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What does the new EU taxonomy mean for the financing of biogas from biowaste?

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The Policy Learning Platform received the following policy helpdesk request: 'How does the climate change taxonomy's classification and treatment of biogas generated from waste, impact financial support and investment in the sector over the short term and/or long term?'

Below you will find the response from our Thematic Experts, Katharina Krell and Marco Citelli. Are you interested in receiving resources from our team? Submit your expert support request

What is the EU taxonomy and why was it developed?

In order to meet the EU’s climate and energy targets for 2030 and reach the objectives of the European Green Deal, it is fundamental to direct investments towards sustainable projects and activities. To achieve this, a common language and a clear definition of what is 'sustainable' is needed. This is why European Commission developed a so-called 'EU taxonomy'.

The EU taxonomy is a classification system, establishing a list of environmentally sustainable economic activities. It provides appropriate definitions to companies, investors and policymakers on which economic activities can be considered environmentally sustainable, thus creating security for investors, protecting private investors from greenwashing, helping companies to plan the transition, mitigate market fragmentation and eventually helping shift investments. As such, the EU Taxonomy is one of the most significant developments in sustainable finance and will have wide ranging implications for investors and issuers working in the EU, and beyond.

The Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (dubbed 'Taxonomy Regulation') was published in the Official Journal of the European Union on 22 June 2020 and entered into force on 12 July 2020.

It establishes the framework for the EU taxonomy by setting out four overarching conditions that an economic activity has to meet in order to qualify as environmentally sustainable. The regulation will be complemented by a number of delegated act that will detail technical screening criteria, to be developed by a technical expert group. A final report on EU taxonomy including the technical annex to the final report on EU taxonomy sums up the expert group recommendations.

What does the EU taxonomy say about biogas generated from waste?

What we mean by biogas: inside the EU, most people distinguish between biogas and landfill gas, even though both originate from organic matter. Biogas is the gas from the anaerobic fermentation of organic matter collected in the digester of a biogas plant, whereas landfill gas is the gas collected in landfills through gas wells. The report follows this distinction by referring respectively to 'biogas' and 'landfill gas'.

What we mean by waste: Biogas can be generated from organic matter that is a waste in the agricultural sector and by the organic fraction of municipal solid waste. Both feedstocks are wastes. We assume the question refers to the latter, i.e. waste as in bio-waste from households, canteens, markets, etc.

In its technical Annex, the report defines anaerobic digestion of bio-waste as 'Treatment of separately collected bio-waste through anaerobic digestion in dedicated plants with the resulting production and utilization of biogas and digestate.' It refers to the definition of bio-waste in Directive (EU) 2018/851 of the European Parliament and of the Council of 30 May 2018 amending Directive 2008/98/EC on waste (Article 1(3)(b)), which comprises biodegradable garden and park waste, food and kitchen waste from households, offices, restaurants, wholesale, canteens, caterers and retail premises and comparable waste from food processing plants.

The summary tables of the Taxonomy Report’s Annex clearly classify anaerobic digestion (AD) from bio-waste as economic activity that substantially contributes to climate change mitigation both in the short and in the long-term (the activity is not considered transitional). This includes the activity in the sectors already at near-zero carbon level that must be expanded in line with the commitments under the EU Green Deal and with the expected climate law. Investing in this activity is recognised as not creating any lock-in effects in the mid-term, meaning the activity is in itself climate-friendly even in the long-term.

A few conditions to ensure that no significant harm is done (DNSH criteria) related to state-of-the-art of bio-waste treatment in AD, such as attention to methane leakage, emissions reduction or avoidance and the subsequent use of the digestate. Certainly, EU-regulated biogas plants already ensure compliance with these criteria, while non-EU plants may lack in some of these areas, at least in some parts of the World.

How can the EU taxonomy impact the financing of biogas generated from waste?

The EU Taxonomy Regulation will require most European financial institutions and non-financial companies to outline the environmental sustainability of their economic activities. The Regulation applies to two different parties: 1) financial institutions that offer financial products on the European market and 2) non-financial companies that already have to submit a non-financial statement under the Non-Financial Reporting Disclosure (NFRD) regulation. This means large listed companies, banks and insurance companies with more than 500 employees. SMEs are excluded.

This disclosure of financial institutions’ alignment with the EU Taxonomy can be a powerful motor of change as it can have a reputational impact if a fund shows its investments are not aligned with sustainability goals.

European financing in the large sense, meaning financing that is public money, leveraged with the help of public guarantees or a blend of financing with a public component will use the taxonomy and align its investment decisions with it.

This will directly, in this programming period (2021-27) impact economic activities: some will cease to receive EU support, such as e.g. bulk incineration of municipal solid waste, while others will become particularly attractive, such as e.g. biogas generation from separately collected bio-waste. This may not be only due to the taxonomy, but the taxonomy gives a methodological frame to this decision to shift public money to sustainable activities. Private money is also shifting, this has not started with the EU taxonomy, as demonstrated by the Divestment-Campaigns. But again, the taxonomy helps assess and communicate what is considered 'green'.

Is this relevant for biogas from waste?

Biogas from bio-waste is likely to attract a lot of public funding in the coming decade. The 'owners' of the feedstock are typically municipalities who own the waste generated on their territory, and along with it the obligation to manage it. In 2018, the revised Waste Framework Directive introduced stricter rules to guarantee the separate collection of waste streams including biowaste (from 2023). At the same time, it called for the diversion of biodegradable waste from landfill and incineration and for the increase of the overall recycling targets to 65% by 2035.

Two treatment methods are available: composting and anaerobic digestion (AD), with AD providing a higher added value due to the energy generation aspect in addition to the material recovery aspect given with composting. In addition, AD does not preclude composting but is just an additional stage in the process, making AD plus composting of digestate the best available technology option for bio-waste.

Since 2001, biogas has mostly been boosted by the Renewable Energy Directives that set targets and provided for support schemes. In the future, the new EU Waste Legislation with 65% recycling targets and the obligation to separately collect bio-waste from households by 2023 is likely to trigger the next wave of biogas development. The taxonomy confirms this, but is not at the origin of the obligation to collect separately and to treat properly. Thus, it has a reinforcing role to play, but the real trigger to channel very important amounts of public money into biogas from bio-waste was the revised EU waste legislation (see also this article and the Interred Europe webinar on biogas from bio-waste).

EU regions are currently preparing the Operational Programmes for the new funding period, and biogas from bio-waste is likely to appear prominently in these, resulting in large amounts of EU and national funding to go into new operations.

In how much the EU taxonomy is able to raise additional funding for biogas from bio-waste remains to be seen. It certainly supports the activity. But for for-profit funds to be attracted by investment opportunities in biogas form bio-waste, this activity must yet find its new business models to yield a return acceptable to private investors. New business models are necessary as feed-in tariffs are being phased out in most countries. With no or low premium prices for the electricity generated by biogas plants, this activity is rarely economically viable in areas covered by the electricity grid when only relying on income for the energy produced, be it in form of renewable electricity, heat or upgraded biogas for grid injection or use as CBG.

This is even more true considering the need to clean the bio-waste feedstock of its typical non-organic impurities before entering the digesters. Therefore, plants treating household bio-waste should get a revenue for this waste treatment and material recycling function, for example in form of a gate fee. Only when the economic activity of converting bio-waste into biogas is also profitable will the EU taxonomy show its full power of diverting financing into this sustainable activity.

Further reading and support available through the Interreg Europe Policy Learning Platform

Find information gathered in the context of interregional cooperation that may be interesting or useful. In particular, Interreg Europe validated good practices and to sources of policy information from the knowledge hub of the Interreg Europe Policy Learning Platform.

Read the publications:

If in need of individual advice, check out the peer review service: The objective of the peer review is to enable policymakers to receive hands-on feedback and advice from peers on a selected policy challenge to tackle, for instance how to design a new bio-waste policy in line with the new EU regulations. Peer reviews target local and regional public authorities from all European regions.

The Policy Learning Platform identifies suitable experts (peers) from other regions who can support the host region in finding solutions to its policy challenges. The peer review process involves an intensive 2-day peer-to-peer meeting that is normally conducted in the host region seeking advice. Since the beginning of the ongoing public health emergency, peer reviews are being successfully carried out online.

See for example the report from a recent peer review for the City of Burgas on Waste Prevention and separate waste collection in a circular economy.

Image credit: Photo by Nareeta Martin on Unsplash
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