ForTheDoers Blog

EU Taxonomy should be beefed up to support carbon neutrality

Merja Paavola  ·  18 December 2020

The EU recently issued draft delegated acts on climate change mitigation and adaptation. The EU taxonomy for sustainable activities creates a classification for sustainable economic activities to help the EU reach its ambitious climate targets. The intentions are good, but in its current form, the taxonomy is likely to prove counterproductive.

The stakeholder feedback deadline for the taxonomy is today, 18 December 2020. Together with several other Nordic energy companies, Fortum has expressed its significant concerns relating to the delegated acts.

We at Fortum are committed to working towards a carbon-neutral European economy and fully support the EU’s ambition to mitigate climate change. We firmly support the EU objective of climate-neutrality by 2050, as well as a sound framework aimed at channeling the investments needed to implement the ambitious EU climate targets in line with the Paris Agreement.

However, the delegated acts proposed by the Commission include requirements that make it harder to reach the goals of the Paris Agreement. The taxonomy in its proposed form places certain CO2 free energy forms in a disadvantaged position by imposing stricter, and to a large degree counterproductive, criteria on them. Whilst the purpose of establishing sustainable financing is well-intended, we fear that the current draft delegated acts on EU Taxonomy will rule out over 40% of European net electricity generation and 2/3 of European CO2 free electricity power generation.

The taxonomy holds significantly stricter sustainability criteria for hydropower, which is used extensively in the Nordic countries for balancing the power system, than for solar or wind power. This, in our view, goes against the principle of technology neutrality, which should be the basis for EU level regulation of sustainable energy production. Ironically, this might hinder the much-needed growth of solar and wind power as hydropower is the main enabler for these technologies. Hydropower is unique in the way it provides double environmental benefits; it is renewable and it enables more renewable power to be connected to the grid.

The proposed criteria would lead to a large share of existing hydropower being classified as non-sustainable in the context of the taxonomy. This again could have impacts on energy companies’ possibilities to receive financing for hydro projects as financing institutions would take into account taxonomy alignment in their credit decisions. Although there is not much potential for new hydropower investments, major investments are made each year to refurbishing existing hydro plants and dams and improving their efficiency. Higher capital cost translates to higher production costs and hence reduces the competitiveness of hydropower compared to other renewable energy production.

Existing EU legislation, namely the water framework directive, already includes sustainability aspects regarding hydropower and the treatment of waterways. It has been applied for two decades and has steered water-related environmental and biodiversity measures successfully. Unlike the taxonomy, the water framework directive with its national applications also takes into account local biological conditions – what is an effective biodiversity investment for a river in Northern Sweden will not benefit a river in the south of France. Therefore these matters should not be regulated by generally applied and geographically blind criteria.

In addition to the problematic treatment of hydropower, the taxonomy leaves the criteria for nuclear power for a later stage. This creates an imbalance that makes it very difficult to assess the impacts of the taxonomy. Considering all power production forms at the same time would create a better environment for holistic analysis of different energy mixes.

As for hydrogen, the proposed criteria seem to exclude all production means but renewables, and even the Nordic energy grid mix would not be clean enough for sustainable hydrogen production. This kind of approach would be highly counterproductive when it comes to increasing hydrogen power development by excluding virtually all existing grid mixes in the EU. Wind and solar will represent an important bulk of the residual power mix, but they are not enough. We should make sure that we tap into all available CO2 free generation if we want to effectively decarbonize the European economy.

Furthermore, bioenergy is classified as a transitional energy form in the taxonomy, again going against the principle of technology neutrality. This classification is also in contradiction with the recent RED II directive which includes sustainable criteria for solid biomass. The directive is not set for a limited time and therefore does not consider bioenergy as transitional.

In addition to the content of the taxonomy, Fortum is concerned by the institutional aspects of the proposed delegated acts. In the EU legal framework, comitology procedure such as this one is intended for supplementing or amending non-essential parts of EU legislation. Imposing sustainability criteria that go beyond existing legislation should not, in our view, fall within the power of this procedure. This view is shared by Kim Talus, Professor of European Economic and Energy Law, in an article published in December 2020 by OGEL.

In Fortum’s view, the best way forward would that the European Commission takes the necessary time to review the delegated acts to ensure that they take a holistic view on the contributing energy sources. An impact assessment is also needed to evaluate the effects on not only the energy industry but on end users of energy, such as stock listed companies with non-financial reporting obligations. Technology neutrality and alignment with existing legislation should be the driving principles of the process.

It is likely that the taxonomy will serve as a basis for forthcoming legislation, and it is therefore vitally important to make this basis as solid as possible. We fear that the taxonomy or its underpinning principles will be used to govern the EU decarbonization process in a way that makes it impossible to meet the demand for clean energy. A regulatory measure that slows down the energy transition and discourages innovation – a likelihood mentioned in the Swedish ELS analysis of the taxonomy – is, in itself, unsustainable.

Merja Paavola

Merja Paavola

Corporate Vice President, Public Affairs
Tel: +358 50 396 1161
merja.paavola@fortum.com

Anton Steen

Anton Steen

VP, Public Affairs Sweden
Tel: +46 70 2446942
anton.steen@fortum.com

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