Despite being called on by NGOs to implement a brown taxonomy, the European Commission has chosen another path. It recently sent a letter of engagement to the Platform on Sustainable Finance - the expert group who advises the Commission on the subject - to request a brief on the use of the EU Taxonomy in the transition to more sustainable models by March 15th. Sent on January 19th to members of the Platform on Sustainable Finance, this letter of engagement raises questions about the Commission's intentions.
1- Should the EU Taxonomy decision-making process be delayed?
The Commission should have published the final delegated act implementing the EU Taxonomy on December 31st, 2020, with the regulation due to come into force at the beginning of 2022. The first delay was due to the record number of responses to its public consultation. To examine nearly 50,000 responses, the Commission decided to postpone publication until March 2021. The new letter of engagement will further delay this review. The Commission asks the Platform on Sustainable Finance to consider whether other activities - not included in the current Taxonomy - could be subject to it.
Therefore, a new framework for the EU Taxonomy will have to be included in the final delegated act, which could justify new consultation and an extended deadline for processing thousands of replies. This would set back the text allowing for the implementation of the EU Taxonomy to at least the end of 2021. Therefore, the risk is losing at least one year in the race to achieving the European Union’s climate objectives.
2 – Are some states forming a blockade against the EU Taxonomy?
Two member state blocks seem very upset with the EU Taxonomy. The first block – led by Poland - is comprised of eastern countries that wish to include gas in the Taxonomy as a transitional energy to replace coal. The second block – comprised of Scandinavian countries - wants to preserve its forestry industry.
"There is enormous confusion about what the transition is in the EU Taxonomy," affirms Sébastien Godinot, Economist at WWF Europe, member of the Platform on Sustainable Finance. Under the EU Taxonomy, transition activities include those for which there is no alternative and also absent of greenhouse gas emissions, such as cement and steel. In the energy sector, there is an alternative to fossil fuels with renewable energy. Godinot continued: "as such, gas cannot be considered a transitional activity”.
Instead, the inclusion of gas has been put on hold as it has been subject to heated political debate since 2019. Two years on, the political risk of seeing an alliance formed between states and industrialists wanting to delay the transition to a dark green taxonomy remains unchanged.
For example, Poland’s energy mix is incompatible with the EU’s climate objectives. Yet, despite the adoption of the Green Deal, negotiations between the two parties do not appear to have started. The strong presence of industrial lobbies in the Platform on Sustainable Finance has raised questions around the applicability of the EU Taxonomy in sectors where many companies have not even thought about the transition process. The letter of engagement publicly reveals the political difficulty of building a consensus around the Taxonomy and how it should be used in the forthcoming delegated act.
3 – What is the impact of the Sustainable Finance Action Plan on other regulations?
The clear delay in adopting the EU Taxonomy also impacts two key dimensions in the system: the overhaul of the Sustainable Finance Disclosure regulation (SFDR) for companies and its entry-into-force in March 2021. The SFDR should encourage companies to communicate on the green share of activities aligned with the EU Taxonomy, so it is necessary to wait for this to be clearly defined. Implementation of the SFDR is compromised by this delayed schedule. Without the precise information that the Taxonomy provides on the environmental qualities of a project, investment, or company activity, it will be difficult to build strong and credible environmental impact indicators.
For all these reasons, Godinot warns: "the European Commission must have the courage to do its job and not give in to the loudest lobbies". For the WWF, if gas was introduced into the EU Taxonomy, it would be so incompatible with Europe's climate objectives that it would be better if there "was no taxonomy at all"!