The EU taxonomy is currently the subject of much discussion. Although it basically came into force at the beginning of this year, its specific form is the subject of heated debate. The focus of the debate is the proposal and the delegated legal act that has now been presented by the European Commission to classify nuclear power and natural gas as sustainable technologies. However, the facts must be taken into account and one fact is: we will not achieve the climate targets set with the expansion of renewable energies alone.
Climate change is one of the greatest challenges facing humanity. With the “Fit for 55” package, the European Union has defined ambitious goals: by 2030, the EU should reduce its CO2 emissions by at least 55 percent compared to 1990 and be climate-neutral by 2050. In its opening statement on climate protection, the new federal government also emphasized that the speed of emission reduction must be tripled in order to achieve the climate targets by 2030. It is a Herculean task that poses enormous challenges, especially for industry.
Investments in the trillions will be necessary worldwide to replace outdated and climate-damaging technologies with lower-emission alternatives. The public sector cannot cover these costs alone, a large part has to be raised by private investors. The EU taxonomy plays a crucial role here. With it, a strict and uniform set of rules is presented for the first time within the EU, which defines the conditions under which economic activities of companies are to be assessed as sustainable.
This gives investors more transparency to make targeted investments in companies and projects that make a contribution to the energy transition. What sounds good on paper poses great challenges for many companies. The specifications for the application of the criteria in reporting, for example, are in part highly complex, and the implementation deadlines are tight. It is necessary to link financial and non-financial criteria in order to carry out the so-called tagging of the key figures and to create reliable reports on this basis.
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Auditors must certify the key figures
In addition, auditors must certify the key figures of the EU taxonomy. The interaction of many departments in the company is required for the successful implementation. And not all detailed questions have been clarified yet, in some places it still has to be specified how the criteria of the taxonomy are to be interpreted. However, with the plans now presented by the European Commission to define natural gas and nuclear power as “sustainable” bridging technologies for a transitional period, a crucial gap in the design of the taxonomy has been closed.
The political debate shows how far the assessment of sustainable technologies differs. This is already illustrated by the different energy mix that the various EU countries rely on. While France still gets around 70 percent of its electricity needs from nuclear energy, Germany will phase out nuclear power by the end of 2022. The phase-out of coal-fired power generation announced by the end of 2038 at the latest is already in full swing.
While the demand for electricity is steadily increasing, the expansion of renewable energies in Germany is not progressing fast enough to ensure long-term security of supply. Bureaucratic approval processes take too long. Intermediate solutions are therefore needed on the way to climate neutrality. And gas plays a crucial role in this.
With gas-fired power plants, the security of supply can be guaranteed even when energy demand increases – they step in when there are not enough renewable energies available, i.e. the sun is not shining or the wind is not blowing. While there are many reservations about the use of natural gas. Compared to coal, however, gas saves around two thirds of CO2 emissions. It is therefore important that the EU Commission recognizes natural gas as a “sustainable” bridging fuel for a transitional period.
The EU taxonomy ensures more transparency
Germany will not achieve its climate goals without investments in gas-fired power plants. It is already technologically possible today to operate gas-fired power plants with hydrogen admixture and, if there is sufficient availability of regeneratively produced hydrogen, to use them CO2-free in the long term. However, the political decision-makers must design the investment conditions in such a way that the carbon-neutral operation of gas-fired power plants also pays off.
There is no question: on the way to climate neutrality we need new, innovative technologies. We should see the EU taxonomy as an opportunity. With the transparent assessment of whether economic activities are sustainable, companies have to put their entire portfolio to the test. In the future, it will be easier for banks and investors to assess a company’s commitment to climate protection. It can be expected that companies with worse carbon footprints will find it more difficult to obtain cheap financing.
For example, which projects are subsidized by public funds and which loans are granted by banks – all these decisions will be made in the EU on the basis of the taxonomy in the future. Companies must also consider the criteria of the taxonomy when allocating their resources and introducing new technologies.
Interest in long-term value creation is increasing
The fact is: Today there is significantly more money available for research and development than a few years ago – on the one hand through government funding programs that promote sustainable projects based on green hydrogen, for example. On the other hand, there is more venture capital that investors are providing to develop climate-efficient technologies such as carbon storage. Nevertheless, we need additional incentives to promote sustainable technologies in order to make them scalable on an industrial scale and thus profitable in the long term.
It can be clearly seen that more and more private investors have a greater interest in long-term value creation rather than short-term profit optimization. Everyone must play their part so that the energy transition benefits our companies, our economies and, above all, our societies. The industrialized countries must lead the way. Innovations, sustainable financing and cross-sectoral cooperation should be enabled and promoted.
From the point of view of globally active companies, it would definitely be desirable if, in the long term, uniform taxonomy standards prevail not only in the European Union but worldwide.
The author: Maria Ferraro is CFO of Siemens Energy AG
More: The taxonomy is just the beginning