The Sustainable Finance Taxonomy’s “North Star” Report:
Key Components for Public Comment
BACKGROUNDER
Categories
The draft report concludes that—to be credible, effective and attract global capital—Canada’s taxonomy must align with climate science and reflect the realities of the country’s emissions‑intensive economy. To navigate this path, the report proposes three categories for sustainable investment:
- Green: Well-established by global taxonomies, the green category would apply to zero to near-zero emission climate solutions that accelerate Canada’s path to net zero by 2050. Activities that commonly fall into this category include renewable energy generation and storage, electric vehicle manufacturing and infrastructure, and smart grid developments.
- Transition: A newer category, used in Australia, China, and Singapore, the transition category would help drive investment into high-emitting sectors (e.g. cement, steel, manufacturing, mining) to support their transition to net zero.
- Abatement: This is a new category for 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, such as upstream oil and gas production. It would apply to activities that drive major carbon reductions in fossil fuel extraction and production processes. However, investments in such activities would need to meet credible, robust guardrails that prevent the risk of “carbon lock-in” (i.e. the prevention or delay of lower-carbon alternatives).
“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?
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.
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.”
– Marlene Puffer, Chair, Canadian Taxonomy and Transition Planning Council
Technical Criteria
The taxonomy’s technical criteria establish the rules of eligibility for each of the categories. Criteria are generally developed at the sector level because every sector has its own set of activities (e.g. projects, technologies, assets) that the criteria would assess. For example, the criteria developed to assess projects and technologies in the electricity sector would be different from criteria used to assess projects and technologies in the transportation sector.
The draft report proposes an overall approach, suggesting that every sector’s taxonomy criteria would include the following five elements:
- Forward-looking criteria that account for evolving science and technology assumptions.
- “Sunset” dates that pre-determine when an activity or technology would no longer be eligible and “sunrise” dates for introducing new standards for taxonomy eligibility.
- Regular reviews that ensure the criteria remains relevant and effective over time.
- Quantifiable metrics that prescribe, for example, performance relevant to a climate target, minimum emissions reductions, best-in-class performance, and/or relative improvements.
- A focus on emissions that are most directly under an operator’s control (i.e. Scope 1 emissions), while also seeking to address the most material sources of emissions that fall outside of direct control (i.e. Scopes 2 and 3 emissions).
“Ensuring the taxonomy is both credible and usable is key to developing the eligibility rules, and there’s an important balance to strike. Public input on the ‘first principles’ outlined in the draft report will significantly inform how criteria for each of Canada’s sectors are developed.”
Safeguards
All taxonomies include measures designed to reduce the risk of channeling investment toward an activity that results in harm, either to people or nature. It’s well understood that just because a project reduces carbon emissions doesn’t mean it meets environmental and social standards or effectively addresses Indigenous and human rights.
The draft report proposes an approach to developing “Do No Significant Harm” criteria, to address the risks of environmental impacts, and “Minimum Social Safeguards”, to address the risks of community impacts. Adapting these safeguards to the Canadian context raises important questions. For example:
- Should projects be required to meet all criteria related to environmental and social safeguards in order to qualify for the taxonomy? Or should a project be allowed to have taxonomy-aligned status as long as it discloses which social and environmental criteria it fails to meet?
- Should social and environmental safeguards be consistent with existing Canadian legislation or should they set a higher bar in cases where more robust global standards are in place?
- How should the taxonomy effectively uphold Indigenous sovereignty, rights and self-determination, and align with Section 35 of the Constitution Act and the 2021 UN Declaration on the Rights of Indigenous Peoples (UNDRIP) Act?
“Social and environmental safeguard considerations are an incredibly important aspect of Canada’s taxonomy, particularly in the context of Indigenous reconciliation. The Council is eager to hear all views and, in particular, the diverse perspectives of Indigenous Peoples regarding the proposals outlined in the draft report.”