On 2 February 2022 the European Commission approved in principle a Complementary Climate Delegated Act (the “Complementary Delegated Act“) which includes criteria for nuclear and gas energy activities under the EU taxonomy. The Complementary Delegated Act will amend Delegated Regulation (EU) 2021/2139, which supplements the EU Taxonomy Regulation 2020/852, and provides a set of criteria for determining whether an economic activity qualifies as environmentally sustainable, and therefore the degree to which an investment is environmentally sustainable.

The Complementary Delegated Act addresses economic activities in the natural gas and nuclear energy sectors, both of which were absent from the first Delegated Regulation, by adding a technical screening criteria for these activities to the Delegated Regulation.

The Complementary Delegated Act will be formally adopted after it has been made available in all EU languages. The European Parliament and Member States will now have four months to scrutinise it.

The Taxonomy Regulation came into force on 12 July 2020, and establishes the framework for the EU taxonomy by setting out conditions that economic activities must meet in order to qualify as environmentally sustainable. In so doing, the draft regulation seeks to fulfil its environmental objectives of:

  • Climate change mitigation
  • Climate change adaptation
  • Sustainable use and protection of water and marine resources
  • Transition to a circular economy
  • Pollution prevention and control
  • Protection and restoration of biodiversity and ecosystems

The Complementary Climate Delegated Act

Under the Complementary Delegated Act, some gas and nuclear energy activities will be labelled as green on the grounds that they are “transitional” activities, although a potentially limited technical screening criteria will apply to both. For the purposes of the Complementary Delegated Act a “transitional activity” is defined as one which is not fully sustainable but has emissions below the industry average and does not lock in polluting assets or hamper the development of low-carbon alternatives.

Natural gas

Natural gas activities will be labelled as green under the Complementary Delegated Act if they are built to replace a more polluting energy source (i.e. coal-fired power station) which cannot be replaced by renewable technology, and are built before 31 December 2030. The new facility must also be capable of switching to a renewable or low-carbon gas alternative by the end of 2035. These new natural gas facilities must also produce emissions below 270g of CO2 per kilowatt-hour on average. Existing natural gas facilities must produce emissions of less than 100g of CO2 per kilowatt-hour on average to be labelled as green.

Nuclear

Nuclear energy activates will be labelled as “green” if the project can demonstrate it has a plan, funds and a site to safely dispose of radioactive waste. New nuclear power plants must receive construction permits before 2045 to be deemed sustainable. Notably, nuclear plants must also show plans to have a disposal facility in place by 2050 for high-level radioactive waste. This goes far beyond the current legislative framework for radioactive waste management and in some cases may make projects unviable. Existing nuclear plants (including those modified or upgraded) will only be deemed as green until 2040, with the exception of third-generation nuclear projects which will be green until 2045.

To fall within the taxonomy and therefore be labelled as “green”, nuclear energy activities are required to be located within a Member State and comply with all existing EU nuclear laws and regulations. However, the Complementary Delegated Act also adds a new reporting category “the taxonomy-non-eligible nuclear energy-related activities” which covers nuclear energy activities located outside of Member States. This new reporting category arguably brings foreign nuclear energy activities at least partly within the scope of the taxonomy.

The technical screening criteria potentially limits nuclear energy activities quite substantially by imposing a requirement that “accident tolerant fuel” be used by 2025. At present, accident tolerant fuels are at a research-level stage and it remains unclear when it will be widely available for commercial use.

Why are “transitional activities” classified as green?

The EU Commission noted at the time of its consultation on the Complementary Delegated Act that the role of natural gas and nuclear energy across the EU will facilitate the transition towards a “predominantly renewable-based future” where more harmful sources, such as coal, are eased out sooner. The final form published is a result of extensive lobbying from Member States on which sources of energy should be considered truly sustainable.

Across the EU opinion on nuclear power is mixed, with countries including Austria, Germany and Luxembourg strongly opposing its use, in comparison to the Czech Republic, Finland and France which see nuclear as crucial in phasing out coal. Austria and Luxembourg both threatened to sue the European Commission for including nuclear and natural gas as a green activity under the taxonomy.

We will continue to monitor developments in this area, and encourage you to subscribe to be kept informed of the latest developments. Please contact the authors or your usual Herbert Smith Freehills contacts for more information.

Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612
Jannis Bille
Jannis Bille
Associate, London
+44 20 7466 6314