Climate change represents one of the most pressing issues and challenges that policymakers and governments need to tackle today. The European Union (EU) has created a ‘taxonomy’ which is a classification system that hopes to provide more clarity on what activities are deemed as ‘green’ which in return will aid, primarily, companies and investors. Natural gas and nuclear energy are two assets that are still under review, even though the taxonomy was finalised earlier this year. Due to the components of these assets the EU is drawing up a separate document which will determine whether investment vehicles containing producers of these goods may be labelled as green in EU capital markets.
What is the EU green labelling system?
The EU has adopted a system which they hope will provide the highest standard available to investors to help them identify whether companies and their activities are ‘green’. For example, the grading for car companies would be based on the revenues they generate from vehicles with engines that have zero emissions. Currently Volkswagen rates as one of the most sustainable companies in the world with ESG rating agencies. The new taxonomy will consider Volkswagen as ‘green’ or ‘taxonomy-compliant’ only for the percentage of sales which include zero-emission vehicles.
The taxonomy brooches potentially controversial territory as the labelling system does not place nuclear or natural gas in the ‘green’ category. A compromise to this has been concluded however as the framework will be left open for the sectors to be possibly considered as transitions that aid individuals and companies to move towards a carbon-neutral world.
The taxonomy could be seen as a heuristic approach to the problem. Many think that the taxonomy should be used as a tool kit rather than a solution to revert climate change. It is a brilliant way to dissolve ‘greenwashing’ companies and will produce investment portfolios that are completely carbon neutral. Not only this but companies will also have a greater incentive to work harder in their green projects so they can be classified as ‘green’. But if the EU is lenient on labelling natural gas and nuclear – is the taxonomy strict enough and authentic? Where will the line be drawn in the future?
Even though it can be seen as somewhat green next to other harmful energy sources, natural gas is still a threat to the environment and is classed as a fossil fuel. Natural gas emits 50-60% less carbon dioxide when combusted in comparison to coal. However, as natural gas is a fossil fuel, drilling and extraction is required to obtain the gas and further processes are required to hold and catalyse the fuel into energy. A major concern with the extraction is the leakage of methane in pipelines.
Methane is the largest contributor to global warming. It is 34 times more efficient than carbon dioxide at trapping heat and has further impacts on both a societal and environmental level. The drilling process can affect local and regional air quality and can contaminate drinking water with hazardous chemicals. Extraction sites tend to be placed in lower income areas and therefore can have a direct correlation to the increase in poverty and inequality. Furthermore, land disturbance from construction sites have historically interfered with wildlife. Lastly, the process of deriving natural gas from the ground has been found to have links to earthquake activity.
Needless to say, natural gas has been a fantastic alternative to coal whilst technologies have adapted – but do we still need to rely on such a fuel? Various countries in the EU have written a letter to oppose the deduction of nuclear and gas from the taxonomy. The letter explains how the exclusion of nuclear and gas would be wrong and would only serve to harm countries with a strong share of the industries in their economy. Countries such as Poland and Germany have confirmed that they are using the alternative fuel to wean themselves off of more harmful alternatives. The threat that subsides these disagreements still remains. Will we become complacent and move to a ‘less’ polluting fuel rather than an entirely ‘clean’ fuel? And will this be enough to revert the concerning effects of global warming?
Since 2010, the transition from coal to gas has saved around 500 million tonnes of carbon dioxide. For extreme polluters such as China, gas demand rose and has positively affected air quality. The greatest benefit of a coal-to-gas transition is the ability to use the existing infrastructure to provide the same energy services but with lower emissions. Utilising existing infrastructure is a quick win for emissions reduction – investment is therefore required to build up new renewables and to implement energy efficiency improvements rather than focus on natural gas. The history of natural gas and the benefits of natural gas are spectacular, however, is further investment and concentration on developing natural gas still needed? Hasn’t natural gas already provided its service and our focus should now shift onto adapting technologies that are completely clean?
Carbon capture is a method of capturing emitted carbon dioxide and depositing it elsewhere so that it does not enter the atmosphere. Natural gas can still be relevant in such a process and therefore investment in such technologies and projects should take priority over using natural gas as a fuel. Yet, to implement such limitations will pose further challenges for those who are compiling the taxonomy. It is important to consider other factors in carbon capture, such as the cost of such technologies and the efficiency rate. Financial incentives are required and further R&D is imperative, albeit costly.
Natural gas has been an eye-opener for many people to see a transition to a cleaner world and to help revert the changes of global warming. However, the overall benefits of natural gas are not so great in the long run which is why the EU has to be extremely stringent on their negotiations with countries who wish to see natural gas labelled as ‘green’. Natural gas may crowd out other technologies that require attention and investment to transition the world to carbon neutrality. The decision lies in the EU’s hands and all will be revealed in June.