This summer, the European Parliament endorsed the European Commission’s decision to classify investments in natural gas and nuclear power plants as climate-friendly under the EU taxonomy. For those not familiar with the EU taxonomy, it’s goal is to define which economic activities are “environmentally sustainable” to help protect investors from greenwashing and guide companies to become better stewards of the environment. Any financial products (ETFs, mutual funds, etc.) marketed as “green” to investors in the EU must be consistent with the categorizations specified in the EU taxonomy.
Of course, labeling natural gas as “green” is controversial—it is a fossil fuel, burning it does emit CO2, and extracting it often releases methane, which is among the worst offenders when it comes to harmful greenhouse gases. Nonetheless, burning natural gas to generate electricity produces roughly half the CO2 released by burning coal (on a kilowatt-hour equivalent basis). Nuclear power emits no greenhouse gases but has the potential for radiation leaks, a risk that many believe outweighs its benefits.
Pursuing “green” while keeping the lights on
The decision on natural gas and nuclear power came after more than a year of delays and lobbying for and against the move on the part of governments and industries across the bloc. In its announcement, the EU Commission stated that natural gas and nuclear can be considered sustainable economic activities under stringent conditions if contributing to the transition to climate neutrality. The decision came as countries across Europe struggle with how to achieve net-zero goals while keeping the lights on and heating homes without natural gas from Russia. At that time, Vladimir Putin had throttled back the amount of natural gas flowing through the Nord Stream pipeline; since then, supplies have been completely shut off.
According to a Reuters article published when the decision was announced, the EU’s financial services chief described the move as a “pragmatic proposal to ensure that private investments in gas and nuclear, needed for our energy transition, meet strict criteria.” Slovakia’s prime minister Eduard Heger said the vote was “good for energy security and emissions-cutting targets.” In contrast, Luxembourg and Austria both oppose nuclear power and have warned against categorizing gas as green, saying they would challenge the law. Greenpeace said it would also oppose the move. This difference of opinion was expected, and is understandable.
In September, an article from I&PE (Investments & Pensions, Europe) reported that a group of organizations is challenging the decision to label natural gas as sustainable and is threatening to bring the European Commission to court. According to I&PE, ClientEarth, an environmental law not-for-profit, the European Policy Office of the World Wildlife Fund, Transport & Environment (T&E), an organization that campaigns for clean transport in Europe, and the German Federation for the Environment and Nature Conservation (BUND) have initiated legal action against the EU Commission for its decision.
The entities named above claim that including natural gas and nuclear power in the EU taxonomy as “sustainable economic activities” conflicts with the taxonomy itself, as well as the European Climate Law, and the EU’s obligations under the Paris Agreement. Based on this assessment, they are asking the European Commission to repeal the decision. According to I&PE, the Commission now has up to 22 weeks to reply. If it does not reply, the organizations can bring the case to the European Union’s Court of Justice.
These organizations say that “labeling gas as ‘sustainable’ risks channeling investments into this harmful energy source, away from genuinely sustainable sources of energy like homegrown renewables – and skillfully reducing demand in the first place.” The I&PE article quotes a spokesperson for the group who said that the EU “needs to stop greenwashing” natural gas as sustainable, and that the EU taxonomy is “supposed to be the gold standard for investments” but is sending “all the wrong signals to investors.”
To borrow an expression from the 1960s, we understand where they’re coming from. We agree that renewable energy sources are clearly preferable to burning fossil fuel of any sort, and reducing energy demand should be part of the solution. Perhaps “pale green” would have been a better choice of words for the EU taxonomy to adopt in this case. We also think there is more to this debate.
The EU Commission says its stance is “pragmatic and realistic,” particularly in light of the war in Ukraine and the decision to stop importing Russian oil and gas. We think that’s important. The intent is still to transition to clean energy, using nuclear if meets safety requirements, and natural gas which, as noted above, emits far less CO2 than burning coal. In other words, the decision does not view natural gas as a “green” energy source indefinitely. In our view, the EU should emphasize that, and commit to the transition in the strongest terms.
When it comes to nuclear energy, we believe proponents of clean energy should reconsider their stance. The data clearly show that nuclear power plants produces significantly less CO2 than energy sources that are commonly considered “dark green”, such as solar and others. And, nuclear energy’s waste footprint is significantly smaller than those other green sources of energy (acknowledging the need to store nuclear waste) . Unfortunately, well-known incidents involving nuclear power plants have occurred when stringent safety protocols—which are the norm, not the exception—were not followed. This has clouded the debate about the role of nuclear power in a net-zero future.
Moving forward, firmly and imperfectly
Successful transitions rarely happen overnight and compromise is almost always inevitable on the road to a lasting solution. We wish there were enough wind farms, solar panels, and batteries right now, today, to make the question of whether or not to label natural gas and nuclear power as “green” a moot point. But we’re not there yet, and thus finding compromises seems to be the way to keep making forward progress.
How long is “temporarily” in terms of viewing natural gas as an acceptable part of the world’s energy mix? While this is obviously a moving target, understanding what is possible can make the situation less frustrating. According to a study published by the University of California Berkeley in June 2020, by retaining existing hydropower, nuclear capacity (net of planned retirements), and existing natural gas capacity, and adding battery storage, the U.S. could dependably meet 90% of its electricity demand with clean power in 2035.
In our view, the world needs people who are passionate about the environment and other aspects of ESG to keep pushing all of us – governments, industries, and individuals – toward a better, more sustainable way of life. We also believe that geopolitical and economic factors cannot be ignored without alienating groups whose support is vital, and that extremists on either side of almost any argument can thwart progress.
OWL ESG offers data and analytics showing how different companies are progressing toward net zero and other sustainability goals. Contact us here for more information.