European Commission faces legal challenge to EU Taxonomy

Introduction

The European Commission (the Commission) is facing a number of legal challenges over the inclusion of fossil gas and nuclear energy in the EU Taxonomy (the Taxonomy). There are currently two separate challenges from environmental groups: one from Greenpeace, filed on 8 September 2022, and one from a coalition of environmental bodies filed on 19 September 2022, which includes ClientEarth, WWF’s European Policy Office, Transport & Environment (T&E), and BUND (Friends of the Earth Germany) (together with Greenpeace, the Organisations).

The Organisations commenced legal action through a request for internal review, a mechanism now open for use by NGOs and the public following reform of EU access to justice laws last year. The review seeks to prevent the Commission from including gas and nuclear energy in the Taxonomy on the basis that those energies are incompatible with EU environment and climate laws.

Opposition has continued to gather since those actions were filed. The Commission now faces a lawsuit filed by Austria on 7 October 2022, seeking to quash the rules under the Taxonomy. Other EU countries have been encouraged to support its legal challenge, with Luxembourg confirming it will join and others likely to follow.

The Taxonomy

The Taxonomy forms an EU-wide pseudo-rulebook for sustainable finance and sets out a list of investments considered to be sustainable. The Taxonomy was created in order to meet the EU’s climate and energy targets for 2030 and achieve the objectives of the European Green Deal, designed to transform the EU into the first climate-neutral continent by 2050. In order to redirect investments towards sustainable projects and activities, it creates a classification system, establishing technical criteria – for example the amount of CO2 emissions – for certain economic activities. Where a listed economic activity complies with the taxonomy criteria, it may be considered environmentally sustainable for investment purposes. As such, the Taxonomy aims to provide companies, investors and policymakers with appropriate definitions for which economic activities can be considered “green” in financial disclosures and reporting.

The Taxonomy’s Complementary Delegated Act (CDA), adopted on 9 March 2022 and published in the Official Journal on 15 July 2022, proceeded to give specific nuclear and gas energy activities a “sustainable” label, which will apply from 1 January 2023. Its terming has attracted widespread objections from EU citizens, climate scientists, financial institutions and environmental organisations.

Request for review

Last month the Organisations sent a formal request to the Commission for an internal review of the CDA, arguing that the inclusion of gas and nuclear in the Taxonomy violates the Taxonomy Regulation, the European Climate Law, and the EU’s obligations under the 2015 Paris Agreement. The Organisations argue that the CDA goes against the Taxonomy’s objectives, sending the wrong message to investors by greenwashing fossil gas and nuclear power and delaying the energy transition.

In particular, Greenpeace argue that the terming of gas – which is the highest emitter of carbon and methane in the European power sector – as sustainable is a denial of climate science.¹ Greenpeace also refer to the wider negative impact of gas, including its use as a political chess piece by Russia, which in turn has led to a dramatic increase in energy prices. Accordingly, labelling gas as “sustainable” risks channelling investments into a likely detrimental energy source.

In parallel, Greenpeace notes that nuclear power uses vast amounts of fresh water. In addition, its lengthy construction processes (approximately 10 to 19 years) and the increasing costs of nuclear power plants suggest that nuclear energy cannot be used as a solution to the climate crisis.

Commenting on the action, Greenpeace sustainable finance campaigner, Ariadna Rodrigo, notes that: “This fake green label is incompatible with EU environment and climate laws. Gas is a leading cause of climate and economic chaos, while there is still no solution to the problem of nuclear radioactive waste and the risk of nuclear accidents is far too significant to ignore. Furthermore, this winter we will face an energy crisis, and people will struggle with their energy bills.”

In response, the Commission claims that the performance thresholds in the technical screening criteria defined in the delegated acts are science-based. The Commission also maintains that the criteria for the specific gas and nuclear activities are in line with EU climate and environmental objectives and will help accelerate the transition towards a climate-neutral future.

Increasing trend of sustainability challenges to legislation

Lawyer Roda Verheyen is supporting Greenpeace’s challenge. Ms Verheyen also acted in the successful constitutional complaint brought in respect of Germany’s 2019 Climate Protection Law. That case was brought by young environmental activists, supported by Fridays for Future, Germany’s Friends of the Earth (BUND) and other NGOs. In their complaint, the activists argued that they had experienced first-hand the effects of the climate crisis, including flooding and heatwaves, and that the government’s climate protection measures were insufficient to protect future generations. That case resulted in a German Constitutional Court ruling which found the 2019 Law to be partially unconstitutional and ordered the government to bring the Law into line with the Paris Agreement.

Both cases appear to be part of a growing trend of sustainability challenges to legislation. In 2019, the Dutch Supreme Court similarly imposed tougher climate change regulation on its government, finding that the government had not done enough to protect the low-lying country’s citizens from the dangerous effects of climate change.

Next steps

The Commission has until February 2023 to review the Organisations’ submissions and to reply. The Commission may agree with their arguments and withdraw the CDA. If the Commission refuses, the Organisations will be able to ask the Court of Justice of the EU to rule. The end result could be a judgment that forces the Commission to repeal the CDA.

In any event, with mounting public awareness and activism, it is likely that sustainability challenges to legislation will continue to grow in importance as the pressure to solve the climate and energy crisis becomes increasingly urgent.

¹ The International Energy Agency has warned that new gas plants will make the goals of the 2015 Paris Agreement unachievable.