EU Taxonomy Regulation: Climate Technical Screening Criteria a step closer to the statute books

In a long-awaited announcement, the European Commission has published a draft text of the EU Taxonomy Climate Delegated Act, together with Annex I (Climate Change Mitigation) and Annex II (Climate Change Adaptation), which were agreed by the College of Commissioners on 21 April 2021. The draft has not yet been formally adopted by the Commission, but this is expected at the end of next month.

The Taxonomy framework

The EU Taxonomy Regulation (Reg (EU) 2020/852) (the EU Taxonomy) seeks to create a common framework to classify whether certain activities can be regarded as environmentally sustainable. It is intended to be a science-based transparency tool to create a common “green” language for investors.

The EU Taxonomy is based on six environmental objectives:

• climate change mitigation;
• climate change adaptation;
• 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.

An economic activity will be considered to be environmentally sustainable if it complies with all four of the following criteria:

• substantially contributes to one or more environmental objectives;
• does not significantly harm (DNSH) any environmental objective;
• complies with minimum safeguards based on certain human rights standards; and
• complies with the Technical Screening Criteria (TSC), which are the detailed conditions for the first two limbs above.

The EU Taxonomy is due to apply in relation to the climate-related objectives from 1 January 2022. The TSC for these objectives were originally due to be adopted by the Commission on 31 December 2020, however these were delayed.

Substantial contribution to climate change mitigation and “transitional” activities

Climate change mitigation is the process of holding the average global temperature increase from pre-industrial levels to well below 2 degrees, with an ambition of keeping it to 1.5 degrees, as set out in the Paris Agreement. Under the EU Taxonomy, an activity will quality as substantially contributing to this objective via the avoidance of emissions of greenhouse gases¹ (GHGs), reduction of GHG emissions or removing GHGs from the atmosphere. Details of how this occurs for specific activities are to be set out in the TSC.

Where there is no technologically and economically feasible low carbon alternative, the EU Taxonomy also recognises that certain activities can qualify as making a substantial contribution to the transition to a net zero economy. Specific transitional activities will be specified in the TSC; these must represent best-in-sector/industry GHG emissions performance, not hamper the development and deployment of low carbon alternatives and not lead to a lock-in of carbon intensive assets considered over their lifetime.

Substantial contribution to climate change adaptation

Climate change adaptation is the process of adjusting to actual and expected climate change and its impacts. In essence, this is what needs to be done to prepare for the changes already taking place, and predicted to occur in the future, because of the GHGs already in the atmosphere.

An activity will qualify as substantially contributing to this objective where it includes adaptation solutions that substantially reduce the risk of adverse impact of climate change on that activity or, subject to certain additional criteria, on people, nature or assets. In both cases, this must be without increasing the risk of adverse impact on people, nature or assets more broadly.

As with the climate change mitigation objective, the detail of how this is determined for specific activities is set out in the TSC.

The draft EU Taxonomy Climate Delegated Act

The draft delegated act published on 21 April sets out the TSC for:

• significant contribution to climate change mitigation and for climate change adaption in respect of specific economic activities;
• DNSH to all six environmental objectives for those activities; and
• generic DNSH criteria for the six objectives.

The climate mitigation TSC cover over 85 activities across the forestry, manufacturing, energy, transport, waste and water, built environment and information and communication technology sectors, as well as professional, scientific and technical activities and environmental protection and restoration activities. The substantial contribution to climate adaptation TSC includes additional activities in relation to finance and insurance, education, health and social work and the arts sectors.

The range of activities included has been the subject of intense debate. The Commission published a proposed draft TSC for consultation in late 2020 that deviated in some respects from the advice of the Technical Expert Group (TEG) – a body which, amongst other things, advised the Commission on the TSC for the climate objectives.² The Commission was inundated with feedback, with over 46,000 responses submitted. The responses revealed polarised views on whether the criteria were too narrow or not ambitious enough, as well as more general concerns that activities which are not Taxonomy-aligned would be perceived as unsustainable and suffer a consequential loss of access to/higher costs of funding.

The Commission sought further advice³ from the Platform on Sustainable Finance (the Platform), an expert body which essentially replaced the TEG under a mandate in article 20 of the EU Taxonomy,⁴ before the TSC were agreed by the College of Commissioners last week.

Conditionally excluded activities

Nuclear has not been included at this stage. The original TEG report concluded that nuclear energy provides near to zero GHGs but could not reach a conclusion on the potential for significant harm to the other environmental objectives, and nuclear is undergoing a separate assessment. The Commission’s Joint Research Centre (JRC) published a report on the DNSH characteristics of nuclear in March 2021,⁵ which is currently being reviewed by two expert committees. The review is expected to conclude in summer 2021.

Natural gas has also been left out at this stage. However, the Commission has explicitly acknowledged the potential transitional role of natural gas in the recitals, and has indicated that it could be included in future TSC where there is conclusive scientific evidence it meets the transitional criteria discussed above. Any future inclusion may include a sunset clause to time-limit the inclusion of transitional activities.

Agriculture was originally included in the draft but has been excluded from the final version. This is expected be reviewed once the revised Common Agricultural Policy has been agreed (anticipated in summer 2021).

Communication from the Commission

The Commission has also published a Communication alongside the final version of the Climate TSC, directed at the co-legislators, the European Economic and Social Committee and the Committee of the Regions, which explains its approach.

The Commission makes it clear that the fact that an activity does not qualify as sustainable under the EU Taxonomy does not automatically make it unsustainable. This aligns with feedback it sought in preparation for the Renewed Sustainable Finance Strategy, where it was exploring the possibility of creating a “significant harm” taxonomy.⁶

The Commission stresses that the Climate TSC does not yet cover all activities that can make a substantial contribution to the environmental objectives. As can be seen from the conditionally excluded activities, whether these are included in the future will be dependent on other workstreams currently ongoing in the EU. It also clear, however, that that the EU Taxonomy was always envisaged as a document that would need to evolve as the data and technology regarding the underlying economic activities develops; one of the mandates of the Platform is to advise the Commission on stakeholder requests to develop or revise TSC for particular activities.

New proposals for financing transitional activities

In response to the concerns about the activities that are not included at this stage, the Commission has announced it will consider proposing legislation to support the financing of particular economic activities that will contribute to reducing GHG emissions in line with 2030 climate neutrality targets. These activities will be principally based in the energy sector, and can be seen as a recognition of calls to acknowledge the transitional role of natural gas.

The Commission also acknowledges the advice of the Platform to explore other options beyond the EU Taxonomy to recognise the efforts made to improve performance towards the substantial contribution thresholds set out in the TSC.

Next steps

The Commission has indicated that draft is expected to be formally adopted after the completion of translations into all EU languages, expected to be at the end of May. This translation process is a normal part of the EU legislative process, but it is unusual for the drafts to be published before adoption.

Once adopted by the Commission, the Climate TSC will be subject to a scrutiny period by the European Parliament and Council. If the co-legislators do not object to the delegated act during this period, the delegated act will be published in the Official Journal and apply from 1 January 2022.

The Commission will also cover natural gas and related technologies, nuclear and agriculture in a separate delegated act, subject to the outcome of the various contingencies mentioned above. This will be adopted “as soon as possible” after the end of the review processes.

The publication of the politically approved text is certainly a step forwards in a fully functioning green classification regulatory framework. However, given the strength of feeling over this critical piece of the EU’s sustainability agenda, and the likely intense scrutiny by the co-legislators, it is by no means over the line yet.

_{Author: Kelly Sporn}

Footnotes

_{¹See art. 2(7) of the EU Taxonomy. GHGs are defined in more detail in Regulation (EU) 525/2013 but are essentially carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, nitrogen trifluoride, certain hydrofluorocarbons and certain perfluorocarbons.
²The final Taxonomy Report: Technical Annex was published in March 2020 following public consultations.
³See Commission request
⁴The Platform is composed of 50 members with specialist environmental, sustainable finance and other expertise, seven European public entities and ten observers, and includes members from the original TEG.  The advice was delivered on 19 March 2021.
⁵See JRC Science for Policy Report Ref.Aeres(2021)198129 – 19/03/21
⁶Previously referred to as a brown taxonomy.}