In a bid to accelerate the energy transition, the European Commission (EC) recently published its draft proposal for an EU Taxonomy. The initiative aims to classify investments making a substantial contribution to the European Union’s (EU) fight against climate change. The proposal sets strict criteria to be labelled “environmentally sustainable”. Yet, skimming through the 500 pages of the text, industrial players and investors may find that one element is missing: the very notion of “transition”.
Among the flagship criteria proposed by the EC is the one-size-fits-all emissions threshold of 100g CO2e/kWh for sectors listed as climate change mitigation activities. That limit is so low that only very few energy solutions are currently able to comply, mainly solar and wind. That leaves many leading European industries, such as the chemical, food and drink, ceramics, pulp and paper and alumina sectors to name a few, with limited choices when seeking funding or getting loans to accelerate their energy transition. Indeed, they need a lot of energy, in particular continuous high temparature heat supply for 24h/7 running production lines. Such heat types cannot be electrified for technical or financial reasons.
Many wonder why such a low threshold was set as a starting point when the carbon intensity of electricity today is on average 296g CO2e/kWh, according to the European Environment Agency. It is even closer to 446g CO2e/kWh or higher when heat or transport are electrified, says The Research Center for Energy Economics in a recent study.
The EU taxonomy Regulation foresees situations where there are no technologically and economically feasible low-carbon alternatives and stipulates that these should qualify as sustainable in so-called “transition activities”. The EC‘s proposal is at odds with this obligaton, for it requires these activities to also meet the - not quite transitional - 100g CO2e/kWh emissions limit.
The result is that power-only plants producing electricity from natural gas would be excluded. Even the most efficient and clean combined heat and power plants (cogeneration), which bring emissions from natural gas to a minimum, would not be able to meet this requirement.
Today, cogeneration is the best emissions performance solution available to these sectors needing huge amounts of energy at competitive prices and at all times. Running increasingly on renewable energy sources, cogeneration is ready for the ‘big switch’ to fuels such as renewable hydrogen and decarbonised gases, when available. Not only will this avoid a carbon lock-in, it will also boost the uptake of these valuable fuels. Moreover, it will avoid wasting renewables fuels thanks to the very high efficiency level of cogeneration.
Elsewhere in the text, the EC considers that emissions lower than 270gCO2e/KWh would do no significant harm. Yet such an emissions limit would not apply, for it is only meant for so-called “climate change adaptation activities”. Given the currently availability of energy technologies, this 270g CO2e/kWh limit would already be a better starting point for transitional mitigation activities to qualify as sustainable. This clarity is urgently needed.
This would also bring greater consistency. The proposed treatment for cogeneration in EU Taxonomy is contradictory of the one of the European Climate Bank, the European Investment Bank (EIB). The EIB decided to stop funding polluting and inefficient fossil fuels and recognised the benefits of high-efficiency cogeneration in its recently revised Energy Lending Policy, provided that their emissions are lower than 250gCO2e/kWh of electricity .This is close to the EC’s 270g CO2 limit proposal. What is more is that the EIB uses the right emissions calculation method for cogeneration to fairly compare emissions from its electricity with electricity from power-only generation, by deducting the emissions that cogeneration avoids on the heat side when replacing an inefficient heat boiler elsewhere in the system. Aligning the EU Taxononmy with EIB’s freshly adopted standards for transitional mitigation activities would bring consistency and investment security.
The very notion of transition is important. Making large carbon emitters such as energy intensive industry less polluting, for example through higher energy efficiency gains, can have major environmental benefits, even if not meeting the 100gCO2 limit. Financing the transition in sectors that are necessary for the European economy and making them more environmentally friendly should be the absolute priority, also to maintain jobs in Europe and avoid carbon leakage.
With its rigid and strict approach, the EC may well prevent, rather than accelerate, investments in sectors where investments are urgently needed. This would run against the intended goal of helping the European economy becoming more sustainable. The text of the EU Taxonomy is expected to be adopted by the end of December 2020. This leaves little time to ensure the currently proposed emissions threshold will not leave industry being stuck in the middle of the energy transition.