The EU is considering bowing out of a gold standard taxonomy, leaving room for China to take the lead
IEEFA’s Christina Ng discusses the EU’s plans to include gas in its taxonomy and what it means for the world
Note: This article was amended after publication to clarify that the documents relating to the Net Zero Asset Owner Alliance were internal, and do not represent the body's official position on gas and nuclear.
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.
This is despite a leaked document from members of the UN-backed Net-zero Asset Owner Alliance, which represents around €9trn, suggesting they are against including gas and nuclear in the EU taxonomy.
Yet here we are.
And if gas is recognised as green energy in the taxonomy, it would qualify for green finance.
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. Even if it is needed in the interim - for manufacturing purposes, for example - or if it has a short-term role to play in decarbonising economies, that does not justify it being awarded green status, or green finance.
Green or sustainable finance taxonomies are supposed to support the funding 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, 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. It now prescribes 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-focused 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 to the EU’s green taxonomy - now excludes gas, LNG and coal-fired power activities. Reading the market, 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 $22trn 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 incentivised.
China is ready to take the reins from the EU. It understands that ESG-focused investors have become more forensic in their research and decision-making on what the different taxonomies recognise.
Russia is also reading the tea leaves. This week, it published its Green Taxonomy, 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
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.
Christina Ng is Research & Stakeholder Engagement Leader for Fixed Income at the Institute for Energy Economics and Financial Analysis