Gas and Nuclear Activities in the EU Taxonomy Regulation: Under What Conditions Does the Commission Deem Them Environmentally Sustainable?

By Paul Mertenskötter, W. Andrew Jack, Cándido García Molyneux & Thomas Reilly on February 18, 2022

On February 2, 2022, the European Commission adopted a Complementary Climate Delegated Act (the “CCDA”) listing specific gas and nuclear activities as “environmentally sustainable” for purposes of the EU Taxonomy Regulation, subject to strict criteria. Only certain activities that comply with strict emissions limits and other criteria detailed below may be so designated. Even so, the Commission’s decision to list nuclear and gas activities as “environmentally sustainable” is controversial and may still be blocked by EU Member States and the European Parliament through an upcoming scrutiny period, and may also be legally challenged before the EU Courts. Nevertheless there is a significant chance that the Commission’s criteria to consider the listed gas and nuclear activities as “environmentally sustainable” will enter into force by the beginning of 2023. This would allow such listed gas and nuclear activities to have access to green investors and ear-marked public funds under the EU’s Next Generation EU investment program.

Taxonomy Re-Cap

The Taxonomy Regulation establishes the EU’s binary system to distinguish between economic activities that are “environmentally sustainable” and those that are not.

Together with other laws of the EU Sustainable Finance Package such as the Corporate Sustainability Reporting Directive (“CSRD”) and the Sustainable Finance Disclosure Regulation (“SFDR”), the Taxonomy Regulation is designed to channel capital investments to sustainable economic activities. To this end, the Taxonomy Regulation provides criteria to allow companies and financial market participants to label specific economic activities and related investments as “environmentally sustainable,” and EU rules require a growing number of companies and investors to report on the degree to which their economic activities and investments comply with the Taxonomy Regulation.

To be environmentally sustainable for purposes of the Taxonomy Regulation, an economic activity must fulfill the following four cumulative requirements:

Substantially contribute to one of six environmental objectives (e.g., climate change mitigation, transition to a circular economy);
Not significantly harm any of the other environmental objectives (e.g., by harming pollution prevention and control due to “a significant increase in the emissions of pollutants” or by harming protection and restoration of biodiversity and ecosystems due to its significant detrimental effects on the good condition and resilience of ecosystems).
Be carried out in compliance with minimum safeguards, which are essentially the core human rights and labor obligations of the OECD, UN Guiding Principles of Business and Human Rights, the International Labor Organization, and those enshrined in the International Bill of Human Rights; and
Comply with so-called “technical screening criteria.”

The technical screening criteria are crucial. They set out the specific conditions that a particular economic activity (e.g., electricity generation from natural gas or construction of a nuclear power plant) must meet in order to be deemed environmentally sustainable for purposes of the Taxonomy Regulation.

The European Commission Is the Key Taxonomy Gatekeeper

Under the Taxonomy Regulation, the EU Member States and the European Parliament have delegated the authority to adopt the technical screening criteria to the European Commission, but Member States and Parliament retain the right to scrutinize and object to them.

The Commission has already successfully adopted Commission Delegated Regulation 2021/2139 (the so-called “Climate Delegated Act”), which sets out the technical screening criteria for dozens of economic activities that are deemed to substantially contribute to climate change mitigation or adaptation (ranging from “anaerobic digestion of sewage sludge” to “transport by passenger cars”).

On February 2, the Commission complemented this Climate Delegated Act with the CCDA, which will still be subject to scrutiny by Member States and the European Parliament. The CCDA specifies the screening criteria for specific nuclear and gas activities, and also amends the specific disclosure rules established in Commission Delegated Regulation 2021/2178 to allow investors and other stakeholders to distinguish Taxonomy compliant gas and nuclear activities from other Taxonomy compliant activities such as the construction of off-shore wind parks (see Annex III to CCDA).

Gas Activities: The Commission’s Sustainability Criteria

The CCDA includes three natural gas activities that can be Taxonomy compliant subject to strict conditions:

Construction or operation of electricity generation facilities that produce electricity using fossil gaseous fuels (i.e., natural gas);
Construction, refurbishment, and operation of combined heat/cool and power generation facilities using fossil gaseous fuels; and
Construction, refurbishment, and operation of heat generation facilities that produce heat/cool using fossil gaseous fuels connected to efficient district heating and cooling.

The technical screening criteria for the three activities are broadly similar. Taking the example of the first activity, electricity generation from natural gas, the key conditions are as follows:

The life-cycle greenhouse gas emissions from the electricity generation must not exceed 100g CO2e/kWh (the emissions are to be calculated based on the EU’s 2013 life-cycle method or applicable ISO standards).
The life-cycle emissions must be verified by an independent third party.
For facilities relying on a form of abatement, such as carbon capture or use of low-carbon gases, the abatement activity must itself comply with the applicable technical screening criteria in the Climate Delegated Act.

We note that the life-cycle emission target of 100g CO2e/kWh in practice means that operators seeking to comply with it must rely heavily on abatement activities, such as carbon capture technologies or the blending of fuels. This is because according to a recent study by the United Nations Economic Commission for Europe (“UNECE”) on life cycle assessments for electricity generation options, “a natural gas combined cycle plant can emit 403–513 g CO2e/kWh from a life cycle perspective, and anywhere between 92 and 220 g CO2e/kWh with [carbon capture and storage].” This suggests that electricity generation from natural gas must use some of the most technically advanced carbon capture and storage technologies available today to meet the technical screening criteria. It may also be possible to use blending of green hydrogen with natural gas to meet these life-cycle emission targets.

In derogation from the generally applicable technical screening criteria above, the Commission foresees laxer emission targets for gas power plants which receive their construction permit by December 31, 2030, and which fulfil additional requirements. The laxer emission target is:

Direct greenhouse gas emissions are lower than 270g CO2e/kWh of the output energy, or annual direct emissions do not exceed an average of 550kg CO2e/kW of the facility’s capacity over 20 years.

The additional cumulative requirements are:

The gas power plant replaces an existing high emitting electricity generation activity that uses solid or liquid fossil fuels;
The power to be replaced cannot be generated from renewable energy sources, based on a comparative assessment with the most cost-effective and technically feasible renewable alternative for the same capacity;
The newly installed production capacity does not exceed the capacity of the replaced facility by more than 15%;
The gas power plant is designed and constructed to use renewable and/or low-carbon gaseous fuels (e.g., “green” or “blue” hydrogen) and the switch to the full use of such fuels must take place by December 31, 2035. The management of the responsible company must approve and commit to a verifiable plan for this switch.
The replacement of an existing electricity generation activity leads to a reduction in greenhouse gas emissions of at least 55% over the lifetime of the newly installed gas power plant; and
If the gas power plant is located in an EU Member State that uses coal for energy generation, that Member State has publicly committed to the phase-out of coal for energy generation.

Nuclear Activities: The Commission’s Sustainability Criteria

The CCDA also foresees that three nuclear activities can be Taxonomy compliant. In broad terms, these are:

Research, development, demonstration and deployment of advanced technologies with a closed fuel cycle (“Generation IV”). This is to spur innovation in future technologies in terms of safety standards and waste minimization.
Construction and safe operation of new nuclear power plant projects for energy generation, which will be using best-available existing technologies (“Generation III+”). Such projects will be recognized until 2045 (date of approval of construction permit). The energy from such plants can be used to produce hydrogen (i.e., “pink” hydrogen).

Modifications and upgrades of existing nuclear installations for the purposes of lifetime extension. Such projects will be recognized until 2040 (date of approval by competent authority).

The European Commission claims that it has relied on extensive expert advice—including from the Joint Research Centre, the Scientific and Technical Committee under Article 31 of the Euratom Treaty, and the Scientific Committee on Health, Environmental and Emerging Risks (“SCHEER”)—to ultimately make the controversial decision that nuclear energy that complies with the regulatory framework in the EU Member States “ensures a high level of protection for the environment and for people,” and therefore, can meet the do no significant harm criteria.

To be Taxonomy compliant, these nuclear activities must meet detailed regulatory conditions that cover requirements beyond the existing EU and national law regulatory frameworks for nuclear power plants. These additional conditions include, for example, definite dates for operational disposal facilities and a prohibition of the export of radioactive waste for disposal in non-EU countries.

Next Steps

Under Article 23(6) of the Taxonomy Regulation, the European Parliament and Council have four months to block the publication of the CCDA in the EU Official Journal and thereby keep it from entering into force. This four month scrutiny period will officially start once the Commission refers the CCDA translated into the different EU official languages to the European Parliament and Council, and may be extended by two additional months at the initiative of the European Parliament or Council. It is likely to last until late summer 2022.

The European Parliament may block the CCDA if a majority of its Members vote to oppose it. The Parliament’s Rules of Procedure suggest that the translated CCDA will be referred to the Parliament’s Committee on Economic and Monetary Affairs (“ECON”) and the Committee on the Environment, Public Health, and Safety (“ENVI”). These two Committees may decide to introduce a motion, backed up by reasons, for the Parliament to object to the CCDA. Alternatively, a political group or a group representing 5% of MEPs may also present such a motion. Any resolution to block the CCDA will have to be voted by the plenary of the European Parliament and will only succeed if at least 353 out of the 705 MEPs support it.

The Council may also block the CCDA if 20 Member States representing 65% of the EU population vote to oppose it. The Economic and Financial Affairs Council configuration (“ECOFIN”)—which brings together the EU’s economics and finance Ministers—has been generally responsible for the EU’s sustainable finance package.

What is more, Member States and the European Parliament may also challenge the CCDA before the General Court of the EU. Moreover, private parties, including NGOs, are also likely to have legal standing to challenge the CCDA before the General Court of the EU if they can show that they are directly concerned by the CCDA.

The CCDA is expected to enter into force on January 1, 2023, if the Parliament and Council fail to oppose it and the EU Courts do not suspend it. At that point, nuclear energy and natural gas investments complying with the conditions set out above would count as “environmentally sustainable” for purposes of the Taxonomy Regulation, thereby opening the door to green investors and ear-marked public funds under the EU’s Next Generation EU investment program.