*** This article was updated on 3 February 2022 following the latest developments on the topic.***

The much-debated issue of gas and nuclear criteria’s inclusion in the EU sustainable finance taxonomy saw decisive developments at the end of 2021 and is now reaching a tipping point, with the European Commission expected to propose rules by late January.

A classification system establishing a list of environmentally sustainable economic activities, the EU taxonomy aims to provide companies, investors and policymakers with appropriate definitions of which economic activities can be considered environmentally sustainable.

A draft of the Commission’s proposal – available here – intends to qualify nuclear power plant investments as green if the project has a plan, funds and a site to safely dispose of radioactive waste. Also, permits for new nuclear plants would need to be issued by 2045. According to the text, the lifetime extension of existing power plants could also be considered green “in view of the long lead times for investments in new nuclear generation capacity”, although these need to “include modifications and safety upgrades” to ensure they comply with “the highest achievable safety standards”.

Investments in natural gas power plants could be considered environmentally sustainable if they produce emissions below 270g of CO2 equivalent per kilowatt-hour, a limit requiring carbon capture and storage technologies or the addition of hydrogen and/or biogas to the fuel mix. Other conditions include obtaining construction permits by 31 December 2030 and the plants to be technically equipped to burn low-carbon gases.

The proposed text classifies both fossil gas and nuclear energy as “transitional” green activities, meaning that their use will be subject to the unavailability of technologically and economically feasible low-carbon alternatives. After consultation during January with EU countries and a panel of expert advisors, the European Commission published on 2 February a final proposal including nuclear and gas power in the EU’s sustainable finance taxonomy, along the lines of the text put forward on New Year’s Eve. The Commission underlined that the overarching objective is to accelerate the low-carbon transition and phase out coal, the fossil fuel considered as the most polluting. The rules also set out new disclosure provisions, with companies having to report yearly about compliance with the green criteria, to be then verified by external auditors to prevent ‘greenwashing’.

The proposal is politically sensitive, with France pressuring the Commission to include nuclear in the EU taxonomy, and Germany making detailed requests on gas to cope with the needs of its energy-intensive industries. On the other side, Austria and Luxembourg have threatened to sue the Commission for adding nuclear and gas to the EU’s green rulebook.

With the EU targets set to a 55% emissions reduction by 2030 and climate neutrality by 2050, the sustainable finance taxonomy is a key tool to direct the necessary investments as, in simpler terms, it is putting a different price tag on sustainable and non-sustainable assets.

The European Parliament and EU member states will now have the possibility to examine the taxonomy proposal on nuclear and gas, with four months to scrutinise it. They cannot introduce changes but only decide to approve or reject it entirely. Both institutions may request an additional two months of scrutiny time if they wish. The European Parliament will validate or reject the Commission’s text by a simple majority vote, while the European Council could block it if 20 of the 27 EU member states agree.