On 31st December 2021, the EU Commission’s much-anticipated “Taxonomy” list – a rule book to define which energy sources can be labelled green for climate-friendly investments – landed. Recently, Brussels experts who were asked to provide feedback on the draft proposal, which was looking to classify some gas and nuclear energy as green investments, have now advised that nuclear power and natural gas should not be labelled as green transition fuels under the Commission’s Sustainable Finance rules.
Although the challenges ahead in reaching the ambitious climate targets, in the EU but also globally, are indeed creating some tensions, it is important to note that to transition the whole economy to meet net zero by 2050 and reach 55% gas emissions reductions by 2030 will require significant consideration of environmental, social, financial and supply issues, so it’s imperative that all four aspects are considered, not just environmental.
But as an article by The Economist has stated, this “taxonomy” has limits when tackling climate change. After all, the aim of this labelling system (taxonomy) is for funds and firms to use it as a means to disclose what share of their activities qualify as green and as a result, the increase in clarity, will help to direct financing from markets to sustainability-focused projects that can contribute to mitigate the climate change, and have been so far disregarded.
The plan, which has been in the works for years, will now require further revision off the back of the recent findings of the Platform on Sustainable Finance. As part of this revision, there are two key areas that must be considered to help propel green projects that will create a positive impact in the direction of the climate targets.
The first is to leverage technology and how it can massively help the world in its net zero journey. Tech developments will cut the carbon-intensity of some activities and lead to innovations in the space. Digital technologies can help reduce global carbon emissions by up to 15% through solutions in energy, manufacturing, agriculture and land use, and transportation to name a few. A booming tech that has been gaining momentum in the space is blockchain technology and digital twin, particularly relevant in the tokenisation of carbon credits linked to green projects and the enablement of offsetting carbon emissions.
As the world continues to search for initiatives to help reach the ambitious climate targets, for example the European Central Bank buying green bonds and imposing stricter green protocols on banks, an area of focus should be on enabling investors to track the carbon emissions of their portfolios, which still remains a challenge. While funds with zero emissions would be welcome, being able to offset carbon footprint quickly and effectively should be a top priority, as this would trigger the need for more detailed disclosures so that investors can more accurately track their carbon emissions and avoid double-counting across supply chains.
At MetaVerse Green Exchange (MVGX), we are the first exchange to mandate carbon disclosures for both issuers and investors through our platform. By providing buyers access to this level of reporting, we are able to give them the insights and control they need to make their portfolios carbon neutral (and even negative), should they wish to do so. With the growing ESG pressures, it is paramount that institutions take responsibility and act upon their commitments.
And while it is important to provide institutional investors with the ability to track and offset their carbon emissions, the EU (and the world in general) should look to use carbon pricing to influence how capital is allocated, therefore leveraging the financing of green projects.
The EU Emission Trading System (EU ETS), initially set up in 2005, was designed to put a price on emitting CO2 based on a metric tonne, with tradable carbon credits allowing businesses to emit CO2. In essence, those companies wishing to engage in carbon-emitting activities must pay to do so – the higher the carbon permit, the higher the cost. In September last year, the price of EU carbon emission permits surged over €65 per metric tonne for the first time, proving that there is interest and plenty of room for growth. And while the EU’s main carbon pricing scheme is currently the world’s most robust, it only covers 41% of emissions, further demonstrating the opportunities that lie ahead.
The truth is that carbon pricing can send a message to the whole economy. It aligns the drive for profit with the aim of reducing carbon emissions, giving a more structured guidance to businesses, and creating a fund that can be directed to inject cash into global green projects.
We are seeing a significant growth in the carbon markets and this is where the main focus should rest. The voluntary carbon markets (VCM) space topped $1 billion in 2021, and it is poised for further growth this year. This is vastly because of the increase in demand for more high-quality carbon credits alongside more sophisticated and well-designed strategies (such as the taxonomy) to help us meet the goals of the Paris Agreement.