After six months of resisting industry calls to add liquefied natural gas (LNG) to its green taxonomy, the South Korean government finally succumbed to gas lobbyists this week.
This is surprising because, just 2 weeks ago, President Moon Jae-in made a new, well-received emissions pledge: to reduce the country’s greenhouse gas emissions to 40% by 2030.
The obvious dichotomy here is that the recognition of gas and LNG as an environmentally friendly ‘transitional’ fuel is likely to lock South Korea into a high-emission future, which directly contradicts the policy and market incentives created. by President Moon’s new emission reduction targets.
Released last week, the Green Taxonomy Project, known locally as K-Taxonomy, prescribes a technical criteria for selecting end-use emissions of 320 g of carbon dioxide (CO2) per kilowatt hour (kWh). A life cycle emissions standard is also expected, but it will not apply until 2025.
This means that relentless new LNG power projects, of which around 10 gigawatts are expected to flood South Korea’s energy market by 2025, could benefit from green bond financing and loans if the K-Taxonomy project is finalized without modifications.
ESG investors concerned about issues should be on the alert
South Korea’s green debt stood at $ 42.8 billion as of September 30, 2021, according to Bloomberg New Energy Finance. One-third, about $ 14.22 billion, financed electric and energy companies.
If the current K-Taxonomy project continues as is, ESG investors could inadvertently find themselves supporting gas.
Gas is a fossil fuel that releases carbon and methane into the atmosphere by combustion, with dangerous and significant life cycle emissions. In addition, the methane in the gas has a warming effect that is up to 80 or 90 times more powerful than carbon over a 20-year period, making the gas worse for the climate than coal in the short term.
The tension around the limited role of gas in the energy transition is evident in the taxonomic work taking place in all global markets.
After much controversy, the European Union (EU) has accepted gas-fired electricity generation as a “transitional” asset class under its taxonomy of sustainable finance, provided that carbon emissions from the cycle life of a project are limited to 100 g of CO2 per kWh.
At this specification, gas-fired projects in the EU will likely require the use of carbon capture technology (CCS), which has yet to be proven economically or technically viable on a large scale anywhere in the world. Under these conditions, it is unlikely that gas will be financed in the short or medium term, or even in the long term, within the framework of the EU taxonomy.
The K-Taxonomy is expected to be finalized by the end of 2021, and with its current project not conforming to the EU benchmark taxonomy, investors are right to be wary.
Moon administration risks running out of new sources of global capital
With the inclusion of gas in the K-Taxonomy, Korean policymakers have effectively signaled that they are not up to the task of leading market development with a green taxonomy.
Instead, they show a preference to stay in step with their counterparts in emerging markets in Southeast Asia who have signaled their intention to recognize gas production as “green”.
This puts South Korea at risk of deterring serious ESG investors who generally prefer “dark green” assets – solar, wind and geothermal for example.
The UK’s first sovereign green bond issued in September 2021 demonstrated this risk when it provided a mixed portfolio of green and controversial assets like “blue hydrogen”, which uses methane in its production. Several large bond investors immediately criticized the sovereign’s opportunistic “green” bond and avoided it altogether.
China is working with the EU to harmonize their respective taxonomies
In contrast, China, the region’s largest green debt market, has taken a different and much more strategic approach, learning from market trends and adapting.
Its first green taxonomy in 2015 classified “clean coal” as a green project eligible for green bond issuance, attracting much criticism, especially from foreign investors.
Recognizing the importance of a truly green taxonomy, in mid-2021 China phased out fossil fuel-related projects and the new catalog of projects approved by Green Bonds – its equivalent green taxonomy – now excludes activities related to fossil fuels. gas, LNG and coal.
Like South Korea, China depends on burning fossil fuels to power the country. However, President Xi Jinping’s pledge to accelerate the country’s transformation to a green, low-carbon economy, and achieve carbon neutrality by 2060, has opened the door to a much more strategic vision on how which the Chinese green finance market should develop and which technologies should be incentivized.
China is also working with the EU to harmonize their respective taxonomies by the end of 2021. This is a positive move between jurisdictions in response to investor demands for a common standard on green or sustainable projects. The move also indicates that the Asian giant is ready to compete for global green capital.
China understands that ESG-focused investors have become more forensic in their research and decision-making on what different taxonomies recognize.
Most notably, China’s mindset to justify green energy activities appears to be unfazed, at least for now, by its need to fund new coal and gas-related projects, which would be needed to carry them through the energy transition phase – on the grounds that his Asian country counterparts, including South Korea, have defended and used to classify their own gas-powered projects as green.
But fossil fuel projects have a long history of being successfully funded. The existence of a green or sustainable finance taxonomy does not prevent assets or projects that the taxonomy excludes from being financed by conventional sources of finance. As in the past, fossil fuel projects will continue to raise funds through traditional unlabelled debt market instruments.
Investors want green taxonomies
Meanwhile, investors around the world are urging governments to step up their efforts and commit to clear, strong, and investable policies that will unlock the capital needed to transition to a net zero economy.
Despite its new promise of now-hollow broadcasts, the Moon administration does not seem ready to rise to the occasion. It risks missing out on new sources of global capital if it does not set the policy parameters properly and instead chooses to bow to the fossil fuel industry.
Christina Ng is Head of Research and Stakeholder Engagement – Fixed Income, Institute for Energy Economics and Financial Analysis (IEEFA).