A policy proposal published at 10pm on New Year’s Eve is bound to be burying some controversial points. While people across the continent were gearing up for fireworks and champagne, the European Commission broke the news that its green taxonomy includes nuclear energy and gas.
The hangover followed over the coming days when campaigners and industry groups raised the alert.
Nuclear power is often listed as an alternative to coal because it does not produce greenhouse gases. But its use is controversial because it takes tens of thousands of years for radioactive waste to decay. Plutonium, a biproduct of nuclear power generation, has a half-life of 24,000 years. Natural gas is also a controversial because it consists mainly of methane, the second largest contributor to global warming.
The decision to include gas and nuclear energy in the Taxonomy was taken following lobbying from countries in Southern and Eastern Europe along with France, which are powered by nuclear energy and gas. But the proposals are now subject to a consultation by the Platform on Sustainable Finance and will subsequently have to be approved by the European Parliament.
Including nuclear power and gas in the taxonomy could have far reaching consequences, explains Andreas Hoepner, professor of operational risk, banking and finance at University College Dublin. He is also a member of the Platform on Sustainable Finance, which is tasked with reviewing the European Commission’s proposals.
“The taxonomy applies to any bank loan, bond issuance and even to a significant amount of government refinancing. Reporting on taxonomy will apply to most investment funds marketed in Europe. And 37%, or €750bn [£625bn], of the EU recovery fund can only be accessed if you have a green proposal,” Hoepner said.
A unified voice
One powerful voice criticising the decision is the Institutional Investor Group on Climate Change (IIGCC), which represents more than 370 asset owners collectively managing £41trn, including the BT Pension Scheme, the Pension Protection Fund, the Greater Manchester Pension Fund and Railpen.
Stephanie Pfeifer, chief executive of the IIGCC, warned: “For institutional investors, the inclusion of gas will limit their ability to align their portfolios and investment with net zero. At a time when we need clarity, the inclusion of gas creates an unhelpful precedent and muddies the waters for investors looking to do the right thing.”
However, the group has not yet resolved whether it also condemns the inclusion of nuclear energy.
Similarly, Eurosif, the European responsible investor organisation, raises objections. “Including natural gas and/or nuclear energy would fundamentally change the nature of the EU Taxonomy, from a ‘green’ to a ‘transition’ list of activities,” and argued that these activities should not be treated as sustainable in the EU Taxonomy which is meant to be science-based.
Biggest greenwash ever
Hoepner is convinced that the proposals will be met with opposition by the Platform. “While I can only speak for myself, my personal view is that this is easily the biggest greenwash ever. If this passes, up to 1.4 billion tonnes in CO2 emissions could be declared green, it’s the equivalent of declaring that French fries are a salad. There will be a high level of agreement that this is a greenwash,” he predicts.
Hoepner believes that the taxonomy might narrowly pass through the European Parliament but will face challenges in court. Austria and Luxembourg have already announced that they plan to appeal against the inclusion of gas and nuclear energy.
While the UK is working on its own taxonomy and is no longer formally bound by the Commission, the implications for UK investors could nevertheless be tangible. The new rules on green investments would, for example, affect funds marketed by European asset managers to the UK.
And with the EU being among the first to develop such a taxonomy, it will influence the scope of similar initiatives developed in the US, China and Japan, among others.
A question of influence
According to Joel Moreland, a principal consultant for Social & Environmental Finance, it is likely that the UK will adopt a similar approach to the EU. “All the signs are that we are going down the same route,” he predicts.
“You have to think what powerful industry groups could influence the decision. In France, the nuclear power industry has a lot of influence. Even though we don’t build nuclear power stations here in the UK, the Tory party is a strong supporter of nuclear energy.” Moreland predicts that major gas producers, such as Shell and BP, will also lobby to include gas in the UK’s green taxonomy.
The UK government has established a Green Technical Advisory Group to advise on implementing the taxonomy. The first set of proposals aimed at climate change mitigation and adaptation will be published in the first quarter, to be followed by proposals for the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention, the protection and restoration of biodiversity and ecosystems which will be released at the beginning of 2023.
But Hoepner stresses that the UK might benefit from developing more stringent rules. “This is a huge opportunity for the UK.”
He points out that the inclusion of nuclear and gas is met with fierce opposition by some powerful investor groups. Besides the IIGCC and Eurosif, Bloomberg’s Net Zero Alliance has also criticised the EU taxonomy.
“If the UK decided not to declare gas and nuclear green, a view they would share with Russia and China, then a lot more investors are likely to use the UK taxonomy rather than the European,” he said.
