to be adopted in the coming weeks. This leaves time to ensure the proposed emissions thresholds will not leave industry being stuck in the middle of the energy transition.

[1] See European Commission Impact Assessment on Guidelines on certain State aid measures in the context of the system for greenhouse gas emission allowance trading post 2021, p.31.