knowledge 24 May 2021 |

EU Taxonomy Regulation – Agreed Technical Screening Criteria Published

EU Taxonomy Regulation – Agreed Technical Screening Criteria Published

In order for an economic activity to qualify as environmentally sustainable under the Taxonomy Regulation, it must:

1. contribute substantially to one or more of the six environmental objectives¹;
2. do no significant harm to any of the other environmental objectives;
3. be carried out in compliance with minimum (social) safeguards set out in the Taxonomy Regulation; and
4. comply with technical screening criteria established by the European Commission through delegated acts.

On 21 April 2021, the European Commission published the text of the EU Taxonomy Climate Delegated Act (the “Delegated Act”)² which sets out the technical screening criteria under which certain economic activities qualify as contributing substantially to climate change mitigation and climate change adaptation and for determining whether those economic activities cause significant harm to any of the other relevant environmental objectives. 

Background

An initial draft of the Delegated Act was published for consultation on 20 November 2020 and, by the time the consultation period closed on 18 December 2020, an astonishing 46,591 submissions had been received from stakeholders.  There was also intense engagement by Member States and the European Parliament on the draft with some objecting to, amongst other things, the effective exclusion of natural gas and nuclear power from the list of activities that could be classified as environmentally sustainable.  This led to the publication of the final agreed text being delayed by a number of months following further discussions with Member States’ experts and observers from the European Parliament and consultation with the Platform for Sustainable Finance³.

The attention received by the draft technical screening criteria reveals a common understanding by a broad group of stakeholders that the Taxonomy Regulation will play a significant role in shaping how the EU’s climate and sustainability goals are achieved over the next decade and beyond.  By creating a living dictionary for what constitutes a ‘green’ economic activity which is intended to be science-based and, in the case of the climate change mitigation objective, consistent with the long-term temperature goal of the Paris Agreement, policy-makers are aiming to underpin the allocation of capital to these activities and to reduce greenwashing.  However, by guiding investment to these activities, concerns have been raised as to the potential implications for stakeholders whose activities may not qualify under the technical screening criteria as environmentally sustainable, notwithstanding that the Taxonomy Regulation does not contain any obligation to invest in green activities.

Although the creation of a ‘green list’ of economic activities is likely to have a broader application over time, for the purposes of the Taxonomy Regulation itself, the characterisation of an activity as being ‘environmentally sustainable’ will, most notably, inform:

1. any requirements introduced by Member States or the EU when setting out the requirements for marketing financial products or corporate bonds as environmentally sustainable such as, for example, the proposed EU Green Bond Standard;
2. the disclosure and transparency obligations of financial market participants offering financial products, which are marketed as environmentally sustainable or as investments with similar characteristics;
3. disclosures by undertakings subject to reporting obligations under the Non-Financial Reporting Directive of how and to what extent their activities are associated with environmentally sustainable economic activities and, in particular, the calculation of certain key performance indicators such as, in the case of non-financial undertakings:
   • the proportion of its turnover derived from products or services associated with environmentally sustainable economic activities; and
   • the proportion of its total investments (capital expenditure) and/or expenditures (operating expenditure) related to assets or processes associated with environmentally sustainable economic activities.

Basis for the Delegated Act

Articles 10(3) and 11(3) of the Taxonomy Regulation require the European Commission to adopt delegated acts establishing the technical screening criteria for determining the conditions under which a specific economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation, respectively, and to establish technical screening criteria for determining whether that economic activity causes no significant harm to one or more of the environmental objectives set out in the Taxonomy Regulation.

The parameters within which the technical screening criteria are to be developed are described in the Taxonomy Regulation including that they identify the most relevant potential contributions to the given environmental objective while respecting the principle of technological neutrality, be based on conclusive scientific evidence, and take into account the nature and the scale of the economic activity, including, where relevant, whether it is an enabling activity⁴ or a transitional activity⁵ as described in the Taxonomy Regulation.  Where technical screening criteria are included for an enabling or a transitional activity, the technical screening criteria shall clearly identify that activity as such.

What activities have been included/excluded?

Two annexes to the Delegated Act set out the technical screening criteria for activities substantially contributing to the climate change mitigation objective (Annex I) and climate change adaptation objective (Annex II) respectively.

For the climate change mitigation objective, technical screening criteria have been set out for over 85 activities across nine sectors, namely:

1. forestry;
2. environmental protection and restoration activities;
3. manufacturing;
4. energy;
5. water supply, sewerage, waste management and remediation;
6. transport;
7. construction and real estate activities;
8. information and communication; and
9. professional, scientific and technical activities.

For the climate change adaptation objective, additional sectors to those listed above have also been included such as financial and insurance activities, education, human health and social work activities as well as arts, entertainment and recreation.

In the explanatory memorandum accompanying the text of the Delegated Act, the recitals to the Delegated Act itself, and in the Q&A relating to the Delegated Act published by the European Commission, a number of points which are worth noting are made with respect to the evolution of the technical screening criteria from the draft criteria published in November 2020:

• Agriculture: in light of the ongoing inter-institutional negotiations on the Common Agricultural Policy (CAP), and to ensure greater coherence across policy initiatives aimed at achieving the environmental and climate ambitions of the Green Deal, no technical screening criteria for agriculture have been included and will instead be established in a further delegated act later in 2021.

• Forestry: the technical screening criteria applicable to forestry have been simplified (particularly for smaller forestry holdings) and the timeline for demonstrating the environmental benefits of forestry have been extended. Clarity has also been provided on what might qualify as a substantial environmental contribution and the technical screening criteria now permit the sustainability criteria set out in the Recast Renewable Energy Directive to be more extensively relied upon.  The Delegated Act notes that a review of the technical screening criteria for forest activities will occur at the time of issuance of the delegated act on the biodiversity objective are published based to ensure alignment with upcoming European Commission policies and EU legislation.

• Manufacturing: the use of the EU ETS benchmarks have been confirmed by the Delegated Act in the context of the criteria for the manufacture of iron and steel, aluminium, plastics, chemicals and other low carbon technologies in the absence of objective alternatives.  However, future revisions of the criteria will examine whether the criteria should be based on other relevant standards, considering life-cycle emissions and technological developments.

• Energy: The cross-cutting 100Gco2e/kWh lifecycle emissions threshold for energy related activities has been maintained with certain exceptions.  Bioenergy has now been included in the Delegated Act with the relevant criteria being more closely aligned with applicable EU legislation although it is proposed to review the technical screening criteria for bioenergy at the time of issuance of the delegated act on the biodiversity objective to ensure alignment with evolving European Commission policies and EU legislation. The criteria relating to hydropower have been made more context specific and also more aligned with existing EU legislation.  In particular, “run-of-river” plants (ie no reservoir), or plants with power density above 5W/m2, will not have to carry out the life-cycle assessment to prove that they comply with the 100g threshold as for other renewable technologies.  In addition, the criteria have been revised to bring it into more explicit alignment with the Water Framework Directive.

• Transport: certain activities are no longer labelled as ‘transitional activities’ (eg electrified rail) while other activities relating to waterway infrastructure have been broadened or improved.

• Buildings: buildings within the 15% in terms of energy performance on a national or regional scale have been included in the Delegated Act.  Certain technical adjustments have also been introduced eg for water consumption criteria and energy efficiency equipment of buildings.

• Natural Gas:  the recitals to the Delegated Act note the legal boundaries for recognising certain activities as transitional activities for the purposes of the Taxonomy Regulation including that they must be compatible with a pathway to limit the temperature increase to 1.5 °C above pre-industrial levels, reflect best-in-class performance, not hamper the development and deployment of low-carbon alternatives and not lead to lock-in of carbon-intensive assets.  Furthermore, the technical screening criteria should be based on conclusive scientific evidence. In this context, it is noted that where natural gas activities fulfil those requirements, technical screening criteria will be provided for these activities in a future delegated act.  However, interestingly and recognising the concerns of Member States and industry bodies who maintain that natural gas has to play a role in any realistic transition pathway, the European Commission is to consider specific legislation to ensure that activities contributing to emissions reductions would not be deprived of appropriate financing.

• Nuclear: the assessment of nuclear energy is still ongoing and pending the outcome of that assessment, no technical screening criteria have been included for that activity.

Living document

The technical screening criteria adopted by the European Commission are intended to be dynamic and to be regularly reviewed over time, and where appropriate, amended in accordance with scientific and technological developments and progress.  In the case of technical screening criteria adopted for transitional activities, the European Commission is required to review those at least every three years.  This ensures that new sectors and activities, including transitional and enabling activities, can be added over time. 

As noted above, a further delegated act will be adopted later in 2021 on agriculture and certain energy sectors not yet included in the Delegated Act.  In addition, future delegated acts will focus on activities making a substantial contribution to the other four environmental objectives. Stakeholders will be able to suggest activities to be included in the criteria via a web portal, which will be established in mid-2021 on the European Commission website which will then be assessed by the European Commission, with input from the Platform on Sustainable Finance.

Next Steps

The Delegated Act will be formally adopted by the end of May 2021 and come into effect from 1 January 2022.

Also contributed by Jacinta Feeney.