Fossil loopholes go dangerously unnoticed in EU Sustainable Finance Rules

Publish date: December 15, 2020

The EU’s new rules on sustainable finance has been a hotly debated topic throughout 2020. Changes to the criteria for climate mitigation have sparked warranted debate on the so-called Taxonomy’s alignment with the EU’s 2050 climate target. The parallel process for climate adaptation, however, have passed many onlookers by. Not paying attention to the potential fossil loopholes introduced in the adaptation criteria is a mistake, jeopardizing the credibility of the Taxonomy.

As covered by FT on the 6th of December, climate experts warn that the removal of the automatically declining climate mitigation threshold in the EU’s Sustainable Finance Taxonomy risks its alignment with EU’s 2050 climate target. With all eyes fixed on climate mitigation, however, loopholes for fossil fuels have been able to slip seemingly unnoticed into the section on climate adaptation. 

The EU’s new rules on sustainable finance has been a hotly debated topic throughout 2020. Changes to the criteria for climate mitigation have sparked warranted debate on the so-called Taxonomy’s alignment with the EU’s 2050 climate target. The parallel process for climate adaptation, however, have passed many onlookers by. Not paying attention to the potential fossil loopholes introduced in the adaptation criteria is a mistake, jeopardizing the credibility of the Taxonomy

Distinctly different from the other 5 objectives of the Taxonomy, climate adaptation alone addresses the climate’s effect on economic activities, as opposed to economic activities’ effect on the climate. Inherently, determining the sustainability of climate adaptation solutions must take into consideration local and context specific conditionsAs a result, the adaptation criteria are more qualitative and to an extent more flexible than the climate mitigation criteria. We cannot allow this flexibility to be taken advantage of, specifically as a back door entry for investments into unabated fossil gas and related infrastructure under the guise of sustainability. 

While any investment addressing solutions to physical climate risks could be an adaptation measure, the Do-No-Significant-Harm (DNSH) criteria is meant to ensure such adaptation investments do not entail a detrimental climate impact – sadly their current form is not up to the task. 

Firstly, the DNSH threshold criterion of 270g CO2e/kWh direct emissions warrants the same criticism as the 100g CO2e/kWh mitigation threshold – as covered by FT on the 6th of December. As an absolute valuelacking any reference and with no proposed decline over timeit does not ensure continued relevance of the TaxonomyThe reference to direct emissions alone moves away from a full life-cycle approach to counting emissions, not taking into account upstream emissions from power production – in the case of gas, highly significantHowever, it gets worse. 

The DNSH safeguard criteria could in fact be partly or wholly circumvented. Partly, by combined burning of hydrogen with fossil gas, with numbers from think tank Ember suggesting an allocation of 20% hydrogen to 80% unabated fossil gas as sufficient. Wholly, by a creative interpretation of exemptions providing projects with a life-span below 10 years the benefit of a DNSH based on downscaled climate projections

Without clarifications on what determines the lifespan of such a project, claims of planned future shifts to low-carbon alternatives could be presented as an end to the current activity. Thus avoiding the DNSH threshold now, without any enforceable guarantee or claw-back possibility once the “sustainable” investment is secured. This would not only allow the investment in question to circumvent any allegations of lock-in, but also provide investment prolonging the lifespan of high-emitting activities such as unabated fossil gas with a sustainability label under the Taxonomy. 

Additionally, it is unclear if the Commission’s removal of the original draft wording ensuring that “only the cost of the actions required to adapt the activity can be counted” is a purely administrative formality to be addressed in the development of delegated acts under Article 8 in the Taxonomy, or a clear policy signal. In the latter case, we risk investments in pro forma adaptation solutions enabling the continued operation of high-emitting activitiesunder the guise of sustainable finance

To summarize, following years of intensive debate on the role of fossil fuels in the EU Sustainable Finance Taxonomyclimate adaptation criteria cannot be allowed to open a backdoor for fossils to sneak back inside. Such a development would not only delay the transition to a low-carbon economy, it would damage the credibility of the Taxonomy as a wholeLoopholes must not be allowed to sink this crucial policy and the vital part it is set to play on the path to a climate neutral Europe by 2050.