Aligning green mortgages in the Nordics with the EU taxonomy

The EU Green Deal, put forward by the European Commission, aims to reduce emissions by 55% by 2030 compared to the 1990 level. A renovation wave of the European housing stock is needed to achieve this. The EU taxonomy for sustainable activities seeks to accelerate the sustainable transition by promoting sustainable investments, including the uptake of mortgages for renovations.

The Nordic Energy Efficient Mortgages Hub (NEEM Hub) focuses on scaling up energy-efficient mortgages for households in the Nordics, thereby contributing to the renovation wave. In this paper prepared for the NEEM Hub, we set out to identify areas where the EU taxonomy could further contribute to the adoption of green mortgages in the Nordics and put forward recommendations to achieve it.

Our main conclusions are

• The green taxonomy is vital in fostering environmental building renovations. Implementing the EU taxonomy has significant effects on the role of financial institutions in the transition and can ultimately contribute to more green renovations.
• The taxonomy’s effectiveness in the Nordics might be partially limited. First, the current framework excludes from its scope environmentally improving and financially attractive renovations. A mortgage for renovating an existing building is taxonomy compliant if the renovation reduces the primary energy demand by at least 30%.  However, many renovations below this threshold are still financially attractive and contribute to green transition. Second, since the scope of the green taxonomy applies only to renovation costs, banks have incentives to prioritise mortgages for new houses over existing houses, at the cost of inefficiency and possibly higher emissions.

We propose three concrete policy recommendations to increase the taxonomy’s effectiveness in the region

• Consider a less strict threshold for energy consumption improvement.
• Allow a higher proportion of the building stock of a renovated home to be taxonomy compliant, to avoid the imbalance in incentives in favour favouring the new construction.
• Revise the application of the taxonomy to new construction and the purchase of existing houses.

This publication was written under the Nordic Energy Efficient Mortgages Hub project and can also be found on the project website.