Viewpoint: The actions of the EU Taxonomy jeopardise its ambitions

"Issuing a classification system (the 'taxonomy') to encourage investment in sustainable economic activities looked at first sight to be a good idea. Unfortunately, the process followed to develop this taxonomy and implement the EU Sustainable Financing Regulation appears to be compromised by political agendas and lack of scientific credibility.

Following the recommendations from the March 2020 Technical Expert Group (TEG) report, the EC has prepared a draft Delegated Act (DA) proposing screening criteria to determine the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation. Despite the fact that the substantial contribution of nuclear energy to climate mitigation objectives is extensive and clear, this first Delegated Act does not consider nuclear power as the TEG did not feel capable to conclude whether nuclear energy can be considered sustainable according to the established criteria and recommended that more extensive technical work should be undertaken by a group with in-depth technical expertise on nuclear life cycle technologies. The TEG felt capable to make assessments for all other economic activities evaluated.

The draft Delegated Act published on November 20 does provide screening criteria for a large number of economic activities from sectors as diverse as agriculture, transportation or electricity generation. Although the stated objective of this draft DA is to “subject all economic activities within a given sector to the same technical screening criteria” in keeping with the principle of a level playing field, the reality is that the level of rigour in the draft DA is quite different for individual activities and especially energy technologies. Given the 46,591 comments submitted to the public consultation on the above Delegated Act that closed 18 December, there are quite a few opinions on the EC proposal for this regulation.

Nuclear energy singled out

In September 2020, about six months after the TEG’s recommendation, the EC mandated the Joint Research Centre (JRC) to undertake a thorough assessment of nuclear energy sustainability. This assessment will be reviewed by two existing committees: the Euratom Article 31 group of independent radiological protection and public health experts from the different member states, and the EC Scientific Committee on Health, Environmental and Emerging Risks (SCHEER) that includes doctors, nuclear physicists, toxicologists and biologists.

This level and range of expertise is encouraging.

The JRC’s report is expected by February 2021 and to be finalised by June 2021 (at the latest).

The draft Delegated Act does recognise that the assessment of nuclear energy is still on-going, but it doesn't indicate what is going to be done with the results of the JRC evaluation, or whether the Delegated Act will be amended to include nuclear energy in case of a favourable conclusion in the JRC report. For the moment, however, the EC is proceeding with the finalisation of this DA without including this major proven low-carbon technology, which can only result in a flawed framework that will harm the EU’s decarbonisation and clean energy ambitions.

The EU Council and EU Parliament, which will have four months to respond, can adopt or reject a Delegated Act, but they cannot amend it. In other words, the EC holds all the cards with this type of legislation.

What are the consequences?

Being eligible for sustainable finance means potentially being able to borrow money at a preferential interest rate. Going forward, many EU funds and financial instruments will require taxonomy compliance (e.g. research funds). This means that only the sectors eligible under the taxonomy will have access to these funds, potentially putting in jeopardy funds such as the Euratom R&D programme. Funds will be made available for investments in technologies such as wind and solar before being made available for investments in nuclear, which could distort the market and create an unfair competitive situation for certain companies.

The European Investment Bank’s (EIB) Energy Lending Criteria, which currently includes nuclear, may be amended to make it eligible to taxonomy-compliant sectors only. If nuclear energy is excluded from the taxonomy, it could therefore lose access to EIB funds.

In addition, the EU plans to revise EU State Aid rules, with the potential goal of only allowing taxonomy-compliant sectors access to state aid. As a result, nuclear projects could potentially become no longer eligible for state aid.

All future EU policy will be taxonomy-aligned, meaning that nuclear energy may find itself officially recognised as an unwelcome technology under EU policy.

Certain EU funds - particularly under Next Generation EU - exclude nuclear energy, such as, Invest EU and the Just Transition Mechanism. The goal is to link EU funds to the taxonomy. The inclusion of nuclear energy under the taxonomy therefore would potentially prevent the EU from expressly listing nuclear as ‘excluded’ and would render nuclear energy eligible for such funds.

Given the global status of the nuclear industry and the keen interest shown in the EU Taxonomy development from global standards and finance organisations, the repercussions or this regulation are likely to extend far beyond the borders of the EU. The EU Taxonomy rules would apply to non-EU companies participating in financial products sold in the EU or wanting to invest in EU projects, and to EU companies wanting to invest in non-EU projects. There is also the risk that other Environmental Social Governance (ESG) financial classifications might follow the definitions created by the EU Taxonomy.

Is the taxonomy technology neutral?

According to the Delegated Acts, wind or solar power do not need to meet a threshold for CO2 emissions and are only required to meet the requirements of relevant European legislation to be considered taxonomy compliant. In contrast to this, hydropower must either meet the 100gCO2e/kWh threshold or a power density above 5 W/m2, which results in much more onerous requirements.

Given that the Delegated Acts specifically state an objective of subjecting all technologies to the same criteria the above screening methodology appears to be woefully inconsistent.

But these inconsistencies trickle down into quite significant 'hidden' impacts that result in even more flagrant anti-competitive issues.  For example, the threshold applied by the DA to the production of clean hydrogen is 2.256 tCO2/eqtH2 (equivalent to around 40 gCO2/kWh). This is a very low threshold which even the most decarbonised grid will not be able to meet.  The fact that wind and solar do not need to meet a CO2 threshold according to the current draft, means that only hydrogen produced from wind and solar will be taxonomy compliant. Nuclear generation may be able to meet this criterion but there is the risk of explicitly excluding nuclear as a source of generation for low-carbon hydrogen!

Conclusion

Nuclear energy is the largest contributor to low-carbon electricity in the EU, currently generating about half of the EU’s low-carbon electricity and having displaced over 20 gigatonnes of CO2 emissions historically.  Reputable international experts as the IPCC or the IEA confirm that nuclear energy is absolutely needed for the world to achieve carbon neutrality. In fact, IPCC middle of the road projections indicate that nuclear energy needs to grow six-fold by 2050 to reach the required 25% of global electricity generation. This assessment matches the Harmony goals of the global nuclear industry. This growth level can only be achieved if nuclear energy projects are given access to the same sustainable financing funds as other low-carbon electricity generation technologies.

The EC must wait for the expert groups at JRC, Euratom and SCHEER to complete their assessments of the sustainability of nuclear energy before finalising this DA. In addition, and if the concept of a level playing field is to remain applicable in EU energy policy, then the process of defining compliance with the taxonomy must be consistent and robustly based on scientific evidence. In other words, all economic activities should be screened against the same set of transparent technology-neutral technical criteria and subject to the same assessment process.

This is the only way to restore the credibility of the taxonomy and to make it a strong and efficient tool to achieving carbon neutrality and sustainable development in the EU and worldwide."

Philippe Costes