EU Taxonomy: Commission publishes final Delegated Act with technical screening criteria for nuclear power and natural gas

On 2 February 2022, the Commission approved in principle a Complementary Delegated Act (“DA”) including, under certain conditions, nuclear and gas energy activities in the list of economic activities covered by the EU Taxonomy.

The Complementary DA is accompanied by:

• Three annexes (Annex 1, Annex 2 and Annex 3);
• Q&A on the inclusion of nuclear and natural gas in the Taxonomy – this explains the Commission’s rationale in more detail; and
• FAQ to clarify the content of the Article 8 Disclosures Delegated Act – this supplements the Article 8 Disclosures FAQ that was published in December 2021. 

The Complementary Delegated Act amends the Climate Delegated Act (see here) and Article 8 Taxonomy Disclosures Delegated Act (see here), both of which were published in the Official Journal in December 2021.

The Commission says it has tweaked the technical screening criteria (rather than doing any major rewrites) from the version it sent to the Platform on Sustainable Finance and the Member States Expert Group on Sustainable Finance for internal consultation in January 2022. It says in the Q&A that:

“As a result of the feedback, adjustments to the technical screening criteria and disclosure and verification requirements were introduced to reinforce notably their clarity and usability. Some criteria were made more flexible, to reflect commercial availability and technological readiness. Specific adjustments were made to make certain criteria more workable across Member States. Transparency and verification requirements were reinforced to improve information and credibility towards investors.”

In particular, the Complementary DA sets out the criteria subject to which certain nuclear and gas activities can be classified as “transitional” activities to those already covered by the Climate Delegated Act. It covers the following activities:

Nuclear-related activities

• Advanced technologies with closed fuel cycle (“Generation IV”) to incentivise research and innovation into future technologies in terms of safety standards and minimising waste (with no sunset clause)
• New nuclear power plant projects for energy generation, which will be using best-available existing technologies (“Generation III+”), will be recognised until 2045 (date of approval of construction permit)
• Modifications and upgrades of existing nuclear installations for the purposes of lifetime extension, will be recognised until 2040 (date of approval by competent authority)

Gas-related activities

• Electricity generation from fossil gaseous fuels
• High-efficiency co-generation of heat/cool and power from fossil gaseous fuels
• Production of heat/cool from fossil gaseous fuels in an efficient district heating and cooling system

Each gas-related activity needs to meet either of the following emission thresholds:

• lifecycle emissions are below 100gCO2e/kWh; or
• until 2030 (date of approval of construction permit), and where renewables are not available at sufficient scale, direct emissions are below 270gCO2e/kWh or, for the activity of electricity generation, their annual direct GHG emissions must not exceed an average of 550kgCO2e/kW of the facility's capacity over 20 years. In this case, the activity must meet a set of cumulative conditions: e.g. it replaces a facility using solid or liquid fossil fuels, the activity ensures a full switch to renewable or low-carbon gases by 2035, and a regular independent verification of compliance with the criteria is carried out.

The Complementary DA also amends the Article 8 Taxonomy Disclosures Delegated Act so that investors can identify which investment opportunities include gas or nuclear activities and make informed choices. Financial and non-financial entities covered by the Non-Financial Reporting Directive (“NFRD”) will be required to disclose the proportion of their activities linked to natural gas and nuclear energy in the numerator and denominator of the Taxonomy eligibility and alignment KPIs they are required to disclose.

In the Q&A, the Commission has also indicated that it will likely amend the disclosure obligations that financial market participants ("FMPs") and financial advisers are also subject to under SFDR / Taxonomy rules on the same basis (i.e. require them to split out the proportions of gas and nuclear related activities):

“In addition, in order to provide a high degree of transparency to investors in financial products concerning exposures to fossil gas and nuclear energy activities, the Commission will explore amending further the disclosure framework pertaining to those financial products as appropriate, to provide for full transparency over the whole life of those financial products. To ensure that such information is clearly identified by end-investors, the Commission will consider amending the requirements on the financial and insurance advice given by distributors.”

Transitional activities are those that cannot yet be replaced by technologically and economically feasible low-carbon alternatives, but which contribute to climate change mitigation and have the potential to play a significant role in the transition to a climate-neutral economy, subject to strict conditions, without crowding out investment in renewables. 

And therein lies the rub: some believe that investing in nuclear power and gas power plants will divert investment from renewables and lock the EU into fossil-fuel dependency for several years to come – while others (including the European Commission) believe that the EU is not yet ready to make a major leap from coal and unabated gas power generation to renewables and needs a pragmatic (if imperfect) bridge in the meantime.

What happens next?

The Complementary DA can only be formally adopted by the Commission once translations are available in all EU languages, which may still take some time.

The formal scrutiny period will then also start – which means the European Parliament and Council will then have four months (which can be extended by a further two months) in which to formally object to the DA. Neither the European Parliament nor the Council can amend the DA – they only have the power to veto it. But in order to veto it, the Council would need at least 72% of Member States (i.e. at least 20 Member States) representing at least 65% of the EU population to object to the DA and the European Parliament would need at least 353 MEPs to object to it.

Austria and Luxembourg have threatened to bring a legal challenge against the Commission but it remains to be seen whether they will go ahead with that threat.

Once the scrutiny period is over and if neither the Council nor the European Parliament object, the Complementary DA will enter into force and apply from 1 January 2023.

The inclusion of nuclear power and natural gas has proven to be one of the most controversial aspects of the EU Taxonomy so far. The Platform on Sustainable Finance as well as some Member States expressed strong views when the Commission consulted them on a draft of the DA in January. However, the Commission is adamant that both nuclear and natural gas have a role to play in the net zero transition and that it is up to each Member State to decide its own energy mix. Investors have also expressed mixed views as to whether they are willing to invest in nuclear power and natural gas (see here for example). 

The Commission has been at pains to remind everyone that the Taxonomy does not prevent investment in activities that do not meet the criteria in the Taxonomy – rather, it is intended to provide a steer towards what it considers to be green/sustainable economic activities and prevent greenwash. No one is forcing anyone to invest in nuclear or natural gas if that is not the right choice for them.

As for whether the inclusion of nuclear and natural gas will undermine the credibility of the Taxonomy ... time will tell.