French Parliament Adopts Ambitious Energy-Climate Law

On September 26, 2019, the French Parliament adopted the "Energy-Climate" law, which sets the framework, ambitions, and target of French climate policy for the next 30 years. In particular, it aims to reduce France's dependence on fossil fuels and to develop renewable energies.Following the British Parliament's declaration on "environment and climate emergency" in May 2019, the new French Energy-Climate law pronounces addressing "ecological and climate emergency" as the main objective of French energy policy, adding for that purpose an amendment to the French energy code. While the impact of such a declaration remains to be determined, it can be considered as an answer to recent climate change claims targeting the French government.The adoption of the Energy-Climate law constitutes a major step toward achieving the French government's ambition to combat climate change by becoming carbon neutral by 2050. This ambitious objective represents a reduction of France's greenhouse gas emissions by a factor of more than six compared to 1990 emissions levels.In order to achieve carbon neutrality by 2050, the Energy-Climate law provides for the reduction of fossil fuels consumption by 40% by 2030—instead of the previous 30% target adopted by France—and for the termination of coal-based electricity generation by 2022. The law provides that nuclear power's share of electricity production in France should be reduced by 50% by 2035.In addition to these reduction targets, the law contains various measures to support the development of renewable energies and various measures to improve the energy efficiency of housing in order to reduce energy consumption by reducing heat loss.With new ambitious objectives, the implementation of the new Energy-Climate law provides incentives for the development of renewable energies, as well as a wide scope of energy efficient solutions, such as low/positive energy buildings, electric vehicles, and energy storage options.

 

Mexico's Carbon Market Pilot Program

In the context of Mexico's Energy Reform and National Climate Change Strategy (see "Mexico Implementing Clean Energy Reform," The Climate Report, Spring 2018), on October 1, 2019, the Ministry of Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales, or "SEMARNAT") published in the Federal Official Gazette, a national carbon market pilot program ("Pilot Program").The Pilot Program aims to establish the preliminary basis for the operation of the country's first carbon market. The initial operation includes only stationary sources from the energy and industrial sectors generating more than 100,000 tons of direct emissions of carbon dioxide and will last for 36 months counted as of January 1, 2020 (ending December 31, 2022).In accordance with the Pilot Program, SEMARNAT will post on its website the amount of "emission rights" that will be assigned free of charge to each participant, which will be deposited annually in the accounts of the same through a government-operated follow-up system (by October 24, 2020, at the latest).Not later than November 1 of each calendar year, participants in the Pilot Program will be required to file with SEMARNAT the number of emission rights equivalent to the emissions reported and certified by an accredited verification unit from the preceding year. This obligation must be complied with as of 2021 with respect to emissions generated in 2020.The participants who comply with the abovementioned obligation will be allowed to use the excess "emission rights" to engage in transactions with other Pilot Program participants or comply with their obligations in subsequent compliance phases within the Pilot Program. Transactions with "emission rights" imply the transfer of the same among the participants through SEMARNAT's follow-up system.Likewise, the Pilot Program establishes flexible compliance mechanisms with its terms, including: (i) a compensation scheme through eligible mitigation projects or activities; or (ii) recognition of early actions for mitigation projects or activities that received external compensation credits prior to the start of the Pilot Program.SEMARNAT will evaluate the results and information generated by the implementation of the Pilot Program by the first half of 2021 and will then publish the transition rules for the implementation of the definitive operating phase, formally establishing Mexico's Carbon Market Program.It is important to note that the Pilot Program's reporting obligation does not exempt participants from complying with their greenhouse gas ("GHG") emissions monitoring, reporting, and verification obligations under other applicable laws and regulations, including 2012's Climate Change General Law ("CCGL") and its implementing regulations.Despite the fact that CCGL has been in place for several years, there remains some confusion regarding how to comply with CCGL reporting requirements, including:

  • Lack of GHG calculation methodologies for several sectors, including food and beverages, landfills, and construction. In these cases, CCGL establishes that methodologies included in international standards or ad hoc methodologies can be proposed and adopted by the operations prior to SEMARNAT's approval. Nevertheless, SEMARNAT is not issuing such approvals and has adopted the position for operations to use "technically reasonable" calculation methodologies, generating uncertainty on what should be understood as such and confusion among the generators and verification units; and
  • Uncertainty of the procedure to report emissions generated by different facilities from the same corporate group (i.e., how to report GHGs from a subsidiary or branch company in the name of its parent and how to include all facilities in such a report since GHG reports from several productive sectors are generally filed per facility).

The mentioned challenges have forced the regulated sectors to find, along with advisors and authorities, legal pathways to assure compliance with CCGL's obligations.

Update on the EU's Efforts to Finance Sustainable Growth                                                                                               

The European Union's ("EU") plan to incentivize sustainable development and combat "greenwashing"—the omission or inaccurate disclosure of climate-related information—has taken shape since the Action Plan on Financing Sustainable Growth was published in March 2018.

European "Taxonomy"

Underpinning the EU Action Plan is the draft Taxonomy Regulation, a proposed far-reaching law meant to create a classification system, or "taxonomy," of environmentally sustainable economic activities throughout the EU.

The draft Taxonomy Regulation, among other things, would create a framework for screening sustainable investments and require that any activity labeled "sustainable":

  • Substantially contribute to one of the Taxonomy Regulation's six environmental objectives (e.g., climate change mitigation and adaptation, marine conservation, pollution prevention);
  • Pass a "do-no-significant-harm" to the other five environmental objectives;
  • Comply with minimum social and governance safeguards; and
  • Comply with specific technical screening criteria to be established by the European Commission (the EU executive branch).

In September 2019, the EU member states' ambassadors greenlit a proposal for the European Commission to negotiate an agreed Taxonomy Regulation text with the European Parliament "when practicable," suggesting a further delay of a final text's entry into force.

Corporate Disclosure

While seeking to implement a common framework in the Taxonomy Regulation, the EU has identified a lack of uniform corporate disclosure of climate-related information as a main obstacle to sustainable investment. In June 2019, the European Commission issued guidelines on reporting climate-related information as a supplement to its 2017 guidelines on nonfinancial reporting.

Large public interest entities with more than 500 employees (including listed companies, banks, and insurance companies) are encouraged to provide reliable information to investors and the public to compare the impacts of: (i) the company's activities on climate change; and (ii) climate change on a company's development, performance, and position (a so-called "double materiality" standard).

These supplementary guidelines further recommend that reporting companies disclose information relating to their business model, due diligence processes, principal risks and risk management, and outcomes of the company's climate policy. They also simplify previously proposed guidelines by removing the distinction between information that "should" be and is "recommended" to be disclosed.

EU Green Bond Standard

Another key development is the European Commission's June 2019 publication of a long-awaited report introducing the EU Green Bond Standard ("EU-GBS"). The EU-GBS is meant to be a voluntary standard that adopts market-leading practices while applying the Taxonomy Regulation to European green bond issuances, such as the "do-no-significant-harm" analysis and sustainable project screening. The EU-GBS notably introduces the requirement of an auditor accredited by the European Securities and Markets Authority to verify that an EU-GBS product's use of proceeds are allocated to finance new and/or refinance existing green projects.

The European Commission's Technical Expert Group, which, among others, drafted the EU Taxonomy report and the EU-GBS report and has been central to building EU sustainable finance policy, is currently set to be dissolved at the end of 2019 and replaced by a yet-undefined EU Platform on Sustainable Finance.

While some European market participants look with trepidation at upheaval associated with climate-related risks, the EU has shown leadership in significantly, albeit slowly, adapting its laws and policy to address such risks. Companies and investors should observe closely.