The Rift Caused by the Upcoming EU Taxonomy
The European Commission took advantage of the distraction of New Year’s Day to release the draft of a highly controversial proposal regarding the position of natural gas and nuclear energy projects in their classification system for sustainable economic activities, the “EU taxonomy.”
According to the Commission, EU taxonomy aims to “create security for investors, protect private investors from greenwashing, mitigate market fragmentation and help shift investments where they are most needed” by restricting the “green” label only to projects that are genuinely climate-friendly. To put simply, it is, as Lisa Jucca from Reuters calls, the EU’s crusade against greenwashing.
Taking into account the soaring assets of funds focused on sustainable investing, which has nearly doubled in the six months leading to September ($3.9 trillion), the EU taxonomy has the potential to play a critical role as an anti-greenwashing tool. It can make climate-friendly projects more attractive to private capital and serve as an eligibility criterion for public finance.
Unfortunately, it is not all sunshine and rainbows. Whether the natural gas and nuclear energy projects qualify as green investments has divided the EU. Under the draft, nuclear energy projects will be considered green if they have a plan, funds and a site to safely dispose of radioactive waste. Similarly, natural gas will be deemed green if it produces less than 270g of CO2 equivalent per kilowatt-hour (kWh) emission. The draft also mentions that the two are considered green on the grounds that they are ‘transitional activities’, meaning they are below the industry average in terms of emissions, supporting the member states with varying transition challenges.
Undoubtedly both of these sources of energy are not truly sustainable. Although natural gas emits around half of the emissions of coal plants, it is anything but environmentally friendly as a result of the (almost inevitable) methane leakage that its infrastructure causes. EU’s advisers had recommended that gas projects should not be labelled green unless they are below the 100g CO2 e/kWh emissions limit. This is only a third of the emission limit stipulated in the draft proposal. On the other hand, nuclear energy is climate-neutral when it comes to CO2 emissions. However, it is not clear yet how nuclear waste can be safely disposed of while Europe is yet to t find a permanent disposal site. It is arguable that the move to paint nuclear energy green is an attempt to collect more capital from investors to push scientific innovation in the field.
This draft proposal, released a day after Germany shut down three of its last six nuclear plants, has unsurprisingly become one of the most heated topics of the early days of 2022. On one side, we have the Austrian Climate Action, Environment, Energy, Mobility, Innovation and Technology Minister reinstating Austria’s position: namely, Austria will take the European Commission to court if nuclear energy projects stay within the EU taxonomy. On the other side, France is leading the charge for including nuclear in EU taxonomy, with its 50+ nuclear plants generating roughly 70% of its electricity supply.
It is certainly not an easy problem to tackle. This policy has been entangled with lobbying governments for more than a year. The need for natural gas and nuclear energy is apparent for the phasing out of fossil fuels and the switch to renewables. However, I am not sure if labelling them ‘green’ is the best solution. It seems to muddy the taxonomy and go against the very thing it aims to achieve.
As Green Philippe Lamberts says,
“by including them… the Commission risks jeopardising the credibility of the EU’s role as a leading marketplace for sustainable finance.”
Luca Bonaccorsi, director of sustainable finance at NGO Transport & Environment, further emphasises the harm to the credibility of the EU’s sustainable finance agenda as a whole if natural gas and nuclear is included in the taxonomy.
According to Nathan Fabia of the UN’s Principles for Responsible Investment initiative, including gas and nuclear risks saps investor confidence in the taxonomy, while undermining its central purpose: fomenting a surge of capital to low-carbon projects. The taxonomy’s purpose is to act as a harmonised guide for investors to rely on when making climate-friendly investments. The clarity that this implies means a cut in investors’ expensive assessments in ensuring that their investments are truly green. However, if the taxonomy blurs the lines and ultimately becomes an ambiguous guide, “that’s a scale killer.”
This also raises the question: what role does natural gas have to play as a ‘transition tool’ in a decarbonised economy? To what extent would investments in gas plants be economically sane if they are bound to become stranded assets in 25 years from now?
It will be interesting to see the finished proposal in January, where member states and a panel of experts will scrutinise the draft proposal.