CCUS and blue hydrogen inclusion seen as slowing Canada’s net zero transition, while finance leaders urge stakeholders to “get on with it”.
Canada-based experts have welcomed a new proposal for a green taxonomy, but are concerned it leaves the door open for untested-at-scale and controversial technologies that will allow for continued investment in fossil fuel industries, thereby slowing the net zero transition.
Produced by Canada’s Sustainable Finance Action Council (SFAC), the proposed framework outlines two categories for sustainability-focused investments.
The ‘green’ label will be awarded to activities that emit little to no carbon, such as solar energy, and solutions enabling those low-carbon activities, such as green hydrogen pipelines.
But controversy surrounds Canada’s attempt to introduce one of the first taxonomies in the world that sets criteria for investable transition activities. Although it excludes investment in new coal, oil and gas projects, the proposal paves the way for some existing oil and gas projects to fall under the ‘transition’ label, provided they have limited lifespans and result in a real reduction in CO2 emissions.
“There’s a lot of good in what has been proposed, but this taxonomy ultimately includes harmful activities that simply shouldn’t be there,” Adam Scott, Executive Director at Shift: Action for Pension Wealth and Planet Health, told ESG Investor.
He noted that there is a case to be made for the inclusion of hard-to-abate industries like steel, cement and fertiliser production, as they have a role to play in a net zero world. However, critics are concerned about the proposed inclusion of carbon capture, utilisation and storage (CCUS) technologies for oil sand production, as well as the production of blue hydrogen.
The taxonomy establishes Canada “as a climate leader in one sense, and a laggard in many others”, said Julie Segal, Senior Manager of Climate Finance at Canadian environmental organisation Environmental Defence.
Following a lack of progress made by the non-profit industry body Canadian Standards Association (CSA), SFAC was launched in 2021 by the Canadian government with responsibility for creating a green taxonomy.
Hitting the snooze button on transition
Over-reliance on CCUS will fail to address significant Scope 3 emissions, Shift’s Scott said, which currently make up between 80-95% of fossil fuel industry emissions.
“There aren’t many examples of [CCUS] actually working or being able to meaningfully reduce emissions,” said Scott. “It’s currently not possible to capture [80-95%] of oil and gas emissions from it, meaning oil and gas firms will still need to be phasing out a significant proportion of their emissions very rapidly. We’re talking stranded assets, almost certainly, within the timeframe it would take to build out CCUS capacity.”
CCUS is “a dead end” that simply allows fossil fuel companies to “hit the snooze button on transition”, he said.
Segal was concerned about the potential inclusion of blue hydrogen, produced from natural gas and supported by CCUS.
“[Blue hydrogen] is just a euphemism for gas, which is a euphemism for methane, which has more short-term warming potential than CO2 – that’s very worrying,” she said.
“Any [fossil fuel firm’s] climate scenario that is aligned with a 1.5°C temperature pathway should outline how it will be winding down production – not expanding – by the end of this decade. Including oil and gas via oil sands and blue hydrogen undermines what a transition label should actually represent.”
The proposed transition label is conditional on fossil fuel projects having well-defined lifespans approximately proportionate to the expected decline in global demand, explained Barbara Zvan, President and CEO of the University Pension Plan Ontario (UPP). She also led SFAC’s taxonomy expert group.
“We still need gas for a period of time, but that demand needs to come down as part of Canada meeting its decarbonisation targets,” Zvan said, noting that oil and gas projects will only qualify for the transition label if they can demonstrate how those aforementioned technologies are resulting in significant greenhouse gas (GHG) reductions across assets.
“Looking beyond the label, the proposal also outlines the importance of providing supporting evidence and information of the risks relative to each label,” she said.
One of the next steps for the development of the taxonomy will be to develop a methodology and criteria to differentiate between eligible green and transition projects according to their relative transition opportunities and risks.
“The concerns [around CCUS and blue hydrogen] are legitimate, and it’s important that we keep them in mind, but my biggest concern is that we risk letting perfect become the enemy of the good,” said Roger Beauchemin, President and CEO at privately-owned investment management firm Addenda Capital. Beauchemin is also Chair of the Responsible Investment Association (RIA).
“We just need to get on with it,” he said, adding that the taxonomy is a living document that can be refined and updated over time.
Potholes in the transition pathway
Both Segal and Scott also voiced their concerns about the leading role of financial institutions in the development of the draft taxonomy.
Members of SFAC include some of the region’s largest asset owners, such as UPP, Ontario Teachers’ Pension Plan and Canada Pension Plan Investment Board.
“A number of [SFAC] members are likely invested in oil and gas companies, so there’s a conflict of interest,” Scott said, adding that it’s “very inappropriate for them to set the rules on what is or isn’t a green asset”.
UPP’s Zvan countered that the taxonomy was developed with research support from the likes of the Canadian Climate Institute and the Institute for Sustainable Finance.
“It has not just been the finance sector involved [in the taxonomy work],” Zvan told ESG Investor.
“We hosted roundtables featuring independent groups and ensured we did much broader engagement with stakeholders.
“This first phase has been about ensuring alignment with the financial community because the first attempt by the CSA didn’t succeed.”
A joint federal government-financial industry governance council will be established to review the draft and finalise the details with independent standard-setting bodies.
“What we now need are the government voices, the NGO voices, and the Indigenous voices,” said Beauchemin.
“Canada finally has a taxonomy. The road is open. Although it may not be paved the way everyone wants, and it may have a couple of potholes, at least we’re now moving forward.”