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The European Commission’s decision to allow gas and nuclear power projects to be considered sustainable investments has fuelled debate over the role of the two energy sources in the transition away from coal and gas.

The Commission announced on February 2 that gas and nuclear power will be added to the EU taxonomy on sustainable finance, which regulates what can be labelled a sustainable investment in the bloc’s 27 member states.

Gas, exported as liquefied natural gas (LNG), has been at the centre of a global debate on the speed of the energy transition required to avert the most devastating consequences of climate change.

Proponents, such as top LNG exporters Australia, Qatar and the US, have argued that the fuel’s lower greenhouse gas emissions compared to coal and oil mean it is a useful substitute in situations where renewable energy is not immediately feasible. Environmental campaigners say that transitioning from one fossil fuel to another ignores the need for rapid emissions cuts.

Natural gas emits less carbon dioxide than coal when burned to create energy, according to the US Energy Information Administration, but still creates about 53kg of the greenhouse gas per unit of energy output.

The International Energy Agency said last year that to meet a global target of net zero emissions by 2050, no new gas fields should be developed.

Green energy advocates were dismayed by the Commission’s move and blamed horse-trading between member states.

“No right-minded financial institution should use this act to make its green finance decisions, since they would still be exposing themselves to the risks of greenwashing, reputational damage, stranded assets, lock-in, and legal complications,” says Sebastien Godinot, a senior economist with the World Wide Fund for Nature.

“Because the taxonomy is a voluntary standard right now, I think financial institutions just won’t use it to promote their sustainable finance products,” Johannes Schroeten, a sustainable finance policy advisor with climate change think tank E3G, tells GTR.

Schroeten argues that the proposal, if implemented, would not have “a massive impact” on nuclear or gas finance but would dent the EU’s image as a global leader on climate and green finance.

 

Terms and conditions

The Commission’s proposal contains several conditions, designed to lower greenhouse gas emissions from any new gas plants, which would make them much more capital-hungry investments.

A plant that receives a construction permit before the end of this decade will be limited to 27 grams of carbon dioxide equivalent (CO2e) per kilowatt-hour, or alternatively will not be allowed to exceed an average of 550kg of CO2e per kilowatt over 20 years.

“Today, the average natural gas-fired generation plant emits 350 grams of CO2e/kWh, with not even the most efficient gas-power projects able to meet the requirement of under 270 grams per CO2-e/kWh,” says Nikoline Bromander, a gas and LNG analyst with Rystad Energy.

“To be able to meet the EU’s requirements, other low-carbon technologies will need to be implemented, such as gas-fired power generation combined with carbon capture and storage (CCS), or fuel mixing technologies in which gas is mixed with biogas or hydrogen for power generation,” she tells GTR.

Bromander says if the proposal is passed into law, the impact on global gas markets will depend on whether investors opt to use CCS or fuel mixing to meet the emissions caps.

Fuel mixing would shrink the need for gas and boost demand for hydrogen or other green fuels, while widespread use of CCS would have little impact on demand for gas.

For any new gas plant to be considered green it will also have to replace an existing high-emissions facility using coal or oil and lead to a 55% minimum greenhouse gas emissions reduction compared to the previous plant. Compliance with the taxonomy conditions will have to be verified by a qualified third party.

 

Parliamentary scrutiny

The Commission’s proposal faces tough scrutiny from the European Parliament, which has four months during which it can veto the plans.

The Parliament’s environment and economics committees, a political group or one twentieth of MEPs can each bring about a vote of objection to the proposal. A successful nixing of the updated taxonomy requires an absolute majority in the Parliament.

E3G’s Schroeten says the mood of the parliament is difficult to read. “I think it is very much up for grabs, there is an amazing amount of uncertainty.”

“The Parliament is not just divided along party lines but also along country lines. So I think this will be a very tight one”.

European reliance on imported gas has also become a political headache for governments on the continent as the US, UK and others foreshadow sweeping sanctions on the Russian natural resources sector – including the newly built Nord Stream 2 pipeline to Germany – which could scuttle imports from Europe’s top supplier.

The Commission had to weigh up competing demands from member states while piecing together the changes to the taxonomy. France and Germany argued strongly for the inclusion of nuclear and gas power respectively, while Austria and Luxembourg have both threatened the Commission with legal action for including the energy sources.

At the Glasgow climate summit in November last year, EU member states including France, Germany, Italy and Spain pledged to end public finance support for all unabated fossil fuel energy projects by the end of 2022.

Globally, public finance bodies provided US$16bn of support to the gas sector in 2017 and 2019, according to the International Institute for Sustainable Development. Some export credit agencies have begun treating the sector with more caution, but commercial lenders are yet to retreat from gas in the same way many have fled from thermal coal.