How a taxonomy of green definitions can help economies go carbon neutral by 2050
Everyone who starts thinking about the bleak likely consequences of runaway global warming – whether freak weather, rising seas, climate refugees, melting icecaps or financial meltdown – ends up by wanting to be more green.
But how? What does it actually mean to be green?
This might sound a philosophical question, but it has profound practical implications for business. In the early days of climate anxiety, business answers were freeform and sometimes a bit hit-and-miss. Was a more efficient coal mine green, if it produced less polluting kinds of coal than before? Was that efficient coal mine still green if you compared it with a solar plant? What was green enough, what was good enough, and what was just “greenwash”? No one really knew.
This lack of definition has gone on creating headaches for anyone trying to invest in green technologies, through a growing array of green financial instruments – bonds and loans – that aim to direct their money at virtuous businesses doing well at going green.
“The financial systems in Europe and elsewhere need to be made fit for purpose. They are still not specifically addressing climate change issues,” comments one expert in the field, Carel Cronenberg of the European Bank for Reconstruction and Development (EBRD). He should know. The EBRD has systematically tracked its own green investments since 2006, and he is responsible for its system.
Three years after the international community pledged to limit global temperature rises caused by greenhouse gas emissions to no more than 2C and if possible to a more ambitious 1.5C, climate change is broadly acknowledged as one of the key risks to financial stability. Among ambitious responses is the European Commission’s plan to motivate European business to go carbon neutral by 2050.
But what is still needed is a generally accepted measurement of business greenness.
And now – at last - it’s coming.
Cronenberg is one of the team of experts helping the European Commission put its plan into practice. This 30-strong technical experts’ group is now completing work on compiling a vast system of green definitions – a “taxonomy” - that will give all businesses obeying European Union regulations a detailed blueprint for doing their work in a way that can both successfully achieve the goal of carbon neutrality by mid-century, and be accurately measured.
“A lot will need to change. But doing this is possible and more cost-effective too,” he says. “The costs if we get beyond 2C are much higher than the costs we need to incur to change the economy to keep well below 2C.”
Last Thursday, at a London conference for the Climate Bonds Initiative, Cronenberg briefed green financiers on his group’s progress. “What the taxonomy group is doing is basically making an official list of all economic activities – there are about 1100 activities on it – and for each activity we define what actions are needed to get to a low carbon pathway,” he explains.
Defining exactly what those actions should be, for sectors from electricity production to cement production to steel production to car production to education and ICT and health services, is “a huge amount of work. But once it is in place then every commercial enterprise in Europe will have a blueprint that tells it, ‘this is how to move towards carbon neutrality.’ There will be a regulatory framework that defines what green activities are. So instead of everybody having the freedom to define the efficient coal plant as green, or say ‘we only want solar’, we’ll get standardisation. It will become very clear, say, that certain hybrid cars will be counted as green and others will not. This is really about change through market-based approaches, labelling activities as green and setting the standards for that.”
This change is coming soon. The climate change taxonomy group’s work ends in June, with a report. Then a European Union platform will be established, extending this work on climate change finance widthways, and linking up with work on defining other environmental impacts such as biodiversity, pollution, water supply. The climate change taxonomy “needs to be in place by 2020”.
It’s is a European initiative. But Cronenberg talks of parallel groups at work in the UK, in Canada, among multilateral development banks, and discussions with China, as standardising the measurement of “green” goes global. “The idea is that that there will be a worldwide taxonomy.”
Once in place, Cronenberg believes the taxonomy will transform financial markets, which are hungry for a better understanding of what economic activities genuinely count as green and can help reduce the risk of climate change.
There is already a flourishing green bond market, worth over €160 billion in 2018, and though it’s still only a fraction of the size of the global bond market, catering for niche investors including the EBRD, it is expected to grow further. There are also green loans, equity and more.
But, if the world is to shift to a low-carbon and climate-resilient economy, trillions of dollars more investment urgently need to shift into green-focused finance.
Standardising definitions of greenness through the taxonomy will boost these green markets further, says Cronenberg, since a company raising money through a bond will be able to define its product far more precisely in green terms, “say, 70 per cent in compliance with the taxonomy. You’ll have the freedom to say, ‘well, we only do a certain part of the taxonomy – renewables but not energy efficiency.’ You have a reference to show investors exactly what you’re doing.”
This in turn will make it easier for commercial investors and central banks to choose their investments with their green policy in mind.
As Cronenberg says, “this is about transforming the financial market – trying to move finance to the green bits, towards the green frontrunners, while on the other hand a lot of bottom-up regulatory work goes on to ban the bad stuff at the other end of the market.”
Interestingly, he adds, it’s the market - and not legislators, governments or institutions - that is leading the current push for better definition and standardisation. Public officials are “just running to catch up with private sector demand.”
“You see, investors are very much aware of climate risk. They are taking temperature rises of 3C and more into account, asking what that will look like and what are their assets at risk, because they have a non-political perspective. With respect to climate risks the private sector is more front-running than governments at the moment.”