The European Union’s (EU’s) much-watched Taxonomy Climate Delegated Act—the world’s first “green list”—unveiled by the European Commission (EC) on April 21 qualifies several power-producing sectors in its technical screening criteria for sustainable investment decisions. However, it delays controversial decisions on gas and nuclear.
The EC adopted the Delegated Act as part of an ambitious package to help improve the flow of money toward sustainable activities across the EU and help the region meet its climate neutral goals by 2050. The decision came one day before the EU reached a provisional agreement to reduce its GHGs by 55% in 2030.
Along with the Delegated Act—which the EU will formally adopt at the end of May and apply from January 2022—the EC on Wednesday unveiled a proposal for a Corporate Sustainability Reporting Directive, which seeks to make sustainability reporting by companies more consistent. Wednesday’s package also includes six amending Delegated Acts on fiduciary duties, which essentially set out how financial firms could include sustainability in their procedures and investment advice to clients.
A Concrete Definition for What Qualifies for Green Investment
The EU Taxonomy Climate Delegated Act bolsters the EU’s Taxonomy Regulation, which became effective on July 12, 2020, to create the world’s “first-ever ‘green list’,” the EC said.
The 2020 Taxonomy Regulation tasked the commission with establishing technical screening criteria through delegated acts, and the EU Taxonomy Climate Delegated Act adopted on Wednesday is the first politically agreed delegated act. The first Delegated Act will serve as a classification system, based on “science-based technical criteria” for environmentally sustainable economic activities.
In other words, it creates a “common language that investors can use when investing in projects and economic activities that have a substantial positive impact on the climate and the environment,” the commission said.
As international law firm Matheson explained last week, the EU’s taxonomy regulation encourages corporate environmental objectives, which are voluntarily and increasingly adopting environmental, social, and governance (ESG) criteria. However, the EU’s response also seeks to reduce the fragmentation in sustainable financing practices “to prevent greenwashing in financial products.”
For now, large financial market participants and non-financial companies that fall under the 2020 regulation’s non-financial reporting directive must disclose to what extent the actives that they carry out to meet criteria set out in the EU Taxonomy. Companies not included in the policy instruments, however, will also likely voluntarily adopt EU Taxonomy criteria to bolster their ESG initiatives and transition strategies.
As examples of other voluntary uses, “Companies and project promoters can choose to meet the criteria of the EU Taxonomy with the aim of attracting investors interested in green investment opportunities. Investors can choose to use the EU Taxonomy criteria in their due diligence for screening and identifying sustainable investment opportunities aiming to achieve a positive environmental impact,” the EC said.
Nuclear and Gas Absent—For Now
While the EU Taxonomy Delegated Act is “a living document, and will continue to evolve over time” to adapt to technology advancement, the criteria covered under the first act will cover economic activity by roughly 40% of EU-based companies (with more than 500 employees), in sectors that are responsible for about 80% of direct greenhouse gas (GHG) emissions in Europe. These include energy, manufacturing, transport, and buildings.
For the energy sector—which accounts for about 22% of direct GHGs, the EC maintained a 100gCO2/2e/kWh lifecycle emissions threshold below which energy generation technologies can be considered sustainable. As it stands, the threshold cannot be met by unabated coal and natural gas–fired plants. The threshold also eliminates coal outfitted with carbon capture and storage (CCS).
The inclusion of nuclear and gas in the taxonomy was a specific point of controversy that had been building as the EC neared publication of the green finance rules. As Euractiv has reported, EU countries in eastern and southern Europe threatened to veto an earlier draft because it did not label gas as “green” or “transition” investments. France, meanwhile, lobbied fiercely to make nuclear a recognized green technology.
On Wednesday, the EC suggested both nuclear and gas could be included in a “complementary Delegated Act” that “will be adopted later in 2021.”
The complementary act “will cover cover natural gas and related technologies as transitional activity in as far as they fall within the limits of the EU Taxonomy Regulation,” the EC said. The inclusion of natural gas has been “subject to a technical assessment and public feedback,” it said.
While nuclear’s inclusion “reflects a delicate compromise,” it too will be “subject to and consistent with the results of the specific review process underway in accordance with the EU Taxonomy Regulation,” the EC said.
As a first step, independent experts— the Group of Experts on radiation protection and waste management under Article 31 of the Euratom Treaty and the Scientific Committee on Health, Environmental and Emerging Risks—will conduct a three-month review of the EC Joint Research Centre’s (JRC’s) March 2021 “do no significant harm” report on nuclear. The JRC’s analyses, notably, “did not reveal any science-based evidence that nuclear energy does more harm to human health or to the environment than other electricity production technologies already included in the Taxonomy.”
FORATOM, the European nuclear trade organization, on Wednesday hailed the EC’s move to include nuclear under a complementary act. “We are of course delighted to finally have some clarity on what the Commission is going to do with the outcomes of the JRC report,” said Yves Desbazeille, FORATOM director general.
However, Desbazeille urged the EC to provide more clarity on a timeframe. “To ensure that taxonomy does not lead to market distortions the Commission must publish this complimentary [delegated act (DA)] as quickly as possible once the expert opinions become available,” he said. “We believe that this could already be done in September 2021 and thus enable nuclear to be added to the second set of DA’s—relating to the Do No Significant Harm criteria—due at the end of this year.”
Context-Specific Criteria for Hydropower, Hydrogen
The EC on Wednesday also made its criteria more context-specific for hydropower. “Namely, “run-of-river” plants (i.e. no reservoir) or plants with power density above 5 W/m2 will not have to carry out the lifecycle assessment to prove that they comply with the 100g threshold as for other renewable technologies,” the EC explained. “While this ‘power density threshold’ has been introduced already by the Technical Expert Group, the criteria have been made clearer and more usable,” it said.
Plants with a reservoir and with a power density below 5 W/m2, however, will need to confirm that they meet the lifecycle-based GHG emission intensity threshold of 100gCO2/2e/kWh. The EC said that determination resulted from a “careful alignment” between the requirements of the Taxonomy Regulation—specifically “do no significant harm” requirements—existing law, such as the Water Framework Directive.
Also of specific note is that the EC recognized multiple low-carbon applications of hydrogen as an energy carrier, storage solution, fuel, or feedstock, going beyond the recommendations of its Technical Expert Group.
“Today’s Taxonomy criteria are in line with the EU Hydrogen Strategy and encourage the production and use of hydrogen in accordance with the European Green Deal goals,” the EC said. Specifically, it noted the criteria for manufacturing hydrogen “are set at a level considered sufficiently ambitious to ensure a substantial contribution to climate change mitigation, favoring the production of hydrogen from renewable sources.”