The EU's goal should be to make it easier for investors to track the carbon emissions of their portfolios, which is currently hard to do accurately
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 capital from markets.
Countries have different energy sources, so the exercise was bound to be political. Still, the classification looks sensible. Labelling nuclear energy as green—subject to conditions including the safe disposal of toxic waste—has been met by howls from thein Germany. But nuclear can play an important part in getting to net-zero; indeed, by deeming it green only during the transition, the taxonomy is, if anything, too timid. The plan to label natural gas as green has been controversial, too.
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.
What else to do? The goal should be to make it easier for investors to track the carbon emissions of their portfolios . Funds with zero emissions would be virtuous, but those that cut their footprint fast might be even better. This will require new disclosure, so that investors can track emissions and avoid double-counting across supply chains. Such a system would be simpler to administer, and ask less of countries that struggle to agree on what counts as green.
By contrast, putting a price on carbon sends a signal that reaches across the whole economy, not just into listed firms, and fully aligns the profit motive with the objective of cutting emissions. The’s main carbon-pricing scheme is the rich world’s largest but, although work is going on to expand it, it covers only 41% of emissions. If thewants to lead the world by unleashing the power of finance to combat climate change, the carbon market is where it should be focusing its efforts.
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