A deeper dive into the first round of consultation on Australia’s Sustainable Finance Taxonomy

The Australian Sustainable Finance Institute (ASFI) released a public consultation paper on Australia’s Sustainable Finance Taxonomy (Taxonomy) on 28 May 2024. Our initial Insight, First round of public consultation on Australia’s Sustainable Finance Taxonomy, outlined the nature and purpose of the Taxonomy and consultation. This consultation focuses on three priority sectors:

• Electricity generation and supply;
  
  
• Minerals, mining and metals; and
  
  
• Construction and the built environment. 

In this Insight, we explore those sectors in detail.

A second ASFI consultation in Q4 2024 will include climate change mitigation criteria for transport, manufacturing and industry and agriculture and land, a ‘Do No Significant Harm’ framework, Minimum Social Safeguards and proposed advice on how taxonomy users can demonstrate alignment with the taxonomy.

Consultation objectives for the priority sectors

ASFI has prioritised sectors and activities that are ‘Australia’s high-emitting sectors, are instrumental in facilitating the transition to net zero; and/or have a substantial role in a net zero economy based on current technological readiness levels’.

The objectives of the Taxonomy are twofold:

• to drive capital into economic activities that will decarbonise the Australian economy at the speed and scale required to reach our climate change targets;[1] and
  
  
• to improve the quality of information available to the market by standardising sustainability definitions to make them credible, comparable and useable.

ASFI seeks feedback on:

1. the headline ambitions, articulated as long-term goals that underpin the six environmental objectives of the taxonomy; and
   
   
2. whether the draft climate change mitigation criteria for assessing the performance of the three priority sectors align with the core principles established by Treasury for the Australian taxonomy – credibility, useability, interoperability and prioritisation for impact.

The consultation closes at 9pm (AEST) on Sunday 30 June 2024.

Categorising activities under the Taxonomy

Under the proposed Taxonomy, activities would be categorised as ‘green’ or ‘transition’ based on:

1. the nature of the activity (i.e. whether emissions associated with the activity can be reduced or removed. If emissions cannot be reduced or removed, the activity is classified as ‘phase down’ because, at present, the only feasible pathway to decarbonisation is for that activity to be phased down or out); and
   
   
2. the performance of the activity (i.e. how an activity is performing according to the technical screening criteria (TSC) and whether this is sufficient to be considered green or transition).[2]

The proposed Taxonomy is structured in line with:

• commitments under the Paris Agreement to limit the temperature increase to 1.5°C above pre-industrial levels;
  
  
• commitments in the Climate Change Act 2022 (Cth) to reduce emissions by 43% below 2005 levels by 2030 and to achieve net-zero by 2050; and
  
  
• the federal government’s target of 82% renewable energy in Australia’s energy generation mix by 2030.

The proposed Taxonomy also intends to complement other direct measures implemented by the federal government to attract private capital into the decarbonisation of electricity generation, including the Capacity Investment Scheme (a national framework to encourage new investment in renewable energy and storage).

Energy generation

The proposed Taxonomy provides that certain energy generation activities (solar photovoltaic and concentrating solar-thermal power (CSP), onshore and offshore wind, and electricity generation from ocean energy) are ‘directly eligible’ and have no additional TSC before 2030 in order to be green. The TSC post-2030 for these activities are not indicated, and will be considered in the next round of consultation, scheduled for Q4 2024.

We expect that in the next round of consultation, ASFI will seek feedback as to whether the Taxonomy should apply an emissions intensity threshold measured during the life cycle of a power plant post-2030 (consistent with other forms of energy generation covered in the proposed Taxonomy). Regardless of the approach that is ultimately taken in the Taxonomy, we expect that the date from which any additional TSC for solar and wind will be subject to regular review and adjustment, having regard to the actual deployment of renewable generation by 2030.

Other forms of electricity generation activities, including hydropower, geothermal and bioenergy are not ‘directly eligible’ and must meet TSC before being classified as green. Generally, until 2030, these activities must achieve an emissions intensity of less than 100g CO2e/kWh during their life cycle. Certain activities have additional TSC, with bioenergy (as an example) required to produce energy from waste or feedstock that complies with existing reputable standards (including the Forest Stewardship Council (FSC) and International Sustainability and Carbon Certification).

Energy storage

Energy storage is essential to enable the move from fossil fuel baseload power to variable renewable generation.[4] It therefore plays a key role in the decarbonisation of the electricity sector. Consistent with this important role, the construction and operation of mechanical, thermal, electrochemical and pumped energy storage technologies are ‘directly eligible’ to be green under the proposed Taxonomy.

Interestingly, chemical energy storage activities (storing energy in chemical fuels, e.g. hydrogen) are subject to upstream TSC in the proposed Taxonomy, rather than being directly eligible to be green. These activities are required to comply with the TSC applying to the manufacturing of the relevant chemical. By contrast, because electrochemical storage technologies are directly eligible, that lithium-ion batteries (by way of an example) are not directly subject to any TSC (even though there are concerns as to the environmental impacts of the manufacturing of lithium ion-batteries). That said, the proposed Taxonomy to some degree addresses concerns with respect to certain minerals used in electromechanical storage, by including criteria for the minerals, mining and metals sector, including specific TSC for lithium (discussed further below).

Transmission

Alongside electricity generation and storage, transmission is the other limb essential for the transition to renewable electricity generation. There are TSC that apply to transmission and distribution infrastructure activities to determine whether they are green. Broadly summarised, until 2030, infrastructure for new or existing power plants with lifecycle energy intensities less than 100g CO2e/kWh, or that are on a ‘decarbonisation trajectory’, will be green. Thresholds for post-2030 will be considered in the subsequent consultation.

Transmission and distribution of renewable and low-carbon gases is another activity covered in the Taxonomy. There are TSC that indicate such activity must be new or retrofitted pipelines transporting 100% hydrogen and/or its derivatives or low-carbon gases, such products being transported must meet their respective taxonomy criteria, and the activity must implement measures and plans to detect and avoid leakage.

What’s not included

The current consultation draft does not include hydrogen production, which will be included in the subsequent consultation (as part of manufacturing and industry). With the recent federal budget allocating funding to support the production of a low carbon liquid fuels (LCLFs) industry, and the anticipated role of LCLFs and hydrogen in the decarbonisation of hard to abate (principally industrial and transport) sectors, it will be interesting to see if the Taxonomy includes LCLFs production or whether, like carbon capture and storage (which is excluded from the Taxonomy), LCLFs will not meet the technological readiness level required. It will also be interesting to follow whether, as the Taxonomy adapts, electricity production from hydrogen and LCLFs (such as a replacement for diesel in remote generation) will be activities covered by the Taxonomy.

The federal government also recently announced the ‘Future Gas Strategy’, outlining the central role of gas in providing firming power through to 2050. Gas firming has not been included in the scope of the proposed Taxonomy at an activity level, which may reflect that the role of gas in energy transition has been unclear until very recently. However, the Taxonomy will explore providing guidance to assess gas firming at a systems-level where gas is part of a transitioning portfolio of assets.

Adaptability

Whilst the proposed Taxonomy is directed towards technologies that are proven and commercialised now (such as solar and wind), it is structured to be flexible and capable of accommodating new and evolving technologies and knowledge, and to adapt to the inevitable changes in the pathway taken in Australia to achieve decarbonisation objectives. As has been the experience of many other countries to date, the pathway to decarbonisation is challenging, unclear and subject to significant, and sometimes rapid, change. In this context, it will be interesting to see how and at what pace the Taxonomy will adapt to these inevitable challenges and changes.