The advisory group mandated last April to set the criteria for green or transition investments under Canada’s forthcoming sustainable finance taxonomy has opened a one-month feedback period to get public and expert comment on how those categories should be designed.

And the federally-appointed Taxonomy and Transition Planning Council has added a third category—abatement—to open a conversation about whether fossil fuel investments should have any place in the framework. A coalition of sustainable finance advocates says fossil fuels should be left out entirely.

On Thursday, the council released a draft of its 67-page Methodology Report [pdf] and set an August 13 deadline for public and expert comment.

A sustainable finance taxonomy is a voluntary framework meant to “identify opportunities for climate-aligned investment in Canadian projects, sectors, and economic activities, and will help drive investments that align with Canada’s clean growth and decarbonization priorities,” states the report, produced by the Canadian Climate Institute with support from the Canada Climate Law Initiative and the investor-led Business Future Pathways (BFP).

“Taxonomies are science-based and create standardized definitions across the market to help companies, investors, and lenders make more efficient and informed investment decisions,” the report explains. “Developing Canada’s own national taxonomy strengthens credibility and interoperability (i.e. harmonization) of investments with global peers while also reflecting Canada’s unique economy and geography.”

Sustainable finance experts have long argued that harmonization is long overdue, warning that its absence is already impeding international investment from countries that are guided by their own taxonomies.

Picking Up the Pace

After years of deliberating on how to set up a framework of guidelines for sustainable investment, the federal government now aims to establish a sustainable investment taxonomy for three economic sectors by the end of this year. It will add three more sectors by the end of 2027. The six include electricity, buildings, transportation, mining, manufacturing, and agriculture/forestry. Each will have its own criteria to help investors determine which investments can be certified as green, which fit into a transitional category, and which could include technology for decarbonizing high-emitting operations, Business Future Pathways writes.

The six principles guiding the taxonomy’s development are meant to ensure the framework is credible, usable, interoperable with taxonomies in other countries, dynamic, regionally specific to account for Canada’s varied geographic and economic landscapes, and that it prioritizes activities that will have the greatest impact on decarbonization, BFP states. Establishing a taxonomy is widely seen as an essential, long-overdue step to bring Canada in line with the more than 60 countries that already have them in place or under development, including most of Canada’s trading partners, giving investors and companies clarity to direct capital toward genuinely low-carbon projects.

“This report really will be the North Star of the taxonomy.” Jonathan Arnold, the Climate Institute’s head of sustainable finance, told The Energy Mix Thursday afternoon. “It will guide how the technical criteria for each sector and activity get developed,” so “it’s imperative that folks take this opportunity to weigh in and provide their feedback on what will be a very important tool in the Canadian climate mitigation landscape.”

“This consultation is the one public opportunity for people to contribute their perspectives on what should or should not be in a sustainable investment label, as well as the methodology and principles that guide it,” agreed Julie Segal, senior manager of climate finance at Environmental Defence Canada and a member of the council’s Technical Advisory Group.

Arnold said the decision to make the Canadian taxonomy voluntary makes it “fundamentally different” from the mandatory framework now in place in the European Union, reflecting the accumulated experience with implementing taxonomies in other parts of the world.

“If anything, we’re on the tail end of how our trading partners and other countries have been defining taxonomies,” he told The Mix. “We have a lot to learn and gain from the experience in other jurisdictions,” and “one of the big pinch points in the EU is around usability,” particularly with provisions to do no significant harm and set minimum social safeguards.

Based on that experience, Australia opted to develop a taxonomy that would be “easier to use by the market, and early signals show that it’s working,” he said. “We’ve emulated many of those approaches that Australia has taken that we hope will ease some of that burden and strike a balance.”

Abating Fossil Fuel Emissions?

Past stages of work leading up to this week’s draft have seen fierce debate on whether investments in natural gas plants, for example, should be recognized as transition investments. Early discussion in this round is centring in on the council’s proposal for an abatement category—and the council says it’s encouraging the discussion.

“By proposing the abatement category, the Council is asking: is it possible to significantly drive down emissions in the oil and gas sector in the short and medium term without locking Canada into higher emissions in the long term?” explained Council Chair Marlene Puffer, former chief investment officer of the Alberta Investment Management Corporation, in a BFP consultation backgrounder released Thursday.

“Given that oil and gas production and refinement represents nearly one-third of Canada’s total greenhouse gas emissions, it is incumbent on us to ask this question,” she added. But “if and how the taxonomy ultimately includes an abatement category is an open question. We’re very interested in people’s feedback on this topic.”

The backgrounder notes that the green category of investments is “well-established by global taxonomies”, consisting of “zero to near-zero emission climate solutions” like renewable energy, storage, electric vehicle manufacturing and infrastructure, and smart grid development “that accelerate Canada’s path to net zero by 2050.” The transition category, a newer measure already in use in countries like Australia, China, and Singapore, would help drive investment in high-emitting sectors like cement, steel, manufacturing, and mining that “support their transition to net zero.”

Newer and more controversial is the abatement category, covering activities “that would drive significant, immediate-term emissions reductions in high-emitting sectors that are likely to experience a decline in demand on the path to net zero,” like fossil fuel extraction and production. “However, investments in such activities would need to meet credible, robust guardrails that prevent the risk of ‘carbon lock-in’,” the backgrounder states.

Decarbonization, Not Production

Arnold said the abatement category is one of the elements scheduled for initial scoping in 2027, with a focus on “specific, time-bound investments” aimed at decarbonizing oil and gas production, “not the production itself”. That work “is important to achieving Canada’s net zero goals, and important in terms of climate mitigation,” he said. “The challenge, of course, is developing guardrails that allow for those short-term investments in emission reductions” without locking in longer-term emissions.

The council set the categorization framework for the taxonomy with the recognition that 80% of the emissions in a barrel of Canadian oil are exported, he said, placing them beyond what the industry means by decarbonization. “We considered the extent to which demand for any activity would remain stable or grow in a net-zero or Paris-aligned pathway, and of course oil and gas demand in those pathways is highly likely to decline because of those 80% of emissions.” So the fossil sector is “treated fundamentally differently” from other high-emitting industries.

Earlier in the week, a report published by Credible Taxonomy said the fossil sector has been pushing to include fossil fuel-linked activities in the taxonomy. But the report argues that applying a sustainable label to Canadian oil and gas-related activities contradicts science-based net zero pathways.

While proponents for including fossil fuels in the taxonomy focus on technologies that could reduce the sector’s production emissions—such as carbon capture and storage—the report stresses that including the sector could “lock-in” future oil and gas emissions.

“While marginally reducing emissions from the production of oil and gas might be possible, this report outlines why the taxonomy is not the appropriate tool to advance this goal.”

The report says including fossil fuels would undermine the taxonomy’s credibility and open the door to greenwashing, while defeating the goal of making it interoperable with more ambitious taxonomies in other countries that leave fossil fuels out.

Since the government has indicated it will use this taxonomy when issuing green bonds, its design will also influence how public dollars are used, Segal added.

“The taxonomy is only useful if it’s scientifically accurate,” she said. “It’s meant to be a translation tool for science to guide finance, and offering a ‘gold star’ to any oil or gas related investments would muddy the waters rather than clarify it.”

Arnold said the methodology draft is meant to address that concern.

“That is exactly why we need to have oil and gas in the abatement category included,” he told The Mix. “We need to set a high bar, but we need to set a clear bar in terms of what investments might qualify. And that will require very robust safeguards that would be developed in that future phase of work. We’re very aware of the challenges with doing that, we note a lot of them in the report, and that’s also why we’re actively consulting on this question,” asking not only about the guardrails that could apply “but even just the existence of the third category itself.”