Sustainable Finance: Nuclear power & natural gas = "green"?

With the European Green Deal, the EU has set itself the goal of becoming the world's first climate-neutral continent by 2050. The substantial financial resources required for this are to be provided both by subsidies and by private investors. With its Sustainable Finance Strategy, the EU wants to create an attractive framework for green investments. The core element is the EU's Taxonomy Regulation; it defines "sustainable economic activities" - i.e. what is green and should therefore be privileged. The controversial question of whether electricity generation using nuclear power and natural gas may be considered green has been decided since 11 July 2022.

What happened so far?

On Friday 31 December 2021, the last day of the year, the European Commission sent a draft delegated act to the EU member states that would classify nuclear and natural gas power generation as a “transitional” activity - under certain conditions. This would allow money from financial products marketed as a “green” to be used, for example, for the construction of nuclear power plants or gas-fired power plants. 

Nuclear power

According to the draft delegated act, investments in the construction of new nuclear power plants could be considered green, provided, among other things, that the safe disposal of radioactive waste is ensured and that the necessary final repository is in operation by 2050 at the latest; final disposal must take place in the EU. However, this is only possible for a certain period: the new nuclear power plants must be licensed before 2045. In addition to investments for the construction of new nuclear power plants, investments to finance lifetime extensions can also be classified as green, provided that the highest safety standards are achieved in the process. To the detriment of nuclear power, investments in the nuclear fuel cycle are not considered green; the good news for the nuclear industry is that the production of hydrogen from new nuclear power plants would be considered as green. The latter could mean a paradigm shift for hydrogen production in the EU. Nuclear power is subject to the general EU taxonomy emission performance standard (EPS) of 100gCO2e/kWh.

Natural gas

Gas-fired power plants can exceed the general emission limit of 100gCO2e/kWh according to the draft delegated act and still be designated as green under the EU taxonomy, provided they are licensed before 2031 and comply with the following alternative emission limits:

• Maximum 270 gCO2e/kWh - provided the gas-fired power plant replaces a more polluting fossil fuel power plant and this reduces emissions by at least 55%/kWh.
• A maximum of 550 kg CO2e/kW/year - averaged over a period of 20 years.

Further requirements concern, for example, the extent of the methane emissions caused or the use of renewable and low-carbon molecules (biogas, hydrogen): as of 2026, at least 30% of the molecules used must be renewable or low-carbon, and from 2036 their share must be 100%.

According to estimates by the gas industry, these challenging targets for gas-fired power plants can only be achieved if the gas-fired power plants are operated with renewable or low-carbon molecules and as combined heat and power (CHP) plants. While this is in line with the European Commission's goals of decarbonising the gas sector on the one hand and increasing the share of renewables in the building sector on the other, there are doubts whether sufficient green or low-carbon molecules, e.g. hydrogen, will already be available by 2026.

Who wants what?

While environmental protection associations and, to some extent, representatives of the (sustainable) financial services industry accuse the European Commission of undermining the credibility of the EU's sustainability strategy by including nuclear power and natural gas and fundamentally reject the delegated act, it was welcomed by many EU member states. France's President Macron, in particular, has clearly positioned himself in favour of the expansion of nuclear power: According to him only with nuclear power can the fight against climate change be won, security of supply be ensured and low electricity prices for households and industry be achieved. France held the 6-month EU Council Presidency ending on 30 June 2022. Since 1 July 2022, the pro-nuclear Czech Republic holds the EU presidency.

Subventions for nuclear and natural gas?

For pro-nuclear EU Member States and EU Member States who need natural gas in order to stop burning coal, the EU Taxonomy could also provide access to EU and national subsidies, e.g. to build the nuclear power plants announced by President Macron in France. Some highly indebted Eurozone country might also hope that green investments will not be scrutinized according to the Euro’s stability criteria.

Germany is caught in an awkward position: after the phase-out of nuclear power - which will be completed by the end of this year - the "traffic light" coalition now also wants to phase out coal-fired power generation more quickly, ideally as early as 2030 instead of 2038. According to the coalition partners SPD and FDP, gas-fired power plants are needed for this; but this road is blocked by the war in Ukraine forcing Germany to reduce its gas demand.

No veto by 11 July 2022

Delegated acts are adopted via the so-called comitology procedure, where the legislative chambers (European Parliament, Council) only have a right to veto, i.e. they can only prevent the delegated act from entering into force - but they cannot change it. The deadline for the veto was 11 July 2022. The European Commission had cleverly bundled nuclear power with natural gas. This calculation worked out and after informal soundings by the French EU Presidency, it was clear that the opponents of nuclear power and natural gas together would not be able to achieve the required 20 out of 27 votes in the Council. Accordingly, no vote was taken in the Council.

In the European Parliament, on the other hand, a vote on a possible veto took place on 6 July 2022: until the last minute, it was unclear whether the opponents of nuclear power and/or natural gas would achieve the required absolute majority of 353 votes. An additional dynamic arose from the war in Ukraine and the accusation made by representatives of Ukraine, among others, that investments in natural gas would finance the Russian war chest. Finally, the Greens and the Social Democrats did not manage to achieve the required majority: 75 votes were missing to stop the delegated act.

Next steps

The delegated act will apply as of January 2023. 

Austria has already announced that it will bring an action against the delegated act before the ECJ; a possible co-sponsor is Luxembourg.

Link to the delegated act and annexes 1 to 3: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=PI_COM:C(2022)631&from=EN