Are Nuclear and Gas The New Green? Five Questions Answered

The European Commission (EC) revealed their New Year’s resolution early this year. On December 31, just three hours before 2022, the EC distributed a draft of the Taxonomy Complementary Delegated Act in secret. In the draft, which was eventually leaked to the public, the EC proposes adding nuclear and fossil gas energy production to a list of activities that can contribute substantially to climate change mitigation and adaptation. The addition of these activities has caused overheated debates among Member States and experts about a fundamental question: Are nuclear and gas energy activities green? Within the EC-led legislative process, some Member States are advocating for the inclusion of gas, while others support nuclear. But labelling these activities as green comes at the price of more transparency requirements for financial and non-financial undertakings.

The EC created the Taxonomy to standardize green language, stop greenwashing, and steer investments toward economic activities that substantially contribute to environmental objectives, without significantly harming other objectives. If an activity is aligned with the specific technical screening criteria stated in the delegated acts of the Taxonomy, it is considered environmentally sustainable, and thus green. That green label is good, as it means access to (more) EU funding. Expectations are that companies with Taxonomy-aligned activities will have easier access to capital or subsidies and lower interest rates. Reporting in line with Taxonomy guidelines is mandatory for listed companies, asset managers, banks, and financial products like green bonds and sustainability-linked loans. From January 1, 2022, every listed EU company will have to show what share of their turnover, capital, and operational expenditures is eligible or aligned with the Taxonomy.

Since the creation of the Taxonomy there has been political debate about whether gaseous fossil fuels and nuclear activities comply with its core values. The debate and its origins follow the different energy transition paths within the EU. Some Member States, like France, have produced nuclear energy for decades and want to continue using this method of low-carbon energy production. Coal-heavy Member States, like Poland and Germany, want to switch to gaseous fossil fuels, which would cut their greenhouse gas (GHG) emissions in half. Advocates are motivated not only by emission reductions, but also by economic and energy security concerns. These technologies are already used, well known, and above all, they can generate energy without the need for sunshine or wind, and under high and low temperatures. Supporters see nuclear and gas as steps towards a zero-carbon future, and therefore as green economic activities that should be included in the Taxonomy. So, why the fuss?

To understand the opposing arguments, one has to dive into the technical figures. Based on political GHG reduction targets, the Taxonomy states an emission intensity threshold for energy production: 100g CO2eq/kWh. All economic activities in the energy production space that produce electricity, heating, or cooling must be below this threshold to be considered green. If not, it will be much harder to reach the European GHG reduction targets. Every five years the threshold will be lowered, approaching near zero in 2050. In the most efficient power plants today, energy production using gaseous fossil fuels is around 370g CO2eq/kWh (direct emissions), well above the threshold. Without any form of abatement, like carbon capture or decarbonized fuels, it would be nearly impossible to color gaseous fossil fuels as green, considering the GHG reduction targets.

The debate around nuclear energy is as old as the technology itself. Nuclear energy’s substantial contribution to climate change mitigation is clear. Its emission intensity is near zero and therefore well below the 100g CO2eq/kWh threshold. However, concerns about the (long-term) management of nuclear waste have blocked nuclear energy’s inclusion in the Taxonomy thus far. Opposing Member States and experts cite the potential for significant harm to the environment through air, soil, or marine pollution, as well as the inability to recycle nuclear waste, as reasons why nuclear energy production should not be considered green. On the other side, Member States that are dependent on or planning to construct nuclear capacity, like France and Sweden, assert that nuclear waste does not conflict with other environmental objectives, as there are safe long-term storage solutions in place.

In the draft proposal the EC included the following nuclear and gas activities:

For each activity there are technical screening criteria to ensure it fits in the green zone. Fossil gas activities have multiple ways to be considered green. The overall threshold of 100g CO2eq/kWh for energy production still stands. For activities with a construction permit granted before the end of 2030, the most important technical screening criteria are:

With these criteria, the EC has created more opportunities for gas to be labelled as green. However, there are risks, especially with the criteria of a 550g CO2eq/kW annual emission threshold measured over 20 years. Forecasting the carbon emissions of a facility over 20 years is nearly impossible. In the future, emissions can increase due to limited availability of renewable or low-carbon gaseous fuels or higher demand for heat or electricity. Inclusion of gas in the Taxonomy will therefore put more pressure on annual compliance demands, which must be executed by a third party.

For nuclear, the emphasis is on nuclear waste management. The most important technical screening criteria are:

Under these criteria, a plan for disposal of high-level nuclear waste is sufficient to comply. Depositing waste within deep geological formations is, with current knowledge, considered a safe way to dispose of high-level nuclear waste. Finland, Sweden, France, and Switzerland have plans in place to build such advanced repositories. While plans are widely available, actual operational disposal facilities are not. There are many challenges for developing such facilities, especially in non-nuclearized Member States.

The EC has consulted the Platform for Sustainable Finance (the advisory body for the Taxonomy) and the Member States Expert Group on the draft delegated act. They have until the 12th of January to give advice on the 60 pages, which is a very short timeframe compared to prior consultation periods. The European Parliament and Council will have a maximum of six months to scrutinize the draft. If the two bodies approve that draft, the inclusion of gas and nuclear is expected from January 1, 2023. This will give all non-financial and financial undertakings sufficient time to assess whether their fossil and nuclear activities comply with the new technical screening criteria.

While the debate around the inclusion of nuclear and gas intensifies, with Member States considering suing the EC over the EU Taxonomy Regulation, the last page of the proposal is probably the most interesting. If the new activities are to be included, the EC demands higher transparency for investors. All non-financial and financial undertakings will have to explicitly indicate the proportion of gas and nuclear activities in relation to their portfolio’s, turnover, capital, and expenditures. Likewise, financial products, such as green bonds and sustainability-linked loans, will be held to the same strict new transparency rules.

We seem to be witnessing the first steps toward broadening the Taxonomy with a so-called ‘traffic-light system.’ While the current Taxonomy only covers activities that are green, the EC has asked the Platform for Sustainable Finance to explore possibilities to include activities that have no significant impact or significantly harm the environment – that is, activities that could be considered, say, yellow or red. So far, this has merely been an exploration. Financial and non-financial undertakings are happy to show their green side, but not their red side

The long debate on the inclusion of nuclear and gaseous fossil fuels seems to be settled. The lobbying weight of Member States in favor of ‘greenifying’ these activities will have its way. Taking any steps toward the European GHG reduction goals seems to be more important than the pace at which they are taken. There is still a possibility that technical screening criteria will be tightened, although the speed at which the EC wants to approve the draft suggests that the language will remain as is. The introduction of this new shade of green that is technically green, but with mandatory highlighting in non-financial reporting and sustainable financial products of nuclear and gas activities, might be the last hope for Member States and experts opposed to their inclusion. Will highlighting nuclear and gas investments scare off or attract investors? That is the big question.