Are natural gas and nuclear energy sustainable?

Published on: 21 July 2022

The use of natural gas and nuclear energy to generate electricity may be labeled as sustainable as of January 1, 2023. However, this will be temporary and subject to certain conditions, as provided in the so-called EU taxonomy Regulation. Johan Barnard, Head of International Public Affairs at APG, regrets the European Commission's decision. But in his new column, he calls for the taxonomy not immediately to be regarded as unworkable.  


The so-called EU Taxonomy Regulation is the basis for a catalog of economic activities that may be called sustainable by financial institutions under certain conditions. Previously, the European Commission had already proposed that electricity generation from natural gas and nuclear energy under this taxonomy regulation be temporarily labeled as sustainable. Implementing arrangements of this kind can be rejected by the European Council of Ministers or the European Parliament for a limited period of time, but do not require the explicit consent of the Council or Parliament. However, a resolution in the European Commission to block this proposal was voted down on July 6. Which makes the decision final.


The result is that from January 1, 2023, investments in natural gas-fired power plants that replace coal-fired power plants may be called sustainable under the EU taxonomy, as may investments in new or existing nuclear power plants, where for nuclear power plants the main limitation is that there is a strict requirement for the storage of the nuclear waste.


If you start looking at the conditions in detail, they differ in several ways from the criteria used for all other sustainable economic activities. At the same time, the practical options are quite limited, however. Member states that want to make investments in natural gas plants sustainable will have to close coal plants. As far as we know, Poland, for example, has no intention of doing so. And even if you are planning to think about new nuclear power plants, it is difficult to bring them under the sustainable category. This is because the new rules stipulate, among other things, that a Member State must then have achieved final disposal of highly radioactive waste by 2050. Dutch policy is to work with temporary storage and the plan for final disposal was not until 2130 at the latest. France does meet all the requirements of the new decree for nuclear energy.


It is important to recognize that early last year, and thus well before the war in the Ukraine, it was clear that the EU Member States had very different opinions on the question of to what extent and for how long nuclear energy and natural gas should continue to play a role. France, in particular, insisted that nuclear power did not produce CO2 emissions, while Germany was working to get out of nuclear power entirely. Because the number of countries joining France was quite small, France and the European Commission thought about broadening the issue to gain more support. This was achieved with the story that replacing coal with natural gas would be good, especially when natural gas plants will soon be made suitable for hydrogen. With this, the German position began to wobble and Eastern European member states were willing to go along with it in the direction of nuclear energy. It is conceivable that the Commission's proposal was intended to support President Macron, just before the recent presidential elections, for fear of a victory by one of the Euro-skeptic candidates.


A cynical view of the additional delegated regulation to the Taxonomy Regulation may therefore be that it is largely of political symbolic value. And that in itself is objectionable, even if the practical consequences are not that great. It is precisely this point that the Dutch pensions industry has stressed several times in the run-up to the decision. The sector understands that, in the context of the climate transition, intermediate steps may have to be taken, which enables an economic activity being first made less harmful than it is now, only to be made climate-neutral at a later stage. It would be a good idea to introduce an “amber” category for this purpose, but it is confusing to start calling those kinds of activities that are not yet fully sustainable sustainable. too. Especially since you know that within a few decades you have to get rid of them again.


The usefulness of a taxonomy that defines which economic activities can be considered sustainable, rests first of all on a solid scientific basis. But also on a broad acceptability to a large group of stakeholders of the final classification. Given the strong opposition from a wide range of NGOs and the division in the European Parliament (and really also between member states - more on this later), it is clear that the credibility of the taxonomy as an instrument has been damaged.


NGOs Greenpeace and ClientEarth are considering legal action against the EU. And Luxembourg and Austria have even already announced the start of such a procedure at the European Court of Justice. It will be positive if there is indeed a review by the European courts. In particular, the question seems important to me whether the Commission's additional delegated act has remained within the powers entrusted to it under the Taxonomy Regulation, or whether real legislation and thus positive decisions by the Council and Parliament would actually have been required here. Incidentally: this positive majority probably does not exist in the Council.


Meanwhile, it is important not to throw the baby (the taxonomy) out with the bathwater. Institutional investors such as Dutch pension funds and pension administrators continue to need an uncontested language to speak to stakeholders about sustainable investments. The additional delegated act prescribes that reports on sustainable investments must indicate separately which part of these sustainable investments relates to natural gas and nuclear energy. It therefore remains possible to look at reliable figures without natural gas and nuclear power.


And even more fundamentally, the taxonomy does not affect the investment freedom of institutional investors. If the taxonomy regulation considers an economic activity to be sustainable, an institutional investor need not invest in it. That makes sense because, of course, the classic considerations of risk, return, and cost still play a role. And in the case of natural gas and nuclear energy, that you can be of the opinion that the taxonomy regulation sets the bar too low. If an economic activity is not sustainable according to the taxonomy, an institutional may continue to invest in it. This is hardly surprising, given that the vast majority of the economy is not yet sustainable enough to meet the requirements of the taxonomy regulation. What is not allowed is to call something sustainable that is not, according to the taxonomy regulation. The expectation is that institutional investors and their clients themselves will steer towards sustainability, in addition to the aforementioned classic considerations of risk, return and cost.


I regret that this decision has come about. At the same time, it is fortunately not going to make a difference to institutional investors who want to divest from fossil fuels, including natural gas. The ugly element added to the taxonomy thanks to the Commission also need not get in the way of better dialogue with stakeholders. After all, it remains visible to what extent, if any, nuclear power and natural gas are hiding among the investments that are sustainable according to the taxonomy regulation. However, efforts should now be made to prevent this kind of political intervention in the taxonomy or only allow it with the explicit consent of the Council and Parliament.