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Why including natural gas and nuclear in the EU Taxonomy is so controversial

© Shutterstock / Nicholas AhonenDefinition of sustainable finance

Following the European Parliament’s approval, amendments to the EU Taxonomy approving the inclusion of nuclear and gas as sustainable investments will come into force in 2023. The debate rages on however,  as inclusion could undercut the very point of the Taxonomy.

EU Parliament approves changes to the EU Taxonomy

Many industrial groups welcomed the measure, viewing natural gas as a ‘bridging’ fuel towards low carbon. With 328 for and 278 against the resolution, MEPs failed to block the proposal but disagreements on the inclusion were rife.

Part of the challenge has been the changing environment in Europe, as the ongoing Russian invasion of Ukraine and the EU’s RePower strategy have divided policymakers on how to respond to the energy crisis. In many ways it looks as if short term energy security concerns have trumped long term planning for change.

Many believe that the inclusion of nuclear and gas undermines the entire point of the EU Taxonomy. NGOs including Client Earth, WWF, Greenpeace and countries including Austria and Luxembourg having already announced plans to address the inclusion in court.

Experts have called it an official validation of greenwash and Greenpeace EU sustainable finance campaigner Ariadna Rodrigo said: “The EU Commission’s shameful backroom dealing on behalf of the fossil fuel and nuclear industries won’t help them there. We …are confident that the courts will strike down this politically motivated greenwashing as clearly in breach of EU law.”

Climate activists and investors alike are concerned about the message

It’s not simply activists who are concerned about the inclusion, as it adds further complexity to the sustainable investment market at a time when the push for clarity is paramount.

Johannes Schroeten, Policy Advisor at independent UK-headquartered climate think tank E3G said: “Financial markets, European citizens and the EU’s own climate bank have made perfectly clear that taxonomy’s usefulness will be severely implicated by labelling gas and nuclear as green.

But vested interests seem to have gotten the upper hand. The EU has now set a dangerous precedent of low ambition for other countries and jurisdictions to follow.” The Global Alliance for Banking Values pointed out that gas and nuclear are already well funded, and that the point of the taxonomy is to direct investment to sustainable projects and activities.

What is the EU Taxonomy?

The EU Taxonomy is one of the tools under the EU’s sustainable finance strategy, intended to allow investors to understand what investments count as sustainable.

The underlying idea is that by providing a standardised approach to how projects and investments are understood to be meeting environmental and sustainability standards, the bloc can help facilitate the realignment of capital towards a low carbon resilient and sustainable future.

As the EU describes it, it is a “common classification system for sustainable economic activities.” Effectively it means that activities outside the taxonomy risk not only being out of step with EU policy plans but being excluded from sustainable investment products.

The Taxonomy Regulation entered into force on 12 July 2020. It establishes six core objectives for the taxonomy under the sustainable finance strategy and identifies the basis for economic activities being included in the EU taxonomy.

There are then four overarching conditions that an economic activity must meet to qualify as environmentally sustainable within the taxonomy.

These are that the economic activity:

  1. provides a ‘substantial contribution ‘ to at least one of the six objectives;
  2. that it does ‘no harm’ to the achievement of any of the other objectives;
  3. that it must comply with ‘minimum social safeguards’, which means behaving as a responsible business; and
  4. the activity must comply with the technical screening criteria – the detail of which define the details of how the first two conditions are understood.

Should ‘transitional’ activities be considered sustainable?

It’s this last element that has allowed the inclusion of natural gas and nuclear, much to the fury of sustainability advocates.  The debate about the EU Taxonomy have recognised that some activities may make a significant contribution towards net zero goals while outside the six key objectives.

These were introduced as ‘transitional’ activities, such as best in industry emissions performance, and were included in the February 2022 Complementary Delegated Act.

Following the approval of the European Parliament on 6th July, from 1st January 2023 new nuclear and gas-fired power plants will now be recognised as transitional activities under the taxonomy until 2030, if they are replacing oil and gas.

On one hand, replacing dirty oil and gas with nuclear and coal may seem a sensible choice, until you consider that decarbonisation of the economy needs to hit 45% by 2030.

Experts remain concerned that the inclusion of natural gas as a ‘sustainable’ investment actively threatens Europe’s energy transition and climate goals. Analysis published in Nature Energy in July, “The expansion of natural gas infrastructure puts energy transitions at risk” suggests that the climate balance for natural gas is roughly as damaging to the climate as oil and coal, considering the risks of additional expansion of gas infrastructure.

The trouble with natural gas: methane

While nuclear may continue to generate low carbon power (ignoring the cost, historical length of build time and the issue of nuclear waste) after 2030, the EU will be left with new gas-fired power plants generating emissions over the long term, creating a massive path dependency challenge.

Fugitive emissions of methane across the natural gas value chain are hugely problematic – to the extent that COP26 saw agreement of the Global Methane Pledge.

This is where over 100 signatory countries agree collectively to cut methane emissions by 30% from 2020 levels by 2030 – which, it has been argued, could cut overall warming by 0.2 degrees and consistent with net zero pathways. Plans for additional natural gas plants moves directly in the face of such an agreement.

Will lack of integrity undermine the sustainability label?

Issues around sustainable finance and what investments and activities can be considered sustainable is part of a major debate that is creating fault lines in the way investors and corporates develop their strategies.

There is growing concern that given the lack of integrity, institutional investors may simply not use the new sustainability labels. No one questions the difficulty of the decisions being made but the argument about short term versus long term strategic decisions must be had.

Part of the difficulty is that the world needs to address climate and sustainability impacts that are going to fundamentally change the way economies and societies operate, at the same time as facing all the usual challenges that seem to be multiplying – from war, inflation, supply chain resilience, inequality, health.

One of the things that hasn’t played a major part in any of the discussions is the fact that natural gas and nuclear are already incredibly well-funded and don’t need to find new sources of finance.

The point of the EU Taxonomy was to focus investment in new directions and the inclusion of these transitional activities only undermines its credibility.

The Global Alliance for Banking Values, a network of independent banks, warned that the inclusion is inconsistent with the EU’s environmental goals and warned, “Although the market for sustainable financial products is rapidly growing, there is no common understanding and minimum benchmark for what ‘sustainability’ actually means.

Trustworthy minimum standards for sustainable investments are needed to counteract greenwashing in the financial markets. The EU taxonomy could have provided this.” But following the European Parliament’s decision – it won’t.

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