ZEW Environmental Economist Sebastian Rausch on EU Taxonomy

The EU Commission has adopted the planned EU taxonomy for sustainable investments. This is to define which financial investments are sustainable and which are not. Investments in nuclear power and natural gas are also classified as sustainable in the regulation under certain conditions. Professor Sebastian Rausch, head of the Research Department “Environmental and Resource Economics, Environmental Management” at ZEW Mannheim, has commented on this matter:

“The hope is that the taxonomy will help investors to better identify which financial products in the EU actually serve climate protection and sustainability goals in order to increase sustainable investments. However, it is questionable whether the EU taxonomy will be effective in this respect. At least in the case of climate protection, there are probably more suitable and above all more effective instruments than the EU taxonomy to steer financial flows towards sustainability. The main steering effect should rather come from a CO₂ price. High CO₂ prices would probably make a taxonomy unnecessary.

Furthermore, the design of the taxonomy raises a number of problems. One feature of the taxonomy is the quantitative orientation towards threshold values, e.g. in relation to the emissions balance of certain production processes. According to the taxonomy, a company is therefore either sustainable or not. This binary mechanism does not sufficiently take into account the actual emission intensity and abatement costs of companies. This creates false incentives that lead to emissions not being reduced in a cost-effective manner in the various sectors and industries. Another potential problem is that the taxonomy sets performance requirements based on the current state of research and development. This does not sufficiently promote the development of new technologies for CO₂ reduction. Furthermore, there is even a risk of cementing taxonomy-compliant activities that are labelled sustainable but are not sufficiently so to ultimately become carbon neutral.

The taxonomy would therefore have to be updated regularly. Apart from the administrative costs, the fundamental problem is that the legislator does not have the necessary information. In this respect, too, a market-based approach such as a CO₂ price is preferable in order to effectively steer financial flows towards sustainable growth.”