Natural Gas Threatens Canadian Taxonomy

Despite warnings on its climate impact, demand for Canadian liquefied natural gas continues to grow.

Industry experts have expressed concern on the potential inclusion of natural gas in Canada’s proposed taxonomy and the way it could undermine its domestic and international credibility.

Launched in 2021, the Canadian Sustainable Finance Action Council delivered a roadmap report detailing the taxonomy’s approach and governance structure the following year – setting the path for further progress. The council completed its three-year mandate on 31 March.

But progress on the taxonomy has been slow. Research from Canadian environmental advocacy organisation Environmental Defence pointed to reports suggesting that internal government conflicts around the place of natural gas in the taxonomy had stalled its release.

“There was significant pressure for the taxonomy to specifically allow liquefied natural gas (LNG) exports as a ‘transition’-labelled activity, even though there is scientific consensus that averting the worst impacts of climate change requires the rapid phase-out of fossil gas,” Adam Scott, Executive Director at Shift: Action for Pension Wealth and Planet Health, told ESG Investor.

He added that the inclusion of gas in the Canadian taxonomy was “entirely unworkable” and a “recipe for additional greenwashing”.

“Institutional investors should listen to experts [and] be sceptical of any claims made by the LNG industry about its role in our future energy system,” said Scott.

Crushing credibility

The environmental impacts of natural gas, particularly LNG, are high. Methane, the primary component of LNG, has a global warming potential around 82 times higher than CO2 when burned as a fuel.

“Wrongfully labelling gas as ‘sustainable’ under this taxonomy would entirely squash its international credibility,” warned Julie Segal, Senior Manager for Climate Finance at Environmental Defence, adding that the inclusion of fossil fuels that do not align with climate goals would also defeat its purpose.

“If Canada diverts further from science it will not only be embarrassing, but will invalidate all of the work that has gone into creating a tool that helps clean up and align our financial system with climate action.”

Ahead of the publication of the UK’s own taxonomy, the CEOs of three major sustainable investment organisations echoed similar concerns on the inclusion of natural gas –

Taxonomies are not Instruments of Industrial Policy

Christina Ng, Managing Director of the Energy Shift Institute says Asia’s transition finance complications could harm its climate goals.

Is transition finance an attempt to extend the spectrum of green finance? Or is it a covert means of financing non-green activities, which have had limited opportunity in gaining access to sustainability-conscious investors?

This phenomenon appears to be occurring in Asian markets.

And nowhere is this more apparent than in the realm of national financing frameworks, where the drive to foster economic growth is so strong that it can be pursued at the expense of transitioning to a genuinely green and sustainable energy future.

Recent developments underscore this troubling trend.

For example, Indonesia’s revamped Sustainable Finance Taxonomy incorporates certain new and existing coal-fired power plants as transition activities and therefore qualifies them for transition finance. The Indonesian government justifies this classification due to the role of coal power generation in processing critical minerals for electric vehicles and clean energy technologies – which aim to contribute to economic growth.

Flawed reasoning

This flawed reasoning not only perpetuates the reliance on fossil fuels but also risks alienating climate-minded foreign investors. Indonesia’s logic, if applied universally, would imply that any power plant, including fossil-fired ones, could be labelled transitional, simply because it powers the manufacturing of clean energy technologies.

Up in the northeast of the region, the government of Japan launched a Green Transformation (GX) policy. It aims to switch Japan’s fossil fuel-oriented industries to clean energy focused ones and issue sovereign transition bonds, among other instruments, to finance the GX plan. But a deeper dive reveals that the centrepiece of the government’s GX strategy is about ensuring economic growth.

This observation is also shared in a Sustainable Fitch note which found an emphasis on the term ‘competitiveness’. Specifically, the term was mentioned 15 times in the GX framework as compared to just once in Singapore’s green financing plan and not at all in India’s framework. The note goes on to say “this may explain why some of the eligible transition activities under Japan’s strategy are supportive of industry, but do not meet international green standards”. The questionable activities referred in Japan’s strategy include hydrogen, gas infrastructure, and ammonia co-firing in coal and gas power plants.

The approaches in Indonesia and Japan overlook the fundamental goal of sustainable finance – chiefly, to channel capital to activities that mitigate greenhouse gas emissions that would, in