A newly formed, independent council and the organizations collaborating with it are seeking the Canadian public’s feedback on a draft voluntary guidebook, called a taxonomy, that will foster sustainable, climate-friendly investments, support net-zero emission goals and curb greenwashing.

A taxonomy — also referred to as a classification or “labeling” system — provides credible, science-based categories for economic activities. This particular taxonomy, a draft of which was published earlier this month, is open to public response until August 13.

Released on July 9, the newer version of the taxonomy and its addition of natural gas and nuclear energy draws on the previous roadmap, covering six sectors: electricity, buildings, transportation, mining, manufacturing and agriculture/forestry. 

A controversial process

Efforts to develop a green taxonomy in Canada have been slow and controversial. In 2022, the government published a Taxonomy Roadmap Report, but progress on it was halted after former prime minister Justin Trudeau left office. 

At the time, the roadmap drew criticism for its potential inclusion of nuclear and natural gas projects under a sustainability label — a practice first introduced by the EU in its own green taxonomy. 

The International Institute for Sustainable Development has stated that liquefied natural gas (LNG) projects in Canada are incompatible with its climate targets and only lead to greater domestic emissions.

This updated version of the taxonomy is the result of a collaboration between the newly formed Taxonomy and Transition Planning Council (TTPC), the Canadian Climate Institute and Business Future Pathways. 

A closer look

In its first phase, the taxonomy will focus on investments that reduce greenhouse gas (GHG) emissions, to support Canada’s transition to net-zero emissions by 2050.

Although taxonomies are used by more than 50 countries globally, this guide is a first for Canada. 

“As investors aim to commit capital into sustainable investments, they’re faced with a wide variety of classification systems. Some they make themselves, some are made by others, but there’s nothing that in Canada is used widely at all,” said Marlene Puffer, chair of the TTPC, in an interview with Canada’s National Observer.

The draft proposes three main categories for economic activities: green, transition and abatement. 

The ‘green’ category refers to climate solutions that will produce zero or near-zero greenhouse gas (GHG) emissions, such as renewable energy or storage technologies.

The ‘transition’ category applies to GHG emissions-intensive activities, such as steel, cement or chemicals manufacturing, that can achieve substantial GHG reductions and are expected to have stable or growing demand in a net-zero economy.

The ‘abatement’ category covers activities that drive significant emission reductions in the short-term in sectors like upstream oil and gas, which are likely to decline on the path to net-zero. This more controversial category will come with strict guardrails to prevent long-term dependency on fossil fuels.

Pipeline projects that use leak detection and repair technology to reduce methane emissions are an example under the ‘abatement’ category. Despite supporting fossil fuel infrastructure, such technology still reduces overall emissions from operations, its proponents argue. Natural gas extraction will also be addressed here, though at a later stage.

While the green and transition categories are common in sustainable finance taxonomies worldwide, abatement is unique to Canada. Most international taxonomies typically exclude investments in high-emitting sectors, but the abatement category recognizes investments that lead to short-term emission reductions in support of climate goals, according to the draft report.

Because of its novelty, Puffer said the guidebook’s authors are “especially keen” for feedback on the category. The draft report specifically asks for input on its proposed guardrails.

The group is also looking for input on other aspects of the draft report, such as its climate adaptation measures and social safeguards, including the protection of Indigenous rights.

“We want to make sure that projects and activities that achieve a substantial contribution on climate mitigation don’t do harm against other social and environmental objectives,” said Jonathan Arnold, head of sustainable finance at the Canadian Climate Institute and lead researcher on the report, said in an interview with Canada’s National Observer.

Arnold and other members of the institute conducted most of the technical work required for the report, drawing on existing taxonomies from other jurisdictions, particularly Australia. 

Their work was later reviewed by technical, financial and international advisory groups before coming to the TTPC for final approval.

In a webinar hosted by the TTPC, Puffer stressed the group was “an independent body,” despite being underwritten by Finance Canada. 

“There’s no direct influence or participation of the government in our work,” she said. “Independence from other industrial policy-making is important here. We’re just trying to set a labelling system, and we’re trying to maintain that narrow focus.”

Next steps

After this first round of consultations — which also includes webinars and communication with Indigenous parties — is complete, the technical team from the Climate Institute will consolidate the responses into an additional publication, to be reviewed by the TTPC and published later this fall. 

The TTPC is expected to finalize taxonomy guidelines for all six sectors by the end of 2027, as mandated by the federal government. 

Puffer said the taxonomy will “need to live and breathe.” In the future, the group will review and revise it as needed, though they have not yet decided at what frequency. 

As in most other countries, the use of the taxonomy will be voluntary in Canada, though Puffer said she was confident that it would be successfully implemented because of growing demand from asset managers, banks and other institutional investors.

“They have demand from their investors who want to invest in sustainable activities, and they want to have credible labelling to be sure that what they’re investing in is actually credibly designated as green or transition investing,” she said.

If successfully implemented, Puffer predicted the taxonomy system could lead to lower emissions in Canada, in line with its net-zero goals, which it is not on track to meet. The capital that gets directed into sustainable activities would be another measure of success.