The European Green Taxonomy: A Technical Tool or A Political Agenda?

By Ece Ucar

Abstract: The EU Green taxonomy is one of the measures undertaken as part of green transformation actions following the announcement of the Green Deal. This financial instrument, which also ensures the influx of green finance into the EU, was developed by the Union specifically for the categorization of production and investment. However, there are significant obstacles to the implementation of this technical tool, including greenwashing, politicization, and the harmonization of technical capacity across Member States.

For international environmental agreements, non-binding principles have always created a debatable grey area. As the most recent example of this situation, 2016 Paris Climate Agreement ended in several withdrawals[1] and unstabalized volunteer contribution[2]. In such an uncertain picture, the EU remained as one of the rare actor remained true to its word.

Following these debates, the EU clarified its environmental targets and published its Green Deal at 2020. The concept of “Decorbonizing economy” took its place as one of the important goal within the deal[3]. The deal alone does conceptualize only the main approach of the Union and gives a new lease of life to future legislation. On the other hand, the Green Deal's target of mobilising 1 trillion euros[4] makes it is the largest enviro-financial effort in the world. Imagination of such a financial capacity brings a rising problem with itself: Green Washing. [5]

To cope with such a negative externality, the EU created[6] a figting mechanism called “The European Green Taxonomy”[7].

In brief, Green taxonomy is a classification system that assesses environmental risks and impacts. Any institution, person, company and even NGOs can create its own classification system under the title of taxonomy. In European context, this aparatus uses “environmental sustainability” as a benchmark to identify, measure and manage sustainability-related activities. It provides a standard/guidance to recognize/categorize environmentally friendly activities. Eventually, in financial sense, it provides a schema to evaluate environmental performance of investments.

The EU-Green taxonomy has been developed around 6 filter criteria[8]: (1) climate change mitigation, (2) climate change adaptation, (3) sustainable use and protection of water and marine resources, (4) transition to a circular economy, (5) pollution prevention and control, and (6) protection and restoration of biodiversity and ecosystems. Roughly, an economic activity can be found partly sustainable if it fulfils at least one of these criteria. In addition, the subjected activity should fulfill another determinant criteria: : Do Not Significant Harm (DNSH) which is a principle ensuring that investments promoting sustainability in one specific area do not generate negative impacts elsewhere.

Shaped around all these criteria, the EU Green Taxonomy forces industry actors to disclose mandatory reports. [9]This enables investors to clearly assess the sustainability of their activities when investing in a company[10]. Change in reporting pratics of company boosts the transparency and leads a better coping structure against GreenWashing. Moreover, it facilitate planning of green transition of companies by following process and it highlights green activites by scoring better sustainable investment.

Despite all of these positive developments, there is growing skepticism among the EU public regarding the assertion that the EU taxonomy is truly “climate neutral”. To avoid such a doubt, the EU authorized a Technical Expert Group (TEG) finalizing last shape of the taxonomy. Yet, the issue failed to remain depoliticized. Accordingly, there is still a persisting pressure towards the Committee. The most significant point of contention stems from member states’ different policies, development trajectories, and perception of green transition.

In order to gain a comprehensive understanding of the controversial side of the European taxonomy, it becomes imperative to delve into the circumstances preceding the emergence of the green deal. Before the implementation of the Green Taxonomy regulation, each member state had its own sustainability standards and classification methods[11]. This situation was counterproductive to the positive externality of transparency brought about by the Green Taxonomy. The presence of multiple standards and frameworks not only created confusion but also gave rise to groups seeking to exploit this situation for their own benefit. Moreover, the existence of different standards resulted in multiple reporting processes. Consequently, increasing reporting costs and waste capital flow occured. Considering these circumstances, it is undeniable that a common EU taxonomy has contributed to minimization of ambigious standardization and waste of attention. [12]

However, while the introduction of the common taxonomy has increased harmonisation between countries, the common criteria may also overlook the unique stages that countries are trying to reach in green transition. As an example, the threshold value for activities considered as “low carbon emitting” may vary across countries[13]. For a member country that has already advanced in environmentally friendly adaptation, the threshold of “low emitting” would prioritise high expectations. In contrast, an economy maintaining its existence due to carbon-emitting activities would probably be willing to give more “low emitting” labels.

Since the low or high threshold value also determines which country the investor will transfer more money to, the issue may evolve into an area politicised by lobbies. In this critical juncture, the "scientific" nature of the taxonomy that the Technical Expert Group legitimized may become questionable.

To better illustrate this ongoing debate, it would be appropriate to present a concrete example of politicization. In 2021, one of the most widely discussed subjects within the context of Green Labelling revolved around the categorization of nuclear energy.[14] Similar to any economic activity, nuclear activities can undergo evaluation by the EU Taxonomy tool. By employing this tool, it becomes possible to determine the positioning of nuclear energy-related activities on the green scale. Consequently, an essential question arises concerning whether the activity itself satisfies the six aforementioned criteria and the additional DNSH criteria.

As it is abovementioned, prior to the publication of the Taxonomy, different countries had varying priorities. For instance, based on this previous understanding, France perceives nuclear energy as more environmentally friendly due to its lack of carbon emissions[15]. In contrast, Germany, which has significantly invested in renewable energy, views wind energy as a far more preferable alternative compare to nuclear energy[16]. This assessment discrepancy between France and Germany is also observed among other countries, particularly within the framework of the DNSH principle. Northern European countries, in particular, emphasized the potential future environmental damage of nuclear in case of a disaster. Such a possible outcome directly contradicts the DNSH criterion. They also accept that nuclear power reduces carbon emissions, but they find barely any place for nuclear in common Taxonomy.

All these debates continue to foreshadow the future of the European Green Deal and its harmonization process. In addition, lobbying pressures on the EU's technical teams are continuing. Despite all, the EU taxonomy does not only affect the member states but also concerns trade partners of the Union. The impact sphere of the green taxonomy is enlarging [17]because both foreign investors and producers will have to meet the standards. In this case, an alignment of the taxonomy of other countries with the EU taxonomy is expected. The closest example of such an alignment would be the constant comparison of the EU and Chinese taxonomy[18][19]. In this case, the next challenge can be centered around this question: After the internal harmonization of the Europen taxonomy, can member states start to talk about influencing foreign taxonomies? In such a case, trade partners of each member state may verify and lead to another differentiation between member states’ positioning in international platforms.

[1] https://climateanalytics.org/briefings/fact-check-trumps-paris-agreement-withdrawal-announcement/

[2] https://www.cfr.org/backgrounder/paris-global-climate-change-agreements

[3] https://ecfr.eu/article/decarbonise-and-democratise-how-the-european-green-deal-could-transform-high-carbon-economies/

[4] https://www.eceee.org/policy-areas/test/financing-the-eu-green-deal/

[5] https://www.theguardian.com/commentisfree/2020/feb/07/eu-green-deal-greenwash-ursula-von-der-leyen-climate

[6] https://www.greeneuropeanjournal.eu/the-dirty-politics-of-greenwashing-energy/

[7] https://www.euractiv.com/section/energy-environment/opinion/no-more-greenwashing-a-science-based-and-credible-taxonomy-is-needed/

[8] https://finance.ec.europa.eu/sustainable-finance/tools-and-standards/eu-taxonomy-sustainable-activities_en

[9] https://corpgov.law.harvard.edu/2022/04/04/eu-taxonomy-and-the-future-of-reporting/

[10] https://dydon.ai/what-businesses-need-to-know-about-csrd-and-eu-taxonomy/

[11] https://www.oecd-ilibrary.org/sites/134a2dbe-en/index.html?itemId=/content/publication/134a2dbe-en

[12] https://blogs.law.ox.ac.uk/business-law-blog/blog/2021/07/eu-vs-greenwashing-birth-pangs-transparency-comparability-cooperation