by Frederic Simon
European Commission Vice-President Frans Timmermans has suggested that EU funding for natural gas projects could be envisaged as part of the European recovery plan – but only in cases where gas replaces coal. Do you support this view?
Whether in the European recovery plan or the just transition fund, we now have a common tool which has just been adopted by the European Parliament – the EU sustainable finance taxonomy, which is intended to distinguish investments enabling the green transition from those that don’t. I am in favour of applying it in this case.
The taxonomy classifies technologies in three categories: 1) “green” technologies such as renewable energies, 2) those “enabling” the transition, such as glass for building insulation, and 3) so-called “transition” technologies.
Gas falls under the third category. And the question we should be asking ourselves is this: under what conditions can gas be considered as helping the transition when it replaces coal, while ensuring supply security?
This is a difficult question because we must avoid a “lock-in effect” with natural gas over the long run. Even though natural gas allows CO2 savings in the short term, it remains a polluting fossil fuel, and becomes a trap in the long term: if you look over several decades, which is the usual lifespan of these types of projects, gas prevents the transition to low-carbon energies such as renewables.
Finding a balance between these two must be at the heart of our thinking when deciding the rules of the game under the European recovery plan and the just transition fund.
And here, the green finance taxonomy will be fundamental in guiding our decisions. Because it allows breaking away from the black-and-white debate on gas, by defining technological standards that will differentiate between projects that are compatible with carbon neutrality and those which are not.
How do you draw a line between the two? The European Investment Bank, for instance, has defined a threshold of 250g of CO2 per KWh beyond which gas projects would no longer be eligible for public funding. Should this threshold also apply in the context of the European recovery fund?
For the moment, I‘m waiting to see what the European Commission will put forward in the delegated acts that will be adopted under the taxonomy. The European Parliament will have the opportunity to express its views on the subject in the autumn, and decide whether to back the Commission’s proposal or not.
What is certain is that, at the legislative level, the taxonomy must be used to guide public investments, not just financial markets.
The EIB has already announced its intention to do so. And I also note that the European Central Bank called on the Commission to establish a “brown” taxonomy to allow the gradual removal of high carbon assets from its balance sheet.
Once this is done, we will have written a new rulebook for finance.
A “brown” taxonomy is not envisaged at the moment at the EU level, as far as I know…
Yes it is: by December 31, 2021, the Commission has to publish a report describing the provisions necessary to extend the scope of the current taxonomy to cover economic activities that are harmful to the environment and the climate.
From the moment that the ECB requests it, and the banking system as a whole requests it, the Commission has every reason to follow up and table a legislative proposal quickly.
Financiers need to be able to assess climate risk. And to do that, they need a common definition of what is negative and what is not for the climate, it is not up to them to invent those definitions, they need a common rulebook.
So, I think we are naturally moving towards that. This is the next step and it will be launched, in my opinion, in 2021.
The other question that inevitably comes up with the taxonomy is nuclear power, which is a red flag for many countries. The stakes are high for France, so what is your view: can nuclear, like gas, be considered a “transition” or “enabling” technology?
This is a question that is both important and very relative. It’s relative because it concerns only one technology amid hundreds of others that are covered by the taxonomy.
And it’s important because it is clear that nuclear is always the last question that remains at the end of political negotiations! This is also why, during the negotiations on the green finance taxonomy last winter, wisdom told us not to decide and to kick the can down the road instead. I’m alright with this strategy.
So what to do? First, from a climatic point of view, nuclear is a low-carbon source of energy, no one can dispute that. And so it goes in the right direction, especially when it replaces coal.
But from a risk and waste management perspective, it is also absolutely clear that nuclear cannot be described as a renewable or sustainable source of energy. Indeed, we leave future generations to deal with nuclear waste, and we have clearly seen with Fukushima the intrinsic risks linked to this technology.
So there are two dimensions, which are contradictory. The pro-nuclear states highlight the carbon-free side and those who oppose it highlight waste management and risk.
Wisdom, in my opinion, consists in continuing to consolidate the taxonomy on all other subjects related to the green transition – on transport, buildings, non-nuclear energy, etc. – and refer the nuclear issue to delegated acts, which must in any case be put on the table before 31 December 2021.
Let’s move to the just transition fund now. Do you support using the fund to replace coal-fired power plants with gas? Poland, in particular, says it could reduce its emissions quickly by replacing part of its coal fleet with gas…
In the European Parliament, the regional affairs committee is in charge of this file, where a vote is scheduled to take place in early July.
Today, the position of including gas unconditionally in the Just Transition Fund does not have a majority in Parliament, nor does the position of excluding it without exceptions. So we have to find a third way.
And since we have the green finance taxonomy, I think the most intelligent position is to break away from the black-and-white logic and answer the question we posed at the beginning, namely: under what conditions can gas be considered as a transition fuel when it replaces coal?
We can also rely on climate energy plans, and on the future EU climate law which will strengthen the oversight of countries’ climate and energy strategies, to ensure that they are compatible with Europe’s carbon neutrality ambition.
Again, where do you draw the line in this debate? Is the CO2 emission threshold sufficient or do you believe other criteria should apply?
The first element is the emission threshold defined in the taxonomy.
That said, you have to keep in mind that the taxonomy covers the entire life cycle of a project and is based on five-year rounds. So, every five years, we will consider a new delegated act, with thresholds that will probably be revised downwards because technologies keep evolving.
The second issue is how to avoid a “lock-in effect”. Here, it is necessary to look ahead 10 or 15 years from now, to make sure that the immediate CO2 emission gains of replacing coal with gas does not become a trap.
And here, the solution is to look at the amortisation period. What I’m pleading for, in addition to the taxonomy, is to support this decision by an economic, financial and accounting analysis to be carried by the European Commission.
This analysis should tell us – within the framework of national energy-climate plans or post-COVID recovery plans – whether a gas project is compatible or not with carbon neutrality and whether or not it risks becoming a “stranded asset”.
In the end, it is the profitability of the investment until 2050 that will have to be examined. By applying these two analytical criteria, Eastern EU countries are given the means to get out of coal, while avoiding falling into a trap in the medium term. And by doing that, we also break away from this binary black-and-white logic on gas.
How to deal with dual-purpose projects – for example, a gas pipeline which can also receive hydrogen?
Today, given the lack of maturity of hydrogen-related technologies, basing the arguments of a gas project solely on this seems too uncertain to me.
Especially since we hear very different things about the capacity of pipelines to carry hydrogen above a certain threshold: some say 5%, others say 20%.
So I think the Commission should not structure its analysis on this point. In five years, it may be another story, but today it’s just too uncertain.
So, no funding for this kind of projects?
No, I didn’t say that. I said that the dual-purpose argument is not a major one for me to take into consideration when evaluating the climatic compatibility of a gas project.
Because the risk of “greenwashing” is just too high: I don’t see how, for example, we could finance a gas project on the sole promise that, in 20 years, fossil gas will in any case be replaced with green hydrogen.
And a pure hydrogen infrastructure, would you support that?
If it’s green hydrogen based on renewable electricity, yes. But if it’s hydrogen generated from gas, no. Hydrogen can potentially be a solution – but it all depends on how it is made, transported, stored, etc.
This is the crux of the problem…
Exactly, that’s why I’m pragmatic. I obviously want to support hydrogen, and I am in favour of putting public money into it.
But we cannot consider in principle that hydrogen is an ecological solution in all circumstances – this is simply not true. Under certain conditions, however, hydrogen can play a major role in the energy transition. And this is what we must support to help European leaders emerge in the sector because we have all it takes to become the global leader on green hydrogen.
*first published in: www.euractiv.com
By: N. Peter Kramer
