The European Commission proposes the inclusion of specific activities in gas and nuclear sector into the EU Taxonomy

I. Background

As set out in the Taxonomy Regulation[1], the EU Taxonomy is a classification tool for economic activities contributing to an environmental objective qualifying as “environmentally sustainable”.

Technical screening criteria in relation to each of the EU Taxonomy environmental objectives are to be developed under delegated acts supplementing the Taxonomy Regulation. Economic activities have to follow those technical screening criteria in order to be deemed as contributing substantially to the relevant EU Taxonomy objective. In that context, the Climate Delegated Act entered into force on 1 January 2022 and sets out the relevant technical screening criteria in relation to the objectives of climate change mitigation and climate change adaptation.

The Climate Delegated Act provides for the criteria for climate change-oriented activities in several industries such as forestry, infrastructure, energy. As of now, the Climate Delegated Act does not cover any activity related to nuclear energy and only covers specific gas-related activities, mostly oriented towards non-fossil gaseous or low-carbon gas.

The question of whether nuclear and other gas-related activities should be eligible to qualify as “environmentally sustainable”, based on their potential contribution to climate change mitigation or climate change adaptation, was discussed by European Union law makers.

Following lengthy debates, the European Commission finally presented the Taxonomy Complementary Climate Delegated Act[2], which introduces, under specific conditions, some nuclear and gas-related activities as part of the activities aligned with the EU Taxonomy.

II. The Taxonomy Complementary Climate Delegated Act

The Taxonomy Complementary Climate Delegated Act, as presented by the European Commission on 2 February 2022, provides for strict additional technical screening criteria in relation to specific gas-related and nuclear-related economic activities. Six economic activities in relation to nuclear energy and fossil gas are to be eligible to qualify as “environmentally sustainable” under the EU Taxonomy.

The European Commission pointed out that the inclusion of gas-related and nuclear-related economic activities aims to “help accelerating the shift […] towards a climate-neutral future”[3].

As such, the alignment of nuclear and fossil-gas activities as “environmentally sustainable” with the EU Taxonomy is strictly conditioned to the fulfillment of certain rigorous criteria, including the requirement for contributions towards the transition to climate neutrality. For instance, regarding fossil gas-related activities, the facility should switch fully to renewable or low-carbon gases by 31 December 2035.

In accordance with the FAQ[4] published by the European Commission, the technical screening criteria provided by the Complementary Climate Delegated Act ensure that the nuclear energy and gas activities aligned with the EU Taxonomy will play a significant role in the transition towards more renewable energy.

Closely linked with the potential alignment of certain activities in the nuclear and gas sector with the EU Taxonomy, the Complementary Climate Delegated Act also provides for a high degree of transparency regarding investments in natural gas and nuclear energy activities, by increasing the volume of the reporting obligations of NFRD-companies and businesses in respect to their activities in the gas and nuclear energy sectors.

III. Implications and next steps

If the proposed Complementary Climate Delegated Act is approved by the co-legislators, it is expected to be applicable as of 1 January 2023.

In practice, this means that as of that date, investment funds managers may report a positive alignment with the EU Taxonomy for the funds that they manage, for instance, in respect to electricity generation from fossil gaseous fuels or the construction and safe operation of new nuclear power plant. This may already be of interest for many Luxembourg investment funds managers who are considering investing in some gas-related activities and willing to maintain the ESG focus of their funds.

Although the proposition of the European Commission opens the gates for supporting investments that could accompany energy transition, especially in countries where nuclear power remains an important part of national economic activity, the topic remains a sensitive one. As members of the European Parliament and Members States already expressed their reluctance to consider nuclear energy and gas-related activities as “green”, including Luxembourg, it is still to be seen whether the investment funds managers will have to report on their investments related to nuclear or gas activities.

As the Taxonomy Complementary Climate Delegated Act is still in the hands of the EU legislators, please rest assured that we will keep you updated on future developments.

[1] Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088

[2] https://ec.europa.eu/finance/docs/level-2-measures/taxonomy-regulation-delegated-act-2022-631_en.pdf

[3] https://ec.europa.eu/info/publications/220202-sustainable-finance-taxonomy-complementary-climate-delegated-act_en

[4] https://ec.europa.eu/commission/presscorner/detail/en/qanda_22_712