Finance giants and green groups ‘extremely concerned’ at reports that UK’s green finance taxonomy will include gas

The Daily Telegraph reported on Friday (13 May) that Business and Energy Secretary Kwasi Kwarteng is “keen” to ensure that North Sea natural gas extraction is classified as ‘environmentally sustainable’ in the forthcoming finance taxonomy.

Chancellor Rishi Sunak stated last October that the Treasury is planning to publish the Taxonomy by the end of 2022. At that point, it was stated that all activities which will be labelled as ‘environmentally sustainable’ would need to “do no harm” in regards to emissions mitigation and climate adaptation.

The report from The Daily Telegraph, including quotes from sources reportedly close to Kwarteng, states that he wants to see natural gas positioned as a transition fuel. The report also alleges that Kwarteng is keen to see nuclear included in the green finance taxonomy.

In the recent Energy Security Strategy, which was broadly criticized by green groups for its missed opportunities on energy efficiency and onshore renewables, there was confirmation that a new licensing round for oil and gas fields will commence this autumn. The Strategy also included a new commitment for the UK to host 24GW of installed nuclear generation capacity by 2050.

The UK Sustainable Investment and Finance Association (UKSIF) has stated that the Government’s reported positioning of natural gas extraction as green is “extremely concerning”. The Association represents more than 270 organisations including banks, financial advisory firms, investors and pension funds. Collectively, these organisations have more than £10trn of assets under management.

“As we highlighted last week, the inclusion of natural gas would fundamentally change the taxonomy’s purpose as a science-based tool to define for investors what is ‘green today’, and directly conflict with the UK’s ambitious decarbonisation targets,” said UKSIF’s chief executive James Alexander.

“The UK must learn the right lessons from the EU’s recent experience with its taxonomy, and this means not using the taxonomy as a direct political instrument to drive our energy security policy. If implemented, this move could seriously damage the UK’s leadership position on sustainable finance in the coming years.”

The EU’s taxonomy on sustainable finance was published in February. It covers three categories of activities – those that ‘substantially’ contribute to environmental progress; those that enable other environmentally beneficial transitional activities and those that are transitional.

Nuclear power plants and natural gas power plants are classed as transitional in the EU’s taxonomy. Natural gas and oil extraction are included. Many organisations had hoped to see all oil and gas activities branded unsustainable, in support of the bloc’s 2050 climate goals.

“The UK excluding gas from its own green taxonomy is a great opportunity for constructive divergence from EU rules that will improve UK competitiveness in an important area,” said the Oxford Sustainable Finance Group’s director Ben Caldecott.

“We can have a robust, science-based green taxonomy that is adopted worldwide because it is trusted by the market, thereby supporting UK leadership in green finance, or we can end up with something that is irrelevant because it has become debased.”

An often-cited criticism of branding gas ‘green’ is that the International Energy Agency’s (IEA) 2050 net-zero energy systems scenario caps the expansion of future oil and gas extraction pipeline post-2021. Similarly, the most recent UN climate report recommends a major scaling back of the world’s operational and planned fossil fuel extraction and burning.

However, Kwarteng has repeatedly argued that the UK will not be able to meet all of its energy needs with renewables and nuclear for “decades to come” and stated that it would be preferable to use North Sea fossil fuels than to import them from overseas. It bears noting, though, that oil and gas extracted in UK waters do not automatically enter the UK market. Extracted fuels belong to the licence-holders and are sold to the highest bidder.