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March 22, 2023

Canada’s latest green taxonomy proposals exclude gas and nuclear

The Canadian parliament buildings, Ottawa. The country’s future taxonomy might have more in common with Asian countries, such as Japan and Singapore, who are also embedding transition criteria in their frameworks (Photo: Tetyana Kovyrina/ Pexels)
The Canadian parliament buildings, Ottawa. The country’s future taxonomy might have more in common with Asian countries, such as Japan and Singapore, who are also embedding transition criteria in their frameworks (Photo: Tetyana Kovyrina/ Pexels)

Canada’s Sustainable Finance Action Council recommends its new taxonomy focuses on green and transition categories and diverges in some respects from both the EU and UK approaches.

Earlier this month, Canada’s Department of Finance published a roadmap to establish a taxonomy for sustainable investment in the country that considers transition activities and excludes gas and nuclear power from its green definitions.

This roadmap is based on 10 recommendations made by the country’s Sustainable Finance Action Council, which in May 2021 was mandated to resume work on the national taxonomy after earlier attempts by the Canadian Standards Association failed to reach a consensus.

The proposal focuses on two investment categories: green and transition. Low or zero-emitting economic activities, such as solar, wind and green hydrogen, and their enablers (for example, electricity transmission lines or hydrogen pipelines) would be considered green under the taxonomy.

For an economic activity to fall under the “transition” category it needs to operate in a carbon-intensive sector and be in the process of significantly decreasing its Scope 1, 2 and 3 emissions – without the use of carbon offsets – aligned with scenarios to limit global warming to below 1.5C.

In the case of oil and gas, which the document cites as “expected to face decreasing global demand in [the low-carbon] transition”, some leeway exists as eligible projects could include activities aimed at carbon capture and storage on oil or gas fields with a short-to-medium-term lifespan.

International comparisons

Notably, nuclear and gas are not considered “green” under the proposals, which clearly diverges from the positions of both the EU and the UK. The EU’s last-minute inclusion of nuclear and gas into the EU taxonomy (which does not include transition criteria) generated intense discussions and legal challenges last year, with Austria suing the European Commission in front of the Court of Justice of the European Union.

Meanwhile, UK chancellor Jeremy Hunt recently indicated that nuclear will be classified as “environmentally sustainable” in the country’s delayed taxonomy.

Canada’s SFAC admits that a judgement call still needs to be made on nuclear power, and future inclusion in its taxonomy is possible. The proposals do, however, include the use of “do not significant harm” criteria, pioneered by the EU, to ensure projects are only eligible under the taxonomy if they are not detrimental to other ESG objectives such protecting indigenous rights, or those of workers and communities in a just transition.

Still, with its focus on transition finance, Canada’s future taxonomy might have more in common with Asian countries such as Japan and Singapore – who are also embedding transition criteria in their frameworks – than its Western counterparts. The documents also flag “potential competitiveness implications” that might arise with its southern neighbour, the US, which has not yet started developing a domestic taxonomy.

In related news, Canadian government suppliers will now be obliged to disclose their greenhouse gas emissions and set reduction targets from April this year.

Canada is estimated to have an annual investment gap of $115bn to reach its climate goals. For the SFAC recommendations to move forward, a taxonomy council (represented both by the federal government and the financial industry) should be established to appoint technical working groups alongside stakeholder input, with the aim to have a complete taxonomy in place by the end of 2025.

 

A service from the Financial Times