Updated: Feb 25, 2022
This month, the EU made news in climate circles for the release of its “Complementary Climate Delegated Act,” which categorized natural gas and nuclear energy as environmentally sustainable activities.
Let’s unpack what that means and why the EU got attention for it.
In order to understand the news, first we need to know what a sustainable finance taxonomy is, what transition activities are in this context, and what factors were behind the EU’s decision.
What is a sustainable finance taxonomy?
A sustainable finance taxonomy is a tool for categorizing economic activities. The taxonomy sets parameters within which activities are considered “sustainable” and fall in line with overall goals for carbon reductions. The EU’s sustainable finance taxonomy came into use last year as a way to help guide investors (banks and other financial entities) make green investments and for companies to avoid greenwashing.
Sustainable finance taxonomies are growing in importance and ubiquity around the world, as governments and investors seek to understand how financial flows can support the transition to a net zero economy, and CCAP is on the frontlines of disseminating information and helping to guide the development of these tools. CCAP has just completed work on a sustainable finance taxonomy overview for the GIZ, a German development agency that supports the government’s international aid work, so staff there can better understand what these taxonomies are and what the potential shortcomings might be. You can read more about our work here.
What are transition activities?
Transition activities are economic activities (i.e., projects or investments) that may not be in line with long-term goals for decarbonization but are seen as viable ways to reduce emissions in the short term while maintaining a functioning economy. For instance, using natural gas in place of coal*.
Why did the EU include natural gas and nuclear power in its taxonomy?
EU countries each have their own electricity grid and sources. Some countries have high renewable penetration. For instance, Spain gets more than 40 percent of its electricity from wind, solar, and hydro. About a quarter of its electricity comes from nuclear, and about a quarter comes from natural gas. Germany, on the other hand, still gets a quarter of its electricity from coal, which is the most-carbon intensive source of electricity. In an effort to transition away from coal, Germany has invested heavily in natural gas infrastructure. Natural gas now accounts for about a sixth of Germany’s electricity. France gets nearly two-thirds of its electricity from nuclear sources and uses very little coal or natural gas. (Nuclear energy does rely on the carbon-intensive extraction of uranium, but most nuclear critics focus their concerns on potential safety issues. The EU taxonomy includes the Do No Significant Harm principle to protect the overall environment and support social equality.)
As the EU looks to transition from carbon-intensive electricity sources to renewable sources, country leaders seek to balance sunk investments in technology and economic pressures. Critics of the inclusion of nuclear and gas have said that it undermines the EU taxonomy’s credibility; although an EU commissioner said, “credibility is actually enhanced by doing something difficult but necessary.” The EU has set a goal of net zero by 2050.
*Natural gas combustion emits 50-60 percent less carbon dioxide than coal combustion; however, scientists have pointed out that the methane released during natural gas extraction should also be considered in the life cycle impact of natural gas. Because methane is 86 times more potent than CO2 over a 20-year period, leaked, or “fugitive”, methane must be kept to very small amounts in order for natural gas combustion to have less greenhouse effect than coal. CCAP works to support methane mitigation in the oil and gas sector.
Since 1985, CCAP has been a recognized world leader in climate and air quality policy. Headquartered in Washington, D.C., CCAP helps policymakers around the world develop, promote and implement innovative, market-based solutions to major climate, air quality and energy problems that balance both environmental and economic interests.