EU Taxonomy adds gas, nuclear despite veto from EC's own experts

The EU's executive this week extended its green finance criteria to nuclear and natural gas-fired power despite objections from NGOs, investors, member states, and its own expert group.

On 2 February, the European Commission (EC) published the second delegated act of the EU Taxonomy Regulation for adoption over the next four to six months after scrutiny by co-legislators.

The first delegated act, defining green activities from sectors such as energy, chemicals, and waste was adopted in December and entered into force on 1 January. The second could enter into force in January 2023.

The pair of acts are cornerstones to the two policies in the EU's 2018 Sustainable Finance Strategy: the Sustainable Finance Disclosure Regulation (SFDR) entering into effect in stages last March and next January, and the Taxonomy Regulations that became effective in 2020.

Using the acts, the EU wants firms and companies to report on and direct investments to businesses that contribute to meeting the EU's net-zero aims.

The reporting obligations for companies and firms under these criteria have been in flux, wrote sustainable finance consultant Danielle Conen Henriquez in a blog.

Already under SFDR, asset managers and financial advisors must disclose their financial products' alignment with the EU Taxonomy, picking one of three categories: dark green, light green, and non-sustainable.

A further policy, the Corporate Sustainability Reporting Directive, aims to make sure more companies report using the standards. It would apply for the first time in 2024, according to law firm Arthur Cox.

Rolling out new environmental disclosure rules should allow investors make decisions based on climate risk, helping the EU to hit its Paris-Agreement-aligned climate neutrality target.

The policies also help define how member states should spend €723.8 billion ($874 billion) in EU funds set to help make Europe climate neutral by 2050 under the Recovery and Resilience Facility (RRF).

On 3 February, Nathan Fabian, the chair of the Platform on Sustainable Finance (PSF), a permanent expert group the EC created to assist development of the disclosure rules, tweeted dismay over criteria that he said were "weaker than the previous draft."

Platform member and NGO Environmental Coalition on Standards (ECOS), said of the latest act: "The draft [delegated act] is no less that institutional greenwashing and would have dramatic consequences if adopted. There is no place for fossil fuels in the Taxonomy. Not only would it channel money into the wrong kinds of investments, but it would also undermine the environmental credibility of the entire Taxonomy, setting a precedent for other dirty activities, such as waste incineration, to be labelled green."

ECOS also said the EC wrongly applies Article 10(2) of the Taxonomy Regulation, which lays down the rule that energy transition activity can only be green where no low-carbon alternatives exist.

The industry, political, and academic group Club of Rome's Co-President, Sandrine Dixson-Decleve, who is also member of the PSF, tweeted that there was no scientific support for a green label for natural gas and nuclear power. "Europe's own investment bank has understood this and policymakers should follow suit," she added.

Those concerns were echoed by Stephanie Pfeifer, the CEO of the Institutional Investors Group on Climate Change, with members managing €50 trillion worth of assets. "For institutional investors, the inclusion of gas will limit their ability to align their portfolios and investment with net zero," she said of the draft of the act.

Nuclear power

Germany's Climate Minister Robert Habeck and Environment Minister Steffi Lemke also criticized the decision to label nuclear power as green.

Germany, Belgium, and Spain committed to phasing out nuclear power plants after the 2011 Fukushima nuclear disaster. "[Nuclear power] is fraught with risks and expensive. Nor can new reactor designs such as mini reactors, which raise similar problems, be classified as sustainable," said Habeck and Lemke in a statement.

However, French President Emmanuel Macron, whose government is funding small nuclear reactors, backed nuclear power being in the taxonomy. France's nuclear power industry produces 69% of its total power and exports power to its neighbors.

On the day the act was published, EU Financial Services Commissioner Mairead McGuinness hit back at the criticism by pointing out that the EU needed all the weapons it could get to fight its dependency on coal. The EU was also a signatory to a pledge to accelerate a transition away from unabated coal power at COP26.

The evidence supports this: European think tank Ember last week released a report showing few European utilities have yet to pledge to stop burning coal and natural gas.

But the EU's expert group (PSF) questioned aspects of the latest act. Nuclear plants failed to meet certain criteria because of potential water pollution by nuclear waste, among other things, it said in its report to the EC last month.

These criteria include the Do No Significant Harm (DNSH) principle introduced in the SFDR, which finds an investment sustainable only if it does not harm other EU environmental or social objectives.

In April, the first delegated act defined causing significant harm in power generation as a system in which direct emissions exceed 270g CO2e/kWh of output. No fossil fuel generation system currently meets this threshold, but they may be able to using carbon capture and storage technologies or low-carbon gases.

While the latest act's criteria allow emissions from gas-fired generation at levels below this, it also allows direct GHG below an average of 550 kg CO2e/kW of the facility's capacity over 20 years.

The expert group insists that the lifecycle threshold should be the 100g CO2e/kWh of the output energy defined in the first delegated act, which can only be met by renewable sources such as solar, wind, and hydropower.

However, a July report from the EC's Joint Research Centre found that nuclear passes the DNSH criteria as its lifecycle GHG emissions were comparable to hydropower and wind power and it had a similar level of impact on water toxicity, although there were no long-term underground repositories yet established for so-called high-level waste.

Gas-fired power

The inclusion of gas-fired power, which emits mostly NOx as well as methane via the natural gas supply chain, drew additional criticism.

Green umbrella group CAN Europe recently criticized a draft of the act in an open letter, saying: "The inclusion of fossil gas and nuclear in the EU Taxonomy would not only mislead consumers and investors but would also call into question the extent to which the EC values scientific evidence."

New power plants using natural gas would start operating with emissions above the DNSH criteria level and stay that way for 20 years, the PSF said in its report.

But the latest act does not allow much runway for new gas-fired power investment. The projects it approves are limited in terms of the construction permit date (before 31 December 2030) and there are limits on the quantity of emitting fossil gas that can be included in the fuel mix.

The act requires that unabated fossil fuel gas-fired power plants be designed to start running on exclusively low-carbon gases such as biogas and hydrogen in 2035.

The PSF warned however, that low-carbon gas hydrogen is not yet available from renewable sources, and without standards for fossil fuel-origin hydrogen, "increased blending with low carbon gases may actually be worsening the overall GHG emissions."

Posted 04 February 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability