Is Europe Greenwashing Its Own Sustainability Rules by Flagging Nuclear Energy and Gas as Green Investments?
Geopolitics and the need for energy security weigh against the principles of the EU Taxonomy
According to the response of the Platform on Sustainable Finance (PSF), an expert group advising European policymakers on sustainability matters, and also to an open letter by the Institutional Investor Group on Climate Change (IIGCC), a group of climate investors with assets of more than €50 trillion, the answer — to the greenwashing question — is a resounding yes.
The story, though, gets a bit more complicated when three factors are taken into consideration:
- National economic interests within Europe vary as countries have different energy infrastructures in place. For instance, countries like France and the Czech Republic, which utilize nuclear energy to a greater extent than others, are more likely to support a policy marking nuclear energy as a green investment, because it is simply cheaper for them to maintain and expand on what they already have. At the same time, they get to protect their local industries and the workers employed therein.
- Even countries which oppose the use of nuclear energy on concerns about radioactive waste, such as Germany, still find some merit in the idea of interim investments in gas as a way of getting out of more-polluting coal.
- Geopolitics and in particular the recent Russia-Ukraine crisis has highlighted more than ever the need to ensure energy security for Europeans. Politicians then need to weigh carefully the pros of sticking to their strict sustainability principles against the cons of being exposed to external energy supply shocks with a possibly detrimental effect on the European economies.
1. Background — Europe aspires to lead the world on sustainability
The European Green Deal, agreed on in July 2021, has been described as Europe’s commitment to become the first climate neutral continent in the world, while simultaneously aiming for the improvement of the well-being and health of its citizens, and the conservation of its natural capital and biodiversity.
The Sustainability Policy Focus of the European Union (EU) can be summarized into two broad categories:
- Promote investments into sustainable projects
- Avoid greenwashing by increasing transparency for investors
For the implementation of their sustainability policies, Europeans legislated the EU Taxonomy, “a science-based”, green classification system and transparency tool, for both companies and investors.
The idea behind the Taxonomy is that it creates a roadmap for investors to help them decide in which projects and activities to invest, based on their positive impact on the environment. It also provides the guidelines to be followed by companies and financial market participants in disclosing their activities to investors.
2. New policy to allow for nuclear energy and gas to be considered green under conditions
In February 2022, the European Commission, presented a Taxonomy Complementary Climate Delegated Act on climate change mitigation and adaptation covering certain gas and nuclear activities.
The new policy allows for the inclusion of “certain nuclear and gas activities” to be used transitionally under the EU Taxonomy, and hence be treated as sustainable, while also requiring specific disclosures for businesses related to these activities.
Strict conditions are imposed as follows:
“for both gas and nuclear, that they contribute to the transition to climate neutrality; for nuclear, that it fulfils nuclear and environmental safety requirements; and for gas, that it contributes to the transition from coal to renewables.”
3. Objections by experts and institutional investors on the ‘sustainable nature’ of nuclear energy and gas
In its response to the Complementary Delegated Act (CDA), the PSF provided its expert opinion which criticized the proposal to treat nuclear energy and gas as sustainable investments, and in fact found it to be incompatible with the technical requirements of the EU Taxonomy. It was mentioned that,
“The overall assessment of the Platform is that the draft CDA activities are not in line with the Taxonomy Regulation and most members see a serious risk of undermining the sustainable Taxonomy framework. Further, Platform members have doubts about how the draft criteria would work in practice and many are deeply concerned about the environmental impacts that may result.”
The reaction of the IIGCC was along similar lines. Stephanie Pfeifer, the CEO of IIGCC said:
“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. The inclusion of gas also risks channeling material levels of capital towards initiatives that undermine a sustainable, net zero future”
3. Geopolitical developments and Europe’s fragmented national interests
Ensuring a sufficient and reliable flow of energy to European consumers has always been high on the agenda, for both economic and political reasons.
The EU Green Deal aims to drive resources away from fossil fuels and increase investments into sustainable energy sources such as solar, wind, and other renewable sources, as defined in the EU Taxonomy.
The recent stand-off between Russia and the West, due to the Ukraine crisis, has brought back into light the high dependence of Europeans on Russian gas. The threat of supply disruptions seems more real than ever. From this point of view, it makes some sense to argue in favor of transitory investment in gas infrastructure, as long as it reduces reliance on more-polluting coal.
At the same time, and since the transition to net-zero by 2050 entails significant investments in sustainability projects and reforms, individual countries will always have an incentive to push for rules that favor their own current infrastructure capabilities if they can help it. For example, countries such as France with important existing nuclear plants will find it more beneficial to push for its flagging as green within the EU Taxonomy, as opposed to other countries which don’t have any nuclear energy capacity.
4. Key take-aways:
- According to the experts (PSF) changing the rules to accommodate nuclear energy and gas as green investments seems problematic to say the least.
- Putting aside the common European vision for achieving net-zero by 2050, individual countries will naturally favor different energy strategies depending on their existing infrastructure and on what makes more economic sense for them.
- Geopolitical worries and concerns over energy supply disruptions, push all in the direction of choosing security over adherence to strict principles.
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