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IEEFA: EU considers bowing out of gold standard taxonomy – leaving room for China to take the lead

November 15, 2021
Christina Ng

It appears the EU is no longer going for gold.

The executive vice president of the European Commission, Frans Timmermans, has signalled that after months of debate, the bloc is considering a role for ‘natural’ gas in the EU green taxonomy.

It appears the EU is no longer going for gold

This is despite the UN-backed Net-zero Asset Owner Alliance representing around EUR 9 trillion warning just this week against including gas and nuclear in the EU taxonomy.

Yet here we are.

If gas is recognised as green energy in the taxonomy, it would qualify for green finance.

Gas is a fossil fuel and like coal, is not green

It is very concerning that gas-powered generation could possibly be seen as green.

Gas is a fossil fuel that contributes carbon and methane to the atmosphere through its combustion, with lifecycle emissions that are dangerous and significantly worse for the climate than coal in the short term.

If gas is needed in the interim for manufacturing purposes or has a short term role to play in decarbonising economies, that does not justify gas projects being seen as green, nor qualifying for green finance.

Putting gas in any taxonomy muddies the waters

Green or sustainable finance taxonomies fund assets or projects that deliver on climate objectives, helping to drive capital towards priority environmentally sustainable projects.

Putting gas in the EU Taxonomy, or any taxonomy for that matter, muddies the waters.

Taxonomies are supposed to be factual and science-based. And the EU Taxonomy has long held the gold standard of green finance.

Gas industry lobbying for green finance is concerning

The ongoing controversy surrounding the EU Taxonomy has sent a concerning message to energy planners globally that gas industry lobbyists can’t be ignored.

After six months of resisting industry calls to add liquefied natural gas (LNG) to its green taxonomy, the South Korean government finally caved in October.

Gas corporations can see into their shrinking future

South Korea’s draft “K-Taxonomy” now also includes gas, prescribing an end-use emission technical screening criteria of 320g of carbon dioxide per kilowatt hour and a life-cycle emission standard expected to apply from 2025. This means new unabated LNG-power projects will qualify for green bonds and loans during the next four years.

The push by lobbyists for gas to be recognised as ‘sustainable’ in both the EU and Asia indicates that gas corporations can see into their shrinking future. They are fighting for a place in the rapidly growing sustainable finance universe in order to expand sources of capital available to them.

But the gas industry doesn’t need specialised green finance. As in the past, fossil fuel power projects will continue to raise funds through conventional sources of finance – traditional non-labelled debt market instruments.

ESG investors need certainty

Classifying gas as green poses a significant problem for investors.

ESG lenders and investors want certainty that they are investing in truly clean and sustainable technologies, and rely on taxonomies as a guide on what those technologies are.

If taxonomies recognise gas as green, ESG investors may find themselves inadvertently backing the high methane and carbon fuel.

The new gold standard: China’s taxonomy rejects LNG, gas and coal

The situation in the EU could make way for China to take the lead in upholding high quality green energy finance standards.

China’s new Green Bond Endorsed Project Catalogue—its equivalent green taxonomy—now excludes gas, LNG and coal-fired power activities.

Reading the market, China is showing it knows how to attract private capital.

China is showing it knows how to attract private capital

Early this year, the People’s Bank of China’s Governor Yi Gang stressed that government funding alone would not be sufficient for China to meet its net zero goals—forecast to require an estimated USD 22 trillion from 2021 to 2060—and therefore, market participants must be encouraged to step in and fill the gap.

President Xi Jinping’s pledge to accelerate the country’s transformation to a green and low carbon economy, and to achieve carbon neutrality before 2060, has opened the door to a much more strategic view on how China’s green finance market should develop, and which technologies should be incentivized.

China is ready to take the reins from the EU. It understands that ESG-focussed investors have become more forensic in their research and decision-making on what the different taxonomies recognise.

Russia is also reading the tea leaves. It published its Green Taxonomy this week which only considers gas as ‘green’ if it meets the same caveats as the EU Taxonomy currently requires (ie. lifecycle emission of <100g CO2/kWh). New gas projects will not be funded using green capital with such tough restrictions.

Energy planners are setting the stage for our future

The EU’s Taxonomy backflip is not welcome

As investors shift their focus to the sustainability credentials of businesses, policymakers will have to weigh the odds carefully. Somehow justifying the role of gas in decarbonisation plans does not make them green investments.

The EU’s ambitions to be a leader in green finance standards means it has a responsibility to employ sound and defendable rationale that will set the tone for the rest of the world.

The EU’s Taxonomy backflip is not welcome.

Gas should not be recognised as a ‘green investment’ in any taxonomy.

By Christina Ng, Research and Stakeholder Engagement Leader – Fixed Income, Institute for Energy Economics and Financial Analysis (IEEFA)

This commentary first appeared in Responsible Investor.

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