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ClientEarth Communications

2 February 2022

Climate finance
Fossil fuels
Clean energy
European Green Deal

What’s wrong with the EU’s new green investment rules?

If we want to solve climate change, we need to change where the money goes. And for that, we need rules.

The EU’s taxonomy for sustainable investment is critical in reaching the EU’s ambition of net-zero emissions by 2050. The taxonomy, which at first sounds very technical, is here to tell us what can be classified as sustainable climate-friendly investment.

But so far, Brussels is facing resistance on all fronts. What’s wrong with the EU taxonomy and what is ClientEarth doing about it?

What is the EU taxonomy?

At this moment in our fight against climate change, the way money is allocated could be make or break. But how can we make sure that the money is directed towards climate-friendly projects, both targeting climate mitigation – such as renewable energy businesses – or working on adaption solutions in areas hit hardest by climate change? The EU taxonomy was created to provide responses to these questions. It is a classification system, establishing technical criteria – for example the amount of CO2 emissions – for certain economic activities. When a listed economic activity complies with the taxonomy criteria it may be considered environmentally sustainable for investment purposes.

It aims to provide companies, investors and policymakers with appropriate definitions for which economic activities can be considered ‘green’ in financial disclosures and reporting. In this way, it should create clarity for investors and companies about which activities are sustainable, prevent greenwashing, and help shift investments where they are most needed.

But in its current form, it’s failing on all counts.

Our legal action against the taxonomy

In June 2021, a first series of activities were labelled as sustainable in the taxonomy. This includes bioenergy, bio-based plastics and chemicals used to make plastics. These activities supposedly “contribute substantially to climate change mitigation or adaptation” and do no significant harm to the environment.

But the logic behind this is majorly flawed. For example, scientists warn that burning wood for energy – which comes under the category of ‘bioenergy’ – has a severe environmental impact and is far from carbon neutral, producing more CO2 emissions than burning fossil fuels and fuelling logging linked to deforestation.

Our forests lawyer Filippo Mattioli said: “To claim that forest biomass significantly contributes to combatting the climate crisis is absurd. The Commission is currently encouraging investment into biomass under a false label of sustainability, disregarding the clear scientific warnings over the harm it will cause to the climate and biodiversity.”

Similarly, ethylene, propylene and the other chemicals in question are made of fossil fuels and they are mostly used to make single-use plastics – which release carbon into the atmosphere after they are disposed of. Bio-based plastics are also mainly used for single-use plastic applications.

Our plastics lawyer Tatiana Luján said: “Classifying these as sustainable is not only stupefying, it’s also unlawful. As it stands, the EU taxonomy will only increase investment in plastics instead of promoting the much-needed shift to a circular model.”

Ultimately, this system for enabling ‘green investment’ is set to perpetuate the old model of funding climate harm.

That’s why we filed an internal review request to the European Commission for unlawfully labelling bioenergy, bio-based plastics and chemicals used to make plastics as “sustainable” in the EU taxonomy. An internal review request is the first step NGOs have to take before being able to bring a court challenge.

The European Commission now has 16 weeks to reply to this internal review request. If the reply does not fix the breaches of law, we can challenge the decision before the European Court of Justice.

What about gas?

The name “natural gas” hides the truth about the environmental damage caused by this commodity. Gas is natural in the sense that it naturally occurs within the Earth’s surface – just as oil and coal do. And like oil and coal, exploiting it and burning it has huge climate impacts: burning gas emits far more carbon dioxide than we’re led to believe.

But there is another threat: in the process of extracting, transporting, and distributing gas, potent methane – its main component – leaks into the atmosphere. Methane is a powerful greenhouse gas with a global warming potential 86 times that of carbon dioxide over a 20-year period.

The inclusion of gas in the taxonomy was so hotly debated that the European Commission delayed its decision for months. But finally, the Commission has now unveiled its final proposal, which classifies different gas and nuclear-based economic activities as transitional activities and therefore as ‘sustainable’ investments.

We have done our own legal analysis and found that including gas in the taxonomy would clash with EU laws, for example the EU’s obligations under the Paris Agreement and the recently adopted European Climate Law with its commitment to a climate-neutral Europe by 2050.

Our lawyer Marta Toporek said: “Branding gas as transitional and green in the taxonomy clashes with a number of EU laws, including the EU’s obligations under the Paris Agreement, the European Climate Law and – amazingly – the Taxonomy Regulation itself. Failing to take these legal obligations into account puts the Commission at serious risk of legal challenge.

“We now urge the European Parliament to prevent a disaster in the making and veto the Commission’s proposal.”

We’re not the only ones sounding the alarm. Financial players are against the inclusion of gas in the taxonomy. The Institutional Investors Group on Climate Change (IIGCC), which has €50 trillion of assets under management, has repeatedly called on EU leaders to exclude gas from the EU Taxonomy, as it would undermine its credibility and the EU’s own net zero commitments.

The EU Commission’s own advisory body on the topic, the Platform on Sustainable Finance, has also slammed the European executive on a draft it received for consultation late in December. The 57-member body said it had "doubts about how the draft criteria would work in practice and many are deeply concerned about the environmental impacts that may result."

With that in mind, it’s clear that failing to take these legal obligations into account puts the Commission at serious risk of legal challenge. We will not hesitate to legally challenge gas in the taxonomy.

The EU Taxonomy beyond climate

In addition to climate mitigation and adaptation, the taxonomy will eventually cover water and marine resources, circular economy, pollution prevention and control, biodiversity and ecosystems protection. That’s why it needs to be as robust as possible from the start.

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