EU Taxonomy

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The low-down on the Complementary Climate Delegated Act

The European Commission recently announced the inclusion of gas and nuclear in the EU Taxonomy causing a lot of controversy within the EU sphere.

The low-down on the Complementary Climate Delegated Act

A brief background

As of last January, the Taxonomy Delegated Act for Climate change mitigation and Climate change adaptation came into effect. But lately, an ongoing argument on whether including or not gas and nuclear energy activities to the EU Taxonomy has been creating controversy within the EU sphere. The EU Commission was facing pressure to elude Member States that are highly dependent on gas and nuclear energy for being left behind in the low-carbon transition.

On the 31st December 2021, the EU Commission circulated discreetly among the member states for consultation a draft of the complementary Delegated Act of the EU Taxonomy Regulation covering certain gas and nuclear activities

The proposed Complementary Delegated Act (CDA) which comes into force on 1st January 2023 qualifies three distinct nuclear energy activities as EU Taxonomy eligible: 

  1. Demonstration units for advanced nuclear technologies
  2. Construction of new nuclear power plants using the best available technologies
  3. Electricity generation from existing nuclear installations

As well as including three gas activities: 

  1. Electricity generation
  2. High-efficiency cogeneration
  3. District heating

It is worth mentioning that the nuclear power and gas activities were listed as transitional activities under the EU Taxonomy. Conversely, the transitional status of nuclear energy was unclear from the draft CDA as the text omits the word transition for nuclear related activities. Further, the CDA text talks about the “evidence on the potential substantial contribution of nuclear energy to climate mitigation objectives was extensive and clear”. However, it says that the operation of existing plants and new nuclear plants must be authorised by the competent authority by 2040 and 2045 respectively. 

But, why include gas and nuclear power now?

In Europe, the current energy mix varies from one Member State to another, with some still dependent on high carbon-emitting coal. It would be very difficult for some Member States to transition from fossil fuels to 100% renewables. For example, France relies on nuclear power for their electricity needs. And, Germany has committed to phase out its coal and nuclear plants and continue to provide baseload using gas as a transition fuel until 2035. 

As part of its preparatory work, the EU Commission requested the Joint Research Centre (JRC) to provide more information on the effects of the nuclear energy lifecycle (waste (nuclear) management, radiation protection, environmental impacts, etc). The JRC concluded that nuclear energy is compliant with the safety standards and waste management requirements under the regulatory framework in EU Member States and ensures a high level of protection for the environment and for people. Following the latter scientific advice, the Commission has concluded that nuclear energy as a low-carbon energy source can play a role in the transition towards climate neutrality.

Observations made by the Experts of the Platform on Sustainable Finance (the Platform)

In a detailed report the Platform questions the inclusion of gas and nuclear power despite the scientific matters,  and it undermines the European Union goal of reaching net-zero goal by 2050.

The Platform experts explain that the draft CDA differs in fundamental ways to the Technical Screening Criteria (TSC) in the Climate Delegated Act and is not consistent with the provisions of the EU Taxonomy Regulation, specifically Article 10.2 and the provisions of Article 19. The effect is that the draft CDA activities could not be considered sustainable within the meaning of the EU Taxonomy Regulation.

The members made the following observations on the draft CDA and some of the important observations are highlighted below:

  • The TSC for the gaseous fossil fuel should be capped at 100g CO2e/kWh on a life cycle basis as this is the science-based, technology-neutral approach. Any criteria above 100g CO2e/kWh on a life-cycle basis could use an alternative Taxonomy.
  • New and existing nuclear facilities as defined by the TSCs should not be considered as Taxonomy aligned on the basis that they do not ensure to fulfill the Do No Significant Harm (DNSH) criteria requirements of the EU Taxonomy Regulation. Further, the current DNSH for nuclear omits the length of time the waste disposal fund should cover and a reasonable estimate of the cost per tonne of High-Level Waste management.
  • The future corporate and financial product disclosures should be materially enhanced if the CDA is accepted in the proposed form. Verification requirements need to be strengthened to avoid misleading claims about the environmental performance of economic activities and financial products.
  • The timeline of new nuclear power plants to obtain a permit by 2045 has been flagged by the members as it will take several years for the commissioning of the power plant and it will not substantially contribute to 2050 climate goals.
  • Furthermore, the members flagged the exclusion of the mining of uranium from the EU Taxonomy as it is an essential activity of nuclear power generation.

Apart from the above, the members suggested some changes to the disclosure requirements to ensure transparency in the reporting process.

The final text of the CDA contains five reporting templates with a detailed breakdown showing exposure to separate activities as has been recommended by the Platform on Sustainable Finance members. The five templates are:

  1. Nuclear and fossil gas-related activities: have an option of yes/no for each activity to determine whether the reporting entity has exposure to any of the six CDA activities.
  2. Taxonomy-aligned economic activities (denominator): to determine the amount and proportion of such activity from the CDA in the denominator of the applicable KPI. It includes columns for combined and separate reporting for each activity contributing to climate change mitigation (CCM) and climate change adaptation (CCA) expressed in monetary and percentage terms.
  3. Taxonomy-aligned economic activities (numerator): determines the amount and proportion of such activity from the CDA in the numerator of the applicable KPI. It includes columns for combined and separate reporting for each activity contributing to climate change mitigation (CCM) and climate change adaptation (CCA) expressed in monetary and percentage terms
  4. Taxonomy-eligible but not Taxonomy-aligned economic activities: to determine the amount and proportion of such activity from the CDA in the denominator of the applicable KPI. It follows the same disclosure patterns as Taxonomy aligned economic activities above.
  5. Taxonomy non-eligible economic activities: to determine the amount and proportion of economic activity referred to in Row 1 of Template 1 (Nuclear and gas-related activities) that is taxonomy-non-eligible in the denominator of the applicable KPI. It has two columns for the disclosure in amount and percentage terms.

In conclusion, the inclusion of nuclear energy activities and gas didn’t elicit a positive response from the stakeholders including the investors, asset managers, NGOs and some of the Member States. The Austrian government has threatened to pursue legal action if nuclear power is included in the EU Taxonomy and has been backed by Luxembourg. Some of the Asset Managers expressed disappointment as the CDA in its current form will promote greenwashing and redirection of the capital that could have been allocated to the renewable energy sector. Even the most celebrated Climate Activist, Greta Thunberg tweeted – “The EU Taxonomy today takes greenwashing to a completely new level. The people in the power do not even pretend to care anymore. Now they are moving into unchartered greenwash territory”.

The CDA still needs to be adopted by the European Parliament. After analysing the response of the Platform on Sustainable Finance and the comments from the Member States, it seems that it will be very difficult for the CDA to pass through in its current form. To be continued…

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