Climate change necessitates a swift transition to clean energy and completely rethinking how we live, manufacture, produce and consume. In Europe commitments to do so are even time-bound under the EU Climate Law – 55% emissions reductions across the EU by 2030 and climate neutrality by 2050. Naturally, this will cost a lot of money and then some more to ensure that the transition is done in a fair and equitable manner. The EU estimates that a large portion needs to come from private capital – €180 billion annually to be exact. At the same time, the scale of sustainable capital markets is estimated at $3.2 trillion and is growing rapidly. Setting standards to tackle ‘greenwashing’ – the labelling of unsustainable investments as sustainable - is crucial in a rapidly growing and increasingly more complex market.
The EU Taxonomy was designed to do just that – through transparency and clear standards to inform investors and thus guide the private capital demand for sustainable investments where it is most needed. It is a classification system of economic activities, against which some European financial market participants have disclosure obligations but are not restricted in their investment decisions in any way. Until recently the taxonomy’s approach to ‘what is green’ has in fact been based on the best current understanding of climate science and what is required to reach the EU’s goal of climate neutrality by 2050. The recent political battle over the classification of natural gas and nuclear power as sustainable, however, has captured the public attention and the taxonomy started making the headline news even outside Europe. In Brussels, it is unprecedented that a secondary level legal text with such very technical specificities is as contested and politically controversial as the EU Taxonomy Delegated Act for gas and nuclear energy. What do Member States find so difficult to agree on?
The political tug-of-war
Over the course of a year, negotiations and backdoor deals took over what was intended as an expert, science-led process aligned with Paris commitments and climate neutrality goals. The debate started with natural gas, or rather its absence. The criteria for the energy sector proposed by the European Commission in 2020, following the expert advice of its Technical Expert Group on Sustainable Finance, drew the line at 100g of C02e emissions per kWh and everything more polluting could not be considered sustainable. Emissions from fossil gas are far above this limit. The first countries to object to this proposed exclusion were a group of 10 Central and Eastern European (CEE) Member states. As the public consultation on the threshold intensified, an opposing camp formed. Ireland, Spain, Austria, Luxembourg, and Denmark wrote to the Commission calling for stringent limits excluding fossil gas. Other countries were seemingly silent on the gas front, although Germany was said to be supportive of the inclusions of fossil gas in the taxonomy and to back CEE efforts to do so. Once nuclear energy was also on table, the frictions between Member States’ positions started intensifying even more quickly.
The European Commission’s currently adopted taxonomy criteria clearly exclude both gas and nuclear. However, in the approval process, there was fierce opposition from some pro-gas and pro-nuclear EU Member States threatening to veto the legislation. Germany’s failure to clearly commit to a science-based taxonomy did not help. In search of a solution, the Commission decided to clarify the issue of fossil gas and nuclear energy in a separate legal act. This was in response to pressure from France and Finland, which had organised a pro-nuclear coalition of Member States. The Commission delayed publishing a decision on the gas and nuclear legal act originally expected last autumn, partly to have clarity on the course of a new German government. Publicly, Germany has expressed its opposition to classifying nuclear power as a sustainable source of energy, while the traffic light coalition parties have openly taken a different stance on the classification of fossil gas in the taxonomy. Most recently, Germany reaffirmed its official pro-gas position in the Commission's Member States consultation.
Europe’s visible internal split around defining “green” has eroded its climate leadership and international image too. This was seen for example during the United Nations climate conference (COP26) in Glasgow in December 2021, when Germany, Austria, Luxembourg, Denmark and Portugal issued a joint declaration during the conference arguing against the positions of fellow Member States including France, Finland and Central and Eastern European countries. Spain, an anti-nuclear and anti-gas state, did not sign the declaration, refusing to take sides in the pro-gas versus the pro-nuclear debate. Austria’s threat to take legal action against the European Commission if nuclear energy were classified as sustainable has in the past months been joined by Luxembourg too. France and the Czech Republic, presiding over the EU Council in 2022, have reaffirmed their support for both gas and nuclear. Italy has been a strong proponent of gas, while the Netherlands are strongly against it but in favour of nuclear. The list of different national positions goes on in classic EU fashion and in search of a compromise. But why are positions on this scientific list of activities so very different?
Misconceptions fuelling the conflict
Different countries’ energy mixes, polices and transition needs vary greatly. However, the ability of Member States to set their own energy transition pathways would be completely unaffected by the taxonomy. It refers to scientific thresholds, but how it is used is a political decision. It is a common misconception that the taxonomy restricts or bans investments. If certain economic activities are not included on the “green list” there will be no accompanying restriction on the ability of the private sector or Member States to finance these activities. It does not prohibit investments, nor does it make them less attractive in a cost-of-capital comparison. One possible effect of the taxonomy could be that the financing of sustainable investments on capital markets becomes more favourable due to mere investor demand, or that the capital costs of non-sustainable economic activities become more expensive. Whether this will happen, however, is entirely up to market forces alone.
EU Member States have nonetheless been especially concerned about the possible application to public spending and EU funding. France in particular was anxious about the decision on nuclear power affecting the country’s ability to finance its “nuclear renaissance” if a no-nuclear taxonomy were to be applied to EU state aid rules. Recently approved, the new environmental state aid guidelines, however, only loosely refer to the taxonomy and there are no plans to introduce it as a mandatory tracking tool for any government investment or spending. For EU funding too, it has played only a marginal rolein the European Recovery and Resilience Fund. Investments that are neither financially nor environmentally sustainable are thus not curtailed by the taxonomy. However, countries could also use it to communicate transparently to citizens what public investments flow to, and it is possible this justification might take precedence over scientific integrity for some countries.
Most recently, the Russian invasion of Ukraine has highlighted the geopolitical vulnerability of the EU to fossil fuels imports, which in turn is shifting the narratives around the role of gas and nuclear power in the energy mix of EU Member States. In light of the EU’s efforts to end its reliance on Russian gas and transition to renewable energy sources, 102 Members of the European Parliament requested the Commission to withdraw the delegated act on gas and nuclear. On nuclear power, it is too early to know how the war in Ukraine will shift countries’ positions. While some, like Belgium, have delayed their nuclear phase-out to cut their demand for gas, others, like Germany, have reaffirmed their anti-nuclear position and safety concerns following the missile attacks on nuclear facilities in Ukraine.
Preserving the integrity of a science-based approach
The proposal for gas and nuclear to be considered sustainable is but one element of the taxonomy, which covers 88 economic activities in nine sectors and with a lot more criteria currently in the making. However, the contentious debates around their inclusion highlight the dangers of mixing science with politics and underscores the need to preserve the integrity of a science-based approach to determining what is sustainable in order to make broader progress. Agriculture criteria in the taxonomy for instance have been postponed several times to avoid enflaming the existing divisive debates and due to the political controversy around the topic of the EU’s Common Agriculture Policy. Civil society and investors have been equally concerned about agriculture criteria being driven by national political interests rather than scientific and expert-level input. In the making are additional criteria for other environmental goals of the EU including circular economy, water, pollution prevention and biodiversity.
While national and regional considerations are important, they should not disregard science and undermine the intended purpose of the taxonomy as a financial market transparency and anti-greenwashing tool. It is evident that the politization of what was meant as an expert-driven process has resulted in backroom deals and political concessions. The gas and nuclear legal act proposed by the European Commission is now in scrutiny period to be approved or vetoed by Member States and the European Parliament this summer.