Kudos to the federal government for announcing a pathway for a Canadian taxonomy. Soon it will set up an arms-length body to develop standards, and the quality of the outcome will depend to a large degree on the composition of the team and how it handles the thornier questions.
One challenging topic will be addressing the conundrum that the financial industry introduced into the process, namely how we define carbon lock-in, and how much of it we will tolerate in a taxonomy.
Carbon lock-in takes place when an investor extends the life of a polluting project by requiring a longer operating period in order to recoup an investment. This is especially true when there is a viable low-carbon alternative to that project that they could have invested in instead.
The Canadian financial industry – via the Sustainable Finance Action Council (SFAC) which it exclusively ran – invited carbon lock-in via its taxonomy recommendations in the transition label. Unlike Australia or the EU where they define transition activities as those for which there is no viable alternative, SFAC dropped this key provision in order to recommend that the transition label apply to fossil fuel mitigation projects like CCS or methane capture.
The problem is that by definition this sanctions carbon lock-in at the project financing level since there are viable alternatives that investors can choose instead. And, once the door is opened a crack to fossil fuels in this way, there is pressure to blow that door wide open, as we see beginning even in the government announcement.
SFAC attempted to limit the carbon lock-in it introduces by moving from the deal level to the system level, redefining it to mean activities which fall outside our 1.5 degree carbon budget. That is, even under a 1.5 degree scenario we’ll still use some oil and gas, so we may as well make that activity a bit cleaner, and call that cleaning process “transition,” even though it’s actually mitigation.
But, applying that new definition in practice is incredibly complicated and is where fossil fuel interests will work to widen the door opening. SFAC tried to limit the carbon lock-in in three ways:
- By restricting to “existing” rather than “new” oil and gas projects;
- By requiring those existing projects to have timelines consistent with a 1.5 degree phaseout; and
- By requiring that the investments make significant emissions reductions
Each of these conditions is difficult to operationalize, evidenced by the paper that the Canadian Climate Institute wrote on the topic, and it’s hard to imagine a taxonomy with enough specificity to safeguard against ineligible projects, particularly since there will be no referee to police misinterpretations – these are ultimately private financing transactions.
Even before we’ve embarked on taxonomy design, the government itself demonstrated pushing the door open further for fossil fuels in this paragraph:
“In consideration of Canada’s economic makeup, the taxonomy could potentially include activities that significantly reduce the emissions of existing natural gas production and/or the emissions associated with a limited buildout of existing production sites. The technical drafters may also consider a broad range of possible eligibility criteria for existing natural gas production, such as the displacement of more polluting fuels internationally, provided they are aligned with limiting global temperature rise to 1.5°C above pre-industrial levels.”
Note that this exposes SFAC’s first criterion to be open to interpretation, and then blows up the third criterion by shifting from reducing existing fossil gas emissions to arguing that fossil gas in itself is a good thing. This latter argument is an oil and gas industry talking point that has been repeatedly debunked, including by a recent Cornell study showing LNG can have worse life cycle emissions than coal.
Where the taxonomy lands on these issues will be determined by the process that the government now sets up, and critically, by who is selected to make these decisions. A credible taxonomy would hold the line on carbon lock-in and recognize that including fossil fuel mitigation, while valuable, isn’t actually transition and creates political dynamics and design challenges that could sink the credibility of the overall enterprise.
