Out-Law Analysis | 28 Jan 2022 | 5:55 pm | 6 min. read
On 21 January, the German government issued its eagerly awaited statement on a supplementary delegated act on the EU Taxonomy Regulation, on which the European Commission launched a consultation on 31 December 2021. In its draft, the European Commission proposes to classify electricity generation using nuclear power or natural gas as environmentally sustainable - albeit natural gas only under certain conditions. If this proposal is adopted, it will ensure that financial products and economic activities relying on these types of electricity generation would in principle be eligible for financial support.
"From the German government's point of view, nuclear energy is not sustainable. We therefore reject its inclusion in the delegated act under the Taxonomy Regulation. Severe accidents with large-scale, transboundary and long-term hazards to humans and the environment cannot be ruled out [...]. Nuclear energy is expensive and the final storage issue has not been solved," the statement said.
Where natural gas power is concerned, the German government's position is more nuanced. It calls for improvements in the Commission's draft in this regard, but states that in principle the operation of modern gas-fired power plants with natural gas is a positive transitional solution: "From the German government's point of view, the use of natural gas is not sustainable in the long term either. However, for the German government, fossil gas as a fuel in ultra-modern and efficient gas-fired power plants forms a bridge for a limited transitional period [...] to enable the rapid phase-out of coal and thereby achieve CO2 savings in the short term and accompany the ramp-up of renewable energies. Crucial for the classification as a transition technology is that the gas-fired power plants support the rapid switch to renewable energies and the reduction of emissions in the energy sector as a whole, do not displace renewable energies and convert their operation to hydrogen in good time."
The EU Taxonomy Regulation came into force in July 2020 and is part of the "Action Plan on Financing Sustainable Growth" presented by the Commission in March 2018. It aims to create a classification system for environmentally sustainable economic activities that will make it easier for investors to assess whether projects and other economic activities have a positive impact on the climate and the environment. Ultimately, the EU's taxonomy system is intended to combat ‘greenwashing’ and make the degree of sustainability of companies more consistent and transparent. Businesses classified as sustainable would find it easier to access capital on the financial markets and via state financial instruments, while non-sustainable businesses would find it more difficult.
The scheme currently covers 13 sectors that account for around 80% of greenhouse gas emissions in the EU. These include energy, transport, forestry, manufacturing, buildings and insurance.
The EU taxonomy is particularly relevant in the context of disclosure and reporting obligations. Since 1 January 2022, large listed companies with more than 500 employees have been required to report on the sustainability of their economic activities within the framework of a declaration on EU taxonomy-alignment in accordance with the Non-Financial Reporting Directive (NFRD) – in Germany converted into national law under the CSR Directive Implementation Act. In doing so, they must indicate how and to what extent their businesses is involved in ecologically sustainable economic activities according to the EU Taxonomy Regulation. Specifically, businesses must report on the environmentally sustainable share of their sales revenues, capital expenditures and operating expenses. For financial market participants and advisors, the Sustainable Finance Disclosure Regulation - a regulation on sustainability in the financial services sector that entered into force on 10 March 2021 - provides for similar and even more extensive obligations, particularly around disclosures on the sustainability of financial products.
An activity is considered environmentally sustainable if it contributes significantly to the achievement of one or more of the EU’s six defined environmental objectives, without significantly harming one or more of the other environmental objectives. According to the Taxonomy Regulation, the more precise definition of the requirements and, in particular, detailed technical assessment criteria to determine what is considered a "significant contribution" as well as what is considered a "significant harm with regard to the environmental objectives" is to be carried out by means of so-called delegated acts of the European Commission.
The first delegated act was published by the European Commission on 4 June 2021, entered into force at the end of December 2021 and is binding since 1 January 2022. It defines precise technical assessment criteria for the environmental objectives of climate protection and adaptation to climate change, while still excluding nuclear energy and natural gas-based energy technologies. A second delegated act, which has already been delayed, will set more precise specifications for the remaining four environmental objectives, namely the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, as well as the protection and restoration of biodiversity and ecosystems.
When the European Commission excluded nuclear energy and natural gas-based energy technologies from the first delegated act of 4 June 2021 it was clear that there was potential for dispute among the member states. This finally manifested itself in the submission of the draft supplementary delegated act by the Commission on 31 December 2021.
While the Commission classifies nuclear power unconditionally as ecologically sustainable and affirms this for electricity generation with natural gas under certain conditions, the newly elected German government reconfirmed the position of the previous German government with its statement: "Germany emphatically rejects the inclusion of nuclear power in the delegated act." Austria, Denmark and Luxembourg took a similar position, while France and Poland have been particularly clear in their support for nuclear power as sustainable energy.
Among others, the Commission bases its assessment on a report published by the Joint Research Centre (JRC) from March 2021. In its statement on the role of nuclear power in the EU taxonomy on 12 January, the German Office for Safety in Nuclear Waste Management (BASE) noted that the report underestimates the risks of nuclear power. BASE President Wolfram König explained that from a professional point of view, the classification of nuclear power as a sustainable form of energy production is untenable. He said that nuclear energy was a high-risk technology, produces waste and bears the risk of misuse of radioactive material for terrorist and war purposes. Future generations would be saddled with considerable burdens that could not be reconciled with the claim of intergenerational justice.
BASE also considers that the Commission's assumption that hardly any greenhouse gases are emitted when nuclear technology is used is incorrect. Considering the entire life cycle - including uranium extraction and dismantling - there are indeed emissions of greenhouse gases, BASE said.
Before the supplementary delegated act can enter into force and become valid, it must first be adopted by the European Commission. This is expected to happen in the near future. Afterwards, it will be submitted to the European Parliament and the Council of the EU for consideration. Within four months - or six months if an extension is requested - these bodies can raise objections or even stop the supplementary delegated act, but it is already becoming apparent that the necessary majority for this will not be found in the Council. It would be necessary for 20 of the 27 member states to oppose the supplementary delegated act. In the parliament, a simple majority would be enough to reject it, but most observers do not expect such a majority to be found.
Austria and Luxembourg have already announced their intention to sue if the supplementary delegated act is adopted in its current form. Environmental organisations are urging Germany to join this lawsuit.
Regarding the possibilities of a lawsuit, the German government’s spokesperson Steffen Hebestreit announced at the beginning of January that the German government saw little chance of stopping the Commission's plans to classify nuclear power as sustainable. For this to be the case, the Commission would have to have exceeded its sphere of competence with the regulation, but "the European Commission seems to be on safe ground legally".
To the extent that the German government has also indicated a need for improvement with regard to the classification envisaged for gas-fired power, it may ultimately have little interest in taking legal action. Admittedly, the blending of decarbonised gases required by the European Commission - 30% by 2026 and 55% by 2030 - poses a considerable hurdle to the further development of gas power due to the lack of sufficient quantities of green hydrogen available at that stage. But the alternative might be that natural gas-based power will straight away be left behind as an unsustainable way of generating electricity.
Nevertheless, it is not entirely out of scope that the German government could support a lawsuit. Regarding nuclear power, there is a hint of a lawsuit consideration in its statement: "In view of the very fundamental and political importance of the issues dealt with here, the German government believes that a proper legislative procedure and public consultation would be appropriate". With regard to the classification of nuclear power as sustainable, the German government states that this also gives rise to legal reservations about the supplementary delegated act, "as it is doubtful whether the inclusion of nuclear power is compatible with the requirements of the EU Taxonomy Regulation". This may at least be interpreted as a sign that the German government is trying to keep all options open.