Fuest Criticizes EU Regulations Governing “Green” Financial Investments

The introduction of an EU regulatory framework for “green” financial assets reduces overall economic performance and could lead to less climate action worldwide. This is the conclusion reached by ifo President Clemens Fuest and ifo researcher Volker Meier in a recent article for ifo Schnelldienst. “The taxonomy is not aligned with other climate policy instruments; most importantly, it undermines the efficiency advantages of the CO₂ price,” Fuest says.

The authors are also critical of the possible goal of binding future governments to a stricter environmental policy on the basis of this EU regulation. Although the capital would be tied up in “green” investments over the long term, the willingness of the population to pay for additional environmental policy measures would decline.

“Emissions trading is a better instrument of climate policy than the EU taxonomy, which is essentially taking a planned-economy approach by defining which financial assets are ‘green’ and which are not,” Meier says. To reduce greenhouse gas emissions, the EU would do better to directly cap the allocations of emission rights.

In the taxonomy, the EU Commission lays down rules regarding which financial products are considered “green.” This is intended to create transparency for investors about which economic activities are sustainable, with the goal of steering funding preferentially to these activities. In addition, the EU is expected to apply these rules when funding projects.