Ronan Kavanagh, London; Jason Eden, London; Jaime Concha, Copenhagen- Jan 7,2021

After a busy year of new climate policy pronouncements in 2021, the EU now faces the hard task of turning those into reality. Reaching agreement will require a tricky balancing act between EU institutions and member states, with early signs pointing to a difficult road ahead. The landscape is very different now than two years ago when the Green Deal was first announced, with recent high prices stoking fears about energy transition costs. Brussels has warned against “knee-jerk reactions,” pointing to the need for climate policy ambition and predictability, but its latest proposals also signal a more pragmatic and gradual move away from fossil gas and a bigger role for nuclear than some member states and climate campaigners demand. The balance that the EU ultimately strikes in the final legislation will have huge implications beyond its borders, in shaping the wider energy transition and future role of natural gas, as well as the struggle between producers and consumers on the pace of change. 

The European Commission released the final and perhaps most contentious part of its landmark energy and climate policy package on Dec. 31, with a draft proposal on what technologies would be classified as sustainable technology under its labeling system for green investment. This included natural gas and nuclear power, which the EU says would remain part of its energy mix "to facilitate the transition towards a predominantly renewable-based future," albeit with strict environmental controls.

That should give EU members more flexibility to pursue different energy transition pathways, and could have ripple effects outside Europe. With the EU claiming to be a leader in the global fight against climate change, the plans could prompt other countries to follow suit and adopt similar green labels for gas and nuclear as they wean their electricity mixes off coal.

The so-called taxonomy plan is designed to help investors decide where to put their money. Investment in gas or nuclear would not be banned even if they were excluded from the sustainable technology list, but it would de-emphasize them and steer EU cash to other low-carbon projects. Some investment funds and sectors of the financial community might also not invest as much in EU energy technologies that aren't included in the taxonomy.

Political Battleground

What started out as a seemingly simple regulation on how investments are classified has become a political battleground. The proposed eligibility of natural gas and nuclear power under the EU's sustainable finance rules has created a new rift between EU countries that were already squabbling over how to respond to recent energy price volatility . Several European countries and environmental groups have accused the commission of "institutional greenwashing," with some arguing that the proposals would "lock in" consumption of fossil natural gas for longer than necessary, which would be at odds with EU climate targets.

The inclusion of nuclear — widely seen as a victory for France — is particularly contentious. Germany, Austria and Luxembourg are all opposed: Germany, which is phasing out its own nuclear plants, called the proposal "wrong," while Austria threatened to sue the commission. It's unlikely that these countries will be able to halt the legislation, however, at least at the level of the EU Council — comprised in this case of EU member states' national energy ministers. Blocking the proposals in the council would require a supermajority of at least 20 EU countries representing at least 65% of the EU population. In the European Parliament, a simple majority of at least 353 members would be sufficient.

Wider Policy Framework

The commission also released proposals earlier in December to decarbonize gas markets by boosting the use of clean gases. This includes enabling the integration into its market of hydrogen, which Brussels wants Europe to lead in. The package envisages phasing out long-term contracts for unabated gas too by 2049 — just before Europe aims to achieve net-zero emissions. While this might unsettle suppliers such as Russia, the market is already trending toward sub-15-year contracts due to buyers’ preferences for greater flexibility, and some gas contracts could be signed past 2049 if the supplier can prove that they can abate greenhouse gas (GHG) emissions.

Brussels has decided as well that natural gas will not be eligible for state aid under the EU’s new guidelines unless it can be proved that it contributes to decarbonization and does not lock in the fuel past 2050. Poorer EU countries will, however, be allowed state aid for gas if it helps to phase out more polluting fuels such as coal.

Gas may still be a contributor to the EU energy mix in the second half of the century, with the EU saying that it expects the gaseous molecules it uses to be two-thirds low-carbon and renewable gases and one-third natural gas with carbon capture and storage.

Industry lobby group Eurogas expects fossil gas to account for roughly 7% of the mix in 2050, down from about 20% now, and all gaseous molecules — including low-carbon and renewable gases — to provide 20%. It wants Brussels to set hard targets for greener gases to spur investment. Eurogas tells Energy Intelligence it wants policymakers to demand that the GHG intensity of EU gas be cut by at least 20% from 2018 levels by 2030 through "increased use of renewable and low-carbon gases," and for "renewable gas demand to rise to at least 11% of gas consumed."

Methane Emission Regulations

Brussels released new draft methane emissions regulations in December too. In the first-ever EU legislative proposal on methane emissions reduction in the energy sector, the commission proposes strict rules to detect and repair methane leaks and ban venting and routine flaring. The commission suggests this would cut EU methane emissions related to oil, gas and coal by 80% from 2020 to 2030. Environmental groups say that is not enough, criticizing a lack of concrete targets and policymakers’ reluctance to tackle methane emissions from imported oil and gas, which account for the vast majority of EU energy-related methane emissions.

While earlier leaked drafts suggested that gas imports would also be covered, the final proposals instead adopt a two-stage approach. Initially the EU will only impose “information requirements” on importers to better understand the methane footprint of fossil fuel imports. In a second step, the commission says it will “engage in a diplomatic dialogue” with international partners and review the methane regulations by 2025, with a view to introducing more stringent measures on fossil fuels imports then. But environmental campaigners are calling on the parliament to ensure the regulations are applied to imports from the outset, a move that it supported in a resolution adopted in October.

Ronan Kavanagh is editor of World Energy Opinion, Jaime Concha is deputy editor of World Gas Intelligence, and Jay Eden is a senior correspondent at Energy Intelligence.


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