Transitioning towards clean energy in Europe: comparative analysis of the EU Taxonomy for Green Activities and the EU Emissions Trading System as tools for sustainable finance.

Following the implementation of the Paris Agreement and the European Green Deal, efforts to decarbonise the energy sector in Europe have been increasing in the last few years. Reducing carbon as well as GHG emissions in this sector is of upmost importance if Europe intends to reach carbon neutrality by 2050. To do so, sustainable finance, i.e., guiding investments towards projects that help support the energy transition, is of crucial importance. This challenge is made more difficult by the complex economic nature of electricity markets. A first instrument set up to address this is the European Emissions Trading System (EU ETS). It came into force in 2005 and is a mechanism which caps the total amount of emissions and allows covered sectors to trade certificates for the remaining amount with the result that a price on carbon is paid. In more recent years (2020), another tool was developed to provide the private sector with specific definitions of what constitutes a green activity, in order to direct investments and financing towards environmentally friendly projects as well as to prevent greenwashing practices. It is the EU Taxonomy for Green Activities. On the one hand, the EU ETS is based on a free-market approach has been subject to criticism regarding the volatility of the price and some speculative behaviour by market players. On the other hand, the Taxonomy is a regulatory tool and was subject to backlash due to the implementation of gas and nuclear in the Climate Delegated Act (CDA). The purpose of the present paper is to provide a comparison of both tools and their ability to support the clean energy transition in Europe, based on interviews conducted with professionals in the domain. Overall, it appears that while the EU ETS could be withdrawn in favor of more diversified and specific sectoral policies, the EU Taxonomy has higher prospects of success on condition that the CDA is reviewed. However, this outcome is likely to be determined only in the longer-term.