On 6 July 2022, the European Parliament voted to allow nuclear energy and natural gas to be defined as sustainable energy sources under the European Union (EU) Taxonomy Regulation (Taxonomy), with only 278 of the 639 lawmakers present voting against the adoption of the new delegated act. While there is still an opportunity for member countries to block the law, the likelihood at this stage is that it will pass.
Why is this change on the cards?
On 4 June 2021, the first delegated act was published, outlining in detail the technical screening criteria for each industry to determine whether an economic activity contributes substantially to climate change mitigation or adaption and whether that activity does no significant harm to any of the other environmental objectives. Left out of this first delegated act was whether or not nuclear energy or natural gas would be included as environmentally sustainable activities, with disagreements about whether these fuels help or hinder climate change.
Meanwhile, after some intense lobbying and political jostling on 6 July 2021, a second delegated act was implemented that explains in detail the content and presentation of information to be disclosed by financial and non-financial undertakings relating to the proportion of environmentally sustainable economic activities.
The reasons for the inclusion have and are being highly debated, but in short natural gas is seen as a critical ‘transitionary activity’ for the move to low carbon, and for the case of nuclear, a potential door opener.
When will the Taxonomy apply to nuclear energy and natural gas?
The draft delegated act defines nuclear energy and natural gas as transition activities in limited circumstances and only under strict conditions. The key details of the draft delegated act are:
- The direct emissions of gas projects must be lower than 270 gCO2e/kWh, or over the 20-year lifespan of the facility, the average emissions are less than 550 kgCO2e/kW, and
- New nuclear plants must avoid significant harm to the environment and water resources.
Essentially, the delegated act opens certain nuclear and natural gas projects to be defined as green activities, which in turn means that investment in them can be seen in the same light as renewable energy sources like solar, wind and hydroelectricity. This could mean that investments that would have otherwise flowed towards renewable energy sources can be pushed into potentially environmentally damaging projects and possibly dilute the original intention of the Taxonomy.
To put this in an Australian perspective, while nuclear power is already banned in the country, at last count Australia provided roughly 31% of the world’s uranium resources and 12% of its production, while the majority of our liquified natural gas (LNG) exports are delivered to Asian markets (over 85%). Changes in public perception of nuclear energy and natural gas could see a flow on effect of increased demand for our exports.
Are nuclear energy and natural gas really sustainable?
The main criticisms of this act are twofold, that a fossil fuel like natural gas cannot, by definition, be sustainable as it will release greenhouse gases, and that while nuclear energy is emissions-free it will divert financing that could have gone to renewables. Critics worry that including nuclear energy and natural gas will complicate the implementation of the Taxonomy with certain parts of society that won’t consider gas or nuclear investment as green regardless of what the Taxonomy says.
So, what is the EU Taxonomy Regulation?
The EU Taxonomy Regulation outlines the classification system for what are considered environmentally sustainable economic activities, a framework that aims to channel investment into green activities to help achieve environmental objectives.
The Taxonomy covers six environmental objectives:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems.
There are four overarching conditions that determine whether an economic activity qualifies as environmentally sustainable:
- Substantially contributes to one or more of the six environmental objectives
- Does no significant harm to any of the environmental objectives
- Is carried out in compliance with the minimum social safeguards
- Complies with technical screening criteria established by the Commission.
The European Commission is tasked to establish, through delegated acts, the criteria for determining whether an economic activity is considered environmentally sustainable. The European Parliament may reject it by a majority of its component members, or the European Council may object to it by a reinforced qualified majority. Assuming no objections, the delegated act will then enter into force.
Who does the EU Taxonomy Regulation affect?
The Taxonomy applies different obligations to different economic actors, with required reporting applying to three groups:
- The EU and its Member States when setting requirements for financial products or corporate bonds that are defined as environmentally sustainable.
- Participants in the financial market that offer financial products in the EU.
- Companies that are obliged to publish non-financial information pursuant to Article 19a or 29a of Directive 2013/34/EU (as amended by Directive 2014/95/EU), that is companies with over 500 employees.
Financial market participants must disclose the environmental objectives that the underlying investment contributes to each relevant financial product offered, as well as the proportion (expressed as a percentage) of which is compliant according to the Taxonomy. Companies with over 500 employees must disclose the share of turnover, capital expenditure and operating expenses that comply with the Taxonomy.
What’s next for the EU Taxonomy Regulation?
Currently, the Taxonomy only covers the climate change mitigation and adaptation portion of the environmental objectives. The expectation is that further delegated acts will follow in 2022 to cover sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.
In time the Taxonomy will become the standard for defining green investment in Europe, and in turn, influence the global approach to sustainable investment.
Australian business will need to be aware of the ongoing developments in the EU, particularly as it continues to drive the largest reallocation of capital towards businesses that can demonstrate their environmental, social and governance (ESG) credentials and positive impacts towards reducing emissions.
Get in touch
If you’d like to have a detailed conversation about these changes, and the impacts on your business if they do get passed into law, please reach out to one of our sustainability experts.