2024-05-31
Earlier this year, the European Investment Bank announced that it was working with large financial institutions such as Nordic Investment Bank, BNP Paribas, SocGen, Temasek Holdings, and the ING Group to invest €250 million (around NT$10 billion) in a Swedish steel company.
And it's not only the European Investment Bank; the European Union Innovation Fund, which is made up of carbon tax income, is also pitching in. Why would the eco-friendly and environment-conscious EU invest in a new steel plant?
According to the European Investment Bank, the reason to invest in steel is that the steel industry has strategic importance and is central to Europe's economy. "We promised net zero by 2050, which means these major sectors need to undergo large-scale transformation." In other words, sustainable financing and green financing are not just about new green technologies like renewable energy; they must also support high-emitting industries in their low carbon transformation.
The abovementioned Swedish steel plant is the first in the world to achieve mass production using only hydrogen power. By using hydrogen fuel instead of coal, the steel it produces is bona fide green steel. Once it reaches economy of scale, it can cut carbon by 95% compared to traditional steel factories.
Chi-Jui Huang (黃啟瑞), professor at the Department of Finance and Cooperative Management at National Taipei University, explains that when governments and financial institutions talk about sustainable financing, they usually mean putting money in carbon-free industries such as clean energy.
But people are starting to understand that while cement and steel produce a great deal of carbon, they are also essential industries. Therefore, the new way of thinking around the globe is that, rather than eradicating or impoverishing high-emitting businesses, the correct thing to do is to guide them toward low-carbon production. Hence, the EU leverages government funds as a way of encouraging private investors to also back "transformation financing"—the practice of investing in high-emitting industries' green transformation.
| International Sustainable & Transformation Financing Milestones | |
|---|---|
| Date | Milestone |
| March 2020 | The EU announces its "EU Taxonomy for Sustainable Activities", laying out the rules for what qualifies as low-carbon production processes to pave the way for private investments. |
| November 2022 | The G20 announces its "transformation financing framework". |
| December 2023 | The Glasgow Financial Alliance for Net Zero (GFANZ) announces guidelines for transformation financing. |
In addition to the European Investment Bank coming to the aid of high-emitting industries that are looking for ways to transform, the EU has another important financial tool for green transformation: the Next Generation EU (NGEU) economic recovery package. Its goal is to tide industries over until low-carbon production can support their businesses.
Energy-intensive industries like cement, chemicals, fertilizer, steel, aerospace, and shipping emit one-third of all carbon. Transformation is urgently needed if carbon reduction goals are to be reached. The EU estimates that in order to reach the carbon reduction goals laid out in the Paris Agreement, up to €1.5 to 3.5 trillion (around NT$53 to 123 trillion) must be invested every year from 2020 to 2050.
Besides the NGEU, the EU's Innovation Fund is also key to helping Europe's high-emitting industries initiate their green transformation. The money comes from the carbon credits that high-emitting industries have to buy when they go above their emission quota. Through grants or subsidies, the money is spent on the specific carbon-reducing techniques developed by these high-emitting players.
According to Bloomberg News, the Innovation Fund spent €6 billion (NT$210 billion) within four years of its establishment; €5 billion of it was spent on energy-intensive industries like power generation, steel, and mining. For example, both France's industrial gases company Air Liquide and Switzerland's cement giant Holcim received funding to develop carbon-capturing technology. Shell Global and Germany's electricity company RWE AG put their funding toward producing hydrogen for clean energy generation.
Kurt Vandenberghe, Director-General of the European Commission’s Directorate-General Climate Action, says that, while not every proposal will succeed, the goal is to fund the newest projects with the most potential. Risk is unavoidable, which is why "private investors might not be ready to put their money into these plans, so this is where we step in," he says.
Taiwan is dealing with the same problem of energy-intensive industries struggling to transform. China Steel Corporation (CSC), Taiwan's second-largest carbon emitter, not only faces the rising cost of carbon credits, but also stiff competition abroad as other steel companies invest heavily in low-carbon production processes.
"This is certainly a very, very big challenge for us," CSC Chairman Wong Chao-tung (翁朝棟) says, not mincing words. "(Incorporating low-carbon production) is the biggest and most difficult transformation CSC has faced since its founding."
With regard to the hurdles faced by the steel sector, Tseng Wen-sheng (曾文生), Deputy Minister of the Ministry of Economic Affairs, says that while other countries offer significant subsidies for hydrogen-powered steel production, this is harder to achieve in Taiwan due to its fiscal policies. For one thing, the Taiwanese government is very touchy about raising the debt ceiling. For another, hydrogen-powered steel production is seen as avant-garde, tier-one green technology, meaning it comes with higher investment thresholds and higher risk.
Regarding how other nations' governments are helping high-emitting companies transform, Tseng says that if funding is limited, new policies will have to be considered, such as drawing from Taiwan's sovereign wealth fund.
Can Taiwan take a page out of the EU's playbook and use its upcoming carbon taxes to help high-emitting businesses transform?
Je-Liang Liou (劉哲良), Deputy Director of the Center for Green Economy at the Chung-Hua Institution for Economic Research, points out that Taiwan's Climate Change Response Act already lists more than ten ways in which the carbon tax can be used, including subsidies, awards, and grants aimed at supporting research and development into carbon reduction technologies. The government could use differences in tariffs—such as only applying a more beneficial tariff to high-emitting industries if they meet their carbon reduction goals—to encourage enterprises to invest in improving energy use effectiveness and developing new carbon reduction processes. In addition, for energy-intensive industries where it is difficult to cut carbon and secure investments, Taiwan could emulate the EU and use money from the carbon tax to support very specific carbon reduction technologies.
Chia-Wei Chao (趙家緯), adjunct assistant professor in National Taiwan University's International Degree Program in Climate Change and Sustainable Development, says that Taiwan's challenge lies in the fact that there is neither a consensus in society nor a complete set of research or discourses concerning the path toward carbon reduction, not to mention the processes that must be created for high-emitting industries. "Whereas in Germany, seven to eight years were spent just evaluating the situation."
He opines that for future discussions on Taiwan's transformation financing and how the income from the carbon tax should be used, the principle should be that the money shouldn't be used on the "gradual transformation" of high-emitting industries—like improving current procedures or replacing old equipment, such as exchanging an old furnace for a new one. Instead, the money should be invested in innovative carbon reduction processes that take the entire company's business model into account. A one-time, small-scale test is not enough; there should be a concrete set of evaluations, covering areas such as how much progress is made in achieving eco-friendly production within a set number of years.
Source： CommonWealth Magazine web-only article, 2024-04-23
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