Financing the EU energy transition

This opinion piece was firstly published on EURACTIV.

The Taxonomy Regulation, a classification for “environmentally sustainable investments”, on which political agreement was reached on 16 December 2019, is the central element of the EU sustainable finance action plan.

Its purpose is to identify economic activities that substantially contribute to environmental objectives, such as climate change mitigation or pollution prevention, while not causing significant environmental harm elsewhere.

In light of the ambitious transition to climate neutrality which the EU is considering, made even more challenging by the economic impact of COVID-19, the aim of the taxonomy should be to clarify and facilitate the effort of all the stakeholders engaged in this process.

Coherence between the overarching provisions in the sustainable finance initiative and sectoral policies – such as ensuring a safe, secure, sustainable and affordable energy supply underpinning the Energy Union – remains crucial for the implementation of effective measures to support sustainable investments.

Technical screening criteria need to consider all technologies and emissions along life cycle

The Technical Expert Group (TEG) on Sustainable Finance, mandated by the European Commission, recently published its final report on the taxonomy including recommendations on the application of technical screening criteria to identify environmentally sustainable activities, which the Commission will develop through delegated acts.

Additional inputs may come from the Platform on Sustainable Finance that should be operative in the 2020 autumn. We believe the Platform should ensure broad and comprehensive representation of all stakeholders, and notably industry, including manufacturing, energy and transport.

This will assure a stable investment climate in Europe and consideration for high potential low-carbon solutions which may currently not have been assessed in a holistic way.

The formalization of the technical screening criteria through delegated acts in the coming years will kick off with those for climate change mitigation by end 2020.

Criteria should be defined with utmost consideration for the relevant sectoral EU legislation, which should remain in our view the main reference, especially in terms of CO2 emissions along the life cycle, market and technological evolution.

GasNaturally agrees with an approach that sees technology-neutral threshold levels based on GHG emission reductions. Specific country and system needs should be considered so as to ensure that gradual or stepwise emissions reductions are possible.

The criteria also need to take into account the scalability of a given technology, its potential for multiple applications, in addition to potential cross-sectoral effects and learnings.

Transitional activities and new technologies both necessary to achieve climate and energy objectives

The adopted EU Taxonomy Regulation introduced a new category of “transitional activities” which is of key importance in our view. Indeed, there is enormous potential in the market for the transformation of existing carbon-intensive industries and processes, whether emission reductions through switching to natural gas in heat and power generation, or uptake in energy-intensive industry or transport (LNG/CNG).

In sectors such as agriculture, improved manure management for biogas production can be achieved whilst reducing methane emissions. The most substantial contribution to the EU’s environmental objectives will be transitioning existing activities to a more sustainable footing and we believe, therefore, that an additional list of transitional and retrofit activities needs to be created.

This category, recognised by the Taxonomy Regulation, would highlight feasible, near-term steps that will act as building blocks and provide near-term options to reduce emissions in a bid to deliver the Paris Agreement and the EU climate-neutrality target.

For instance, the recommendation of the TEG to exclude the expansion of gas infrastructures in the taxonomy would represent in our view a detrimental message for the viability of the energy transition. Investment in gas infrastructure remains crucial to abate emissions in Europe, both through natural, renewable and decarbonized gases, as through hydrogen, which could be transported cost-effectively using existing gas infrastructure with technical adaptation.

Whilst we welcome the fact that retrofits and upgrades to existing infrastructure are covered by the report, we call for the possibility for expansion to be considered too. Indeed, whilst this would be key for a coal-to-gas switch in many countries, it would also be required for the connection of new renewable and decarbonised gas sites which otherwise could not be connected to the gas grid.

It is crucial here to consider that the sustainability of investments into gas infrastructure should be judged based on the molecules flowing through it and the GHG reduction potential those provide.

While we encourage the Commission to incorporate a section on transportation of hydrogen, we welcome the sections on manufacturing/storage of hydrogen as environmentally sustainable activities within the TEG report, as well as the classification of CCS-related-parts.

We believe that all low-carbon technologies, such as power-to-gas technologies, blue hydrogen production processes such as Steam Methane Reforming or Methane Pyrolysis, complemented by CCUS technologies, would need to be further developed towards full technological maturity.

GasNaturally hopes that these technologies will be considered in the upcoming delegated acts and provide a stable, long-term framework for EU policies that drive investments in these low-carbon technologies.

Realistic timeline is needed to ensure proper implementation of rules and success of transition

To ensure a smooth and proper implementation of the future rules, a realistic and well-sequenced application timeline is needed, especially regarding disclosure obligations. It means ensuring there is sufficient time between the publication of the final technical measures and the application date of various delegated acts.

The taxonomy should facilitate the effort of all stakeholders engaged in achieving the EU’s climate and energy objectives. Its main objective, namely that of informing private investors of which investments should be considered sustainable, should be aligned with the overarching objectives of the EU’s climate and energy policies.

We call upon the European Commission to ensure policy coherence and to explicitly recognize the contribution of transitioning existing activities in achieving climate neutrality.