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Sustainable finance under the EU Green Deal
The European Union and the Commission strive to channel finance to sustainable investment options, compatible with the climate neutrality objective outlined in the Climate Law. Concretely, the Commission aims to direct financial flows to green investment and avoid stranded assets, via increased available funds for sustainable investment and through a reviewed taxonomy.
The Commission announced a Sustainable Europe Investment Plan, the investment pillar of the Green Deal. It will mobilise through the EU budget and associated instruments at least €1 trillion of private and public sustainable investments over the 2020-2030 period. In this framework, the Commission plans to have a 25% target for climate mainstreaming across all EU programmes and at least 30% of the InvestEU fund to the fight against climate change, aside of more than €500 billion dedicated to climate and environmental spending in the EU budget over the next decade. Innovation and Modernisation Funds revenues (stemming from ETS auctions) and their scope have since been reviewed to ensure they help deploy innovative and climate-neutral solutions. With a proposed budget of €95.5 billion over the 2021-2027 period, the Horizon Europe research and innovation programme also contributes to the goals and targets of the Green Deal. 35% of the EU’s research funding will be set aside for climate-friendly technologies. Additionally, the Just Transition Mechanism also helps regions with higher dependence on fossil fuels and sectors that are harder to decarbonise, to transition towards a low-carbon model, via a fund reaching €19.2 billion for the period 2021-2027. Along the same lines, the EIB, too, aims to funnel green investments by doubling its climate target from 25% to 50% by 2025.
In July 2021, the Commission adopted the Strategy for financing the transition to a sustainable economy. The strategy aims to support the financing of the transition to a sustainable economy by proposing six actions in four areas: transition finance, inclusiveness, resilience and contribution of the financial system and global ambition. The six actions include: extending the existing sustainable finance toolbox to facilitate access to transition finance; improving the inclusiveness of SME and consumers; enhancing the resilience of the economic and financial system to sustainability risks; increasing the contribution of the financial sector to sustainability; ensuring the integrity of the EU financial system and monitor its orderly transition to sustainability and lastly, developing international sustainable finance initiatives and standards, and support EU partner countries. Following this trajectory, the co-legislators in December 2022 adopted new rules on Sustainable Corporate Finance, updated in December 2023 the Capital Requirements Regulation and Directive (so-called Banking Package) as well as adopted the Solvency II Directive.
The EU taxonomy, adopted in 2020, is a tool for investors to understand whether an investment is considered environmentally sustainable or not. It sets a common language for investors, issuers, and policymakers. To be aligned with the EU taxonomy, an economic activity needs to make a substantial contribution to one of six environmental objectives (climate change mitigation; climate change adaptation; sustainable and protection of water and marine resources; transition to a circular economy; pollution prevention and control; protection and restoration of biodiversity and ecosystems), and it needs to avoid doing significant harm to the other five. Regarding economic activities that bring a substantial contribution to the climate change mitigation objective, they may do so via their own performance, enabling activities, or transitional activities. The Technical Expert Group (TEG), mandated by the European Commission, developed Technical Screening Criteria. They are being adopted by means of delegated acts by the Commission in two phases. The first technical screening criteria, for activities which substantially contribute to climate change mitigation or adaptation, were adopted on 4th June 2021. The Complementary Climate Delegated Act, which contains technical screening criteria for energy generation from specific nuclear and fossil gaseous fuels activities, was published in the Official Journal in July 2022 and it applies since 2023. According to the new delegated act, energy generation from fossil gas and nuclear processes are to be qualified as transitional activities under the EU taxonomy, if they are compliant with the technical criteria laid down in the annexes. Activities wishing to be compliant with the taxonomy will either have to prove life cycle GHG emissions lower than 100 g CO2e/kWh or prove that the annual GHG emissions are lower than 270g CO2e/kWh.
In April 2023, the Commission published a proposal to amend the two Delegated Acts, on Climate Change Mitigation and Climate Change Adaptation, alongside the publication of a new Delegated Act on some of the activities within the remaining environmental objectives (sustainable and protection of water and marine resources; transition to a circular economy; pollution prevention and control; protection and restoration of biodiversity and ecosystems). These entered into force in June 2023 and apply from 2024 onwards.
Key changes as part of these revisions on the Delegated Acts involve the maritime sector, aviation, and other activities. Under the revised Delegated Acts, the maritime sector is opened to e-fuels besides direct zero-emissions solutions; other changes include increased targets for fuel consumption or GHG emissions reduction for retrofitting of inland vessels and for sea and coastal freight and passenger water transport, as well as introducing a progressive reduction of GHG intensity of on-board energy use required. As for aviation, the revised Delegated Act adds activities related to air transport, aircraft leasing and manufacturing with transitional phases to move towards the introduction of e-fuels from 2027 to 2038, followed by zero direct (tailpipe) emissions aircrafts after that date.
New activities introduced in the Delegated Acts relevant to the hydrogen sector are manufacturing of automotive and mobility components, for instance components for zero direct emission passenger vehicles, as well as manufacturing of rail constituents (also zero direct emission but with possibility for conventional engines in case of unavailable infrastructure). As for the new categories added, those include water desalination under the climate change adaptation objective, while for the circular economy objective new activities are hazardous materials for manufacturing of electronic and electrical equipment (which could cover electrolysers and fuel cells) and biowaste treatment.
What’s in it for hydrogen?
Updated sustainable finance rules and the renewed taxonomy have a major impact on what types of activities may be eligible for green investments. By classifying which economic activities are environmentally sustainable, the EU taxonomy brings these economic sectors in line with the climate neutrality objective by helping to decarbonise those that are high-emitting and by helping to grow those that are low-carbon. Futureproofing of investments (especially in gas infrastructure) means that current investments in clean hydrogen technologies – potentially across the whole value chain – will receive funding and that other investments will have to be compatible with the reality that clean hydrogen is betting on.
The EU taxonomy plan gives a clear signal that clean hydrogen technologies, across a wide range of sectors, will be fostered as environmentally sustainable solutions. They can benefit from a clear financial advantage, which may help to create an uptake in industrial production (e.g., in FCEV or electrolyser).
Hydrogen solutions are mentioned numerous times as “taxonomy-aligned”, specifically in the following sectors: Manufacture of equipment for the production and use of hydrogen; Manufacture of low-carbon technologies; Manufacture of Iron & Steel; Manufacture of Hydrogen; Manufacture of anhydrous ammonia; Electricity, heat and combined heat and power generation from renewable non-fossil gaseous and liquid fuels; Transmission and distribution networks for renewable and low-carbon gases; Storage of hydrogen; as well as various hydrogen end use activities in the transport sector.
The most important rule impacting hydrogen in the EU taxonomy is the requirement for hydrogen manufacturing activities, to be aligned with climate change mitigation objectives, that the carbon footprint of hydrogen cannot exceed 3 tonnes of CO2e per tonne of hydrogen (on an LCA basis).
Furthermore from 2026 onwards, in most transport applications, except for aviation, only vehicles with direct emission intensity of 0g CO2/km will be taxonomy-aligned, putting wide adoption of renewable and low – carbon synthetic fuels in the transport sector at risk.
Links to the original document and additional information:
The European Green Deal
Strategy for Financing the Transition to a Sustainable Economy
