Green Finance and the EU-Taxonomy for Sustainable Activities: Why Using More Direct Environmental Policy Tools Is Preferable

The EU taxonomy on sustainable activities is expected to pave the way for steering capital towards sustainable investments. However, the economic effects are problematic. Promoting "green" capital will lead to income losses due to productivity differences, while greenhouse gas emissions do not change at a given EU emission allowance cap. Worldwide emissions may even increase as carbon intensive production moves outside the EU. While green finance may be used to bind future governments, committing to future climate goals directly is a superior policy since efficiency losses can be avoided.