In this research note, we consider whether or not natural gas should be included in the EU Green Taxonomy because of the latter’s distorting effect on the cost of capital of energy projects. We argue that excluding gas from the taxonomy would not increase the cost of capital of gas generation and thus would not create any risk of under-investment in natural gas as a ‘transition fuel’.

Conversely, including gas in the Green Taxonomy creates a genuine price distortion and a perverse incentive to limit future investments in renewable energy technologies. In conclusion, there is no good financial reason to include gas in the Green Taxonomy of the EU.