What is the EU Taxonomy Regulation?
The EU Taxonomy Regulation sets out the parameters for determining what activities can be classed as environmentally sustainable. The main objective of the Taxonomy is to channel public and private finance to sustainable activities to facilitate the energy transition, enabling the EU to meet its 2030 climate and energy targets under the European Green Deal.
The Taxonomy Regulation sets out the following conditions that an economic activity must meet in order to qualify as sustainable:
- contribute substantially to one or more of the six environmental objectives set out in Article 9 of the Taxonomy Regulation, which include climate change mitigation and climate change adaptation, as well as sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems
- “do no significant harm” (DNSH) to any of the other environmental objectives set out in Article 9
- be carried out in compliance with social safeguards set out in the Taxonomy Regulation; and
- comply with technical screening criteria established by the Commission through Delegated Acts. As noted above, the first Delegated Act was issued on April 21 of this year.
The Taxonomy Regulation differentiates between activities that are inherently low-carbon and activities without technologically and economically feasible low-carbon alternatives that need to be decarbonized as part of the energy transition (“transitional activities”). Transitional activities are to be included in the Taxonomy if they do not obstruct the deployment of low-carbon alternatives or lead to a lock-in of assets incompatible with climate neutrality objectives. The Taxonomy Regulation provides that the technical screening criteria for such activities should ensure a realistic path towards climate neutrality. Further, the Taxonomy Regulation classifies certain activities as “enabling activities” if they enable other activities to make a substantial contribution Article 9 objectives without leading to a lock-in of assets that undermine environmental goals, and if they have a positive environmental impact.
What does the first Delegated Act cover?
This first Delegated Act specifically covers technical criteria for activities that qualify as contributing to climate change mitigation and climate change adaptation. The Taxonomy Regulation requires the Commission to adopt Delegated Acts on these two issues by December 31, 2020. The Delegated Act itself sets out the general parameters for the technical criteria used in the Taxonomy. The actual technical criteria are set out in the two Annexes to the Delegated Act—Annex I covers criteria for determining conditions under which an activity qualifies as contributing to climate change mitigation, while Annex II covers criteria for determining whether an activity qualifies as contributing to climate change adaption. Both Annexes address criteria for determining whether the activity causes no significant harm to any of the other environmental objectives laid down in Article 9 of the Regulation.
The Annexes do not solely set out the technical sustainability criteria but principally also classify economic activities. Each Annex covers a broad panoply of activities, with some of the largest categories being manufacturing, energy, transport, and construction and real estate. Each activity is identified as either inherently low carbon or transitional; justification for this determination is given based on the methodology contained in existing EU legislation, such as Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the Promotion of the Use of Energy from Renewable Sources and generic criteria for DNSH set out in appendices to the Annexes.
Activities in the energy sector classified as sustainable by the first Delegated Act include electricity generation from solar, wind, tidal, hydro, geothermal, gaseous and liquid fuels of renewable origin and bioenergy (biomass, biogas or bioliquids). Some of the activities are subject to conditions of inclusion in the Taxonomy; for example, for bioenergy generation to be labeled sustainable, facilities rated above 100MWt must attain a certain electrical efficiency and use carbon capture and storage technology. Activities such as electricity and hydrogen storage are classified as enabling.
Transitional activities included in the first Delegated Act include high-carbon industrial activities, such as the manufacturing of cement, aluminum, iron and steel, and plastics, as well as various types of transport. Each of these activities is subject to conditions, such as carbon capture, compliance with lower greenhouse gas (GHG) standards, efficient use of electricity, and materials reuse.
What about nuclear energy?
Notably, the first Delegated Act does not address nuclear energy.
The Commission stated in its April 21 communication that it will issue by summer of 2021 a complementary Delegated Act covering nuclear energy “subject to and consistent with the results” of a review process that is underway in accordance with the Taxonomy Regulation. A key milestone in that process was a nearly 400-page report issued in March 2021 by the Joint Research Centre (JRC), the EU’s technical in-house science and knowledge body, determining that nuclear energy does no significant harm to the environment [cite to our previous article] and thus providing the scientific basis for inclusion of nuclear energy in the Taxonomy as a sustainable economy activity. This landmark JRC report is under review by two other expert groups, the Euratom Article 31 experts group and the Scientific Committee on Health, Environmental and Emerging Risks (SCHEER), both composed of radiation protection and public health experts. The review is targeted for completion by June 2021.
The inclusion of nuclear energy in the Taxonomy has been the subject of much debate. On March 25, 2021, the leaders of the Czech Republic, France, Hungary, Poland, Slovakia and Slovenia penned a letter to the Commission urging the EU to not only recognize but actively support “all available zero and low-emission technologies that contribute to climate neutrality” and accordingly expressly include nuclear power as a sustainable activity in the Taxonomy. The government-led effort was followed by a letter from 46 non-governmental organizations (NGOs) from 18 countries to Ursula von der Leyen, president of the Commission, calling for the inclusion of nuclear in the Taxonomy. At the same time, the governments of Germany and Austria are adamantly opposed to nuclear energy, as are certain NGOs that have not moved away from an anti-nuclear stance despite increasing recognition of nuclear by climate change experts as an important tool in achieving decarbonization.
The statement in the Commission’s communication that nuclear energy will be addressed in a separate Delegated Act on its face looks favorable for nuclear supporters. The statement appears to suggest that nuclear will be included in the Taxonomy. Further, as noted above, the Taxonomy only includes activities either deemed as sustainable or transitional. It is difficult to see a scenario where nuclear energy would be labeled a transitional activity because it is inherently low carbon. However, given the thorny politics surrounding nuclear energy in the EU, that optimism has to be met with some caution. Reviews by the Euratom Article 31 and SCHEER experts are still outstanding, and any negative conclusions by those bodies could change the course of the inclusion of the nuclear in the Taxonomy. Further, it is unclear how nuclear energy will be described in the separate Delegated Act and whether any limitations or conditions for labeling nuclear as sustainable will be applied. While the review process continues, nuclear proponents—whether governments, private sector or NGOs—would benefit from continuing to strongly urge for a transparent and science-based approach for the continued development of the Taxonomy.
How does the Taxonomy treat natural gas?
Natural gas and related technologies were also excluded from the first Delegated Act and will be covered by the same complementary Delegated Act that should address nuclear. The Commission expressly stated that natural gas will be labeled a transitional activity and that the Commission will consider a sunset clause for such activities. Based on the treatment accorded transitional activities in the first Delegated Act, the complementary Delegated Act will likely impose conditions on natural gas production, such as carbon capture and storage and compliance with EU environmental regulations currently in place.
What are other next steps?
In addition to nuclear energy and natural gas, the complementary Delegated Act will also cover other sectors, such as agriculture and certain manufacturing activities not included in the first Delegated Act.
The Commission will also issue a separate Delegated Act that will cover activities making a substantial contribution to the other four environmental objectives set out in the Taxonomy Regulation (sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems).