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Guest essay by Eric Worrall

The Economist has slammed the European Union for not going far enough with its green initiatives.

The EU’s green rules will do too little to tackle climate change

To the rescue has come the European Union, which has devised a new labelling system, or taxonomy, that sorts the economy into activities it deems environmentally sustainable, from the installation of heat pumps to the anaerobic digestion of sewage sludge. The idea is that funds and firms will use this to disclose what share of their activities qualify as green, and that clarity will help unleash a flood of capit al from markets. The proposals have been in the works for years, and on December 31st the European Commission circulated its latest thinking.

The plan’s flaws lie in its bureaucratic outlook. The simplistic nature of the labelling may lead to a purity test in which funds exclude assets that are dirty. In fact a key job of capital markets is to own polluting companies and manage down their emissions. The classification is static, whereas changes in technology will cut the carbon-intensity of some activities and lead to inventions the classifiers have not envisioned. It fits a pattern of European climate-finance ideas that are well-meaning but marginal, including using the European Central Bank to buy green bonds (which could overstep its mandate), and imposing green “stress tests” on banks, even though the lifespan of their assets is shorter than the horizon for the most deva stating climate change.

The EU’s broader aim should be to use carbon pricing to alter how capital is allocated. Relying on investors to save the planet using a taxonomy has obvious limits. Less than a third of global emissions stem from firms that are publicly listed and controlled by institutional investors. And investors do not have a clear incentive to be green. If you don’t mind the stigma, owning polluting assets can be profitable, which is why they are increasingly held privately.

Read more: https://www.economist.com/leaders/2022/01/08/the-eus-green-rules-will-do-too-little-to-tackle-climate-change

The EU already has a record high carbon price of around €70 (USD $80) / ton. Clearly The Economist thinks more pain is required.

via Watts Up With That?

January 8, 2022