EU taxonomy and the principle of proportionality : will increased costs of borrowing lead to more derogations from emission limits?
Abstract
The European Union has introduced a new taxonomy, which prohibits banking institutions from financing coal-related projects, even when they are aimed at emission abatement. This fact could significantly increase the costs of compliance with the latest emission limits for large combustion plants.
Considering that plants may be granted a derogation from achieving the emission limits due to disproportionate costs, the new taxonomy could unintentionally contribute to a higher number of derogations in Europe. With the least expensive option of external funding being unavailable, facilities would have to rely on other options.
This paper examines the sensitivity of costs of compliance to changes in several loan attributes such as the interest rate, the length of the payback period and the share of the funds that needs to be borrowed. Czech data were used to make a case study on a hypothetical power plant that needs to retrofit its current technology.
The results show that in some cases even a slight change to the interest rate or other parameters may change the outcome of a proportionality assessment. With sources of external financing uncertain, the costs of borrowing could easily prove to be prohibitive, leading to disproportionate costs compared to environmental effects of the regulation.