European Commission consults on draft EU taxonomy delegated act for climate change mitigation and adaptation
On 20 November 2020, the European Commission published, for consultation, a delegated regulation containing the technical screening criteria (TSC) for the first two environmental objectives (climate change mitigation and climate change adaptation) under the EU Taxonomy Regulation. The draft delegated regulation is accompanied by Annex I which contains the TSC for climate change mitigation and Annex II which contains the TSC for climate change adaptation.
The Taxonomy Regulation sets out an EU-wide framework (a classification system known as a “taxonomy”) according to which investors and businesses can assess whether certain economic activities are “sustainable”.
Think of it as an EU dictionary of what activities may and may not be called sustainable.
Under the Taxonomy Regulation, in order for an economic activity to qualify as “environmentally sustainable”, it must satisfy four tests. The activity must:
- contribute substantially to at least one of the six environmental objectives set out in the Regulation (climate change mitigation, climate change adaptation, water, circular economy, pollution control, and biodiversity);
- do no significant harm to any of the other environmental objectives;
- be carried out in compliance with minimum social and governance safeguards; and
- comply with TSC to be adopted under the Regulation.
The draft delegated regulation which the Commission is consulting on contains the TSC setting out the conditions under which a whole host of economic activities qualify as contributing substantially to climate change mitigation or adaptation, and for determining whether those economic activities do no significant harm to one or more of the other environmental objectives in the Taxonomy Regulation.
Annex I of the delegated act groups economic activities into the following nine categories:
- Agriculture and forestry
- Environmental protection and reforestation activities
- Manufacturing (e.g. manufacture of cement, steel, plastics and hydrogen)
- Energy (e.g. energy generation using solar PV, wind power and gas)
- Water supply, sewerage, waste management and remediation
- Transport (e.g. cars, rail and maritime transport)
- Construction and real estate activities
- Information and communication (e.g. data centres)
- Professional, scientific and technical activities
Annex II contains the same categories as Annex I, with the addition of:
- Financial and insurance activities
- Human health and social work activities
- Arts, entertainment and recreation
Nuclear power is not included in the draft delegated act. The Commission has asked the Joint Research Centre (JRC), its in-house research body, to assess whether nuclear power should be included in the EU taxonomy as an environmentally sustainable activity. The JRC is expected to submit a technical report on the “do no significant harm” aspects of nuclear energy in 2021. To accommodate the possible inclusion of nuclear power in the taxonomy later on, the Commission has said it would consider amending the delegated act with the TSC for climate change mitigation and adaptation by the end of 2021.
The draft delegated act reflects, for the most part, the recommendations of the EU Technical Expert Group on sustainable finance (TEG) and the feedback received from the Commission's inception impact assessment. However, some commentators are concerned that the text has strengthened some of the thresholds compared with the TEG recommendations and weakened others (see IPE commentary, ENDS commentary, Politico commentary and Responsible Investor commentary).
What happens next?
The consultation closes on 18 December 2020.
The Commission will consider the feedback received before finalising the adoption of the delegated act. Once adopted, it will be subject to scrutiny by the European Parliament and Council. The final draft delegated regulation will be subject to a four-month objection period by the European Parliament and the Council, which can be extended by two months at their request.
The Taxonomy Regulation requires the delegated act to be adopted by 31 December 2020 so that the TSC for climate change mitigation and adaptation can come into force from 1 January 2022.
The TSC for the other four environmental objectives under the Taxonomy Regulation (water, circular economy, pollution control, and biodiversity) will be developed by the newly-established Platform on Sustainable Finance which has replaced the TEG - with a view to that TSC being adopted by the end of 2021 and coming into force from 1 January 2023.
We should not underestimate how much debate certain aspects of the criteria in the delegated act is likely to elicit. For example, at present, in order for a gas-fired power plant to qualify as “environmentally sustainable”, the life-cycle greenhouse gas emissions would need to be lower than 100 grams of CO2-equivalent per kilowatt hour unless enough CO2 is captured and permanently stored. Even the most modern gas power plants would struggle to meet that limit. There is also a question mark about how the life-cycle emissions level will be calculated.
The consultation period itself is only four weeks long but the European Parliament and (perhaps more importantly) the Council will then have 4-6 months to raise objections.
The Taxonomy Regulation is a key piece of legislation, with implications for what projects will be entitled to access some of the funds under the EU’s Covid-19 recovery package, access to capital from lenders more widely and will also form the basis for the forthcoming EU Green Bond Standard.
There is a lot at stake, in particular for the energy and transport sectors, and the fight over what can or cannot be classified as green/low carbon in the EU is still far from over.
For more information on the draft delegated regulation, see EU webpage with links to the draft delegated regulation, Annex I to the delegated act with the TSC for climate change mitigation and Annex II with the TSC for climate change adaptation.
For more information on the Taxonomy Regulation, see our publication EU Taxonomy Regulation: A detailed analysis and blog post EU Taxonomy Regulation: what does it do and what happens next?