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  1. Analysis
January 20, 2022

Natural gas: green investment, or a fuel to be snubbed?

The EU Commission’s latest taxonomy has sparked industry debate and environmental concern by including natural gas as a ‘green’ investment.

By Scarlett Evans

On New Year’s Eve, the EU Commission introduced new guidelines for its standard on sustainable investments – the EU taxonomy – which will be used to define and guide investments into green energy sources. The deliberation process has been months in the making but its ushering in, hours before the new year, has left some suspicious over the final decision, in particular the choice to include nuclear power and natural gas as “green” investments. 

While they are included in the “transformative”, as opposed to “sustainable”, energy sources bracket and come with some caveats, the proposal has been met with backlash from both environmentalists and some EU governments.

Climate activists including Greta Thunberg have spoken against the decision, labelling it a “real life climate nightmare”, while political tensions are also simmering as nations argue the case for the inclusion, or exclusion, of the controversial resources. Here, we take a look at why the sources have been included, the reasons behind the backlash, and what the taxonomy’s ripple effects could be should the new rules go ahead. 

The taxonomy

Initially published 22 June 2020, the taxonomy was established to provide a “universal language” on sustainability, and the projects that can be included within this definition. The addition of nuclear and natural gas came in the much-delayed sustainable finance taxonomy” rules, with the draft proposal submitted at 10pm on 31 December.

In a statement on the addition, the European Commission said: “Taking account of scientific advice and current technological progress…the Commission considers there is a role for natural gas and nuclear as a means to facilitate the transition towards a predominantly renewable-based future.”

The decision follows lobbying from a number of EU states, many of whom have either included gas as a “bridge” fuel in their energy transition plans, or are placing increasing stock in nuclear as a low-carbon alternative. While France, the Czech Republic, and Hungary support nuclear power, nations such as Germany have made the case for gas given their foregoing of coal and nuclear, leaving a demand gap that needs to be filled. 

“Gas has got a really important role both now and in the future because it’s a very flexible energy vector,” says Oil & Gas UK senior investor relations adviser Francesca Bell. “That flexibility means it’s really important for supporting continued growth of renewable and hydrogen, which we know will be vital to the UK reaching its net zero targets.

“Why shouldn’t it be in the taxonomy if it’s going to be a beneficial investment for transitioning and retaining security of supply, as well as scaling up other sources like hydrogen and supporting the backstop for renewables?” 

The inclusion of these fuels in the taxonomy is subject to some stipulations, with gas only permissible if “the same energy capacity cannot be generated with renewable sources”, while nuclear can only be included if a project demonstrates it has a plan to deal with radioactive waste.

Despite these requirements, the inclusion has been met with opposition from both activist groups and industry members, with the Austrian Government even threatening to sue the Commission if the proposal goes ahead. Unlike previous technical criteria, the latest proposal will not be open for a public consultation – something that has in itself sparked some concern – though there is the chance for the European Parliament and the European Council to study the document and file any objections. 

Given the divisions already caused by the announcement, the outcome of these deliberations is uncertain.

Undermining the path to a greener future?

Navraj Singh Ghaleigh, senior lecturer in climate law at the University of Edinburgh, says that even without the inclusion of public opinion in the final decision, approval of the bill is by no means assured. 

“It’s not just the environmental NGOs who are going to be kicking up a stink about this,” he says. “From the perspective of the integrity of European institutions, who have invested a huge amount of policy time and effort in the taxonomy, it would really blow quite a significant hole under the waterline if it permitted nuclear and gas. It undermines the credibility of this major policy initiative of the European Union.”

While the exclusion of gas and nuclear in the taxonomy would not in itself prevent investments into these fuels, there is the fear that labelling them sustainable gives greater incentive to pursue these sources at a time where other industry bodies are calling for their overhaul. 

“In order to keep to the 1.5°C climate target, there must be no more new plans for fossil infrastructure after 2022,” says Michael Bloss, Germany’s Greens/EFA climate policy spokesman. “If new gas-fired power plants are now to be built with European taxpayers’ money as part of the EU’s taxonomy, and if this is also described as green, then this undermines the path to the 1.5°C path.”

Ghaleigh says that the issue is representative of a continued rift between the need for green change, and the industry’s inability to adapt.

“This issue is raising, in a really clear way, the tension between the ambitions of the taxonomy – which was essentially to reallocate finance in a way that is consistent with the requirements of the Paris Agreement – and the overwhelming desire of large parts of industry for business-as-usual,” he says. “This was essentially what this decision is, it’s trying to include business-as-usual technologies within a green framework.”

The role of gas in a green framework

While some argue our energy future has no space for gas, others say that it will remain an inevitable part of nations’ energy mixes for years to come. 

“We need to remember that the transition is not tomorrow, we can’t flip a switch and have a different system,” says Bell. “We’re going to need gas for a number of years and if we exclude it from the taxonomy, it will not prevent it from being invested in, it will just bump up the cost of production. 

“While there is still that demand for the product, it’s about making sure that we produce it in the most low-carbon way possible,” she adds. “Paving the way for future investments into this resource means that we will be able to control the emissions associated with it. 

“At the end of the day, if demand is still at 10, and you’re only producing at five, the offset of that is you’re going to have to import that product. And if you’re importing that product, then you don’t have control over those emissions.”

Debate over the subject is not unique to the EU, but an ongoing global one as nations navigate their paths to a cleaner future, and the taxonomy’s outcome will have ripple effects on global energy investments. 

With a final decision on the proposal expected in four months’ time, industry members across nations will be looking to the taxonomy’s final iteration for an example of sustainable energy action, and for an indication of which direction the industry is going.

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