How to save the scientific integrity of the EU’s green finance taxonomy

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

The Sizewell B nuclear power station, England. [SN Thomas Photography / Shutterstock]

Decision-makers cannot let economic questions on energy security and cost thwart the scientific integrity of the EU Sustainable Taxonomy, write Elise Attal and Jan Vandermosten.

Elise Attal is Head of EU Policy at the Principles for Responsible Investment (PRI), a United Nations-supported international network of investors. Jan Vandermosten is a Senior Policy Analyst at PRI

It is crunch time for the EU Sustainable Taxonomy; a classification framework developed to help investors direct capital towards sustainable economic activities.

Member states and industry are heavily lobbying to include gas-fired electricity and nuclear energy within the definition of sustainable activities for climate mitigation.

While these sectors may be needed in the short-term to secure energy supply, their inclusion would fundamentally undermine the scientific integrity of the EU Sustainable Taxonomy – the bedrock on which the entire credibility of the EU sustainable finance framework relies.

Policymakers and industry should consider the risks of tarnishing investor confidence in this carefully designed and sophisticated framework aimed at providing long-term certainty.

The EU Sustainable Taxonomy regulation delineates an economic activity as sustainable if it “substantially contributes” to one out of six environmental objectives while at the same time “doing no significant harm” to any of the other five objectives. Screening criteria, based on best performance thresholds and life-cycle analysis, for instance, are under development for each environmental objective by an independent expert group, the Sustainable Finance Platform.

The Platform’s assessment relies on conclusive scientific evidence and – in the case of the climate change objective under the EU Taxonomy – whether the economic activities contribute to the long-term temperature goal of the Paris Agreement. First screening criteria for climate change mitigation and adaptation were adopted by the European Commission in April. Still, a decision on gas-fired power and nuclear was postponed at that time.

The inclusion of gas-fired electricity would seriously compromise the EU Sustainable Taxonomy’s ability to act as an independently and scientifically designed tool for guiding investment into environmentally sustainable activities in line with the EU’s goal of reducing emissions by 55% by 2030.

Research on net-zero by 2050 pathways for the energy sector, including the recent IEA World Energy Outlook, stresses that there is no remaining carbon budget for new gas investments and that existing gas-fired power plants will have to be phased out by 2035 in the OECD and 2040 globally.

The current EU Sustainable Taxonomy screening criteria for climate mitigation state that power generation from different technology sources can only make a substantial contribution to climate change mitigation within an emissions threshold of 100g CO2e/ kWh. Most existing gas production today would even fall above the ‘significant harm’ threshold for climate change mitigation, which has been set at 270g CO2e/kWh.

The merits of including nuclear energy in the EU Sustainable Taxonomy are also debatable.

Nuclear energy’s potential substantial contribution to climate mitigation objectives is clear, but important questions remain over its ability to meet the “do no significant harm” criteria with regards to other environmental objectives. A report by the Joint Research Centre that was commissioned to inform a decision on this matter has been criticised (e.g. SCHEER, Heinrich Böll Stiftung, Austrian Institute of Ecology) for not sufficiently addressing risks related to the storage of nuclear waste, severe incidents and nuclear proliferation.

Proponents of the inclusion of gas-fired electricity and nuclear energy in the EU Sustainable Taxonomy will argue that these economic activities have a role to play in the energy transition.

This argument is beside the point: the EU Sustainable Taxonomy’s design is aimed at defining which economic activities are green – not which economic sectors are needed for the transition to a net-zero by 2050 economy.

Decision-makers should therefore explore possible alternatives, developing a framework that gives gas-fired electricity and nuclear energy their rightful place as short-term transition activities towards reaching net-zero emissions by 2050.

The European Commission has already committed to propose by early 2022  separate legislationto recognise and support the financing of certain economic activities, primarily in the energy sector, including gas, that contribute to reducing greenhouse gas emissions in a way that supports the transition towards climate neutrality throughout the current decade’.

This could be a valid alternative to the inclusion of gas-fired electricity and nuclear energy in the EU Sustainable Taxonomy on the condition that it is done by linking transition finance plans to sectoral pathways with science-based and periodic decarbonisation targets.

Another option is to extend the scope of the EU Taxonomy beyond environmentally sustainable economic activities. The European Commission was tasked with preparing a report on this matter by the end of this year. Commissioner McGuinness recently said in the Financial Times that they are in that context considering creating  ‘an “amber” label for activities that did not win the green label but would still secure a place in the bloc’s transition and not discourage private sector investment’. Such an approach must still be science-based.

Decision-makers cannot let economic questions on energy security and cost thwart the scientific integrity of the EU Sustainable Taxonomy and still have an opportunity to save the credibility of the EU’s sustainable finance policy framework. It is now up to them to take responsibility.

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