Should gas be included in the EU's Green Taxonomy?

The debate over whether fossil gas can be considered a green investment in the transition to a net-zero economy has been raging through the energy and climate spheres in recent weeks, reaching a crescendo as the EU Commission decided to include fossil gas in its Green Taxonomy, with certain caveats. We'll discuss the issues with this approach, including the economic and climate implications of including fossil gas.

From plug and play to disarray: the nuances of fossil gas co-firing

The EU’s green taxonomy is a voluntary framework that classifies certain economic activities as “green”. After a long debate, the EU’s Taxonomy for Sustainable Activities was submitted by the EU Commission to the Council and Parliament for approval on 2nd February 2022. The objective of the taxonomy was to create a plug and play framework that investors could trust to align their portfolios with the temperature goal of the Paris Agreement and EU’s climate target to be net zero by 2050. Compared to a previously leaked text, the Commissions’ proposed draft includes significant concessions for fossil gas. These compromises risk muddying the water for those investors who are less knowledgeable regarding the investment implications of climate science.

The EU Taxonomy states that fossil gas plants can be included as a ‘transitional’ investment until 2030 if they meet certain strict criteria, including an emissions intensity target of 270g CO2/kWh and burning a progressively higher proportion of low-carbon gases, up to 100% from 2035. An initial draft included criteria for the fossil gas plants to start co-firing with 30% low-carbon fuels, such as hydrogen, by 2026. However, this was dropped in the final document, after Germany argued this was ‘unrealistic’.

The industry standard seems to suggest the use of volumetric equivalents, and 30% by volumetric equivalence would be 10% by energy content due to the low energy density of hydrogen. The current best-in-class CCGT plants cannot achieve 270g CO2e/kWh without co-firing with alternative fuels. So by default, the taxonomy implies a need for co-firing, for fossil gas to be included in the taxonomy.

This is likely technically feasible. In terms of new builds, most advanced fossil gas turbines currently already support hydrogen co-firing (ranging from 20%-50%). However, reaching above 50% co-firing and going up to 100% low-carbon gas, as the taxonomy requires after 2035, is another matter.

Some modifications are required for retrofitting existing CCGT plants to allow for lower levels of hydrogen co-firing. This includes the construction of an upstream fossil gas blending and hydrogen storage facilities, some modifications on equipment, safety, and exhaust systems, some modifications to account for flashback in burners and potentially additional NOx control systems. This retrofit work could potentially be completed during a period of planned outage. Higher co-firing ratios may require large-scale retrofits, which may see downtime extended to upwards of a year.

Low-carbon gas co-firing: Possible but expensive

While fossil gas co-firing is technically feasible, whether such an approach is competitive over the long-term relative to zero carbon alternatives is under-researched. Based on our analysis, co-firing with 30% hydrogen by volume is expected to add around 16% to the fuel cost compared to using fossil gas. This is assuming a US$8/MMBtu fossil gas price and US$2.4/kg hydrogen cost. If we consider green hydrogen at around US$6/kg, then the fuel cost shoots up to 55% more expensive than fossil gas.

With the low and rapidly falling costs of renewable energy, it is unlikely that co-firing with hydrogen would be cost-competitive. Previous analysis by TransitionZero has found that 64% of coal plants could cost more to operate than replacing with new renewable power in 2021.

More grey than green: Gas co-firing is likely a step backwards on climate

Aside from the potentially high costs, the most fundamental issue with including fossil gas in a Green Taxonomy is that it undermines the credibility and usability of the taxonomy and is expected to influence policy and investments in the EU and beyond.

Co-firing hydrogen with fossil gas will do little to bring the EU closer to its 2030 grid emissions target of 114g CO2/kWh. Blending 30% hydrogen by volumetric equivalence and energy content will yield emissions factors of 324g CO2e/kWh and 252g CO2e/kWh respectively. Both are higher than the 2020 EU-27 grid emissions factor of 231g CO2/kWh and more than double what is needed to be in alignment with net-zero goals.

Note: Embedded GHG emissions include upstream emissions associated with mining, extraction and transport emissions. A thermal efficiency of 60% is used for gas plants in this analysis. More details on the methodology can be provided upon request.

As a fossil fuel that releases carbon dioxide and methane, fossil gas is a major contributor to climate change and will need to be phased out. According to the IEA net zero by 2050 report, the world should be generating 100% net-zero electricity by 2040, meaning almost no unabated fossil gas globally. The EU is expected to be a front runner on this eventual transition away from fossil gas, not a laggard.

While the proposed taxonomy does align with ‘no unabated fossil gas after 2040 due to its caveat that plants need to transition to burning low-carbon fuels, the concern is that labelling fossil gas plants as green investment in the short term could encourage the development of new capacity. This would lock in higher emissions, lead to stranded assets and investment risk, and potentially divert investment away from renewable energy. The priority must be to channel capital into scaling up renewable energy rapidly.

Follow the leader: EU’s role in global climate policy

The EU is usually seen as a defacto gold standard setter and considered a leader in global climate diplomacy. Due to its inclusion of a fossil fuel as a sustainable investment under some circumstances, the taxonomy is decidedly less ambitious than many had hoped. This poses two potential outcomes: either other countries will follow suit and global climate ambition will be weakened, or the EU will lose some of its climate credibility as countries go their own way.

How exactly this plays out remains to be seen, and will likely include a mix of both. South Korea’s Green Taxonomy has since included fossil gas, with caveats, as has the ASEAN Taxonomy. It will be easy for other economies highly dependent on fossil fuels to argue for the ‘transition role’ of fossil gas, given the EU’s precedent. We have also already seen the Australian LNG sector pushing to expand exploration due to the EU Taxonomy’s classification of fossil gas, and its expected effect on demand. Meanwhile, China has opted not to include fossil gas power plants in its own version. Despite seeing a strong role for fossil gas - and even coal - in its energy mix for many years to come, China is keen to maintain strict standards around what is classed as a green investment.

This is a more clear-eyed approach that other countries would do well to follow. Credible arguments for continued use of fossil gas in the short to medium term does not justify classifying it a ‘green investment’. Anything that lowers the bar on climate leadership is an unwelcome step backwards, at a time when we should be raising ambition.

As for the fate of the EU Taxonomy, it will now be up to the European Council and European Parliament to choose whether to veto the proposal over the next four months.

Coal to clean?

The inclusion of fossil gas as a green investment is obviously predicated on the assumption that replacing coal power with fossil gas reduces emissions, and is therefore to be encouraged. While this is true, coal power can also be displaced by renewable energy, leapfrogging fossil gas entirely. TransitionZero is working on a ‘coal to clean’ fuel price index as a proxy for how much it will cost to bypass unabated fossil gas entirely, as doing so is a necessity. Subscribe to receive our latest research and data.