EU’s green leadership threatened by Taxonomy wrangling
French-led push for nuclear and gas puts credibility at stake
The European Union’s hopes of influencing countries around the world to green their economies more rapidly have been dimmed by shaky diplomacy at COP26. But in the next four weeks they will face a severe threat from within, as countries including France and east European states are agitating for gas and nuclear power to be classified as sustainable.
Nearly half the countries in the EU want either gas or nuclear to be included in its Taxonomy of Sustainable Economic Activities, an official list of what should be called sustainable in financial markets. They have joined forces and now look likely to get at least some of what they want.
They may achieve that without going through the independent expert panel that is supposed to keep the Taxonomy science-based.
Environmentalists and climate-conscious politicians are appalled. “Europe will turn from a leading market for green finance to a leading joke,” said Sven Giegold, a German Green member of the European Parliament. “No serious green investor will take it seriously. They will just use the market standard instead.”
Close observers of the process believe France is threatening to block the Taxonomy rules from becoming law unless it gets its way. Because of the way EU lawmaking works, if the pro-gas and nuclear states prevail in the coming weeks, there may be very little opponents can do about it.
“It would be devastating, because you would lose the scientific basis for the Taxonomy, and if you don’t have that, it is a political instrument and becomes up for grabs,” said Paul Tang, a Dutch Labour MEP and member of its Committee on Economic and Monetary Affairs. “It would undermine the Taxonomy’s credibility not only within Europe, but outside.”
Europe’s Taxonomy has inspired a swathe of similar regulations around the world, but policymakers and market participants are conscious of the need to avoid conflicting standards and are seeking harmonisation. The EU Taxonomy is likely to be the kernel around which others congregate. If it includes gas and nuclear, this will remove a strong incentive for others to exclude them.
Some observers believe gas would be more threatening to the Taxonomy than nuclear, some the reverse.
The head of sustainable finance at a major investment bank in London said most of the recent discussion in financial markets had been about the nuclear issue, rather than gas.
“Some investors are uncomfortable with nuclear, others acknowledge the important role it has to play,” she said. “But on average, they don’t see it as green.”
She added: “If we do see green bonds, including EU Green Bond Standard labelled deals, that include nuclear, it will cause a lot of market discussion. It’s not unusual in green bonds to see nuclear power as a specific exclusion, while there is not so often a reference to gas. To work to convince the market that nuclear is green might be more complicated — there would need to be a discussion about why there had been that significant change.”
The UK's green Gilts, for example, excluded nuclear investments.
The banker thought investors might continue to demand exclusions of nuclear as an extra condition on top of Taxonomy compliance. Other market participants said that for German investors, this would be a must-have.
The debate is likely to become intense, as countries weigh up how hard they can push for the positions they support. Disagreements in the EU are usually hashed out behind closed doors rather than actually being put to the vote.
The political calendar is complicating the situation. President Emmanuel Macron, who began his term in office planning to reduce reliance on nuclear power, this week announced France would build six new reactors. He faces an election in April in which the most serious challenge will come from far right nationalists, so has an incentive to look tough in defending France’s interests in EU negotiations.
Meanwhile Germany, which is staunchly anti-nuclear and is phasing out this power source since the Fukushima disaster in 2011, has only a caretaker government led by the outgoing chancellor Angela Merkel. The Social Democrats, Greens and Free Democrats are still negotiating on whether they can form a government.
German observers feel it would be unfair for a decision to be made on gas and nuclear while they are without a proper cabinet.
And at the same time, EU unity is under severe strain from the wrangles between the EC and Poland and Hungary over their adherence to the EU’s interpretation of the rule of law. The Commission and other member states will be reluctant to anger them further.
Nuclear had few vocal supporters in EU chambers until recently — besides France, only Finland tended to speak up for it. Many are wary of nuclear power because of the risk of toxic accidents and the problem of dealing with nuclear waste.
Gas being included in the Taxonomy has been supported in the past year by 11 countries — Poland, Czechia, Slovakia, Hungary, Slovenia, Croatia, Romania, Bulgaria, Greece, Malta and Cyprus. Some of these states are very strong on the issue. They are numerous enough to carry substantial weight in Brussels debates, but remain a minority.
What has changed in the past few months is that France, which derives 70% of its electricity from nuclear stations, has forged an alliance with the countries in central, eastern and southeastern Europe that support gas, to demand that both technologies be added to the Taxonomy.
“There’s clearly a push led by France using the wish from east European countries to have gas included,” said Tang.
This drive has pulled states usually strict about reducing fossil fuels — such as France itself — into the camp of supporting an extended justification for gas. And at the same time, it has rallied support for nuclear.
An official in the European Parliament said Poland, Romania, Hungary, Bulgaria, the Czech Republic, Slovakia, Croatia and Slovenia were now arguing for it in the Council.
They appear determined to force the issue in the next four weeks, before the European Council of member states meets on December 10-11.
At that meeting, ministers are scheduled to approve the Delegated Act, or secondary legislation, containing the detailed criteria for what counts as sustainable in the first two chapters of the Taxonomy, on climate change mitigation and climate change adaptation.
The Taxonomy has been in the works since March 2018 — this is its final legal hurdle.
After a long process of public consultations and drafting by the EU’s independent Technical Expert Group, the Delegated Act was published by the European Commission on April 21. It was passed by the European Parliament in October, while the Council requested a two month extension to its scrutiny period.
Despite vocal protests last winter in favour of gas by east European countries, the April text sticks to the recommendations of the Technical Expert Group — the college of sustainable finance experts, mainly from the private sector and civil society, which the European Commission recruited in 2018 to help it draft the Taxonomy criteria.
The TEG has now morphed into a permanent Platform on Sustainable Finance, whose role is to advise the Commission on all aspects of the Taxonomy, aligning it with the views of the sustainable finance market and giving it scientific objectivity.
The TEG set two principal standards for power generation. To be considered as not causing significant harm to the climate, it must produce less than 270g of CO2 equivalent per kilowatt hour. To be called sustainable, it must produce less than 100g.
Even the 270g level cannot be reached by the most modern gas-fired power stations, unless they use carbon capture, use and storage (CCUS) technology, or blend so-called “green gas” in with fossil gas. So far, both these technologies are too expensive to have been adopted at scale. Therefore, according to the Taxonomy as it stands, all normal gas power plants cause significant harm.
The Delegated Act member states will vote on in December contains these conditions, with no further leeway for gas.
The DA also does not include nuclear power, because the TEG had already decided to leave it out of the Taxonomy at first, pending further detailed scientific advice.
Most agree that nuclear power is low carbon, generating less than 100g of CO2/kWh, and therefore can make a substantial contribution to mitigating climate change.
However, to be included in the Taxonomy, all activities also have to clear the hurdle of not causing significant harm to any of the EU’s six environmental objectives. These go beyond climate, covering water, biodiversity and the circular economy.
Supporters of nuclear believe it is safe and can pass these tests — opponents say it is absurd to class it as not harmful to the environment, given the risk of leaks from nuclear plants and waste.
In March the EC’s Joint Research Centre delivered a report opining that nuclear was safe, and according to nuclear enthusiasts, reports by two other EU scientific boards in July gave further endorsement. Sceptics argue this analysis is incomplete or has been misinterpreted.
France now wants the EC to stick to plan and publish a new Delegated Act to incorporate criteria for nuclear power into the Taxonomy.
New law floated
The EC was not able to shut the door on the gas demands entirely in April. Mairead McGuinness, the commissioner for financial services, promised to bring forward a separate legislative proposal by the end of this year that would give gas official status as contributing to decarbonising the economy, even if it was not actually sustainable.
Announcing it, she and Valdis Dombrovskis, EC vice-president, carefully avoided using the word “transition”, which is a category in the Taxonomy.
The indication was that this would require a new instrument, outside the Taxonomy, because the Taxonomy’s legal architecture did not contain space for gas.
But the east European states have not been willing to settle for this compromise, and are continuing to push for gas to be included in the Taxonomy proper.
The energy price rises in Europe since the summer have spooked public opinion, emboldening policymakers who believe in a large role for gas or nuclear power to provide stable power supply as coal is phased out. EU ministers discussed energy security in October.
France and the east Europeans have now come together to form a joint front pushing for gas and nuclear to be included in the Taxonomy itself.
New plan for gas
In October, a two page sketch of a “Complementary Delegated Act” was drafted, and proposed to the Commission. It allows much more room for gas than a proposal the east European countries supported in the spring, which some Platform members and many enviromentalists rejected.
Giegold said a Commission source had confirmed to him that France had written the document with a number of east European countries. Officials from an EU government also believe it is a French proposal.
The French Ministry of Finance did not answer detailed questions from GlobalCapital about the issue.
The text has been leaked, and was first reported by the website Euractiv on November 3.
The document asks that all significant parts of the nuclear energy value chain be included in the Taxonomy as sustainable. Storage and disposal of radioactive waste and mining and processing of uranium fuel would be classed as enabling activities, a category in the Taxonomy.
For gas, it asks that power plants be admitted to the Taxonomy’s transition category if their direct emissions are less than 340g/kWh — meaning only modern, efficient plants — provided that their annual total emissions were no more than 700kg a kilowatt.
The idea is that efficient gas stations should be classed as sustainable if they are only used as back-up to power the grid when renewable supply proves insufficient. A plant working at 340g/kWh could be run for up to 86 days a year and still be classed as sustainable, under this proposal.
Gas combined heat and power plants could be sustainable transition assets if they emitted less than 250g-270g a kilowatt hour and allowed a 10% energy saving compared with generating heat and electricity separately.
New plants of both kinds would be allowed to be commissioned until December 2030.
Green campaigners and those who have worked on the Taxonomy are dismayed.
A member of the Platform on Sustainable Finance said plants emitting up to 340g/kWh were not only above the Taxonomy’s existing level of 100g for sustainable power, but well above the 270g level that meant they were causing significant harm to the climate.
That ought to be a red line in the Taxonomy, she said. A second problem is that a principle of the Taxonomy is to be technology-neutral. Giving gas a special status of being able to break the standard emissions limits as long as total yearly emissions were limited would break that principle.
Thirdly, she said, allowing new plants until 2030 “doesn’t make sense at all. If you commission a plant in 2030 it will be operational for 30 years. That’s not what we are talking about. Gas is supposed to be a bridging technology.”
The criteria on transitional activities in the Taxonomy, she pointed out, were meant to be revised every three years, to tighten them up as technology improved.
A fourth problem is that “if you commission a plant based on it only running for 90 days a year this is not workable”. Even if such an investment could be economic, it would not work with Taxonomy reporting.
All large companies and investors are supposed to declare what percentages of their capital expenditure, operating expenditure and revenues are from activities dubbed sustainable by the Taxonomy.
She said it would not be possible to class capex for such a plant as sustainable, because at the time it was made, there would be no way to be sure it would not be used for more than the permitted hours. The opex metric would be problematic too, she thought.
“At a more fundamental level,” she said, “it’s a very difficult signal to put gas in. You can have gas plants — no one is shutting them down — they are just not sustainable, and this should be the signal — that is what the Taxonomy is for.”
Another Platform member expressed similar sentiments in much stronger language.
Giegold said the French proposal was “just for the naïve ones”. It was so extreme it could not possibly succeed, he said, and was part of a strategy to “put out a radical document and then offer a compromise”.
In the dark
Even those very close to the process have little idea what is happening now.
The Platform’s role as scientific adviser to the EC on Taxonomy criteria has been bypassed.
The EC is not legally required to ask the Platform to draft its criteria, as it did with the first Delegated Act. But that is expected, since the Platform is part of the architecture designed to create confidence that the Taxonomy is science-based and free of political influence.
So far, the EC has not asked the Platform to draft criteria for including gas and nuclear in the Taxonomy.
Observers are left guessing what the EC will do.
Referring to France and the east European countries, Paul Tang said: “They could be successful on gas. Von der Leyen indicated she was willing to take it on board.”
Ursula von der Leyen, the Commission President, has pushed strongly for the European Green Deal — a raft of policies to respond to climate change by shifting the economy radically towards sustainability this decade.
The EU has committed to cutting emissions 55% from 1990 levels by 2030 — by far the most ambitious decarbonisation of any major economy. Without converting as much as possible of electricity generation to low carbon sources, this target will be unattainable. Only about 23% of EU final energy consumption is electricity, and it is one of the easier activities to decarbonise.
But the recent energy price rises in Europe have spooked public opinion, emboldening policymakers who believe in a large role for gas or nuclear power to provide stable power supply as coal is phased out.
On October 22, von der Leyen tweeted: “We need more renewables. They are cheaper, carbon-free and homegrown. We also need a stable source, nuclear, and during the transition, gas. This is why we will come forward with our taxonomy proposal.”
That appeared to imply the EC planned to squeeze nuclear and gas in to the Taxonomy.
“We know the EC have given the order to their staff to write a compromise document,” said Giegold. “They are following the French will, by making a compromise between this radical leaked proposal and the original one. It is to divert attention from the fact that the market standard is without any gas or any nuclear.”
The pro-gas and nuclear countries appear to want the Commission to publish a new Delegated Act admitting those technologies to the Taxonomy before December 8, which is the last moment for them to decide whether to oppose the Taxonomy in the Council meeting two days later.
Observers believe that France and the east European countries are threatening to vote against the existing Delegated Act if they do not get their way — thus holding up the central piece of the EU’s sustainable finance regulation.
Sean Kidney, CEO of the Climate Bonds Initiative and another Platform member, is optimistic that an acceptable deal will be found.
“I don’t think [nuclear] will make it into the European [Taxonomy] because of German vetoes,” he said. On gas getting in, he said: “I think that day has gone.”
He explained: “There are two developments. The first is the International Energy Agency’s [Net Zero report], which says no new gas and oil. Europe isn’t seriously going to put gas back into the Taxonomy — that’s a stretch, even with a few countries pushing it.”
The second, Kidney said, was the German coalition negotiations. “In the last few days the CSU, Greens and SPD have all come out and said ‘nuclear in the Taxonomy over our dead bodies’. So I think it’s extremely unlikely it would go in the Taxonomy.”
Taking into account COP26 as well, Kidney said: “I wouldn’t think the political stars are lining up. Methane leakage was a ubiquitous topic at COP. And the Chinese have taken gas and coal out of their taxonomy — it would look odd if Europe put it back in. There would be geopolitical egg on their faces. So there are a lot of reasons why it’s not a realistic outcome.”
It was possible, he thought, they could be put in an “orange Taxonomy, not green, but recognised somehow — the Commission is trying to find a compromise.”
Why do they care?
Approval by the Council was supposed to be a formality, but in the past year, the goalposts have moved.
Politicians have become much more aware of the Taxonomy. What was originally intended as a reporting standard for financial markets has turned into a battleground on which countries are fighting for the energy technologies they cherish.
Exactly why countries are willing to go into so much strife over the issue is not explicit. The Taxonomy is not an EU energy or economic policy. Activities outside it are not banned — the law simply says they cannot be described as sustainable in official financial markets reports.
Sustainable finance experts who support the Taxonomy — such as members of the Platform — are exasperated that politicians are bent on altering the Taxonomy, when it will not stop them doing anything.
But those close to the situation believe there are several reasons why countries are so concerned.
“It is mostly symbolic politics, because most actors can finance whatever they want,” said Giegold. “But there is one angle — it may be the flow of public money would be linked to the Taxonomy in future.”
Politicians are not mistaken in thinking the Taxonomy is more important than its original descriptive purpose. Already, it is being used for purposes beyond that, for example as a guide to what public expenditure counts as sustainable.
Many support this. Tang said the Taxonomy should be used to classify public investment. “You don’t want to have a situation of double standards,” he said, in which private sector actors had to describe things according to the Taxonomy, but public ones did not.
The €724bn of EU loans and grants available to members through the Recovery and Resilience Facility, the main part of the Next Generation EU fund, include 37% that must be used for climate investments and reforms.
Green targets in view
For France in particular, the financial system may be important. The Banque de France is in the vanguard of central banks in beginning to monitor climate risks to banks and insurance companies, and will be watching carefully to see these risks reduced.
From 2024, under a rule introduced by the European Commission in July, banks will have to report their green asset ratios: the quantity of green assets, as defined by the Taxonomy, over total banking book assets.
If lending to nuclear power and some aspects of gas can be counted in the green column, rather than the grey, it may help banks and regulators reach targets, as well as removing a drag on those industries when they seek finance.
Bank capital rules that explicitly favour green assets are not official policy yet, but many market participants expect them to come.
Already, some financial doors are closing to the gas and nuclear industries. The European Investment Bank, which has been deeply involved in the process of developing the Taxonomy through membership of the TEG and Platform, has been adopting these organs’ criteria as they have drafted them, even before they have been legally adopted.
The EIB established a new Energy Lending Policy in 2019 and a Climate Bank Roadmap in 2020. Under these, the EU will not finance any more unabated fossil fuel infrastructure after the end of this year. Gas plants can only qualify if they emit less than 250g of CO2 for each kilowatt hour of electricity — even modern stations cannot get below 300g.
But even if the Taxonomy is changed to include gas, the EIB will not go back on this. It has said it will stick to its own existing policies if these are stricter than the Taxonomy.
Nuclear is not excluded by the EIB, but apart from a few safety investments, it has not financed nuclear infrastructure for decades, and has no plans to.
Tang offered another reason why countries may care about the Taxonomy: “My political group [the Socialists and Democrats] is in favour of the green golden rule — you don’t include green investment in the [limits on EU countries’ budget deficits] in the Stability and Growth Pact. It would help to promote sustainable public investment. But formally the link [with the Taxonomy] is not there yet. It could be they are positioning themselves for future discussions.”
Giegold pointed to yet another — EU state aid rules. “In the current circumstances you cannot finance nuclear generation or gas without state aid, because the economics of energy tell you renewables have won the war — they are simply cheaper. So private investors would fear [nuclear and gas] were stranded assets.”
State aid rules could in future be relaxed for green investments, which could be defined according to the Taxonomy.
If gas and nuclear power are classed as sustainable in the Taxonomy, it is likely some members of the Platform, especially from NGOs, would resign and campaign against it, further impairing the guidebook’s reputation.
Most observers are less confident than Kidney that the gas and nuclear push cannot succeed.
There are several ways it could be done that climate progressives could tolerate, such as the orange or amber category Kidney referred to.
Plans to create such a category — the middle ground of activities that do not cause significant harm to the climate, but also do not create a substantial benefit — are being developed by a subgroup of the Platform, but they are at an early stage.
But it is not clear whether this would satisfy the nuclear and gas promoters.
One way or another, what the Commission does in the next few weeks will have enormous importance. This is because of the status of Delegated Acts in EU lawmaking.
If the Council and Parliament have given the Commission power to write Delegated Acts to flesh out a particular primary law, the presumption is then that these will become law.
There has to be a public consultation on new DAs — and at present that may be the only way the Platform will get to comment on the mooted gas and nuclear proposal. But once the Commission has published a DA, it requires a supermajority in the Council to block it.
In Parliament, an absolute majority of MEPs can stop it, but that is very difficult to get on a contested issue, because not all members will vote.
Progressives, particularly from Germany, hope the EC will use its power to refuse the French and east European demand to produce a new DA on gas and nuclear now. That would give time to separate the two DAs and reach a sensible compromise, with the involvement of a new German government.
But that would risk provoking a serious bust-up in which France and others might even vote down the first Taxonomy Delegated Act in December, fearing that they would otherwise lose their main leverage.
Any new Delegated Act, Giegold said, “is the final result, and this is why what matters is what the Commission proposes. No power is able to correct a badly drafted Delegated Act. It has happened, but here — forget it. It’s too evenly balanced. There is no qualified majority to block it.”
This means the negotiations now going on are of immense significance — but they are happening behind closed doors, with no scrutiny even from ordinary politicians, let alone financial markets, the media or civil society.
Kidney admitted that the EC was “under immense pressure from member states. It’s still in play,” he said. “I don’t think anybody knows how it’s going to end up.”