Taking a look at the EU taxonomy and the future of energy policy in Europe

The EU has made a proposal with the taxonomy to succeed in scaling up the EU’s sustainable investment. However, a look at both the concrete contents of the taxonomy and the examples of France and Germany raises the question: How exactly can the EU respond to the varying nature of European energy markets?

A comment by Lukas Seelig

 

On New Year’s Eve 2021, the European Commission sent member states a draft of the long-awaited “taxonomy” list. This scheme – embedded in the framework of the European Green Deal as well as the action plan on financing sustainable growth – lays out a classification system determining which energy sources can be labeled green for investment purposes. Industries which are less polluting would then be labeled sustainable and get access to a certain treatment from banks or investors according to their sustainability rating. The aim was therefore to create an institutionalised form of security for investors, thereby mitigating market fragmentation and attracting preferential borrowing rates on financial markets.

With this understanding of the taxonomy in mind, the European Commission – since the publication of the Regulation on 22 June 2020 – had to come up with a corresponding list of environmentally sustainable activities by defining technical screening criteria for each environmental objective through individual delegated acts. Until now, the EU published, adopted and approved (i) a “Delegated Act on Sustainable Activities for Climate Change Adaptation and Mitigation Objectives,” (ii) a Commission Communication on “EU Taxonomy, Corporate Sustainability Reporting, Sustainability Preferences And Fiduciary Duties: Directing Finance Towards The European Green Deal,” (iii) a “Delegated Act supplementing Article 8 of the Taxonomy Regulation” and – most importantly – (iv) a “Complementary Climate Delegated Act” (CCDA). With the first three aiming at informing industries and investors on how the sustainable finance toolbox facilitates access to financing and specifying the content to be disclosed by corresponding undertakings, it is the forth act – the CCDA – that is of particular interest to this article. 

After a long process of negotiations, the fourth act was formally adopted in all EU official languages on 9 March 2022 and transmitted to the co-legislators for their scrutiny on 10 March. Here, the Commission controversially includes specific nuclear and gas energy activities in the list of economic activities covered by the taxonomy, declaring that it “considers there is a role for natural gas and nuclear” as a means to facilitate the transition towards a predominantly renewable-based future. 

Considering that in the context of both a climate and an energy crisis, both forms of energy supply bring their own characteristic with them, it is this inclusion of nuclear and gas that makes the taxonomy such a controversial piece of legislation. This becomes clear not only with regard to the perception in the European public, but also regarding the fact that even the Commission itself did not unanimously agree on the labeling of green energies, with sources saying Commissioners Johannes Hahn, Elisa Ferreira and Josep Borrell voted against it. Thus, a glance at a release of a commission advisory group which argued that green labels for nuclear and natural gas plants “could not be considered sustainable,” as well as the argument by some counter-players, show the institutionally inherent friction. 

However, as Commissioner Mairead McGuinness summarised it, although gas is a fossil fuel, one can argue that it is, environmentally as well as economically, much better than the continued use of coal. This idea then was particularly based on the argument that nuclear power is in its nature carbon free, with the Commission’s proposal additionally requiring that nuclear sources cause “no significant harm” to the environment. 

Building on this polarisation of the taxonomy and also against the backdrop of the war in Ukraine, people naturally pointed towards Europe’s Russian energy dependency, with some even arguing that nuclear power is back in fashion. A closer look at the taxonomy and the politics behind it therefore promises some insightful observations.

 

Bringing nuclear energy back?

Drawing on the fact that about a quarter of the electricity and half of the low-carbon electricity in the EU is generated by nuclear energy, it is for a start insightful to take a look at the nuclear energy sector. In this regard – and as recently as 7 March – Commissioner McGuinness on behalf of the European Commission underlined that the College “considers there is a role for nuclear energy as a means to facilitate the transition towards a decarbonised, predominantly renewables-based future energy system,” seeing that nuclear energy emits virtually no carbon

Based on that, the inclusion of nuclear activities in the taxonomy first and foremost relies on a specific assessment of a whole set of experts which the Commission consulted before the publication. The “Joint Research Centre” (JRC) drafted a peer-reviewed technical report on the “do no significant harm” aspects of nuclear energy which then found their way into the Commission’s overall risk assessment. When it comes to this particular kind of energy generation, “The Complementary Climate Delegated Act” therefore includes nuclear energy under strict conditions and criteria. 

Taking reference to nuclear plants, the draft text by the Commission states that these should be considered “sustainable” if the host country can ensure they cause “no significant harm” to the environment, which includes safe disposal of nuclear waste. This applies to all “new nuclear installations, for which the construction permit has been issued by 2045.” Furthermore, it will focus both on the development of new, cleaner reactors – including the so-called Generation III+ reactors – as well as updating the security of existing nuclear power stations. The Commission also underlines that no “taxonomy” money should finance any export of radioactive waste for disposal in third countries.  

The whole inclusion is mainly based on sunset clauses which in turn serve to promote the use of the latest technologies and safeguards, including the use of accident-tolerant fuel in the near future, appropriate disposal facilities, funding for all decommissioning activities and for the management of spent fuel and radioactive waste, and comprehensive reporting to the Commission on compliance with the criteria. Therefore, one can argue that the taxonomy does not only go hand in hand with technical safety requirements, but also builds on legislative frameworks such as the Directive 2009/713 which establishes a comprehensive framework to ensure that member states provide for a high level of safety for nuclear installations. It therefore continues to be a premise that any granting of a license to construct or operate a nuclear installation in the EU has to be based upon a comprehensive site and installation-specific assessment.

But when interpreting this regulatory framework against the background of the current state of energy supply in the EU, this is where politics comes in and where France is a case in point. As the IAEA reports, France has 56 nuclear power reactors in operation, with the country’s nuclear power plants accounting for 70.6 percent of total French electricity generation in 2019, and about 90 percent of France’s electricity coming from low carbon sources. In line with an already existing dependency on nuclear energy, Macron announced recently plans to construct up to 14 new-generation reactors. 

With this being the case, actors such as Bruno Le Maire argue that “the rapid inclusion of nuclear energy within the European taxonomy framework and in state aid regulations is absolutely necessary.” Reflecting on such statements and examining the existing energy infrastructure in France, it can be argued that by including nuclear energy in the taxonomy, France will not only succeed in boosting its own energy security. In the long-term perspective, this also means that France will be able to position actors such as largely state-owned “Électricité de France” (EDF) to economically compete more aggressively against Chinese and American companies in a global market for nuclear energy. 

However, the inclusion of nuclear energy in the taxonomy encountered resistance from all parties of the Bundesregierung. Here, the government says nuclear power is dangerous and therefore cannot sustain the near future of green energy. These views are also shared by other stakeholders such as Environment Minister Steffi Lemke who gave a “clear no” to the proposal. It can thus be argued that with that stance on the taxonomy, Germany remains faithful to the policy of Angela Merkel’s from 2011, with the closure of the last nuclear power plants being completed by this year.

 

Natural gas and decarbonisation

As briefly noted above, the taxonomy also addresses the controversial energy carrier of gas. With gas power plants generating around one-third of the EU’s electricity sector carbon emissions, the taxonomy first and foremost relies on the recommendations and input of various stakeholders. Groups such as the “Technical Expert Group on Sustainable Finance” (TEG), the “Member States Expert Group on Sustainable Finance” and the “Platform on Sustainable Finance” have provided the Commission with a corresponding knowledge regarding the treatment of gas activities in the EU taxonomy. Also in light of technical meetings, such as between Commissioner McGuinness and the Members of the ECON and ENVI committees on 19 January 2022, the taxonomy proposal now argues that gas enjoys “a time-limited recognition of the contribution of those activities to decarbonisation.”

With this assessment in mind, the “Complementary Climate Delegated Act” now assumes that energy generation from natural gas can – under certain conditions – play an important role in accelerating the transition from fossil fuels to cleaner energy. Taking reference to the specific technical screening criteria, meaning that if direct greenhouse gas emissions of the respective activity are lower than 270g CO2e/kWh of the output energy, natural gas producers can use the platform to attract private investment. Adding to that, the recognition of specific activities above the threshold of 100g CO2e/kWh is – same as the nuclear aspect – subject to a sunset clause and a set of very strict cumulative criteria. Among these, the Commission listed a direct emissions threshold and required relevant stakeholders to replace a more polluting facility leading to a reduction of at least 55 percent of greenhouse gas emissions over the lifetime of the facility.

Looking at Germany, where natural gas is the second most important primary energy source in the country’s energy mix and where the gas grid stretches over a total length of 511,000 km, the decision to block the proposal is far less uniform in terms of EU natural gas regulations. While the Greens pushed for a very tough line and would like Germany to vote against the taxonomy proposal altogether, the Social Democrats and Liberals asked for a more nuanced view on this matter, after the Greens-led economy ministry – at the end of January 2022 – asked the Commission to weaken the rules for gas. 

The Ministry argued that the “fossil gas fuel in state-of-the-art and efficient gas-fired power plants offers a bridge for a limited transition period – until the switch to an energy sector based on renewable energies – to enable the rapid coal phase-out and thereby achieve CO2 savings in the short term and accompany the ramp-up of renewable energies.” This clinging-on to gas is also supported by the natural gas industry. The “International Association of Oil and Gas Producers,” for instance, argues that it is about disconnecting or dissociating natural gas from its carbon, therefore not replacing gas but rather modifying its use. 

Statements such as these show that both the German government as well as the respective private sectors see gas as a potent vehicle to – for now – ensure energy security on Germany’s pathway towards renewables-based climate-neutrality in 2045. It is this sort of calculation which now leads to Germany voting against the proposal instead of taking the Commission to court over it, as Austria intends to do. However, it can not be neglected that with regard to energy price stability and in terms of necessary commitments to decarbonisation and climate neutrality, the mentioning of gas in the taxonomy remains limited to only certain energy related activities, underlining once again the transitional character of this resource.

 

What to make of the taxonomy?

Against the backdrop of this high degree of contestation, it is therefore important to note some aspects that may hinder a seamless translation of the taxonomy into an effective corporate investment policy. First, it is important to note that – although the Commission labels the relevant energy sources as “sustainable” – nuclear and gas labels might still be ignored by investors. As a delegated act, the taxonomy proposal does not force investors to invest in gas and nuclear but rather tries to classify under what conditions nuclear and gas can be accommodated within the broader context of the Green transition and the Fit For 55-package. 

The proposal may incentivise investments in nuclear and gas energy infrastructure, however, it ultimately is the investor’s decision to decide in which manner and context to bring the taxonomy to bear. Especially against this background it should be accentuated more consciously that the labeling of nuclear and gas as “green” does not equal the term “green” in an environmental sense. Rather than touting gas as a “green” energy source, it should be made clear that the taxonomy for now sees gas as a bridging vehicle and a means to an end, therefore avoiding an unnecessary praise of this particular kind of fossil fuels.

It is also worth emphasising that investors are still aware of the fact that the cuts achieved by the EU during the past four decades amount to less than 20 percent of the total required to meet its 2050 target. Therefore, it can be argued that – although with nuclear and gas being included – the CCDA and taxonomy can be seen as further milestones in the context of a strengthened climate information architecture. The Commission has made a significant contribution to the improvement of market confidence, safeguarded financial stability, and boosted sustainable finance

However, in order for the taxonomy to align itself with other parts of the EU’s plan towards a sustainable economy, it must be understood as a puzzle piece that has to work with other policy solutions such as emissions reduction targets and the “Emissions Trading System.” In this sense, companies can also make use of the system developed in a Report by the “Platform on Sustainable Finance,” providing further guidelines and investment clarity. In combination with country-specific government strategies and plans that point out the way towards a sustainable transition, it is paramount that all stakeholders involved make use of the taxonomy, contributing to a globally more harmonised set of principles for climate finance taxonomies. 

Therefore, and reflecting on both the energy policy and decision-making challenges, only one thing can be said with certainty: If member states and private investors manage to fill the framework presented by the EU Commission with suitable contents and see nuclear and gas as the “bridge” technologies they are, one can consider the taxonomy to be a power energy policy framework, accompanying other initiatives such as the “RePower EU”-proposal. If used by all stakeholders as intended and to the maximum of its possibilities, the taxonomy can serve as an important policy instrument in a time where decisive, globally coordinated efforts on the climate front are needed more than ever.

 

The Polis Blog serves as a platform at the disposal of Polis180’s & OpenTTN’s members. Published comments express solely the authors’ opinions and shall not be confounded with the opinions of the editors or of Polis180.

Image via unsplash

 

Lukas has studied political science and history at the University of Bielefeld. His areas of interest and expertise include European and U.S. foreign and domestic policy, especially fiscal and technology policy. Lukas has been active at Polis180 since July 2020 and is involved, among other things, in the programme areas of European Economic Policy and The America(n)s.

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