Comment

EU Taxonomy: How the European Commission can win the climate war one battle at a time

Mark Foster / Jan 2022

Mairead McGuinness, the European Commissioner for Financial Services, Financial Stability and Capital Markets Union. Photo: European Union 2022

 

After over a year of delays, technical committee reports, expert group opinions and extended consultation deadlines, the European Commission is on the cusp of finalising its draft Delegated Regulation as regards economic activities in certain energy sectors and specific public disclosures for those economic activities.

Without wanting to minimise the importance of the comprehensive and detailed technical work undertaken by all involved in this complex and lengthy process, these draft Regulatory Technical Standards (RTS) essentially boil down to two competing political visions, battling it out as to how best to create a credible EU Taxonomy as an integral part of the EU’s transition path towards carbon net neutrality.

One camp argues that achieving the EU’s legal obligation of net zero by 2050 is an illusion without a supportive regulatory and legislative framework to enable a smooth transition. In short, whilst nuclear produces waste, it doesn’t emit carbon. And whilst gas may emit carbon, it does so at levels which are lower than other fossil fuels, therefore making it a preferable transitional energy source than, say, coal.

This camp wants nuclear and gas included in the EU Taxonomy’s sustainability eligibility criteria. It is led by the French government - current holders of the EU Council Presidency and staunch supporters of the inclusion of nuclear - and several Central and Eastern European Member States – who have invested heavily in gas as a greener alternative to coal.  

In the other camp proponents argue it is disingenuous to claim that nuclear energy meets the EU’s own ‘do no significant harm’ criteria given the toxic waste generated. Advocates of a stricter interpretation of the sustainability eligibility criteria point to elements of the draft RTS which, they say, demonstrate watering down and greenwashing – e.g., inclusion of new fossil gas plants as ‘green’ as early as next year if they convert to renewable gases by 2035.

This side wants nuclear and gas excluded from the EU Taxonomy’s sustainability eligibility criteria. It is led by Austria and Luxembourg, who have threatened to take legal action against the European Commission. These countries also co-signed a recent letter with Spain and Denmark, reiterating that ‘natural gas and nuclear power do not meet the legal and scientific requirements set in the Taxonomy Regulation to qualify as sustainable activities’. There is also a vocal and influential minority in the European Parliament who are critical of the process and/or support the position taken by the European Commission’s own expert group and arguments made by prominent NGOs in support of exclusion.

Interestingly, the financial and investment community seems divided on the issue. Banks and investment firms tend to lean more towards supporting inclusion of gas and nuclear, to allow them to support financing such clients in their own corporate climate change transition and in recognition of the fact that the energy needs of the European continent cannot currently be met by renewables alone. However, an international collective of asset managers and institutional investors sent an open letter to the EU earlier this month calling for gas to be excluded from the EU Taxonomy.

There are also broader economic and reputational aspects to this fight for the European Commission to consider. Opponents to inclusion claim this Delegated Regulation actually reduces EU environmental standards to below other developing standards at international level. Proponents of the EU’s own Green Bond Standard not aligning with the Taxonomy was because ICMA’s green bond principles (the current industry standard) does not include nuclear or gas. The broader, political and reputational point is that the introduction of Nuclear / Gas lessens EU leadership on climate change, detracting from the previously iron-clad justification of the taxonomy being scientifically based.

So can the European Commission win the fight but lose the war? Or can it win the war one battle at a time?

As far as the Taxonomy treatment of gas and nuclear is concerned, as things stand, it looks likely that the Delegated Regulation will be adopted as drafted – that is to say that the European Commission position of inclusion of gas and nuclear will prevail. The procedural requirements to reject in either the Council (qualified majority) or EP (simple majority) simply seem too high to reach. The European Commission is of course counting on these high benchmarks not being met. It cleverly increased its chances of winning this battle by drafting a single Delegated Regulation covering both gas and nuclear together, thereby neutering attempts to pick off nuclear or gas opponents individually.

But winning the taxonomy battle doesn’t guarantee winning the broader climate change war. What is certain is that the war is not over for those advocating a more ambitious climate change policy. The political sensitivities around delivering the EU’s green deal and its 2050 carbon neutral commitment seem only likely to intensify as the direct and very real economic and social consequences of implementation start to bite on EU business and citizens alike.

The European Commission must learn the lessons from the Taxonomy battle if it is to avoid losing the war. Carefully navigating this political battlefield will also require bringing businesses and citizens along on the climate change journey, lest the metaphorical war spillover into a much larger and more tangible political problem: social unrest. That would a sure-fire way to divert political capital and energy away from the climate goals, which would be in the interest of neither side.

 

Mark Foster

Mark Foster

January 2022

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