Every nation would do well to emulate Europe’s Green Deal approach. Here’s how it works.
“The Green Deal is at the centre of the EU’s plan for post-Covid recovery,” Diederik Samsom, head of cabinet of the vice-president of the European Commission said last week on a webcast from the Stockholm Environment Institute.
“After the pandemic we are going to have one of the biggest economic crashes we have experienced, so we want to invest in the new economy that is already going to be sustainable, not reboot the old one and then try to green it.”
The recovery fund is worth €540 billion [AUD$889.74 billion].
“The human reflex can be to pick up and go on as before, but the real challenge is to address this impetus, to persuade everyone that it’s about real recovery and so we have reshaped the Green Deal.
“For example, it will include energy efficiency renovation of buildings, which is labour creating.”
The just transition
“Another vital part is the Just Transition Mechanism, to which the EU decided to apply the Taxonomy last Thursday, and we have made this better than it was before. €40 billion [$65.9 billion] are now allocated to the Just Transition, to be spent in regions that were lagging behind before and now will be even more,” Samsom continued.
The fund will “promote social fairness in the transition towards a climate-neutral economy in the most vulnerable coal- and carbon-intensive regions” such as Poland, he said.
“Everyone is looking for leadership from the Green Deal,” said Sandrine Dixson-Declève, co-president of the Club of Rome. “We’ve been called anti-growth, we’re not – it’s a new growth paradigm – meaning prosperity, natural capital. The Chinese are rethinking GDP so that their society can work within planetary boundaries. We can’t prop up the old system, and many countries are saying they don’t want to go back, we must be brave.” She praised those countries that have a well-being ethos like Wales and New Zealand.
Bas Eickhout, a Green MEP and vice-chair of the committee on the environment, public health and food safety, issued a note of caution. “We don’t know how the European Commission will judge the recovery plans of member states, and on what basis they may be challenged. There’s also state aid, which is about €2000bn and we don’t talk about that, will it be subject to the same rules?”
How it will work: Green Bonds and the EU Taxonomy
Some of the most important work going on today to tackle climate change is not at the frontiers of technology or on the barriers but in work that to many may seem obscure and dry: the development of taxonomies.
These taxonomies are not just any old lists, but lists of initiatives and technologies that qualify for climate or green bonds. These bonds, issued by companies and governments to raise finance, are like any standard bond but with a bonus feature – the proceeds are used to tackle climate change.
This type of finance is attracting huge interest from many of the world’s largest asset managers and pension funds. Most use “environmental, social and governance” (ESG) frameworks to guide their investments so they reduce pollution and unethical behaviour.
And if all goes well, they will be used to steer the European Union’s post-Covid-19 recovery plan.
Other lists are being used in China, where companies led the world last year, selling $33.6 billion of green bonds, according to data group Dealogic, and in different countries around the world.
Different shades of green
But there are many different standards for what constitutes “green”. “The variety of local standards and their divergence from internationally recognised frameworks, such as the Green Bond Principles or the Climate Bonds Initiative, require global investors to do more diligence to verify whether the use of proceeds are targeted at green projects,” says Singapore-based Paul Lukaszewski, Aberdeen Standard Investments’ head of corporate debt for Asia and Australia.
Sean Kidney, the CEO of the Climate Bonds Initiative, an international, investor-focused not-for-profit, says such standards absolutely must be in line with the Paris Agreement. This sets out a global framework to avoid dangerous climate change by limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C.
He says that “green bonds were experiencing the fastest growth in the world before the pandemic. They have been superseded by Covid bonds, but of course they are similar in a sense.”
The EU Taxonomy: a green list
Kidney has been leading a team of fifty experts who have created the EU Taxonomy, “an EU classification system for sustainable activities”. “It’s a lexicon, a common language,” he calls it. “It’s about minimising risk for investors.”
The experts are also producing criteria for identifying economic activities that can make a substantial contribution to climate change mitigation or adaptation, while avoiding significant harm to four other environmental objectives: sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention control, and protection and restoration of biodiversity and ecosystems.
This will inform all investment made under the European Union’s new Green Deal. This was announced at the end of last year and, since the pandemic, has assumed much greater importance.
Samsom said the EU needed to show it was serious by also applying the Taxonomy criteria to goods imported from elsewhere in the world “so we’re not dumped on by products that don’t meet our specifications.”
Broadening the influence
Samsom also said that the EU “might invest in companies, take a share and do the due diligence”. One consequence of this is that the prospects for trade disputes become huge. To this end, Kidney’s team has also prepared Excel tools to help users of the Taxonomy to implement it in their own activities. Kidney feels that a new form of World Trade Organisation may be required to manage the application of such rules globally.
For this to happen, the use of taxonomies needs to spread throughout the world, and all the different rules that are currently applied to green bonds need to be slowly harmonised in line with the Paris Agreement.
Kidney, speaking on a webinar organised by the Canada Climate Law Initiative, says that taxonomies are “getting popular – Malaysia, New Zealand, maybe Mexico, Canada. They’re not so far from one another.”
“What I’ve seen [in China] is the rapid growth of the market but a slight increase in harmonisation with international standards,” Xuan Sheng Ou Yong, a green bond analyst at BNP Paribas Asset Management in Hong Kong, told the Financial Times recently.
Kidney agrees. “China’s is pollution-focused because their pollution is bad. Last Friday, the People’s Bank introduced an updated taxonomy, and removed coal from it. This makes harmonisation easier but still allows some carbon emissions. They introduced sustainable agriculture and geothermal energy.
“Each country has to learn from the other,” he says. “The EU and China, if they get together and harmonise the others will probably follow. Canada, currently developing a taxonomy, will align with the EU one.”
Tightening the screw
The taxonomy follows the science of climate change. Therefore, the reductions of emissions necessary to avoid catastrophic climate change are severe “and this has ratcheted up the taxonomy,” says Kidney.
“There is therefore no new fossil fuel or nuclear investment permitted. It’s changing fast. In 2017 the environment ministry in Israel was proud of switching from coal to gas. Bad news. Gas is now out unless it is with carbon capture and storage if that is financially viable.
“This is what the taxonomy can do, rule out a technology. In the building sector, 40 per cent of reductions must be made by 2050. We are encouraging the circular economy, pollution-control, ecosystem improvement and natural capital.”
Investors like the mitigation idea too, he says.
Of course, alone it is not enough to meet the Paris requirements which is why the OECD and the International Energy Agency have called on governments to seize the opportunity of historically low oil prices to redirect some of the half a trillion dollars spent annually supporting fossil fuels into sustainable investment including low-carbon energy.
Kidney compared what the IPCC has predicted with what happened in the 16th century, the last time there was climate change when the global temperature dropped by 10°. “We didn’t experience this as everything getting slightly colder, we experienced a series of sudden shocks. We had the Black Death, famines and wars from Europe to China. We lost the third of the world’s population. The IPCC predicts the same thing, a series of sudden shocks, happening this century, including pandemics, and this is the first”.
The taxonomy makes it easier for people to understand risk; it looks at all the different sectors. “We’ve put into thresholds in place which will tighten over time to ratchet down to zero emissions by 2035,” says Kidney. “Hydrogen is labelled according to how it is being generated. It will be big in the future.
“Oil will virtually disappear as a use for fuels within a decade,” he continues. “We believe bitumen will become an important end use for stockpiles.
“Materials used as components of things are problematic if some of them are used for non-sustainable purposes as well as sustainable ones. For example metals. Mining is critical to get the rare earth and other metals necessary for the energy transition. These are the type of transition issues we need to tease out. Fifteen per cent of buildings will become eligible for green bonds, rising to 30 per cent within a few years.”
European thinking is aligning. For the first time, a broad community of NGOs has also agreed on a common energy scenario. Under the umbrella of the PAC project – “Paris Agreement Compatible Scenarios for Energy Infrastructure”– the Climate Action Network Europe and the European Environmental Bureau have developed an energy scenario for Europe which aims at 100 per cent renewables in Europe by 2040 in all sectors, a 65 per cent reduction in greenhouse gas emissions by 2030 and net-zero greenhouse gas emissions by 2040.
Never have lists seemed so important.
David Thorpe is the author of ‘One Planet’ Cities: Sustaining Humanity within Planetary Limits. He also runs online courses such as Post-Graduate Certificate in One Planet Governance.