1. Background
On June 17, 2020, the European Parliament considered a draft regulation to implement the EU Taxonomy for Sustainable Activities1 (the “Taxonomy Regulation” or “Taxonomy”).
The Taxonomy Regulation forms part of the European Union’s (EU) increasingly expansive use of climate laws which are intended to provide qualitative and quantitative mechanisms against which green investment products may be measured and rated. The Taxonomy Regulation seeks to encourage sustainable investing and address the issue of “greenwashing” relative to investment products. We previously wrote about the Taxonomy Regulation in this Client Blog.2
As drafted, the Taxonomy Regulation includes both the gas and nuclear sectors in the Taxonomy, meaning certain investment activities and products in those sectors could be labeled as sustainable.
On June 14, 2022, two separate committees of the European Parliament, each containing a cross-party coalition of legislators (spear-headed by the Greens and center-left parties, and including legislators from the center-right European Peoples Party) proposed a motion to remove nuclear and gas sector products from the Taxonomy (the “Motion”). The Motion was proposed by the committees days after the Parliament received a well-subscribed petition from the environmental pressure group Friends of the Earth Japan3 which discouraged the inclusion of gas and nuclear products on both environmental and nuclear safety-conscious grounds. On July 5, 2022, the Motion was rejected by the European Parliament, in a 328-to-278 vote margin, falling short of the absolute majority required to veto the Motion altogether. The failure of the Motion means that the Taxonomy will include certain nuclear and gas sector investment products when implemented next year.
The Motion comes at a time when the debate in the EU is intensifying on how to achieve energy security in light of the EU’s efforts to reduce its dependency on imports of oil and gas from Russia while also working toward its longer-term net zero commitments.
2. Compliant Nuclear and Gas Investment Products
The Taxonomy Regulation does not propose to provide a rubber-stamp or green credential to any and all nuclear or gas products. The inclusion of these sectors is considered and limited to those activities and products that are consistent with the EU’s stated environmental goals and contribute to the transition toward carbon neutrality.
To access Taxonomy classification, relevant products must comply with the Taxonomy’s objectives and satisfy onerous screening criteria (see below). Notably, products from the nuclear and gas sectors must be transitional in nature (see below).
2.1 Environmental Objectives of the Taxonomy
For an economic activity to qualify as sufficiently environmentally sustainable to be included in the Taxonomy, it must satisfy several criteria, detailed in the Taxonomy Regulation and to be enforced by the EU and member states. Namely, the Taxonomy Regulation’s (i) Environmental Objectives, (ii) Minimum Safeguards and (iii) Technical Screening Criteria.
(a.) Environmental Objectives:45
A compliant activity must contribute substantially to one of the below environmental objectives (the “Environmental Objectives”). Moreover, it must not “significantly harm” any of the Environmental Objectives when the full life cycle of the activity’s products and services is taken into account.
- Climate change mitigation
- Climate change adaption
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems.
(b.) Minimum Safeguards:6
To be Taxonomy-compliant, an activity must satisfy certain minimum safeguards (“Minimum Safeguards”); namely, procedures implemented by those carrying out the economic activity to ensure alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights,7 as well as other international human rights laws.8
Furthermore, when ensuring compliance with the above guidelines, the activity must adhere to the definition of a “sustainable investment” in a 2019 EU Regulation (the “Sustainability Disclosure Regulation”). That definition says that in order for an activity to be a “sustainable investment” it must:
- Contribute to certain environmental objectives (i.e., in respect of the Taxonomy, those Environmental Objectives detailed above).
- Not do any significant harm to any of those environmental objectives.
(c) Technical Screening Criteria:
The Taxonomy Regulation makes reference to requisite technical screening criteria by which investment products and activities can be measured in complement to the Environmental Objectives and Minimum Safeguards (the Technical Screening Criteria (TSC)). These have been developed in subsequent regulations.
The First Delegated Regulation9 details the TSC used to determine whether an economic activity complies with and contributes to the Taxonomy’s climate goals. The Second Delegated Regulation10 details the content and methodology that should be used when a financial undertaking makes disclosures in respect of TSC.
On July 15, 2022, the EU Commission published its Complementary Climate Delegated Act11 (the “Taxonomy Delegated Act”) which sets out the specific conditions and standards which must be met by nuclear and gas activities. This is where the “devil in the details” for these activities is set out. The Commission commented at the time of publication12 that the imposed criteria ensured that nuclear and gas products included in the Taxonomy will be compliant with the EU’s climate and environmental goals and will accelerate the shift from fossil fuels toward a climate-neutral future.
Crucially, to comply with the Taxonomy Regulation and the Taxonomy Delegated Act, investment products from the nuclear and gas sectors must be transitional in nature (thereby supporting the EU’s transition away from more carbon-intensive energy sources) and satisfy long-term emissions caps.13 Existing nuclear power plants can attain green credentials under the Taxonomy if they phase in accident-tolerant fuels and develop sophisticated plans for storing and disposing of waste products in the long-term. Gas sector products must meet similar emissions caps and commit to reduced-carbon gases in the future. More detailed examples of the TSC in respect of nuclear and gas products are set out below.
2.2 Nuclear Products – Technical Screening Criteria1415
To satisfy certain of the Environmental Objectives, the relevant nuclear product must (inter alia) meet the following criteria:
(a) Be located in a member state which has:
- Adopted the “Euratom Treaties”16 in respect of the installation and operation of nuclear activities, and of the disposal of nuclear waste products.
- Made available appropriate resources to assist with waste management and decommissioning of nuclear activities during and at the end of the estimated life of the nuclear product.
- Made operational final facilities for the storage and disposal of radioactive waste17 and spent fuel.
(b) Be notified to the EU Commission in accordance with the Euratom Treaties.
(c) Use the best-available technology which has been certified by the relevant national regulator.
(d) Use accident-tolerant fuels (or switch to such fuels by 2025).
2.3 Gas Products – Technical Screening Criteria18
To satisfy certain of the Environmental Objectives, the relevant gas product must (inter alia) meet the following criteria:
(a) Have a life cycle emission rating less than 100g CO2e/kWh verified by an independent third party.1920
(b) Obtain a construction permit in respect of its facilities which:
- Is for direct emissions of less than 270g CO2e/kWh over a 20-year capacity.
- Does not replace power generated by renewable energy sources based on a comparative assessment.
- Replaces an existing high emitting electricity generation activity using solid or liquid fossil fuels.
- Is designed and constructed to use renewable or low-carbon gas fuels (such as hydrogen) and for a future switch to fully renewable or low-carbon gas fuels by 2035.
- Will lead to a 55 percent emissions reduction in its lifetime when compared to the replaced facility.
- If in a member state in which coal is used for energy generation, that member state has committed to the phase-out of the use of coal.21
3. Response and Next Steps
Member states differ in their response to the Taxonomy Regulation. For instance, the Austrian government, with support from the Luxembourg government, has promised a legal challenge to the inclusion of the gas and nuclear sectors in the Taxonomy. It remains to be seen whether legal challenges of this nature will slow the rollout of the Taxonomy.
There has also been support for opening the Taxonomy to nuclear and gas products, notably in countries likely to benefit from their inclusion. France, with its large domestic nuclear fleet, has supported including nuclear sector investment products in the Taxonomy, and Germany and several Eastern-European states that currently rely on gas for their energy needs have also supported the inclusion of gas in the Taxonomy.
Meanwhile, the United Kingdom continues to develop its own unilateral green taxonomy, which is to utilize foreign taxonomies as a framework upon which to build (none more so than the Taxonomy). Neither the British government nor the U.K. Financial Conduct Authority has materially commented on the failure of the Motion and it is currently unclear whether gas and nuclear products will be included in the eventual British taxonomy.
The Taxonomy Delegated Act is scheduled to enter force in the EU on January 1, 2023, and no impactful opposition from the European Council was launched before the deadline of July 11, 2022.
1 Taxonomy Regulation 2022/8052.
2 E. Zahabi, J. Daghlian et al, “Environmental Disclosures: European Regulators Publish Revised Secondary Rules and Templates Under the EU Taxonomy Regulation,” Akin Gump, March 26, 2021.
3 FoE Japan, Petition Letter to European Parliament, June 10, 2022.
4 Article 3(b), Taxonomy Regulation 2022/8052.
5 Article 9, Taxonomy Regulation 2022/8052.
6 Article 18, Taxonomy Regulation 2022/8052.
7 OECD, Guidelines for Multinational Enterprises (LINK).
8 Specifically, the eight fundamental conventions identified in the Declaration of the International Labour Organisation on Fundamental Principles and Rights at Work and the International Bill of Human Rights.
9 Published in December 2021.
10 Published in July 2021.
11 https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32022R1214&from=EN.
12 European Commission, Press Release, “EU Taxonomy: Commission presented complementary climate delegated act to accelerate decarbonisation,” https://ec.europa.eu/commission/presscorner/detail/en/ip_22_711.
13 Specifically, commitments pursuant to the Paris Accords for the EU to achieve carbon-neutrality by 2050 and to cut emissions of greenhouse gases by 55 percent by 2030.
14 The requirement for compliance with subsequent technical screening criteria is at Article 3(d) of Taxonomy Regulation 2022/8052.
15 ss.4.26 – 4.31, Annex 1 of Delegated Regulation 2022/1214.
16 Council Directive 2009/71/Euratom and Council Directive 2011/70/Euratom.
17 Article 41 of the Euratom Treaty or under Article 1(4) of Council Regulation 2587/1999.
18 Clause 4.29, Annex 1 of Delegated Regulation 2022/1214.
19 Clause 4.29, Annex 1 of Delegated Regulation 2022/1214.
20 Recommendation 2013/179/EU.
21 Article 3, Regulation (EU) 2018/1999.