A big week for financing climate action, no space for agriculture, and progress needed on forestry

Agriculture is out of the green list for climate action, risking its access to much needed private capital to support the sector in both its sustainability transition and in responding to the adaptation needs in light of a changing climate.

We can argue about the content, but there is no doubt that this week marks a huge milestone in the EU’s development on climate action and one of the largest steps taken towards guiding financial markets towards climate sustainability, both in the EU and globally.

The provisional agreement on the European Climate Law has been adopted as one of the key elements of the European Green Deal. This enshrines the EU’s commitment to reaching climate neutrality by 2050 and the intermediate target of reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. Mobilising private finance is essential, with an estimated yearly investment gap of €175 – € 290 billion needed to reaching these goals. The second major milestone this week sees a way forward to address this gap as the European Commission adopts the first of its Delegated Acts to arise from the Taxonomy Regulation – with a focus on climate mitigation and adaptation. This sets out the criteria by which more than 70 economic activities, covering around 80% of EU GHG emissions, can be judged to be contributing substantially to climate change mitigation and adaptation objectives.

Yet, getting to this point in the legal process has been tough, with EU lawmakers threatening to veto the act for opposing reasons. Some felt it was too ambitious, some felt it was too weak. This signals just what a challenge it is to bring sustainability across the economy. In addition, there have been and continue to be challenges to the scientific credibility of the Taxonomy. The Platform on Sustainable Finance has necessarily needed to reaffirm the role of transparency and scientific evidence in decision making and respond to these challenges. The Platform will continue to work on a scientific basis in developing criteria for biodiversity, water, pollution and circular economy.

No agriculture in the taxonomy – at least not yet?

The release this week confirms that the agriculture sector has not been included in the Delegated Act for climate, despite more than two years worth of work developing criteria for the sector. There is little doubt that the ambition and science-based recommendations put forwards by the Technical Expert Group (TEG), would have taken agriculture to a new level of sustainability, bringing it more in line with the ambitions of the EU Green Deal. But this seems to have been a step too far for some Member States and industry lobbyists when the EU’s common agricultural policy is still being decided. Whilst those resisting change may feel like this has been a small victory, the practical implications of what is happening cannot be underestimated.

Many in other sectors, are asking – and lobbying hard – to be part of the taxonomy, to be included so that they can get access to green finance and be supported in their sustainability transition. For agriculture, to be out of the loop means it will not be able to align with the taxonomy criteria. This risks access to much needed private capital to support around 40% of the EU’s land area and the sector as a whole in both its sustainability transition and in responding to the adaptation needs in light of a changing climate. With more than €58 billion going to agriculture each year from public funds, it may seem a limited risk. But private finance is a much, much bigger pot, and the funding gap in agriculture is huge. A recent fi-compass study across just 24 Member States “identified a significant financing gap of € 19.7 – 46.6 billion for agriculture and more than € 12.8 billion for the agri-food sector” on top of what is being funded already. Whilst mainly reviewing public finance, the gap remains significant and gives a clue as to the broader financial needs of the sector.

Why has it been so hard to reach an agreement on agriculture? The decision around the future CAP is one of the key reasons, with the Taxonomy Delegated Act coming before discussions on the future CAP are settled. The Commission communication on the Delegated Act notes that this will allow greater coherence between the two policies, with a focus on the Green Deal. However, last month’s Agriculture and Fisheries Council highlighted the reticence of Member States to align their CAP strategic plans to the objectives of the Farm to Fork Strategy and the EU Green Deal. Civil society have already called for the withdrawal of the Commission's post-2020 CAP proposal to safeguard the Deal, just one month before the Taxonomy Delegated Act on climate was launched.

It is expected that the Platform will be asked to work further on the agriculture criteria, as CAP discussions settle, and the Commission is empowered to amend the existing Act or bring new criteria and sectors into the Taxonomy through future and complementary Delegated Acts. So, the game is not entirely over, and we, in the Platform, are already working on criteria for other Taxonomy objectives (such as biodiversity) that could see agriculture back in the future. The evidence for what the sector needs to achieve on climate is not likely to change any time soon and the TEG’s recommendations (Main report & Annexes) remain solid. The shift will need to come from Member States and those who have resisted change.

Forestry in, but a lot of room for improvement

Unlike agriculture, forestry has retained its position within the Delegated Act, significantly changed since the text was released for public consultation last year. There is no question that the content of the current Delegated Act on forestry is less ambitious that it could be, and some significantly concerning elements still remain.

There is a great reliance on national law to set the standards for sustainability, and compliance with existing sustainability criteria of the recast Renewable Energy Directive (RED II). Elsewhere in the Delegated Act, bioenergy criteria have been aligned with RED II sustainability provisions, which is arguably a baseline requirement rather than a more ‘substantial contribution’. Most concerning however, is some of the do no significant harm (DNSH) criteria for forestry which require that there is no “significant reduction of the supply of primary forest biomass from forests” in order to protect the circular economy objective. This would seem at odds with other, more positive elements of the criteria, such as the requirement for a forest management plan, a climate benefit analysis and a guarantee of permanence of the forest area (to ensure carbon benefits are seen over the longer term). Limiting the reduction in supply of primary forest biomass would rule out the recognition that forests as extant areas can and should be incentivised to play a role as carbon sinks within the EU’s climate transition. Particularly whilst the forest carbon sink in the EU is expected to decline in coming years, in response to increased demand for biomass.

Whilst a lot of this is concerning from an environment and climate point of view, future changes to these criteria are already envisioned in the Communication, in line with the ongoing discussion on the EU Biodiversity 2030 strategy, the EU Forestry Strategy and the proposed revisions of RED II. The Delegated Act is seen as a ‘living document’ in this sense, and allows an opportunity to bring in positive changes to the Forestry criteria and recognise the role of forests in the EU’s climate goals. The discussion is far from over.

Key concerns, and clarity on the Taxonomy

Regardless of whether agriculture makes it into the Taxonomy for climate, or whether the Forestry criteria are improved, the development of the sustainable finance agenda in Europe continues. It is a milestone in a long-fought transition that is not yet finished. As more sectors are added to the Taxonomy and more environmental objectives are integrated, the financial space outside the Taxonomy is going to shrink. As we advance towards our sustainability goals (or our environment and climate tipping points!) the bar is also going to rise. The role of science and evidence is more important than ever, as is transparent decision-making on the final content of policy.

Supported by the Chair of the Platform, the platform will hold to its scientific mandate, where "it finds that scientific evidence does not support certain criteria, it will make recommendations to revise them, in keeping with its mandate”. In addition, “the Platform has sought the agreement of the European Commission to review the governance and transparency of decision making on Taxonomy criteria, to ensure that the role of evidence and technical input is protected and respected”. On this basis, we proceed and IEEP remains committed to ensuring the best outcome possible from the Taxonomy process.

Ben Allen is Research Director at IEEP and is co-rapporteur on the Technical Working Group of the Platform on Sustainable Finance.