Table of contents

GLOSSARY

LIST OF FIGURES

LIST OF TABLES

LIST OF BOXES

1.Introduction: Political and legal context

1.1. How does the delegated act on climate change mitigation and adaptation fit with the political priorities of the Commission and the EU?

1.2. Legal and policy context of the delegated act – the Taxonomy Regulation

1.3. The uses of the EU Taxonomy and interactions with other initiatives

1.4. Scope and structure of the report

2.Problem definition

3.Why should the EU act?

4.Objectives: What is to be achieved?

4.1.General and specific objectives

4.2.Operational objective

5.Key methodological choices

5.1.Prioritisation, selection and classification of economic activities

5.2.Approaches to set technical screening criteria

5.3.Level of ambition for technical screening criteria

6.Assessing the proposed approaches and technical screening criteria against the requirements of the Taxonomy regulation

6.1.Substantial contribution to climate change mitigation

6.1.1 Policy Coherence    

6.1.2. Environmental integrity    

6.1.3. Level playing field    

6.1.4. Usability of the criteria    

6.1.5. Consistency with the requirements in Article 19(2)-(4) of the Taxonomy Regulation    

6.2. Substantial contribution to climate change adaptation

6.2.1. Policy Coherence    

6.2.2. Environmental integrity    

6.2.3. Fair treatment of sectors, avoid distortion, and set right incentives    

6.2.4. Usability of the criteria.    

6.3. Do no significant harm

6.3.1. Assessment of the DNSH to climate change mitigation criteria against the requirements of the Taxonomy Regulation    

6.3.2. Assessment of the DNSH criteria against the requirements of the Taxonomy Regulation for climate change adaptation    

6.3.3. Assessment of the DNSH criteria against the requirements of the Taxonomy Regulation for objectives 3 to 6    

7. How the Taxonomy will be used, monitored and evaluated

7.1 Monitoring and review of the technical screening criteria

7.2 Uses of the EU Taxonomy, indicative impacts and broader monitoring and evaluation provisions

ANNEX 1: PROCEDURAL INFORMATION

1.1. Lead DG, Decide Planning/CWP references

1.2. Organisation and timing

1.3. Consultation of the RSB

1.4. Evidence, sources and quality

ANNEX 2: STAKEHOLDER CONSULTATION

2.1. Technical Expert Group on Sustainable Finance (TEG) and Member States Expert Group (MSEG)

2.2. TEG’S first call for feedback

2.3. TEG workshops with additional experts

2.4. First stakeholder dialogue on sustainable finance

2.5. TEG’s second call for feedback

2.6. Second stakeholder dialogue on sustainable finance

2.7. Feedback by Member States on TEG report

2.8. Feedback on inception impact assessment

2.9. Consultation on the Renewed Sustainable Finance Strategy

2.10. Feedback on the draft delegated act: November-December 2020

ANNEX 3: WHO IS AFFECTED AND HOW?

3.1 Practical implications of the initiative

3.2 Summary of costs and benefits

ANNEX 4: KEY METHODOLOGICAL CHOICES

4.1Classification of economic activities - NACE

4.2 Methodology for selecting economic sectors and activities for climate change mitigation

4.2.1. Prioritisation of sectors and activities for assessment    

4.2.2. Inclusion logic of activities in the EU Taxonomy    

4.3 Methodology for selecting economic sectors and activities for climate change adaptation.

4.3.1. First category of included activities: Activities for which DNSH criteria for environmental objectives 3-6 were developed under the mitigation Taxonomy.    

4.3.2. Second category of included activities: (i) Activities not assessed by the TEG but for which DNSH criteria for activities already assessed can apply or (ii) Activities that have no or a very low impact on other environmental objectives.    

4.3.3. Third category of included activities: Enabling activities identified by the TEG.    

4.4 Approaches to set technical screening criteria

4.5 Level of ambition for the technical screening criteria

ANNEX 5: CLIMATE CHANGE MITIGATION

5.1. Sector-specific assessment of the approaches and criteria for substantial contribution to climate change mitigation

5.1.1. Forestry    

5.1.2. Agriculture    

5.1.3. Manufacturing    

5.1.4. Energy sector    

5.1.5. Water, sewage, waste and remediation (WSWR)    

5.1.6. Transportation    

5.1.7. Information and communications (ICT)    

5.1.8. Construction and real estate activities    

5.2. Inclusion of additional sectors and activities for climate change mitigation

ANNEX 6: CLIMATE CHANGE ADAPTATION

6.1. Assessment of the proposed criteria

6.2.Overview of the relevance of the proposed sectors and activities for climate change adaptation.

6.2.1.    First category of included activities: Activities for which DNSH criteria for environmental objectives 3-6 were developed under the mitigation Taxonomy.    

6.2.2.    Second category of included activities: (i) Activities not assessed by the TEG but for which DNSH criteria for activities already assessed can apply or (ii) Activities that they have no or a very low impact on other environmental objectives.    

6.2.3.    Third category of included activities: Enabling activities identified by the TEG.    

ANNEX 7: DO NO SIGNIFICANT HARM

7.1. Analysis on DNSH to climate change mitigation

7.2. Analysis on DNSH to climate change adaptation

7.3. Analysis on DNSH to sustainable use and protection of water and marine resources (in short: “DNSH to water”)

7.4. Analysis on DNSH to the transition to a circular economy (in short: “DNSH to circular economy”)

7.5. Analysis on DNSH to pollution prevention and control (in short: “pollution DNSH”)

7.6. Analysis on DNSH to protection and restoration of biodiversity and ecosystems (in short: “DNSH to biodiversity”)

ANNEX 8: EXPECTED USES OF THE EU TAXONOMY

8.1. Overview of the potential uses of the EU Taxonomy

8.2. Illustrations of potential coverage and alignment with the EU Taxonomy

8.3 More detailed overview on literature and case studies referenced in this annex

ANNEX 9: LIST OF PROPOSED ECONOMIC ACTIVITIES IN THE DRAFT DELEGATED ACT AND APPROACHES TO SET TECHNICAL SCREENING CRITERIA

9.1 List of activities for climate change mitigation

9.2 List of activities for climate change adaptation

9.3 Major deviations from the final recommendations of the Technical Expert Group on Sustainable Finance (TEG) in the draft delegated act as published in November 2020

ANNEX 10: RELEVANT EU LEGISLATION AND POLICY INITIATIVES

10.1 Interaction between the EU Taxonomy and other legislation in the field of sustainable finance

10.2 EU legislation relevant for setting technical screening criteria for the delegated act

ANNEX 11: RELEVANT EXCERPTS TAXONOMY REGULATION

11.1 Requirements relevant for the delegated act for climate change mitigation and adaptation

LIST OF REFERENCES

GLOSSARY

LIST OF FIGURES

Figure 1: The four basic conditions for economic activities in the Taxonomy Regulation    

Figure 2: Timeline of files related to the Taxonomy Regulation    

Figure 3: Uses of the EU Taxonomy    

Figure 4: Framework for assessment    

Figure 5: Typology for substantial contribution to climate change mitigation.    

Figure 6: Representation by type of stakeholder    

Figure 7: Visualisation of EU Taxonomy assessment process in a non-financial company operating in multiple economic activities.    

Figure 8: GHG emission in the EU27 in 2018.    

Figure 9: Typology for substantial contribution to climate change mitigation.    

Figure 10: EU greenhouse gas emissions by sector 1990-2017.    

Figure 11: International Hydropower Association data on GHG emissions and power density.    

Figure 12: Gross inland consumption of biomass and waste. Source: COM(2018) 773    

Figure 13: Shares in power generation.    

Figure 14: Partial reproduction.    

Figure 15: Categorisation of companies in relation to Ecolabel pockets.    

Figure 16: Results of the fund-level assessment.    

Figure 17: Estimated split between types of potentially aligned activities based on Nordea report    

Figure 18: Estimated split of potentially aligned activities per macro-sector based on Nordea report    

Figure 19: Estimated share of potentially aligned activities in different sectors based on Nordea report    

Figure 20: Sectoral shares of insurer’s eligible holdings, EIOPA, 2020    

Figure 21: Issuers by potentially aligned revenue share (MSCI, 2020)    

Figure 22: Number of relevant companies per sector within MSCI ACWI IMI Index (MSCI, 2020)    

Figure 23: Sector representation of MSCI ACWI and potentially Taxonomy-eligible companies    

Figure 24: Potentially Taxonomy eligible companies in MSCI ACWI    

Figure 25: Comparison of Taxonomy-relevant and Taxonomy-aligned revenue shares    

Figure 26: Possible Covid-19 recovery packages, Hepburn et al., 2020    

Figure 27: Interaction between Taxonomy Regulation, NFRD, and SFDR    

Figure 28: NFRD overview    

LIST OF TABLES

Table 1: Overview of annexes    

Table 2: Proposed approaches by macro sector    

Table 3: Relevant pieces of Union legislation that set rationale of intervention    

Table 4: Measuring success of the EU Taxonomy for climate change mitigation and adaptation as established by the delegated act    

Table 5: High-level comparison of studies on Taxonomy alignment and eligibility    

Table 6: Possible broader monitoring provisions for the EU Taxonomy    

Table 7: Overview of benefits    

Table 8: Overview of costs    

Table 9: Analysis for inclusion of adapted activities beyond TEG recommendation    

Table 10: Presentation of the generic types of approaches    

Table 11: Relevance of the different approaches depending on the type of substantial contribution of the activity    

Table 12: Deduction of the assessment grid: conditions under which an approach can be selected for a given economic activity    

Table 13: Assessment of proposed approaches to set criteria for forestry    

Table 14: Assessment grid for agriculture activities    

Table 15: Assessment grid for manufacturing activities    

Table 16: Assessment grid for electricity and/or heat generation activities not including those relating to biomass, biogas and bioliquids    

Table 17: Assessment grid for water, sewerage, waste and remediation activities    

Table 18: Assessment grid for transportation activities    

Table 19: Assessment grid for information and communication activities    

Table 20: Assessment grid for Construction activities    

Table 21: Climate risks    

Table 22: Sensitivity Matrix for information and communication    

Table 23: Sensitivity Matrix for financial and insurance activities    

Table 24: Potential uses (mandated and voluntary) of the EU Taxonomy    

Table 25: Initiatives under the European Green Deal that reference the EU Taxonomy    

Table 26: Studies of the European Commission on EU Taxonomy    

Table 27: Clustering of Revenue Segments    

Table 28: JRC study climate policies mapped to NACE activities covered in EU Taxonomy    

Table 29: Potential financial coverage of the EU Taxonomy on climate change mitigation in equity and debt markets by NACE sectors*    

Table 30: Potential financial coverage of the EU Taxonomy on climate change mitigation in equity and debt markets by CPRS sectors    

Table 31: EU-Taxonomy eligible activities in equity and debt markets by CPRS    

Table 32: Potential of EU Taxonomy to close investment gap by sector and EUCO scenario    

Table 33: Activities for climate change mitigation    

Table 34: Activities for climate change adaptation    

Table 35: Deviations between final recommendations of the TEG and Commission services    

LIST OF BOXES

Box 1: Disclaimer    

Box 2: What does it mean to be "included" in the EU Taxonomy?    

Box 3: The iterative introduction of the EU Taxonomy and its dynamic nature    

Box: 4 Types of approaches to set criteria for substantial contribution to climate change mitigation..18

Box 5: Types of approaches to set criteria for substantial contribution to climate change adaptation    

Box 6: Types of approaches to set criteria for do no significant harm    19

Box 7: Example of different DNSH to adaptation criteria based on the nature of activity.    

Box 8: Compliance costs vs. administrative costs under the EU Taxonomy    

Box 9: EU Taxonomy alignment: from economic activities to investment portfolio    

Box 10: Definition of economic sectors and activities    

Box 11: Types of approaches to set criteria for substantial contribution to climate change adaptation    

Box 12: Types of approaches to set DNSH criteria    

Box 13: Deviations from the TEG recommendation for technical screening criteria for substantial contribution to climate change adaptation    

Box 14: Peseta IV    

1.Introduction: Political and legal context

1.1. How does the delegated act on climate change mitigation and adaptation fit with the political priorities of the Commission and the EU?

This impact assessment underpins the first delegated act under the Taxonomy Regulation 1 that sets out economic activities and related technical screening criteria for the first two (out of six) environmental objectives. This delegated act provides the technical details to establish the EU Taxonomy for climate change mitigation and climate change adaptation. The Taxonomy Regulation establishes the framework for developing a list of environmentally sustainable economic activities (or “EU Taxonomy”) and was underpinned by a separate impact assessment 2 .

The EU Taxonomy is an important piece of the puzzle to enable and scale up sustainable investment and thus to implement the European Green Deal 3 . The Taxonomy aims to channel capital towards activities that substantially contribute to reaching the objectives of the European Green Deal, such as climate neutrality, zero pollution, preservation of biodiversity, a circular economy and a high degree of energy efficiency. This framework coherent with the European Green Deal will help limit the risk of greenwashing and avoid market fragmentation. Taxonomy

In light of the ongoing post-crisis fiscal stimulus 4 and the EU27’s estimated financing needs after the crisis 5 , the European Green Deal will help provide for the European recovery strategy and the EU Taxonomy can be a valuable tool to help channel finance towards the green recovery.

1.2. Legal and policy context of the delegated act – the Taxonomy Regulation

The Taxonomy Regulation establishes four overarching conditions for environmental sustainability:

(I)it contributes substantially to one or more of the six environmental objectives set out in the Taxonomy Regulation 6 ;

(II)it does not significantly harm any of the other environmental objectives;

(III)it is carried out in compliance with minimum (social) safeguards set out in the Taxonomy Regulation 7 ; and

(IV)it complies with the “technical screening criteria” that are established by the European Commission through delegated acts. The technical screening criteria specify the conditions under which an economic activity meets criteria (i) and (ii).

Figure 1: The four basic conditions for economic activities in the Taxonomy Regulation

The Taxonomy Regulation acknowledges different means for an activity to make a substantial contribution for each objective. Across all objectives, it is recognised that activities may not only qualify due to their own performance, but also by enabling another activity or activities to substantially contribute. For climate change mitigation, the Regulation additionally stipulates in Article 10 (2) that “transitional activities”, for which no feasible low-carbon alternative exists, can qualify under certain conditions.

The technical screening criteria that are set in the delegated act are performance criteria for a specific economic activity that determine under what conditions i) the activity makes a substantial contribution to a given environmental objective (where relevant); and ii) it does not significantly harm the other objectives.

The first delegated act that establishes the activities and technical screening criteria for the climate objectives (and which is accompanied by this report) is adopted by the Commission in April 2021. A second delegated act will set out the activities and technical screening criteria for the remaining four environmental objectives under the Taxonomy Regulation, to be developed over 2021. A third delegated act due by mid- 2021 will establish the key performance indicators that companies need to disclose under the Taxonomy Regulation. This timeline is illustrated in Figure 2.

Figure 2: Timeline of files related to the Taxonomy Regulation

In order to assist with the development of the first delegated act, the Commission tasked the Technical Expert Group on Sustainable Finance (TEG) with providing advice on the development of the technical screening criteria on the objectives of climate change mitigation and adaptation. Their final recommendations are publicly available . The final recommendations serve as a basis and main technical input for the Commission’s analysis in this impact assessment.

In order to assist the Commission in the preparation of subsequent delegated acts and to update the EU Taxonomy, the Taxonomy Regulation creates a Platform on sustainable finance (“Platform”) that is composed of a balanced representation of public and private, financial and non-financial stakeholders 8 . This Platform started its work in October 2020 and does not only assist the Commission with developing the EU Taxonomy for the remaining environmental objectives (and advise on potentially extending it to other objectives), but also advises the Commission on the need to update the technical screening criteria and the list of activities for all objectives.

The iterative introduction of the EU Taxonomy and its dynamic natureThe Taxonomy Regulation puts forward an iterative approach to develop the EU Taxonomy, starting with the two climate objectives and followed by the Taxonomy for the other four environmental objectives. In this “second round” of delegated acts developed over 2021, the Commission could further amend the first delegated act in order to include additional activities for climate change mitigation and adaptation. This step-by-step introduction of the Taxonomy and prioritisation of some sectors over others stems from the urgent need to realise the EU green policy agenda. While this overall legislative architecture prioritises those sectors and activities with the highest potential for positive environmental impact, it also allows to include other activities in the Taxonomy, once screening criteria for how they can demonstrably make a substantial contribution to an environmental objective can be worked out and agreed upon in a methodologically sound way. The iterative approach mitigates the risk for activities for which this process has not yet been able to conclude in time for the first round of delegated acts which contains priority sectors and activities backed by broad scientific evidence and consensus. It ensures an objective and rigorous path for their potential inclusion, while safeguarding the integrity of the Taxonomy. The incremental roll-out of the Taxonomy also allows market actors to familiarise themselves with the Taxonomy criteria in stages and facilitates learning how to use the Taxonomy before disclosure obligations become mandatory and other initiatives, which build on the Taxonomy, begin to apply. More information on the monitoring and evaluation of the Taxonomy including its incremental roll-out are given in section 7. In addition, the EU Taxonomy is dynamic in its nature. This has been a political choice in the Regulation itself to allow the Taxonomy to evolve with technological and market developments. The Regulation requires the Commission to regularly review the technical screening criteria and, where appropriate, to amend the delegated acts. Notably the Commission has to review the technical screening criteria for transitional activities at least every 3 years and for other activities at least every 5 years. Such updating frequency should strike the right balance between the costs of updating relevant systems and creating potential uncertainty for investors on the one hand, and reflecting technical progress and policy changes in a timely manner on the other. Any changes will be carefully considered as regards their expected impacts such as the risk of stranded assets. A more detailed discussion on stranded assets is provided in Annex 3.Box 3: The iterative introduction of the EU Taxonomy and its dynamic natureThe iterative introduction of the EU Taxonomy and its dynamic natureThe Taxonomy Regulation puts forward an iterative approach to develop the EU Taxonomy, starting with the two climate objectives and followed by the Taxonomy for the other four environmental objectives. In this “second round” of delegated acts developed over 2021, the Commission could further amend the first delegated act in order to include additional activities for climate change mitigation and adaptation. This step-by-step introduction of the Taxonomy and prioritisation of some sectors over others stems from the urgent need to realise the EU green policy agenda. While this overall legislative architecture prioritises those sectors and activities with the highest potential for positive environmental impact, it also allows to include other activities in the Taxonomy, once screening criteria for how they can demonstrably make a substantial contribution to an environmental objective can be worked out and agreed upon in a methodologically sound way. The iterative approach mitigates the risk for activities for which this process has not yet been able to conclude in time for the first round of delegated acts which contains priority sectors and activities backed by broad scientific evidence and consensus. It ensures an objective and rigorous path for their potential inclusion, while safeguarding the integrity of the Taxonomy. The incremental roll-out of the Taxonomy also allows market actors to familiarise themselves with the Taxonomy criteria in stages and facilitates learning how to use the Taxonomy before disclosure obligations become mandatory and other initiatives, which build on the Taxonomy, begin to apply. More information on the monitoring and evaluation of the Taxonomy including its incremental roll-out are given in section 7. In addition, the EU Taxonomy is dynamic in its nature. This has been a political choice in the Regulation itself to allow the Taxonomy to evolve with technological and market developments. The Regulation requires the Commission to regularly review the technical screening criteria and, where appropriate, to amend the delegated acts. Notably the Commission has to review the technical screening criteria for transitional activities at least every 3 years and for other activities at least every 5 years. Such updating frequency should strike the right balance between the costs of updating relevant systems and creating potential uncertainty for investors on the one hand, and reflecting technical progress and policy changes in a timely manner on the other. Any changes will be carefully considered as regards their expected impacts such as the risk of stranded assets. A more detailed discussion on stranded assets is provided in Annex 3.Box 3: The iterative introduction of the EU Taxonomy and its dynamic nature1.3. The uses of the EU Taxonomy and interactions with other initiatives

The EU Taxonomy is a classification system, establishing a list of environmentally sustainable economic activities. The delegated act that is considered in this impact assessment only represents the first two environmental objectives of this list. The Taxonomy as a whole aims to incentivise the mitigation of GHG emissions and adaptation to climate change compared also in sectors that are not yet recognised as “green” by the market. The Taxonomy is, however, not a mandatory or prescriptive list to invest in.

The different uses of the EU Taxonomy can broadly be grouped in four categories (Figure 3):

Figure 3: Uses of the EU Taxonomy

First, the Taxonomy Regulation sets out several mandatory uses. First, the Regulation sets out disclosure requirements 9 for large companies in the scope of the Corporate Sustainability Reporting Directive (CSRD) that will amend the Non-Financial Reporting Directive (NFRD) 10 and financial market participants under the Sustainable Finance Disclosure Regulation (SFDR) 11 . The EU Taxonomy thus forms an integral part of sustainability-related reporting over the investment chain. Annex 11 provides more detail on these initiatives and their interaction with the EU Taxonomy and also lists existing EU legislation relevant for this delegated act.

The Taxonomy Regulation also mandates the use of the Taxonomy criteria when Member States and the Union set out EU or (public) national labels and standards for financial products and corporate bonds that are made available to investors as “environmentally sustainable”. The possible EU Green Bond Standard and the expected EU Ecolabel for retail financial products are examples of where this requirement applies on EU level. Market-based labels for green funds and green bonds are not required to use the EU Taxonomy. The Taxonomy technical screening criteria therefore draw from existing market-based initiatives as much as possible to allow for coherence when Member States and the EU apply it in this context.

Second, the Taxonomy is set to serve as a basis for various future and ongoing initiatives in sustainable finance. The EU Taxonomy will facilitate the development of Union-wide standards for environmentally sustainable financial products and the establishment of labels that recognise compliance with these standards. Notably, the potential EU Green Bond Standard (EU GBS) 12 and the future EU Ecolabel for financial products are set to use the EU Taxonomy to define a pool of eligible green assets in which a certain percentage of investment will be mandatory to obtain the label. The Taxonomy is also a reference point for climate transition and Paris-aligned benchmarks 13 . Furthermore, the Taxonomy Regulation complements the disclosure obligations on financial market participants that will increase transparency towards investors about sustainable financial products and the entities that issue them. In order to allow for this transparency on financial product level, information is needed from companies. In this context, not only the disclosure obligation for companies under the Taxonomy Regulation, but also the revision of the NFRD through the proposal for a CSRD 14 will be important.

Third, the Taxonomy may be used in public instrument and further EU initiatives. Application of the EU Taxonomy on a European level is foreseen in the proposed Regulation establishing the InvestEU Programme 15 , where the EU Taxonomy will be used in an appropriate way to track the achievements of the InvestEU Fund to the climate objectives by establishing guidance for investment projects. Projects will need to do a sustainability proofing for their projects to be supported by InvestEU and can use the Taxonomy criteria in an appropriate way to do so.

Finally, the Taxonomy may be used in a voluntary way by the market. Investors may use it to reorient their investment decisions towards Taxonomy-aligned activities and projects; companies might use it to increase their share of Taxonomy-aligned activities to become eligible for these investments. The degree of uptake of the Taxonomy by the market cannot be estimated at this stage.

1.4. Scope and structure of the report

This report underpins the first delegated act under the Taxonomy Regulation. Notably, this report assesses the activities and technical screening criteria that are proposed for the delegated act for climate change mitigation and climate change adaptation. It notably assesses the technical screening criteria that have been published in the draft delegated act for stakeholder feedback in November 2020. The changes that have been made to the criteria as part of the stakeholder feedback gathered in this process are not part of the assessment. The feedback received and resulting changes are summarised in Annex 2.10 of this report.

The Taxonomy Regulation itself was accompanied by an impact assessment 16 that outlined the underlying challenges and the relevant problem drivers that resulted in the need to develop a granular, EU-wide Taxonomy. The establishment of the screening criteria is a necessary step to achieve the objectives of the Taxonomy Regulation and to help address the wider problems analysed in the impact assessment that accompanied it. Hence the assessment of these problems and the analysis of the impacts of the broader EU Taxonomy will not be duplicated here.

While the Taxonomy Regulation sets out the overarching framework to develop the EU Taxonomy, the Commission establishes – by means of delegated acts – the list of activities and associated technical screening criteria within the boundaries of the Regulation. In order to propose criteria that comply with the Regulation’s requirements in a coherent, transparent and accountable manner, this report sets out a framework to translate the Regulation’s requirements and provisions to a more granular level and assess the proposed technical screening criteria.

First, the requirements for technical screening criteria (Article 19 of the Taxonomy Regulation) have been grouped around four main categories of requirements (section 4) that present the background (and objective) against which the content of the delegated act is assessed. The assessment structure, including the different steps and choices that are made to operationalise the Regulation’s requirements to set technical screening criteria at the level of economic activities are presented in section 5. This assessment structure is applied to the criteria for climate change mitigation, climate change adaptation and do no significant harm (summary in Chapter 6) to ensure that the content of the delegated act complies to the best degree possible with the Regulation’s requirements. Finally, section 7 outlines how the success of the EU Taxonomy can be monitored in the future, again taking into account the limitations of data availability. Due to the nature of this content, the report deviates from the usual template for impact assessments. For usability purposes, the below table presents an overview of the annexes that substantiate the sections in this report.

Table 1: Overview of annexes

2.Problem definition 

This initiative is a precondition for the establishment of the EU Taxonomy as a classification system for environmentally sustainable economic activities. Without the list of economic activities and associated technical screening criteria that determine under what conditions an activity makes a substantial contribution to climate change mitigation or adaptation and does not significantly harm any of the other five environmental objectives, the problems that led to the development of an EU Taxonomy would not be addressed.

These underlying problems were analysed in the impact assessment underpinning the Taxonomy Regulation and two other sustainable finance proposals 17 . With regards to the EU Taxonomy, the impact assessment established that investors face high search costs in order to identify sustainable economic activities 18 . Together with other factors, this results in limited transparency on sustainability in the financial sector and affects investment behaviour with the ultimate consequence of limiting capital flows into sustainable investments including across borders; necessary in supporting the transition to a climate-neutral and climate-resilient economy. A lack of clarity on what can be considered an environmentally sustainable economic activity for investment purposes was found to be one of the biggest drivers of this problem 19 , and ultimately one of the main obstacles to scaling up green investment, particularly in countries where different definitions of sustainability are used. This was evidenced through relevant literature as well as stakeholder responses to the related public consultation 20 .

In this regard, the conclusion from the original impact assessment that market failures prevent the establishment of a commonly accepted Taxonomy for environmentally sustainable economic activities still holds. The impact assessment presented an overview of existing sustainability classification systems as of May 2018, but concluded that none of these was ready to be used by European investors in a comprehensive way to address the problem. In the two years since then, no commonly accepted classification system has been developed by market operators or public bodies 21 . The EU co-legislators have during that period agreed on the Taxonomy Regulation. However, this Regulation still needs to be fully implemented to become operational. Hence, without the delegated act, the lack of clarity, uncertainty and fragmentation on environmentally sustainable economic activities would continue, against the backdrop of an accelerating climate and ecological crisis and the rising need for investments in environmentally sustainable economic activities. In a context characterized by pervasive and increasing climate change, only those businesses which implement methodologies to control the risks, can ensure corporate value in the long run. At the same time, it is likely that investors would continue to seek more sustainable financial products, driven by greater awareness and higher preferences to invest sustainably, particularly among the younger generations 22 . Due to the absence of clear information on what can be considered environmentally sustainable for investment purposes or on the exposure of operations to climate risks, this capital could be allocated in a sub-optimal manner with regards to its environmental impacts.

To be successful, this initiative has to solve a problem stemming from the agreement to set-up the EU Taxonomy: it has to set technical screening criteria for climate change mitigation and adaptation aligned with the Taxonomy Regulation, especially within the requirements of Article 19. Notably, technical screening criteria need to be environmentally ambitious and science-based, consistent with EU legislation, easy to use and should not lead to market distortion and inconstant incentives when used by companies and investors.

3.Why should the EU act? 

Subsidiarity and the need for action at EU level were established in the impact assessment accompanying the legislative proposals on sustainable finance put forward by the Commission in May 2018. The present initiative is required under Articles 10(3) and 11(3) of the Taxonomy Regulation in order to establish the EU Taxonomy for the environmental objectives regarding climate change mitigation and climate change adaptation. Under this framework, the Commission has been empowered to adopt delegated acts pursuant to Article 23 of the Taxonomy Regulation.

The legal basis of the Taxonomy Regulation is Article 114 of the Treaty of the Functioning of the European Union (TFEU). Article 114 TFEU confers the European Parliament and the Council the competence to adopt measures for the approximation of provisions laid down by law, regulation or administrative action in Member States, which have as their object the establishment and functioning of the internal market. The EU derives the right to establish the EU Taxonomy from Article 114 TFEU, as it aims to create harmonised definitions of what can be considered a sustainable economic activity 23 .

4.Objectives: What is to be achieved? 

Similar to the problem definition and legal basis/subsidiarity, the objectives for this initiative stem from the impact assessment accompanying the legislative proposals on sustainable finance.

4.1.General and specific objectives

The general and specific objectives of this initiative are the same as those already established in the 2018 impact assessment, as the delegated act links to the objectives of the Taxonomy Regulation. Specifically, the development of a uniform and granular EU Taxonomy together with other sustainable finance policies aims to address two out of three general objectives presented there – reorienting capital flows towards sustainable investments (general objective 3) and fostering transparency in financial and economic activity on sustainability (general objective 2) – by reducing investor search costs in identifying sustainable economic activities. To do so, it needs to meet the relevant specific objective (specific objective 3) of providing clarity at EU level on what sustainable economic activities are.

4.2.Operational objective 

The operational objective of this initiative is to ensure that the technical screening criteria in the delegated act are calibrated in a way that is likely to provide clarity at EU level on what are sustainable economic activities. This objective is more specific to this delegated act, although it arises from the Taxonomy Regulation, which has set out requirements in Article 19 that aim to make the technical screening criteria that are established in the delegated act robust, credible, and usable. For practical reasons, the requirements for the technical screening criteria in Article 19 are grouped around four broader categories of requirements based on their common elements and the potential trade-offs between them. An overview of the requirements and their mapping around the four groups of requirements is outlined in Annex 11. It is important to note that the requirements for technical screening criteria in the Regulation refer to both criteria for substantial contribution and criteria for do no significant harm. The requirements reflect some of the main concerns from stakeholders that were raised in the process of developing and negotiating the Taxonomy Regulation and ensure that these concerns will be addressed in the adoption of the delegated act.

Requirement I: Policy Coherence across the EU

This objective serves as a safeguard that the technical screening criteria take into account any relevant existing EU legislation, metrics and methodologies. The criteria should also be built on EU labelling and certification schemes, EU methodologies for assessing environmental footprint, as well as EU statistical classification systems wherever possible. This requirement ensures coherence and consistency across EU legislation and policy objectives. It is closely related to the usability of the technical screening criteria by companies and investors, as building on existing approaches and methodologies set out in EU legislation or policy make it easier for these actors to use the technical screening criteria. It is also linked to the third requirement as it helps to set unambiguous incentives for sustainable investment.

Requirement II: Environmental integrity

This requirement ensures the overall environmental integrity of the EU Taxonomy. For this purpose, the technical screening criteria have to be based on available scientific evidence if it is robust enough and apply the precautionary principle otherwise. They have to take into account life-cycle considerations in addition to the environmental impact of the activity itself, wherever possible. The inclusion of life-cycle considerations in the Taxonomy Regulation for the development of technical screening criteria ensures that positive environmental impacts (especially important in determining enabling activities as set out in Article 16 (b)) and harmful impacts for both upstream and downstream impacts for products and services provided by the economic activity (“production, use and end of life”) must be considered, including existing life-cycle assessments. When setting the technical screening criteria, short and long-term impacts of an activity must have been considered.

Requirement III: Level-playing field

When the technical screening criteria are set for specific economic activities, it is important to make sure that they are calibrated in a way that is unlikely to lead to new forms of market distortion. Moreover, the technical screening criteria have to take into account the nature and scale of the economic activity and should ensure that consistent incentives are set for investing sustainably. Finally, to the extent possible, all relevant activities should be covered within one sector. This requirement serves as a safeguard that the criteria are set fairly within a sector and activities are treated equally if they make the same contribution to an environmental objective and that the criteria respect the principle of technological neutrality. Regarding activities for which the merits of their possible inclusion in the Taxonomy have not yet been assessed in time for the first delegated act, this requirement also ensures that their potential inclusion in due course would be on an equal and non-discriminatory basis. The potential inclusion of those activities would hinge on technical screening criteria complying with all other requirements being worked out, in a methodologically rigorous way as set out in section 5.

Requirement IV: Usability

In order to enable the application of the EU Taxonomy by companies and investors, the technical screening criteria need to be easy to use and verifiable. The technical screening criteria should therefore be set out as simple and clear as possible, as long as this is consistent with ensuring coherence and consistency in the criteria and maintaining the necessary degree of specification.

5.Key methodological choices

The broader framework of the EU Taxonomy has been set by the European Parliament and the Council in the Taxonomy Regulation, determining the key aspects of the EU Taxonomy including the requirements and scope for the delegated acts. The framework determines the setup of the Taxonomy, such as its gradual development through delegated acts. It sets out the definition of the environmental objectives, the definition of “substantial contribution” and “do no significant harm” as well as the requirements for the technical screening criteria.

The provisions adopted in the Taxonomy Regulation cannot be reopened at the level of a delegated act and leave the Commission with limited discretion. The empowerment under the Taxonomy Regulation obliges the Commission to adopt technical screening criteria in line with the specific requirements of the Taxonomy Regulation. In terms of expected impacts, the decisions being taken at the level of this delegated act are expected to play a smaller role compared to those taken at the level of the Taxonomy Regulation.

However, implementing the broader framework of the Taxonomy Regulation required several important choices to set technical screening criteria in line with the operational objective of this initiative. These choices follow a certain sequence that is illustrated below and determines the logic of the assessment in this report:

1)First, developing the Taxonomy in a gradual way required a prioritisation of certain sectors and activities along with a choice of an appropriate classification system for economic activities.

2)In order to systematically establish on which grounds economic activities could make a substantial contribution and could be included (or not), the rather high-level definitions of substantial contribution from the Taxonomy Regulation needed to be interpreted further.

3)Third, there was a need for a methodology to translate the provisions of the Regulation into technical screening criteria on economic activity level for different types of economic activities. For this purpose, different approaches for setting technical screening criteria are assessed in this report and the most suitable approaches are selected, based on how likely the technical screening criteria resulting from them will be to meet the different requirements in the Taxonomy Regulation.

4)Once an approach was chosen, the right level of ambition for the technical screening criteria had to be determined to calibrate the thresholds and practices that would need to be met in order for an activity to be considered EU Taxonomy-aligned, resulting in the formulation of the draft criteria.

5)Finally, the resulting technical screening criteria were checked against the requirements of the Regulation again to make sure that the proposed content is aligned with the requirements of the Regulation.

6)Following completion of this impact assessment, the draft technical screening criteria were published for stakeholder feedback. Feedback was carefully considered by the Commission before final publication.

Figure 4: Framework for assessment

The work of the Technical Expert Group on Sustainable Finance (TEG) has been instrumental in the preparation of the technical screening criteria as well in the choices discussed in this section. The Commission services established clear parameters for the TEG’s work and followed it closely. The TEG’s work was supported by several rounds of extensive feedback from stakeholders 24 and targeted scientific and technical inputs involved industry representatives, academia, environmental experts, civil society, Member States and other stakeholders. The outreach activities of the TEG are described as part of the synopsis report (Annex 2).

In certain areas this proportionate impact assessment evaluates the technical inputs with a view to inform policy decisions concerning the delegated act up to the publication of the draft delegated act in November 2020. Given the close involvement in the TEG deliberations and their extensive outreach to stakeholders, this work is not duplicated at this stage and the focus lies in particular on areas where deviations from the TEG were recommended (including where activities were added) or where the recommendations by the TEG could be substantiated with more scientific evidence. Together, the assessment of these choices aims to ensure the proposed delegated act is aligned with the requirements of the Taxonomy Regulation and that it strikes the right balance between these requirements, where trade-offs exist.

5.1.Prioritisation, selection and classification of economic activities 

The EU Taxonomy is based on EU’s NACE classification system of industries 25 as recommended by the TEG. This choice is aligned with the requirement that technical screening criteria are built upon EU statistical classification systems, where appropriate, and are easy to use. Despite some limitations, NACE ensures that the technical screening criteria can be set in a comparable framework and thus provides a high degree of usability and comparability when the Taxonomy is applied by companies across Europe, but also internationally. A more thorough assessment is available in Annex 4.1.

Given the urgency of this initiative in the light of an ongoing climate crisis, the work on economic sectors and activities with the highest expected potential to contribute had to be prioritised. This sets the basis for further gradual development of the Taxonomy (as set out in Box 3 above). The assessment of economic sectors (and activities within these sectors) for climate change mitigation focused on sectors with the greatest potential to make a substantial contribution to climate change mitigation based on their share of overall emissions and their potential to reduce emissions (their own emissions or those of other activities). For climate change adaptation, all sectors and activities are expected to be able to make a substantial contribution. Nevertheless, it was not feasible to conduct the DNSH assessment 26 for all sectors of the economy for this delegated act. Hence, the starting point for the assessment was the same set of activities as for mitigation.

Within the selected sectors, activities with the highest potential to make a substantial contribution to one or more environmental objectives were prioritised for inclusion 27 . In this process, the assessment carefully considers different ways in which an activity can make a substantial contribution – with the main categories being its own performance 28 and enabling the performance of others, which is recognised in the Taxonomy Regulation for all environmental objectives. In case of climate change mitigation, a guiding principle for identifying low carbon activities was the potential to substitute high impact activities. While many activities across the economy have low carbon impact, not all of them can replace high impact activities and not all of them are therefore included. Another way for low-carbon, or more generally low-impact activities, to make a substantial contribution is to enhance the status of (or “heal”) the environment 29 . This typology of substantial contribution is illustrated in Figure 5 below. As explained above, such prioritisation was not considered applicable for climate change adaptation. Explicit exclusions made at the level of the Taxonomy Regulation (electricity production from solid fossil fuels) and other, rather practical considerations (e.g. technological readiness levels, but also data availability and ongoing work within the Commission) were also reflected in the choice of which activities should be included at this stage.

The prioritisation of sectors and activities also means that not all sectors and activities in the economy that could have the potential to make a substantial contribution, are included in the EU Taxonomy at this point. Some high emitting manufacturing and transport activities, as well as those activities that are not among the most high-emitting sectors but might be relevant as enabling activities, could not be included in the first round. As further explained in Annex 4.1, this results from the methodologic choice, but also from practical constraints such as limited time, ongoing scientific work and inconclusive evidence on certain issues. As explained in section 7, the impact of the delay in inclusion is expected to be limited. Climate-oriented investors are still likely to invest in activities perceived as green for which criteria have not been developed yet. The addition of further activities, as well as activities that could qualify for substantial contribution to other environmental objectives, will be carefully considered based on technical advice of platform on sustainable finance.

Annexes 4.2 and 4.3 provide more detail about the logic of selecting different sectors and activities as well as on the inclusion logic, the former for climate change mitigation and the latter for climate change adaptation.

Figure 5: Typology for substantial contribution to climate change mitigation.

5.2.Approaches to set technical screening criteria

EU climate and environmental objectives do not translate automatically into technical screening criteria for individual economic activities. In the absence of commonly recognised transition pathways and metrics for various sectors, there are different ways in which criteria could be set – for instance, they could require that selected activities meet a specific quantitative threshold or require that a specific process is followed. The European Commission’s Joint Research Centre (JRC) identified 30 a set of feasible approaches to set criteria for climate change mitigation derived from the technical work with the TEG. These approaches are used to determine what types of metrics and criteria would be the most appropriate for a given economic activity considering aspects such as existing policy targets and legislation, data availability, current levels of scientific knowledge and technology feasibility. Usability aspects and risks to create market distortion were also considered, with the Taxonomy Regulation requirements used as a guiding framework 31 . It is important to note that different types of approaches still leave some flexibility to determine the level of ambition needed to define the substantial contribution criteria, which is discussed further below.

Approaches identified by the JRC for setting substantial contribution criteria to climate change mitigation are the following:

Box: 4 Types of approaches to set criteria for substantial contribution to climate change mitigation

While these approaches were derived primarily from the work for defining substantial contribution to climate change mitigation, it was concluded that these could also serve as a starting point for other environmental objectives. Hence, the impact assessment analysed these approaches also for their relevance to substantial contribution to climate change adaptation and retained two approaches for more thorough assessment, reflecting the highly context- and location-specific nature of adaptation needs and solutions and a lack of established quantitative metrics.

The do no significant harm (DNSH) criteria are developed following a similar logic. The approaches identified as most appropriate for substantial contribution to climate change mitigation and adaptation were also followed for DNSH criteria to these objectives – the only tangible difference between the two being a different ambition level. To develop DNSH criteria for the other four environmental objectives, four approaches were retained for more thorough assessment, given the vast differences between the four environmental objectives 33 .

Annex 4.4 provides more detail on the approaches considered in this impact assessment, first explaining them and then showing how the applicability of the different approaches can be tested through the lens of the four requirements, to assess which approaches are more suitable for a given sector or group of economic activities.

5.3.Level of ambition for technical screening criteria

After choosing an appropriate approach to setting the technical screening criteria (resulting for instance in a quantitative metric), a consistent level of ambition had to be calibrated to set the technical screening criteria. The Taxonomy Regulation sets an overall ambition level based on applicable EU climate and environmental objectives. While alignment with these objectives was used as a guiding principle, this overall ambition level had to be translated into specific thresholds for different activities in the absence of commonly recognised transition pathways for all sectors. Particular attention was paid to what is actually feasible for market players, based on available solutions and current market practices.

When setting the ambition level, this report considers all available scientific reference points that can be applied to the selected activities. These include climate scenarios, sectoral pathways, and requirements stemming from existing sectoral legislation. When sectoral legislation defines mandatory standards for a whole sector, the Taxonomy uses them as a baseline to set a (higher) level of ambition, such as for buildings. Where EU legislation already defines best practices and directly contains sustainability criteria 34 , the EU Taxonomy draws from these critiera to set coherent incentives. Nevertheless, these reference points were often not available or could not be directly linked to economic activities or operators, as described in further detail in Annex 4.5. In such cases, the preferred option proposed here is to follow the ambition level recommended by the TEG, which was carefully calibrated based on vast stakeholder outreach. The technical screening criteria will be updated regularly  in order for the EU Taxonomy to evolve with the legislative framework.

The ambition level proposed for substantial contribution in the EU Taxonomy is generally higher than existing EU legislation. Existing EU legislation typically specifies only minimum requirements that all (large) economic operators in a given sector have to meet. Since it was a political choice that the EU Taxonomy aims to “channel capital flows towards sustainable investments” and is thus set to “help achieving the SDGs in the EU” 35 , it has to identify what top environmental performance means in order to achieve this aim and incentivise performance improvements. Considering that in the EU economy as a whole, practices are still far from being climate neutral and climate resilient, the criteria for substantial contribution by definition have to be set much higher than “business as usual”. Setting ambition level at the same level as existing EU law 36 would lead to defining whole sectors as environmentally sustainable, which would not fulfil the main objectives of the EU Taxonomy.

By contrast, DNSH criteria aim to prevent significant harm to the environment and have a similar objective as existing sectoral legislation. Hence, for DNSH criteria, compliance with EU law or mandatory practices is largely considered a suitable starting point for defining technical screening criteria. This motivates the difference in the ambition level between SC and DNSH criteria. The difference in this ambition is explained in more detail in section 6. The technical screening criteria also take good note of established practices among the best environmental performance in different sectors 37 .

A more detailed discussion of the ambition level in the EU Taxonomy is available in Annex 4.5.

6.Assessing the proposed approaches and technical screening criteria against the requirements of the Taxonomy regulation

This section summarises the results of the selection of appropriate approaches for setting technical screening criteria and of the assessment of the resulting technical screening criteria 38 against the Regulation’s requirements. The assessment follows the methodology introduced in Chapter 5 (detailed in Annex 4) and draws from sector-specific assessments that apply this methodology. Stakeholder feedback received in the various rounds of outreach outlined in Annex 2 is duly considered. This chapter also outlines the rationale for the major deviations from the TEG. The conclusions presented in this section are substantiated by detailed analysis for climate change mitigation in Annex 5, for climate change adaptation in Annex 6 and for do no significant harm in Annex 7.

Across the objectives and criteria, the main technical input for this analysis is the final report of the TEG. The deviations from the TEG, the supporting rationale and underpinning evidence is therefore presented in the respective annexes and a summary table can be found in Annex 9.3. Changes compared to the TEG report are proposed in order to (i) achieve a better balance between the requirements from the Regulation where trade-offs exist between them and thus to improve the overall calibration of the delegated act; (ii) include additional activities where sufficient and mature methodological underpinning was available; (iii) improve the overall clarity of the criteria; and (iv) outline areas where stakeholder feedback was particularly divided 39 . Additional analysis and evidence has been presented to underpin these suggestions. The analysis is complemented by in-house expertise on the different sectors and policy areas across different Commission services.

While this impact assessment concludes that the delegated act can largely follow the TEG advice, some deviations are suggested to align the calibration of the technical screening criteria better with the requirements of the Taxonomy Regulation. The deviations aim to improve the balance of the requirements and some eventual deviations might also reflect political decisions as described below. All substantive deviations are displayed in a simplified manner in Annex 9.3 and explained in more detail in the sector annexes (5, 6 and 7). There are different types of deviations recommended in this impact assessment. Some deviations simply add more clarity and precision to the specific criteria. The inclusion of some additional activities are a proportionately bigger deviation, most notably in the case of climate change adaptation. Only very few deviations actually change the thresholds and metrics, considering that these were developed based on technical inputs, most common practices and in line with the approaches introduced in Chapter 5 and Annex 4.2.

Different trade-offs between the Regulation’s requirements were considered carefully and are reflected in choosing the best suitable approaches to set technical screening criteria. For example, while policy coherence is desirable, ambition levels in some areas of existing EU legislation do not correspond to the level of ambition required to make a substantial contribution and do not support the overall objective of the EU Taxonomy. At the same time, the ambition level needs to be considered in the light of the usability of the criteria, as latest scientific evidence might not be operational enough to be used in the assessment and relevant disclosures against the EU Taxonomy. Based on these types of reflections, the resulting approaches that determine the nature of the technical screening criteria are specific to substantial contribution to climate change mitigation, substantial contribution to climate change adaptation and do no significant harm.

Setting a coherent level of ambition within the chosen approach results in concrete technical screening criteria. The criteria are attached in Annex 10 and were checked again against their compliance with the Regulation’s requirements. While a detailed analysis for the choice of approaches was carried out for substantial contribution, the resulting approaches and criteria are checked directly against the Regulation’s requirements for climate change adaptation and DNSH. With the deviations from the TEG’s recommendations proposed, the resulting content for the delegated act is considered aligned with the Regulation’s requirements.

Sector-specific political choices

Besides the methodological choices explained in previous sections, there are certain economic sectors where the choice of economic activities and technical screening criteria have been informed by separate political choices in preparing the draft delegated act that has been published in November 2020. Apart from the sectors discussed below, several other political choices were taken resulting from the feedback received on the draft delegated act in November/December 2020 (Annex 2.10). These include the removal of the agricultural sector in light of the ongoing negotiations between the co-legislators on the Common Agricultural Policy reforms. These choices are not assessed in this report.

While this impact assessment proposes preferred options for the inclusion of economic activities and technical screening criteria for the delegated act, on these three issues, it only identifies several feasible options but does not conclude any preferred option at this stage. The need for a political decision is supported as these issues have received extensive (and much divided) stakeholder feedback.

In the case of forestry, the choice involves whether to include all, none or some of the forest activities proposed by the TEG for inclusion in the EU Taxonomy based on their capacity to make a substantial contribution to climate change mitigation, or whether to await progress in evolving EU policy work under the Biodiversity and future Forest Strategies to inform the appropriate technical screening criteria.

In the evolving policy context around the Biodiversity and Forestry Strategies, a decision is required on whether and which forestry activities to include in the delegated act on the climate objectives.

-One option is to include those forestry activities identified for their potential to contribute significantly to climate change mitigation based on the TEG recommendations, and to set accompanying technical screening criteria.

-The alternative is to delay these choices as the evolving policy context may lead to changes regarding what are considered sustainable forestry practices (and thus the appropriate technical screening criteria), and given that they could either conceivably qualify under the Taxonomy Regulation for the other environmental objectives or be included as updated activities in a revised climate Taxonomy.

In the case of bioenergy, the choice involves the appropriate design of the technical screening criteria, and to what extent these are based on the sustainability criteria for bioenergy contained in the revised Renewable Energy Directive (RED II) as well as to what extent new policy developments (notably the Biodiversity Strategy) are taken into account. Bioenergy is the only energy source that is already subject to mandatory environmental sustainability criteria at EU level in order to be accounted towards the renewable energy target of the Member States and to be eligible for state subsidies, as set out in the revised Renewable Energy Directive (RED II). The Directive and sustainability criteria are the outcome of extensive discussions among the European Parliament and the Council, and are set to be applied as of June 2021. The TEG recommendations put forward tighter emission savings thresholds compared to those defined in RED II and established a stricter definition of feedstock eligible for the manufacture of solid biomass, biogas and liquid biofuels.

Against this background and considering some of the trade-offs between the requirements in section 4.2, there are three main options for bioenergy for the delegated act, notably in terms of the scope of eligible bio-feedstocks:

·Follow the TEG advice and restrict the scope of eligible feedstocks to advanced biofuels in Annex IX, part A of RED II. This would increase environmental ambition but at the possible expense of consistency with EU law and the need to ensure a level playing-field and usability for economic operators.

·Restrict the scope further by excluding some of the feedstocks in Annex IX, part A of RED II 40 . This would further prioritise environmental ambition, but at the further possible cost in terms of the other requirements.

·Broaden the eligible scope to the full Annex IX (Parts A and B). This would increase overall consistency with EU law, better level the playing-field and improve usability, but at the possible expense of a higher level of environmental ambition.

A detailed discussion can be found in Annex 5.1.4.

The European Commission continues to evaluate these options at the time of submission of the Impact Assessment.

In the case of nuclear energy, the choice involves carrying out further technical work on do no significant harm aspects before considering its (possible) place in the Taxonomy Regulation. While nuclear energy contributes to climate change mitigation and the achievement of the climate targets through its low GHG emissions 41 , it is not included as an activity in the delegated act. Its potential contribution to climate change mitigation has been recognised by the Taxonomy Regulation 42 , as well as by the TEG, which considered nuclear energy from a climate mitigation perspective. However, both the Taxonomy Regulation and the TEG underline the importance of the ‘do no significant harm’ requirement applicable to all economic activities under the EU Taxonomy, including nuclear energy. The TEG did not put forward a conclusive recommendation on this issue and recommended “that more extensive technical work is undertaken on the (DNSH) aspects of nuclear energy in future and by a group with in-depth technical expertise on nuclear life-cycle technologies and the existing and potential environmental impacts across all objectives”. Such analysis is to be carried out with the objective of deciding whether this activity, depending on the outcome of the assessment, should be included in the EU Taxonomy by a complementary delegated act on climate change mitigation and climate change adaptation.

In 2020, the European Commission launched in-depth work to assess whether or not to include nuclear energy in the EU Taxonomy of environmentally sustainable activities. As a first step, the Joint Research Centre, the in-house science and knowledge service of the Commission, drafted a technical report on the ‘do no significant harm’ aspects of nuclear energy 43 . This publication is a Science for Policy report by the JRC, which aims to provide evidence-based scientific support to the European policy-making process. The scientific output expressed does not imply a policy position of the European Commission. This report will be reviewed by two sets of 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 on environmental impacts. They are expected to issue their reports within three months. These three reports will inform the Commission’s decision.

6.1.Substantial contribution to climate change mitigation 

This section summarises the sector-specific assessment of the approaches and technical screening criteria for climate change mitigation that is presented in detail in Annex 5. It outlines the coverage of the sectors, the outcomes of the assessments of the different approaches to set technical screening criteria against the Taxonomy Regulation’s requirements and the main deviations for substantial contribution criteria from the TEG’s recommendations. It provides a view to how each policy requirement is met – and which direct relevance it has for the technical screening criteria for substantial contribution.

The assessment carried out for the different categories of activities per sector resulted in proposing specific approaches for each sector under substantial contribution to climate change mitigation, as illustrated below. A summary of the proposed approaches for each category of activity in the sectors can be found in the table below (Annex 9.3). The types of criteria proposed vary not only according to the sectors specificities, but also according to the nature of the activities proposed in each of the sectors. As such, no “one-size-fits-all” solution is proposed. Given the trade-offs between the different policy objectives involved that are explained further below, the recommended approaches to set criteria and the calibration of the actual criteria are considered to strike a good balance between the requirements based on the assessment which is detailed below, supported by additional analysis in Annex 5.

Table 2: Proposed approaches by macro sector

Setting a coherent level of ambition, consistent with the overall objective of the EU Taxonomy to channel capital into the SDGs within the different approaches, resulted in determining the technical screening criteria that were then checked for their alignment with the four categories of requirements in the Taxonomy Regulation. It looks at the way that the ambition level was set for all criteria.

6.1.1 Policy Coherence

EU legislation has been taken into account in several ways resulting into the choice of different approaches to set criteria across sectors. First, it can serve as the source of a recognised and prevalent metric. This is the case for the use of the metrics established and reported by all installations under the EU ETS. Second, the data collected for setting the ETS benchmarks for 2021-2030, which are set up to allocate free allowances to sectors that are exposed to carbon leakage, can be repurposed to establish for the technical screening criteria the level of emission performance of e.g. the 10% best installations on EU markets. This existence resulted in selecting best-in-class performance approaches for the manufacturing sector for transitional activities (Annex 5.1.3), for example, while ensuring that the other three requirements do not imply trade-offs. Third, the sector legislation can also provide directly the criteria and threshold for substantial contribution, like in the case of passenger cars and heavy duty vehicles for which both specific measuring protocols and emission standards have been set which define low carbon vehicles (Annex 5.1.6). Likewise, the EU law sets parameters for specific sustainability performance for construction of new buildings, as the nearly zero-energy buildings (NZEB) 44 that can be used for this purpose. While for the renovation of existing buildings, the energy performance certificates (EPC) 45 are useful tools to measure the energy performance and can be used also to measure the substantial contribution 46 (Annex 5.1.8).

Setting a coherent level of ambition for each approach results in the technical screening criteria. The overarching reference for the EU Taxonomy climate mitigation criteria is the transition towards the objective to decarbonise the EU economy by 2050 47 . Where more precise policy is not yet in place, this objective guides setting the specific criteria and the approaches that were chosen for substantial contribution. Achieving the 2030 climate and energy targets is essential for the long-term decarbonisation objective, therefore the technical screening criteria are set in a way that also allows for meeting the medium-term targets on GHG emissions, renewable energy and energy efficiency.

In addition, based on scientific evidence and market practices as well as underpinned by in-house expertise, the new metrics and thresholds have been developed where a better balance could be achieved in order to set approaches for the technical screening criteria that meet the Taxonomy Regulation’s requirements to a higher degree. This is for example the case for defining sustainable transport infrastructure (Annex 5.1.6) or combining elements for anaerobic digestion of sewage sludge (Annex 5.1.5).

6.1.2. Environmental integrity

A central issue in setting the technical screening criteria for substantial contribution to climate change mitigation is linked to the lack of a set of sector pathways, which is linked to the uncertainties around technological developments and political choices. In the absence of those, in line with the intentions of the Taxonomy Regulation, substantial contribution to mitigation should target limiting temperature increases to 1.5°C. At the same time, this needs to be translated into the technical screening criteria in a range of ways, according to the sector specificities.

In the context of the long-term EU objective 48 , a choice has been made to systemically include activities, which are consistent with a decarbonised economy in 2050 in their own right, like zero emission transport (cf. Annex 5.1.6) and renewable energy generation (cf. Annex 5.1.4). An approach that qualifies the nature of such activities has been taken for these activities. The substantial contribution criteria for such sectors reflect the need to expand investment in sectors where technical solution on the market are already at near-zero carbon levels.

In high-emission sectors where near-zero GHG solutions are not yet viable, the EU Taxonomy should reflect the need to rapidly decarbonise these sectors. A zero carbon target for a manufacturing sector where there are currently no technologies on the market capable of reaching that performance would be ambitious and Paris-aligned, but would not be usable. Therefore, the EU Taxonomy in such contexts should aim to recognise for activities that are best-in-class, provided that they are not locking in activities that are incompatible with a decarbonised economy. This is notably the case for heavy industries. For example, iron and steel productions are emissions intensive both through high energy use and also due to the process of emissions. In addition, this should also be complemented by recognising in the EU Taxonomy to investment in research activities aiming to bring new technologies to the market that support activities to meet and go beyond the respective sector criteria in the EU Taxonomy.

Another type of transitional activity is linked to sectors where near-zero carbon activities exist, but are not yet practicable at scale. For example, this rationale underpins the importance of addressing building renovation with thresholds linked to the relative improvement of the energy performance, not equal to the required performance level of a new building. As in the previous paragraph, an exclusion of such improvements would mean excluding in practice a major part of the actions needed for decarbonisation. Therefore, the calibration of the ambition level on the basis of market presence is also a key element of consideration. Such transitional activities would need to be reassessed as part of the regular review (Section 7).

The analysis also includes criteria reflecting the specific role of certain activities that enable other activities to decarbonise. Such activities are for example manufacture of low-carbon technologies (e.g. production of solar panels, high efficiency windows) and IT solutions that are exclusively aimed at GHG emission reductions. While the emissions performance of such manufacturing might not be the top class within the sector, these are considered to substantially contribute to GHG emission reductions through the benefit their products provide.

Also, in the specific context of activities that do not need to reduce emissions but actually can have negative emissions, the ambition level considered for substantial contribution should be that in addition to reducing emissions, they significantly increase carbon sequestration, such as for forestry.

The technical screening criteria have been set taking into account the latest scientific evidence on both the objectives and of the potential to mitigate emissions in a specific sector. For example in manufacturing hydrogen, for which the current EU ETS benchmark defines a value of 8.85 tCO2/t H2, such level was deemed not sufficiently ambitious to ensure substantial contribution to climate change mitigation, since much lower performance levels and the consideration of life-cycle GHG emissions is possible.

Despite the extensive consideration, the integration of life-cycle considerations universally into the mitigation criteria proved difficult for the lack of usable and comparable data 49 . The TEG recognised the importance of this approach and recommended for further work by the Platform (e.g. for renewable construction materials). The results of upcoming work will be integrated, for example the requirement to evaluate the possibility of taking into account full life-cycle CO2 emissions reduction benefits of biofuels and synthetic fuels under the Cars and Vans regulation EU 2019/631. Where it is already feasible, the criteria can integrate life-cycle considerations through explicitly requiring life-cycle analyses (e.g.: electricity generation activities, heat/cool production activities) and improvements within the boundaries of the activity, as well as of their inputs and uses of products. For example, given the embodied GHG emissions of metal feedstock, the screening criteria for manufacturing of steel includes a direct recognition of steel production in an electric arc furnace if at least a major share of iron content comes from scrap steel (Annex 5.1.3). Likewise, reflecting the importance of electricity use in some processes, the GHG content of electricity can be a major source of emissions for such activities and therefore can be included as a cumulative element of criteria, for example in manufacture of chlorine and aluminium.

6.1.3. Level playing field

The criteria seek to cover all sectors with most of the direct GHG emissions in Europe, as shown in Section 5.2. A horizontal aim is to calibrate the criteria in a way that is not expected to create market distortion within sectors. For example, in the manufacture of chemicals, the criteria allow organic chemicals from bio-based feedstock to be considered in parallel to hydrocarbon-based chemical processes where the EU ETS benchmarking data can be used. Also, in light of the importance of bringing new low carbon alternatives to the market, it is important to include a specific activity on manufacture of other low carbon technologies that can demonstrate on a life-cycle assessment basis substantial GHG emission reductions compared with conventional alternatives.

More broadly, the Taxonomy criteria and metrics are designed in a manner that integrates known methods and allows equivalent performance to be recognised. This reduces the risk of high compliance costs, which could distort the market in favour of bigger actors with stronger capacity and reflects one of the main stakeholder concerns when using the EU Taxonomy, especially for forestry and agriculture. Also, in case the criteria refer to EU standards and legislation, it is important these also allow other equivalent data to be recognised where relevant, to avoid distorting international competition.

Some activities require either fundamental change in the process or long-term actions to be able to achieve high performance. In such cases, it is essential to incentivise transition plans and their implementation. Therefore, it is considered that such plans should be recognised in the EU Taxonomy. At the same time, to avoid perverse incentives, such plans need to be adequately verified and taking place within an appropriate timeframe for the specific sector. In the same rationale, it is necessary to specifically incentivise more complex and deeper building renovation.

In several cases also listed above, the criteria rely on elements that require specialist knowledge (e.g. on international equivalence, quality of decarbonisation plans). The veracity of such information would be difficult to check for investors. Therefore, the criteria should include verification requirements for activities where such concerns are present.

In some sectors, there might be tension between the ambition level within an activity and with other competing activities within the same macro sector. For example, inland water and short sea shipping, rail and road freight are in direct competition, which could imply that the criteria should be set at the same level, to further facilitate modal shift, even if that would mean including vessels that can perform well below average within their class. At the same time, the long term objective of decarbonising transport and the differing technological readiness for that would argue for incentivising investments for improving the performance within a specific transport mode. Such considerations should be balanced case by case keeping in mind the overall aim of the EU Taxonomy.

The proposed criteria and activities should also help sectors and investors to identify possible activities where weak performance on GHG emissions can indicate a risk of asset stranding; as such, the EU Taxonomy reduces the information asymmetry on the market and encourages dynamic adjustment in asset valuations, which in turn reduces the risk of stranding.

6.1.4. Usability of the criteria

The criteria should include both quantitative and qualitative criteria, reflecting a specific situation of each activity. Whenever possible, quantitative criteria that are familiar to the market actors either through EU legislation or through existing market practice should be used. For example, all installations in the EU that operate in sectors covered by the EU ETS benchmark already monitor and report the data accordingly, which is the main metric for most of the criteria in the manufacturing sector. In several cases, where the criteria are based on the current market practice, it will require a broader adoption by the sector of what is currently best practice.

For some activities, it is proposed to set requirements that require specialist knowledge and granular information, which may not currently be used at scale on the market, for example the GHG savings calculations for forestry and agriculture 50 . This will reduce usability in early stages, but will drive best practice once adopted. However, it was ensured that all required practices are already used by some best performers in the market in order to ensure feasibility and to make sure that no additional substantive costs would be required of best performers. Also, some qualitative criteria drive specific practices that have direct economic benefit for the activity, for example criteria requiring a methane leakage monitoring plan for anaerobic digestion plants or energy efficiency requirements throughout the EU Taxonomy.

For some activities, the TEG proposals for new metrics are considered, where data for the threshold or monitoring are not directly available. For example in passenger transport, the importance of looking at the emissions of transport modes comparatively is recognised, but it is also recognised that the calculation methods on the passenger-kilometre are not currently in place at EU level and therefore could lead to a range of interpretations and uncertainties. Therefore, it is more conservative and practicable to limit the scope of potentially aligned activities in such sectors to no-regret options like the zero tailpipe emissions, with a view to updating the EU Taxonomy at a later stage.

Finally, for some technical screening criteria, it is proposed to make certain information publicly available. This feature, such as the requirement for the construction of new buildings to make information on embodied carbon of material used available 51 , would allow the emissions from the production of materials used in the buildings to be managed better, and would facilitate comparability. However, setting this requirement needed to be considered against the risk of causing competition disadvantages in the sector. The usability of the criteria will also reflect the ongoing Commission work on non-financial reporting and corporate governance.

The reported GHG emissions of anthropogenic activities have an uncertainty of variable size and are subject to verification. It is proposed to closely link the reported GHG emissions to the European Monitoring and Verification Support Capacity that the Commission is building under the Copernicus Programme atmosphere monitoring service. It will also visualise the GHG plumes (and their potential change) over Europe in a timely and transparent manner.

6.1.5. Consistency with the requirements in Article 19(2)-(4) of the Taxonomy Regulation

It is proposed to address the requirements set down in paragraphs 2-4 of Article 19 through the following elements. 

The criteria for the energy sector activities need to consider the transition pathways to decarbonisation and energy efficiency across the covered economic activities. For example, in high-energy-consumption manufacturing such as aluminium, it is important to cover also the efficiency of energy used, in addition to the GHG emissions. Furthermore, through the criteria for energy generation, the thresholds need to ensure that power generation that uses solid fossil fuels is not considered EU Taxonomy-aligned. Accordingly, the criteria also exclude transport and transport infrastructure that is dedicated to fossil fuels. The criteria in the transport macro-sector reflect the need to decarbonise the transport sector. It covers land and waterways transport, as well as infrastructure that is dedicated to low carbon mobility. The TEG did not cover aviation and maritime shipping activities, which are crucial elements to decarbonise; work is ongoing to include key no-regret elements on both of these modes, taking into account also the importance of modal shift. In addition, the Commission has undertaken specific studies to develop the mode/segment specific criteria for aviation and maritime transport, to feed possible future revisions of the delegated acts.

The balance between the categories of requirements for technical screening criteria has been further analysed. Annex 5 shows in more detail the considerations for setting the criteria for each macro-sector. With these elements, the criteria would be consistent with the Taxonomy Regulation and fulfil the parameters of substantial contribution to climate change mitigation, as set out in Article 10 of the Taxonomy Regulation, and the requirements for technical screening criteria, as set out in Article 19.

6.2. Substantial contribution to climate change adaptation

This section summarises the more specific analysis in Annex 6, notably how the operationalisation of the requirements in the Taxonomy Regulation as outlined in Annex 4, is applied when setting criteria for substantial contribution to climate change adaptation.

As a starting point, any activity that is considered to make a substantial contribution to climate change adaptation must prevent or reduce physical climate risks that are material (i.e. may lead to damage) to an asset, operation, activity or infrastructure in a given location and context, aligned with the definitions in the Taxonomy Regulation (Article 11) based on climate risk assessments. Prevention and reduction of risks may lead to different adaptation solutions depending on the context, location of the activity, size, institutional and financial capacity of the entity to deal with climate risk and evolution of the risk over time (for instance increased sea-level rise or repetitive drought). Depending on these factors, an economic operator (company) can either implement adaptation solutions within the economic activity itself (adapted activity) or procure the adaptation solution from another operator (a so-called enabling activity) in order to account for the respective risks (e.g. early warning systems) or to reduce them (insurance product or climate resilient crops) and thus to make a substantial contribution.

This is set through the new Article 7 of the Taxonomy Regulation where:

An economic activity shall be considered to contribute substantially to climate change adaptation where:

•Adaptation of an activity (=adapted activities): that economic activity includes adaptation solutions that substantially reduce the (risk of) adverse impact of the current and expected future climate on that economic activity itself;

•Enabling adaptation activity: that economic activity provides adaptation solutions that contribute substantially to preventing or reducing the (risk of) adverse impact of the current and expected future climate on other people, nature or assets.

For substantial contribution to climate change adaptation, technical screening criteria are set that are uniform and mostly qualitative and process-based for most adapted activities as well as specific, tailor-made criteria for a limited number of enabling activities. The primary qualitative nature of the criteria results from the lack of measured baselines or accepted metrics for defining quantitative screening criteria for adaptation at this point in time, and relative lack of quantitative adaptation targets defined at the national, sectoral, or subnational level.  Setting uniform and qualitative criteria for adapted activities, consistent across all sectors of the economy, was also supported by the feedback on adaptation received from stakeholders in the 2019 call for feedback by the TEG. The analysis below supported by Annex 6 illustrates why these criteria are proposed, how they differ from the approach that the TEG proposed and how they fulfil the requirements of the Taxonomy Regulation including how potential trade-offs between them are handled and addressed. It is important to note that the approach to climate change adaptation differs conceptually from the approach to climate change mitigation. This is reflected in the different structure of the annexes that support this part of the assessment. Notably, a sector-specific assessment is not carried out.

6.2.1. Policy Coherence

In general, the “risk-based” approach that is proposed as an underlying rationale for the criteria for substantial contribution to climate change adaptation (“reduction of material risks”) follows closely the rationale of intervention by the Union and Member States as set by the Paris Agreement (Article 7 of the Paris Agreement) and relevant pieces of EU legislation (see table below). In line with the provisions of the Paris Agreement 52 , EU Taxonomy criteria are set to incentivise actions by various sectors to enhance their adaptive capacity, strengthen resilience and reduce vulnerability to climate change, as well as to maximise the co-benefits with other environmental policies and legislation.

Table 3: Relevant pieces of Union legislation that set rationale of intervention

Furthermore, investment based on the proposed screening criteria should not undermine sectoral, regional or national adaptation efforts. All Member States now have national adaptation strategies, adaptation plans and many local adaptation plans exist 58 . A number of sectoral adaptation strategies or standards 59 exist or are under development. The investments that are directed into activities that qualify under the proposed criteria should be consistent with the objectives of the adaptation policy in the location it is carried out. An activity that undermines this effort would not meet the substantial contribution criteria and consequently not qualify under the EU Taxonomy.

6.2.2. Environmental integrity

The proposed criteria for substantial contribution to adaptation ensure environmental integrity in manifold ways. First, the proposed criteria require identification and reduction of material physical risk. The criteria cover both activity-level and systemic adaptation. Activity-level adaptation aims at strengthening an asset or economic activity to withstand identified physical climate risks over its lifetime, such as considering sea-level rise in the design of a bridge. Systemic adaptation aims to actively reduce vulnerability and build resilience of a wider system, or systems, such as a community, ecosystem, or city.

Second, priority is given to green (nature-based) solutions 60 instead of grey-engineered solutions where they exist, because of the numerous co-benefits they bring. Various examples can illustrate these co-benefits.

Third, the proposed criteria ensure that adaptation solutions are based on the latest available scientific evidence. Notably, the company is required to carry out climate risk and vulnerability assessments based on robust climate data to identify most important material physical climate risk 61 . Risk and vulnerability assessments are the primary tools to define the type and level of risk that an asset or entity face, to help identify priorities and plan the most appropriate measures in response. Ensuring high quality of these assessments in the criteria for substantial contribution to climate change adaptation is therefore crucial and the increased use of these assessments would entail to bring co-benefits for an effective policymaking on risk prevention and management. Risk and vulnerability assessments need to be comprehensive, multi-sector and consider changing risks dynamics. These can still remain challenging as the case study of a large Asset Owner illustrates 62 . However, this consideration of initial difficulties in usability seemed to be acceptable given the need and opportunity for all companies to learn. It is considered that the experience is on the rise and the EU Taxonomy will even help to build learning opportunities further. The private sector, think tanks and academia are currently developing ready-to-use climate risk assessment tools, which are partially free of charge 63 . It is expected that the development of such tools will grow in the future, also because of initiatives like the TCFD 64 . Please also refer to Section 6.2.4 for information on climate risk assessments. 

Finally, the criteria require monitoring based on set indicators, allowing adjustments to risks and detection of emerging risks during the life-time of an asset or operations. For example, the construction of an infrastructure is a relatively short economic activity performed by the contractor. Operating the infrastructure is usually a long-lasting economic activity. Climate change adaptation is usually relevant for longer lifespans and time horizons. Hence, infrastructure should be climate resilient throughout the intended lifespan.

6.2.3. Fair treatment of sectors, avoid distortion, and set right incentives

The adaptation Taxonomy criteria are the same across all sectors proposed for inclusion at this stage for the EU Taxonomy. In that sense, a fair treatment of sectors without undue distortions could be assumed. However, the choice of sectors for the adaptation Taxonomy mimics extend the mitigation Taxonomy list and hence the primary focus is not on climate adaptation but reduction of emissions 65 . Nevertheless, as the Annex 6.1 shows, these macro sectors are highly relevant also for adaptation.

This implies that the Platform on Sustainable Finance that is established by the Taxonomy Regulation will be important in the further development of the adaptation Taxonomy 66 . In that sense, the list of sectors must be seen as a living document to be developed further in the future. In its recommendation, the TEG has already suggested sectors for further scrutiny and for which criteria should be established. In particular, as the current list of sectors is based on the mitigation Taxonomy list, it may imply that the sectors with the highest potential for adaptation or those offering adaptation solutions are not yet on the list.

In order to at least partially address the composition of activities under the climate change adaptation Taxonomy, it is proposed to include a limited set of enabling activities and additional activities to be adapted, where it is feasible to ensure that these additions do not cause a significant trade-off with other Taxonomy Regulation requirements. Under these conditions, activities are proposed to be included as “adapted activities” where (i) possible harm to other objectives is sufficiently similar to another activity already assessed (and hence such DNSH criteria can be applied, e.g. additional manufacturing categories); or, (ii) that they are neutral to other environmental objectives. This is typically the case of education or health systems 67 that are important enablers for a successful collective resilience 68 . 

6.2.4. Usability of the criteria.

While the criteria are generally set in a way that they are usable across the sectors, a concern around usability is that good understanding and acknowledgement of increased climate change risks and their evolution over time is still poorly understood by many companies. Adaptation and the notion of physical climate risks may be still poorly understood in many sectors of the economy beyond the insurance industry, despite featuring highly in the last annual Global Risks Reports by the World Economic Forum, in numerous scientific articles, and even in mainstream media reports on climate impacts. A number of companies still either underestimate or completely overlook climate risks to their economic activity. In the EU, 65% of direct economic losses from climate disasters are not covered by insurance (EIOPA, 2019).

This happens despite the gradual development of the policy, permeating into number of policy areas (energy 69 , infrastructure 70 , transport 71 or buildings 72 ), and already pronounced impacts of weather events on assets, business operations or water resources 73 and ongoing standardisation. On the positive side, top-down knowledge on climate change impacts, vulnerabilities and risks has improved sizably over recent years with Copernicus Climate Change Services and granular risk assessment are becoming available at very high resolution. Please also refer to Section 6.3.2 for recent development on economic climate risk assessments.

In the public feedback, many respondents requested additional guidance on usability of the screening criteria for activities that make a substantial contribution on adaptation. The burden of compliance was raised as a concern, especially for small to medium-sized enterprises. Access to climate information was also cited as a constraint.

There is a rapidly growing pool of available tools through online climate service platforms using open data 74 or databases with loss data to identify potential hotspots 75 . These are especially suited for obtaining a first glance of potential risks under climate change scenarios (e.g. Copernicus service 76 ). There is also a substantial literature related to adaptation modelling and approaches. Notably, companies have recourse to (1) Reports from the European Environment Agency on “Climate change, impacts and vulnerability in Europe”, (2) Reports from the Intergovernmental Panel on Climate Change, (3) Projection of Economic Impacts of Climate Change in Sectors of the European Union based on bottom-up Analysis (PESETA) series of projects with JRC, (4) risk assessments, risk management capability assessments carried out by Member States, and summaries thereof as reported to the Commission in accordance with Article 6 of Decision (EU) No 2013/1313 on Union Civil Protection Mechanism, and (5) the Flood hazard and risk maps and measures to reduce flood risks in flood risk management plans as required by Directive 2007/60/EC (Floods Directive).

To address these:

-The TEG has developed additional guidance on use of the Taxonomy Regulation in practice, including adaptation case studies;

-The Platform on Sustainable Finance will support the development of further guidance;

-The Commission will continue in collaboration with European Environment Agency and C3S 77 help bringing granular and accessible information 78 ;

-Some good examples are already available on Climate-ADAPT, in Denmark or The Netherlands;

-Further use cases will be stimulated thanks to the above mentioned study on adaptation modelling;

-The upcoming research and innovation agenda under the Horizon Europe mission on adaptation will stimulate new cutting edge adaptation solutions in areas relevant for finance (forestry, desalination and infrastructure).

Many companies have their own risk analysis teams, and include a risk register, and/or have corporate teams that look at due diligence and safeguards, or environment. They report to the operational teams, investors, financial department, management/board of directors are the primary decision makers. Most companies, however, do not have the expertise to do these assessments, and thus may use climate or management or technical consultancies to undertake these assessments (Annex 6.3.2). The service providers for those assessments do exist. These have recently been assessed in the ClimINVEST project, focusing on services for businesses 79 .

To improve usability of the criteria more concretely, it is proposed to minimise any elements of subjective judgement (“on best effort basis” or “to the extent possible”) to ensure that these principles comply with the requirement of usability. In that respect, certain differences from the TEG recommendations are proposed (Annex 6.2).

Moreover, refined criteria for very limited number of enabling activities are proposed. It is considered that all the activities relevant for mitigation should be understood as adapted activities once they fulfil the established criteria for substantial contribution to adaptation. Such a move would allow for reserving the enabling adaptation activities to economic activities that really offer adaptation solutions and help make other sectors more resilient.

6.3. Do no significant harm

This section contains the summary of the assessment of the approaches used to set do no significant harm criteria as well as the assessment of the actual technical screening criteria for activities that make a substantial contribution to climate change mitigation and adaptation. This includes both the approaches for setting criteria for do no significant harm to the other four environmental objectives set out in the Taxonomy Regulation, as well for the climate objectives 80 .

As a result of the different nature of the do no significant harm criteria to climate change mitigation and adaptation, these criteria are assessed by objective, while the do no significant harm criteria to the remaining four objectives are assessed together in this section. More detail is provided for the assessment in Annex 7.

The section first outlines the do no significant harm approach, how it is in line with the broader EU environmental policy ambitions and how it is reflected in the EU Taxonomy. The section then assesses the proposed approaches to set technical screening criteria against the requirements of the Taxonomy Regulation. For each of the environmental objectives, this section presents areas where this report recommends to adjust the technical input received from the TEG in order to better meet the Taxonomy Regulation’s requirements and support them with additional analysis in the relevant annex. It also takes into account stakeholder feedback received in the various rounds of outreach as presented in Annex 2 into account.

The Taxonomy Regulation puts forward a “do no significant harm” (DNSH) principle alongside the need for economic activities to make a substantial contribution to at least one of the environmental objectives. This is to avoid that an economic activity that makes a substantial contribution to one objective causes significant harm to any of the remaining five environmental objectives. As such, this principle helps safeguard internal coherence of the EU Taxonomy. This “DNSH logic”, recently embraced by the Commission at a more general level as the “do no harm oath” under the European Green Deal, intends to ensure that progress against one objective is not made at the expense of others and recognises the reinforcing relationships between different environmental objectives. In that sense, DNSH criteria play an essential role in ensuring the environmental integrity of the EU Taxonomy.

The DNSH assessment requires some preliminary horizontal considerations ahead of the actual assessment that specify the operationalisation of the four broader requirements set out in Annex 4:

·While the DNSH to adaptation criteria are the same principle-based criteria for all activities, and apply to all activities, DNSH criteria to the other five environmental objectives have been put forward only in those cases where a given economic activity presents a risk of significant harm to a given objective.

·The DNSH technical screening criteria contain quantitative thresholds where possible. Where this is not possible, the criteria are qualitative, describing an action or set of actions to be undertaken in order to avoid significant harm.

·EU legal requirements were considered as minimum requirements and were in general not repeated in the DNSH evaluation.

·However, when environmental impact was considered significant, the relevant requirements stemming from EU legislation (for example best available techniques, or BAT, conclusions and BAT reference documents, or BREFs 81 ) were included in the DNSH criteria unless more specific requirements were deemed necessary to avoid significant harm. This is also to ensure the applicability and environmental integrity of the EU Taxonomy globally. While some DNSH risks may be effectively mitigated by EU legislation, this is not the case globally, hence “repeating” EU requirements in the form of DNSH criteria in the EU Taxonomy ensures global applicability and a global level playing field.

6.3.1. Assessment of the DNSH to climate change mitigation criteria against the requirements of the Taxonomy Regulation

The DNSH criteria are assessed for their compliance with the parameters for defining significant harm to climate change mitigation as set out in Article 17(a) of the Taxonomy Regulation, and the requirements for technical screening criteria as set out in Article 19. The DNSH to mitigation is considered on the basis of whether the activity leads to significant GHG emissions at activity level, taking into account also the life-cycle aspects.

The criteria for DNSH to mitigation were developed by the TEG for the economic activities that would be included in the adaptation part of the EU Taxonomy. For ensuring the objective, it should be noted that even though the sustainable contribution to adaptation can be defined through specific measures that are taken, the DNSH to mitigation should apply to the whole activity, not to the specific measure.

The potential of leading to high GHG emissions and thus significantly harming the climate change mitigation objective has been considered for each economic activity. For activities which present such potential, the DNSH to mitigation criteria are developed. For activities which present low risk of high GHG emissions, no criteria should be proposed.

Policy Coherence

 Wherever possible and appropriate, these DNSH to mitigation criteria cross-reference compliance with minimum requirements set out in EU law, for example for the requirement to comply with RED II. Where EU legislation does not prescribe specific minimum performance related to the environmental ambition, the quantitative metrics in the legislation could be used (e.g. EU ETS installations data, transport metrics).

Ensuring environmental integrity

For DNSH to mitigation to ensure environmental integrity, it is important to ensure that the criteria reduce the risk of maladaptation (i.e. adaptation that induces net harm), even when direct benefits of adaptation are significant. These include, for example, energy-intensive solutions (e.g. cooling systems that reduce heat stress but greatly increase greenhouse gas emissions), or measures that improve the resilience of carbon intensive assets and that, as a consequence, prolong artificially their lifetime. This is notably the case of high-GHG emission activities, where a market average performance in a sector could be considered as a possible delimiter for what activities are leading to significant emissions (e.g. energy production, transport).

In developing the criteria, both the environmental impact of the activity itself and the environmental impact of the products and services provided by that activity throughout their life cycle have been taken into account to the extent feasible.

Fair treatment of sectors, avoiding distortion and setting right incentives

The DNSH criteria for mitigation reflect the balance set for substantial contribution to mitigation, and as such are calibrated in a way that would not cause market distortion, inconsistent incentives or induce stranded assets. The criteria should provide a clear indication to activities that are in high-emitting sectors and that contribute substantially to climate change adaptation that, without a reasonable level of performance in terms of GHG emissions, an activity cannot be considered sustainable under the EU Taxonomy. As indicated in the section regarding substantial contribution to mitigation, the criteria rather improve transparency and long-term signalling to the markets, thereby supporting an orderly transition.

Usability of the criteria.

The DNSH to mitigation criteria use when possible the same metrics as substantial contribution to mitigation. In sectors where there is limited potential for high emissions, no criteria are set, thereby facilitating the use of the EU Taxonomy. The criteria can be both quantitative (e.g. GHG emissions) and qualitative (e.g. having a methane leakage monitoring plan). As such, these are largely based on practices that are already in use, complemented with essential elements that avoid significant GHG emissions.

6.3.2. Assessment of the DNSH criteria against the requirements of the Taxonomy Regulation for climate change adaptation

The criteria for DNSH to adaptation is based on the TEG’s technical input with some deviations to respect the proportionality principle:

-The TEG has mimicked the DNSH to adaptation after the substantial contribution to adaptation. In the Commission’s assessment, this could limit the scope of desirable investments for mitigation substantially, namely the priority given to green solutions, consistency checks with other plans or monitoring requirements, and the requirement to implement adaptation solutions at the start of operations for new activities, or within five years. It means the criteria proposed for this delegated act would be more proportionate with a lower ambition for DNSH than for substantial contribution.

-The TEG has treated the activities aiming at upgrading existing assets (plant upgraded with more electricity efficient machinery) on the same footing as greenfield activities (construction of a new plant using electricity efficient machinery). This could imply that activities that could be more cost efficient at reaching an environmental target (upgrading of a plant) are treated the same way as more costly activities reaching the same goal (construction of a new plant). This may reduce the attractiveness of good investments into cutting emissions of existing operations according to the EU Taxonomy.

-Similarly to the substantial contribution to adaptation, the ‘subjective’ elements in the DNSH to adaptation criteria were perceived to risk creating adverse incentives (reduction of material risks on ‘best efforts’ basis) and are removed compared to the TEG report. They are replaced by a more objective reference methodology (IPCC compliant).

So far, economic operators have mostly relied on community-based adaptation, i.e. adaptation measures were ensured through public intervention (e.g. flood fencing, anti-fire protection). This new DNSH approach also reflects the idea that adaptation is everyone’s responsibility and that all levels of governance should climate-proof their decisions and operations, down to the private individual or economic operator. For this to happen, activities and investment decisions need to be taken based on a clear ex-ante allocation of financial risk resulting from climate change, which helps remove climate-risk awareness issues at all levels, potential split incentives, moral hazard or charity hazard barriers to adaptation; and facilitates easily accessible, decision-useful, customized, and if possible costed climate risk information.

The DNSH to adaptation is based on whether the activity is climate-proof, i.e. any existing and future impacts that are material to the activity are identified and solutions are found to minimize or avoid possible losses or impacts on business continuity. Just as for substantial contribution, it is proposed to include in the delegated act a process-based criterion for DNSH to adaptation that is the same across most economic activities. This process-based criterion is proposed for all activities following the approach that climate change will affect the whole economy.

For new activities, the following is required:

The physical climate risks that are material to the activity have been identified from those listed in the table below by performing a robust climate risk and vulnerability assessment. The assessment is proportionate to the scale of the activity and its expected lifespan, such that:

a)for investments into activities with an expected lifespan of less than 10 years, the assessment is performed, at least by using downscaling of climate projections;

b)for all other activities, the assessment is performed using high resolution, state-of-the-art climate projections across a range of future scenarios consistent with the expected lifetime of the activity, including, at least, 10 to 30 years climate projections scenarios for major investments.

The economic operator has developed a plan to implement adaptation solutions to reduce material physical climate risks to the activity. These adaptation solutions do not adversely affect the adaptation efforts or the level of resilience to physical climate risks of other people, of nature, of assets and of other economic activities and are consistent with local, sectoral, regional or national adaptation efforts.

For activities upgrading or altering existing assets or processes, the following is required:

The physical climate risks that are material to the activity have been identified from those listed in the table below by performing a robust climate risk and vulnerability assessment. The assessment is proportionate to the scale of the activity and its expected lifespan, such that:

a)for investments into activities with an expected lifespan of less than 10 years, the assessment is performed, at least by using downscaling of climate projections;

b)for all other activities, the assessment is performed using high resolution, state-of-the-art climate projections across a range of future scenarios consistent with the expected lifetime of the activity, including, at least, 10 to 30 years climate projections scenarios for major investments.

Physical climate risks assessments and progress on implementing the plan developed to implement adaptation solutions to reduce material physical risks are disclosed in the non-financial statements in accordance with Directive 2013/34/EU of the European Parliament and of the Council.

The economic operator has developed a plan to implement adaptation solutions to reduce material physical climate risks to the activity. The adaptation solutions identified need to be implemented within 5 years from the start of the activity. These adaptation solutions do not adversely affect the adaptation efforts or the level of resilience to physical climate risks of other people, of nature, of assets and of other economic activities and are consistent with local, sectoral, regional or national adaptation efforts.

Box 7: Example of different DNSH to adaptation criteria based on the nature of activity.

While both the criteria for substantial contribution to adaptation and for do not significant harm to adaptation are rooted in climate risks assessments, at the heart of any adaptation action, the ambition is higher under substantial contribution. The criteria for substantial contribution to adaptation require that the economic activity has already implemented physical and non-physical adaptation solutions that reduce the most important physical climate risks that are material to that activity.

On the other hand, the DNSH criteria for adaptation only require a climate risk assessment and a plan to implement adaptations solutions (with a requirement for implementation within 5 years in the case of activities upgrading or altering existing assets or processes). In the case of a new activity, it is expected that the conduct of a risk assessment and design of a plan to implement adaptation solutions should create internal incentives strong enough for economic operators not to create stranded assets and implement solution without the need for the criteria to mandate it.

Moreover, the criteria for substantial contribution include a number of additional requirements compared to the DNSH criteria: (a) preference is given to green solutions; (b) monitoring and remedial action, (c) physical adaptation solutions comply with DNSH technical screening criteria for those activities if established. These requirements are not part of the criteria for DNSH to adaptation, which are instead based on current legislative approaches (RescEU, Climate Law) and practices (climate proofing for 2014-2020 major projects under the cohesion policy) on climate change adaptation.

In light of the above, the DNSH criteria are assessed for their compliance with the parameters for defining significant harm to climate change adaptation as set out in Article 17(b) of the Taxonomy Regulation, and the requirements for technical screening criteria as set out in Article 19.

Policy Coherence

The criteria that are proposed for the DNSH to adaptation are grounded in risk assessment approaches. In general, the “risk-based” approach that is proposed as an underlying rationale for the criteria follows closely the rationale of intervention by Union and Member States as set by the Paris Agreement (Article 7 of the Paris Agreement) and relevant pieces of EU legislation (see Table 4). In line with the provisions of the Paris Agreement, EU Taxonomy criteria are set to incentivise actions by various sectors to enhance their adaptive capacity, strengthen resilience and reduce vulnerability to climate change, as well as maximise the co-benefits with other environmental policies and legislation.

Environmental integrity

To ensure environmental integrity of the DNSH for adaptation criteria, it is important to ensure that business decision regarding specific economic activities are made in light of the possible future changes to the climate and environment in which they are taking place, and that adaptation strategies are put in place. This will prevent placing further stress on the environment and potential financial losses due to material losses to the activity. As such, economic activities relying on extensive water usage are discouraged without proper planning of adaptation solutions, in areas projected to become arid or drought, even when direct benefits of mitigation are significant. These include, for example, water-intensive solutions (e.g. hydropower or energy crops).

Fair treatment of sectors, avoiding distortion and setting right incentives

The DNSH criteria to climate change adaptation are applied across the board to all included sectors and activities in a way that should not lead to any market distortion, inconsistent incentives or induce stranded assets. The criteria are designed in a way that reduces information asymmetries and prevents economic losses due to climate change. The criteria reflects the fact that activities that are contributing substantially to climate mitigation cannot do so without a reasonable level of climate risk assessment and preparedness to be considered sustainable under the EU Taxonomy. With the use of the EU Taxonomy being voluntary, these criteria only constitute an additional tool for companies to consider when making investments, which ultimately depends on the decisions of companies and investors. The criteria rather improve transparency and long-term signalling to the markets, thereby supporting an orderly adjustment to pervasive climate impacts. Nevertheless, the DNSH to adaptation criteria that the TEG proposed were perceived rather strict by the market. Therefore, the level of ambition between DNSH to adaptation criteria and substantial contribution to adaptation criteria were adjusted to support the integrity of the EU Taxonomy better (that DNSH should only prevent significant harm). 82

Usability of the criteria

Since the criteria for DNSH is mimicking to some extend the criteria for substantial contribution for climate change adaptation and revolves around the performance of climate risk assessments, remarks on the usability of the criteria made in Section 6.2 remain valid. An increasing number of companies have their own risk analysis teams, include a risk register, and/or have corporate teams that look at due diligence and safeguards, or environment. Of particular importance for usability is the growing pool of available tools through online climate service platforms using open data or databases with loss data to identify potential hotspots. Increasing literature related to adaptation modelling and approaches and further work by the Commission and the Platform on Sustainable Finance are also elements that will help companies understand and acknowledge increased climate change risks and their evolution over time, and take appropriate adaptation action.

6.3.3. Assessment of the DNSH criteria against the requirements of the Taxonomy Regulation for objectives 3 to 6

The proposed approaches to set the DNSH criteria for the delegated act have been assessed against the broad definition of significant harm to objectives 3 to 6 as set out in Article 17(c)-(f) of the Taxonomy Regulation, and for their compliance with the requirements for technical screening criteria as set out in Article 19. In particular, it has been assessed which approaches would meet the requirements set out in the Taxonomy Regulation to the best degree possible, taking into account stakeholders’ feedback. This section summarises this assessment, which is contained in its detailed form, including examples of proposed approaches and criteria, in Annex 7 for each of the four environmental objectives 3 to 6 83 .

For DNSH to water and marine and biodiversity and ecosystems, it is proposed to include in the delegated act process-based criteria for DNSH that are the same across most economic activities covered in the delegated act. These process-based criteria are proposed for all activities that can pose a risk to the water and biodiversity objectives, which is the large majority of activities 84 .

In deviation from this generic criterion, specific criteria have been identified for selected activities that pose specific risks to the water and biodiversity objectives, as detailed in Annex 7.3. Some of them are also justified in light of recent policy initiatives, such as the 2030 Biodiversity Strategy.

For DNSH to circular economy and pollution prevention and control, the criteria proposed differ across macro-sectors and activities, given that the potential sources of harm to these two objectives differ considerably depending on the activity at hand.

For DNSH to the circular economy, in most cases, the proposed criteria are qualitative, including process-based and practice-based requirements tailored to individual economic activities, such as the existence of waste management plans. Indeed, quantitative thresholds are rarely available or applicable for DNSH to the circular economy, since the circular economy is multi-dimensional and metrics and indicators to measure circularity are still under development. Pollution DNSH criteria are a mix of quantitative minimum performance criteria and qualitative criteria and in most cases rely on references to requirements within existing EU law. Such an approach is adequate for addressing potential ‘significant harm’ from pollution, given that the EU has a comprehensive body of law regulating emissions from industrial and other sources, and the use of chemicals and of hazardous substances, as well as setting objectives to ensure good water and air quality.

Policy coherence

As a general rule and as explained earlier, the level of ambition of DNSH criteria reflect existing EU law in the relevant areas. However, in many instances EU law imposes requirements on Member States which, for Taxonomy purposes had to be translated into requirements that are similar in spirit but applicable to economic operators.

The proposed generic DNSH criterion to water refers to the need to identify and address risks at the appropriate level and to do a water footprint assessment in accordance with a water use and protection management plan, developed in consultation with relevant stakeholders. Such plans are required by the Water Framework Directive in the EU, hence the approach here is fully coherent with EU law. Similarly for the generic DNSH to biodiversity, which require undertaking environmental assessments in line with EU law (notably the EIA and SEA Directives as well as the Habitats Directive).

For those activities where relevant requirements, metrics or thresholds are available, DNSH criteria to circular economy mirror such requirements. Examples include references to requirements from the end-of-life vehicles Directive 85 for many of the transport activities; a requirement for buildings and construction activities to ensure 70% of construction and demolition waste is prepared for reuse or sent for recycling or other material recovery, in line with the national level target for construction and demolition of waste and with the Waste Framework Directive.

The pollution DNSH criteria proposed for the delegated act are by design coherent and consistent with EU legislation and objectives, given the extensive body of EU law regulating pollution of different type and from different sources. For example, many of the criteria refer to BAT conclusions adopted under the Industrial Emissions Directive. It should be noted that, with the European Green Deal having announced a “zero-pollution ambition for a toxic-free environment”, pollution DNSH criteria may well need to be reviewed in a few years’ time in line with policy developments to ensure their continued coherence with EU objectives.

Ensuring environmental integrity

The proposed generic criteria reflect the fact that risks from economic activities to the water and biodiversity objectives are in many cases highly context dependent, and in particular location-specific. For example:

·Whether high water consumption of a given economic activity poses a risk to the water objective depends on whether the activity takes place in a water-scarce area or not; or

·Whether a certain project harms biodiversity depends on whether the area concerned is an important habitat for species in the first place.

At the same time, additional requirements are proposed for certain activities that are considered particularly risky, as explained above and in more detail in Annex 7. This approach of working mainly with generic process-based criteria complemented by more specific requirements for certain activities is considered a viable way forward to ensure environmental integrity and provides the appropriate safeguards to avoid significant harm to water and marine resources or biodiversity and ecosystems. It is also important to mention in this context that, for many activities, the DNSH criteria to different objectives complement each other. For example, for manufacturing activities, specific DNSH criteria to address harm from pollution, including to water bodies, would be included under that objective in the form of requirements in line with the best available techniques (BAT) conclusions. In other words, the DNSH criteria across objectives are to be seen as a set and as such ensure environmental integrity.

DNSH criteria cannot always be matched directly to requirements from EU law, as these may not (yet) exist in at detailed sectoral level. This is the case for some of the criteria for DNSH to circular economy to nevertheless ensure the environmental ambition and integrity of the Taxonomy. Concretely, some criteria are proposed to avoid lock-in to a linear model, which may compromise the future shift to circularity for a given activity.

Concerning DNSH criteria to avoid pollution risk, referring to EU requirements in most cases is considered an approach that ensures environmental ambition and integrity, given, for example, the evidence-driven process 86 of preparing best available technique references documents and conclusions under the Industrial Emissions Directive.

More details in the form of examples are found in Annex 7. As a concluding remark on environmental integrity, in a few cases where EU legislation foresees a range of performance criteria, DNSH criteria tend towards the more ambitious end of that range (for example for waste collection, requiring trucks used to meet Euro V standard, which is not overly ambitious in the sense that any new vehicle meets this standard and air pollution from transport in urban areas is a very significant issue). Where BAT conclusions apply, the DNSH criteria require only being within the BAT – Associated Emissions Level (BAT-AEL) ranges, which is considered the right level of ambition for DNSH and best reflects market practice.

Fair treatment of sectors, avoiding distortion and setting right incentives

For most activities, the generic process-based DNSH criteria are proposed to avoid significant harm to the pollution and biodiversity objectives, apart from some activities with no expected significant risks, for example some of the waste management or treatment activities, and, in the case of biodiversity, most activities relating to the operation of transport. This ensures that sectors are treated fairly according to their potential negative impact on these objectives and not to overburden those sectors that are not expected to give rise to significant harm. At the same time, the assessments required by the generic process-based DNSH criteria will be lighter or more straightforward where there is not much to assess, e.g. in case of an activity or a given operating site that is located in a water-abundant area. Likewise, not all economic activities / projects require a full environmental impact assessment in line with EU rules set out in the EIA Directive.

The criteria for DNSH to circular economy are tailored to the specific sectors in order to address the relevant environmental pressures and existing risks. They also avoid undue burden on sectors that do not pose a risk of significant harm to the circular economy (for example, many of the activities under the water, waste and sewerage macro-sector actually directly benefit the circular economy; or forestry activities, which were not considered to lead to significant inefficiencies or increases in waste). This ensures that sectors are treated fairly according to their potential negative impact on the circular economy objective. This implied some deviations from the TEG report, where some of the criteria were deemed not targeted at avoiding significant harm, and hence dropped, as explained thoroughly in Annex 7.

Likewise, the proposed pollution DNSH criteria are tailored to the specific sectors in order to address the relevant sources and types of pollution. Across the manufacturing macro-sector, all activities have pollution DNSH criteria. Likewise, across the energy macro-sector all activities involving combustion processes have pollution DNSH criteria defined. On the other hand, electricity and heat production from renewable energy sources not involving combustion do not, in most cases, pose a risk of significant harm, and hence no pollution DNSH criteria are proposed.

Usability of the criteria

The proposed generic criteria to water and biodiversity ensure usability for non-financial companies in the sense that they allow to take context-specific risks into account. However, this comes with a trade-off as, at the same time, this makes their verification more challenging for financial market participants.

However, and also based on above considerations on the often very location-specific nature of risks to the water and biodiversity objectives, the choice of largely process-based criteria is considered the preferred way forward, also in view of balancing environmental integrity and usability concerns.

To ease international applicability, the generic criterion to biodiversity refers to international standards for environmental assessments (IFC standards) alongside the relevant EU Directives. In addition, wherever available, references to existing EU guidance documents that ease the practical implementation of the criteria are added 87 . Regarding the DNSH to water, it requires assessing the water footprint but leaves it to the economic operators to choose a method that fits their sectoral or otherwise context-specific needs.

For many activities, there are no criteria for DNSH to circular economy, which obviously facilitate usability by both economic operators and investors. For both pollution and circular economy DNSH criteria, referring to EU legal requirements implies they are easy to use by economic operators undertaking activities in the EU, both in terms of compliance and in terms of providing the information to investors. Usability may be somewhat lower for activities taking place outside of the EU, yet compliance with such requirements is considered necessary to avoid significant harm, as local legislation may not be sufficient. However, BREFs are also a reference point globally, notably when non-EU countries set general requirements for attributing a permit, so with reference of the criteria to BREFs, usability outside the EU should also be ensured. However, when BAT conclusions or BREFs are not referenced, the criteria describe the legal requirements in a way that is concrete and specific enough to allow activities outside the EU to show compliance with the criteria.

7. How the Taxonomy will be used, monitored and evaluated

The initial impact assessment that accompanied the Taxonomy Regulation proposal 88 foresees to monitor success against the objective of “providing clarity at EU level on what are sustainable economic activities”. In line with the Commission’s Better Regulation agenda and the Inter-institutional Agreement on Better Law-Making 89 , the Commission will monitor indicators relevant for the calibration and use of this delegated act as part of monitoring and evaluation activities for the broader Taxonomy Regulation. While this text focuses on climate change mitigation and adaptation, the monitoring approach and indicators presented in this section would also be relevant for future and updated delegated acts under the EU Taxonomy.

The text of the Taxonomy Regulation envisions a report on its application by 2 years after entry into force 90 , and subsequently every three years thereafter. The report will notably assess:

·The progress on the implementation of the Taxonomy Regulation with regard to the development of technical screening criteria for environmentally sustainable economic activities;

·Access by investors to reliable, timely and verifiable Taxonomy-related information, taking into account related administrative burden 91 ; and,

·The effectiveness of the EU Taxonomy in channelling private investments into sustainable activities.

7.1 Monitoring and review of the technical screening criteria

Monitoring for the delegated act will be done in close cooperation with the Platform on Sustainable Finance, which was introduced in Section 1.2. Monitoring falls explicitly under its tasks as established by Article 20 of the Taxonomy Regulation. The main tasks related to the Platform’s monitoring function are the following:

I)Advise the Commission on the technical screening criteria referred to in Article 19 of the Taxonomy Regulation, and the possible need to update those criteria;

II)Analyse the impact of the technical screening criteria in terms of potential costs and benefits of their application;

III)Advise the Commission on the usability of the technical screening criteria, taking into account the need to avoid undue administrative burdens;

IV)Assist the Commission in analysing requests from stakeholders to develop or revise technical screening criteria for a given economic activity;

V)Monitor and report regularly to the Commission on EU and Member State level trends regarding capital flows towards sustainable investment; and

VI)Advise the Commission on the possible need to amend the Taxonomy Regulation.

Further, the Platform will monitor the usability of the technical screening criteria and the data availability and quality, and advise on the possible measures to improve it, building on a range of stakeholder engagement activities. To define the mandate of the Platform, the Commission prepared relevant scoping papers that among others specify how the Platform would deliver on its monitoring role. The monitoring activities done by the Platform on Sustainable Finance will hence be a key input for the monitoring and future reviews of this policy.

Given the dynamic nature of the EU Taxonomy, regular monitoring and evaluation is also needed to update technical screening criteria in line with market developments 92 . The updates are foreseen to be carried out approximately every three years for transitional activities and every five years for other activities, balancing the need to reflect the contribution of the latest market-ready technologies and the cost of adapting relevant systems to the changes in the criteria (see also Section 1.3). In this regard, the Platform on Sustainable Finance will feed into this work, which will reflect available evidence and stakeholder input 93 . To this end, the Platform will set up a process under which stakeholders will be able to flag which economic activities should be added to the EU Taxonomy. The Platform will carefully assess stakeholders’ requests in view of recommending technical screening criteria for that activity to the Commission.

In the case of tightening the criteria for certain economic activities, it is possible that some activities that had previously been considered Taxonomy-aligned may not qualify anymore. However, when tightening the technical screening criteria, the Platform and the Commission will be required by the Taxonomy Regulation to take into account the potential market impact, including the risk of certain assets becoming stranded as a result of the transition, as well as the risk of creating inconsistent incentives for sustainable investing. To identify potential unintended consequences and impacts of the EU Taxonomy and make its calibration faster to respond in a timely manner to potential distortions, the Commission services will reflect together with the Platform on Sustainable Finance on the collection of further data to support monitoring, such as introducing the possibility for stakeholders to suggest other changes supported by evidence for the Platform’s consideration. The Platform’s role in advising the Commission on Taxonomy criteria and on the potential review of the Taxonomy Regulation will ensure that the framework is flexible enough to respond to potential risks and distortions in a timely manner and adequately consider stakeholder feedback.

Beyond the timely delivery of the delegated act, the Platform on Sustainable Finance and the Commission would monitor carefully that the calibration of the list of activities and technical screening criteria continues to correspond to the requirements set out in Section 4, with a view to identifying possible needs to update this calibration. The Platform and Commission would also monitor the expected results from the perspective of investors and businesses – i.e. whether the information provided by the EU Taxonomy is useful and sufficiently clear. The table below summarises the success indicators against which the delegated act could be monitored and what the expected data sources would be.

Table 4: Measuring success of the EU Taxonomy for climate change mitigation and adaptation as established by the delegated act

Companies from different sectors expressed concerns whether or not they will meet the criteria set out in this DA. Commission services have reflected on the inclusion of sectoral indicators in the table above, but concluded that indicators based on sectoral or activity alignment share would ultimately measure the approximate readiness of different sectors for climate neutrality, treating the EU Taxonomy as a roadmap, rather than considering whether the EU Taxonomy has been well calibrated with regards to the level-playing field. Such information may nevertheless be collected as a contextual indicator. Ongoing close cooperation with the Platform as well as Member States Expert Group on Sustainable Finance and other stakeholders is expected to help detect potential further unintended consequences, shall they arise.

7.2 Uses of the EU Taxonomy, indicative impacts and broader monitoring and evaluation provisions

Although outside the scope of the assessment of the delegated act, this section summarises some indicative impacts that may arise from the broader Taxonomy Regulation and various potential uses of the EU Taxonomy which are illustrated in more detail in Annex 8. These uses are not prescribed by the delegated act. Rather, some specific uses and applications of the EU Taxonomy are required by the Taxonomy Regulation and other upcoming EU initiatives, for some undertakings and financial products 97 . Potential impacts of these requirements to use the EU Taxonomy have either been looked at in the impact assessment accompanying the Commission proposal for the Taxonomy Regulation, or are set to be examined in separate impact assessments accompanying the other initiatives. In addition, various voluntary uses are expected.

The EU Taxonomy is not a mandatory list to invest in. Actors in the market remain free to decide whether to align their activities, issuances, financial products, and investments to the EU Taxonomy, and the degree to which to do so. Some undertakings or financial intermediaries can choose to strive for high alignment of their activities and financial products, while others may report low levels of alignment. Some sectors covered by the EU Taxonomy may see more market pressure towards upward-alignment, some less. There may also be regional variation in levels of uptake per sector across Member States, depending on local conditions, environmental priorities among companies and investors and the like. We have yet to see to what degree investors and businesses will choose to use the EU Taxonomy in their business and investment decisions. The results from the consultation on the Renewed Sustainable Finance Strategy indicate that a high degree of use can be expected at least among economic operators that consider themselves sustainable 98 . Among these companies, two thirds indicated a high or very high likelihood of using the EU Taxonomy in business decisions. Among investors, approximately three fourths said that they are likely or very likely to use the EU Taxonomy in their investment decisions. See Annex 2 for more detail.

The delegated act establishes a classification system and sets out criteria for assessing companies’ environmental performance. Financial market participants are expected to use this tool in their investment decisions at their discretion. Use of this tool can help stimulate both supply and demand in the market for green finance. The precise degree to which the EU Taxonomy will be used in investment and business decisions and what impacts will arise for economic activities across sectors and environmental outcomes cannot be credibly determined at this stage. This section offers a brief illustration of potential coverage and impacts of the EU Taxonomy, including an indicative estimation of an approximate magnitude of administrative costs under the NFRD scope. It concludes with potential indicators that could be monitored to assess the uptake and impacts of the EU Taxonomy.

Illustrations of potential coverage

There is so far a limited number of studies available that assess potential EU Taxonomy coverage of the current investment landscape by looking at a sample of companies or green financial products/portfolios 99 .

A brief overview of such studies that were made available to the Commission services is in the table below 100 , with more detailed descriptions in Annex 8. An important distinction between these studies is the level of assessment with regards to the EU Taxonomy – some studies assess potential EU Taxonomy alignment (i.e. what share of activities would likely meet the technical screening criteria), while other limit the assessment to Taxonomy eligibility (i.e. mapping what companies operate in some of the NACE activities from the TEG report 101 ).

Results diverge, but generally suggest relatively low levels of alignment at present across the chosen samples 102 . Considering the Nordea and adelphi studies as the most comparable in their scope to EU capital markets, it is realistic to expect that the percentage of Taxonomy-aligned activities would likely be in lower single digit numbers (probably below 5%) for companies in the EU. Notably, the study by adelphi 103 , which looked at potential Taxonomy alignment in the revenues of 75 European companies listed on three main European indices (EURO STOXX 50, DAX 30 and CAC 40), found levels of alignment between 1% and 2% of total revenue across the indices. Meanwhile, a study by Nordea, which looked at Nordic equity markets, found ~6.5% of potentially Taxonomy-aligned revenues in their sample, using a more limited estimation of DNSH criteria. It is worth noting that the potential alignment seems to be influenced more than expected by the application of DNSH criteria. While approximately 3-5% of revenues were Taxonomy-relevant and compliant with substantial contribution criteria, less than half of this was estimated to comply with DNSH-criteria. There is however a notable degree of uncertainty around these results, as availability of data for assessing the EU Taxonomy alignment is still limited at this stage.

Only few sector-specific conclusions can be drawn from these studies. The study by Nordea (2020) highlights that, for some sectors, almost a third of companies could be potentially Taxonomy-aligned – this concerns notably energy and real estate/construction sectors. For some others, a decent share of 10% or slightly higher can be expected based on the results (e.g. forestry, materials, foods & beverages and capital goods). For other sectors, alignment would likely be lower 104 . Results from other studies are not directly comparable with this, although they generally point at a large role that manufacturing 105 /industrial companies and construction/real estate are likely to play in Taxonomy-focused investment portfolios. Overall, while current levels of alignment are low and important data limitations need to be kept in mind, the results of these studies indicate that the sectoral differences may allow investors to construct a wide range of diversified Taxonomy-focused portfolios.

Table 5: High-level comparison of studies on Taxonomy alignment and eligibility

Meanwhile, a number of company-specific accounts of Taxonomy-readiness show that some individual undertakings may already be aligned to a large degree. These findings do not allow to have a definitive conclusion about current or likely future levels of alignment and do not allow to construct scenarios for potential uptake and aggregate impact.

Potential impacts, costs and benefits

The primary users of the criteria listed in this delegated act will be companies that carry out relevant economic activities in the sectors described in Annex 9. Their disclosures under Article 8 of the Taxonomy Regulation, to be specified further in the future delegated act required by this Article, will in turn help financial intermediaries design financial products supporting investments into these companies and activities. This will also facilitate their own disclosures regarding the Taxonomy alignment of their products under Article 5, 6 and 7 of the Taxonomy Regulation. Finally, this information on EU Taxonomy-alignment throughout the investment chain will benefit end-investors in the shape of accurate and consistent data on green investment opportunities.

Companies and financial market participants would bear administrative costs related to collecting and disclosing Taxonomy-relevant information.

For companies currently covered by the NFRD 111 , we provide an illustrative estimation of an approximate magnitude of aggregate Taxonomy-related administrative costs in the range of 280 – 875 million EUR for one-off costs and recurring costs in the range 140 – 350 million EUR per year. This estimate nevertheless comes with a certain degree of uncertainty and could be influenced by a number of factors. Costs are also likely to vary by company.

Due to the expected gradual changes in asset allocation, an effect of including an activity at a later stage, where this activity is seen as “green” by investors, would be marginal 112 . Moreover, a company that is currently (mostly) not Taxonomy-aligned could manage investors’ expectations by using the criteria as a framework to communicate their future ambitions.

In terms of benefits, the cost of organising information should however be outweighed by the prospect of better access to green capital, including in the post-Covid-19 green recovery context and amid changing investor sentiment. For financial intermediaries and investors, better information along the investment chain can be expected to have significant net benefits: less information assymetry and more transparency about available green investment opportunities, easier access to data which is more comparable, and a lower risk of greenwashing and fraud.

Indirect costs and benefits will depend on how the information is put to use by market participants. Expected costs and benefits are thus contingent on several of the factors outlined above (choices by market actors, sectoral and regional variations etc). Some of these can also only be more directly assessed as part of future initiatives that involve use of the EU Taxonomy.

Potential costs and benefits of the EU Taxonomy, including relevant administrative burdens, are discussed further in Annex 3. Given the proportionate nature of this impact assessment and its focus on the technical calibration of the EU Taxonomy rather than setting up disclosure-related provisions, this assessment is mostly qualitative.

Monitoring of uptake and impacts

The table below introduces possible broader monitoring provisions for the EU Taxonomy, which capture how investors use the EU Taxonomy. Impact can only be assessed ex-post with data of sufficient quality stretching across several years. This table thus only attempts to articulate how success could be measured. Moreover, as the monitoring of capital flows towards sustainable investment is one of the tasks of the Platform on Sustainable Finance, the table presents an indication of what success could look like without pre-empting further elaboration by the Platform, in particular with respect to any target values. It is important to note that where further policy initiatives mandate new uses of the EU Taxonomy, these initiatives will set up their own monitoring provisions that may also capture this element. As regards administrative costs, future reviews of the Taxonomy Regulation and work on the upcoming delegated acts will, as appropriate, look to update and verify some of the estimates referred to in this assessment, based on more empirical data, where available.

Table 6: Possible broader monitoring provisions for the EU Taxonomy

ANNEX 1: PROCEDURAL INFORMATION

1.1. Lead DG, Decide Planning/CWP references

This impact assessment report was prepared by the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA).

The DEcide Planning reference for the initiative ‘Commission delegated regulation on a climate change mitigation and adaptation Taxonomy’ is PLAN/2020/6950.

1.2. Organisation and timing

In the preparation of the impact assessment report, DG FISMA worked closely with the Directorate Generals for Climate Action (CLIMA), Environment (ENV), Energy (ENER), and the Joint Research Centre (JRC).

Three Inter-Service Steering Group (ISSG) meetings, consisting of representatives from various Directorates General of the Commission, were organised in 2020 and were held over WebEx. They were chaired by DG FISMA.

The first meeting took place on 24 March 2020 and was attended by the Directorate Generals for Agriculture (AGRI), Budget (BUDG), CLIMA, Communications Networks, Content and Technology (CONNECT), International Cooperation and Development (INTPA), Economic and Financial Affairs (ECFIN), Civil Protection and Humanitarian Aid Operations (ECHO), ENER, ENV, Internal Market, Industry, Entrepreneurship and SMEs (GROW), Justice and Consumers (JUST), Mobility and Transport (MOVE), Research and Innovation (RTD), Legal Services (SJ), Secretariat-General (SG) and the JRC.

The second meeting took place on 30 April 2020. Representatives from DG AGRI, BUDG, CLIMA, CONNECT, DEVCO, ECFIN, ECHO, ENER, ENV, GROW, JUST, MOVE, NEAR, RTD, SJ, SG and the JRC were present.

The third meeting was held on 11 June 2020. Representatives from DG AGRI, BUDG, CLIMA, CONNECT, DEVCO, ECFIN, ECHO, ENER, ENV, GROW, JUST, MOVE, NEAR, RTD, SJ, SG and the JRC participated in the meeting. This was the last meeting of the ISSG before the submission to the Regulatory Scrutiny Board (RSB).

DG FISMA updated the Impact Assessment by taking into account the comments made by other DGs. In particular, the following changes were made:

-Make the proportionate nature of the impact assessment more explicit, introduce a section on operational objectives of the delegated act, reinforce the section on indicative impacts and uses, and underline the dynamic nature of the Taxonomy in response to comments by SG.

-Adjusted wording in various sector-specific parts of the impact assessment report to address comments from DG MOVE and AGRI.

-Introduced a reference to the international context of the EU Taxonomy in response to comments by DG DEVCO.

1.3. Consultation of the RSB

An upstream meeting with the RSB took place on 18 March 2020 (16:15 – 17:45). The impact assessment report was submitted to the RSB on 23 June 2020. The Board provided a detailed quality checklist concerning the draft impact assessment report on 17 July 2020 and written answers were sent to the Board concerning their main questions on 20 July. A hearing with the Board took place on 22 July during which the Board’s key concerns as described below were discussed further. While the Board recognised that useful clarifications had been provided, the Board issued a negative opinion on the first draft of the impact assessment report on 24 July 2020.

The Board’s main concerns related to the following three points:

1.The report would not sufficiently justify the selection of activities to cover in this delegated act, especially for climate change adaptation.

2.The report would not sufficiently present the proposed screening criteria. It would not sufficiently outline the trade-offs and discuss the political choices, including when the criteria deviate from the advice from the Technical Expert Group (TEG).

3.The report would not address the administrative burdens companies will face, if choosing to apply the EU Taxonomy.

In response to the opinion of the Board and to address the Board’s concerns, the following improvements have been made:

·The logic for prioritising and including economic activities was made clearer for both climate change mitigation and climate change adaptation. The overall approach is explained in Chapter 5 and is detailed in Annex 4.1, Annex 4.2 and Annex 4.3. In each sector for mitigation and for adaptation, the report clarifies the results of this logic – which activities are included and which ones are not included. The adaptation part in particular has been enhanced and made more transparent including regarding the limitations of the selection of activities.

·The draft technical screening criteria were attached to the resubmitted impact assessment in order to make the assessment more tangible and understandable. Their assessment against the Taxonomy Regulation’s requirements has been strengthened. For the most sensitive criteria subject to a political decision, several possible options were presented and discussed (Chapter 6 and detailed annexes per sector). However, no preferred option was selected.

·The analytical basis for the assessment of the approaches has been substantiated (Chapter 5, detailed in Annex 4). Notably, the assessment grids for the different approaches for substantial contribution are based on a more in depth logic, based on a paper by the JRC 113 . The Board’s specific questions were addressed in the different sectors. The process to derive technical screening criteria based on the level of ambition has been explained more clearly in Section 5 and has been applied to climate change mitigation (Section 6.1 and Annex 5) climate change adaptation (Section 6.2 and Annex 6) and do not significant harm (Section 6.3 and Annex 7).

·The explanations of the deviations from the TEG’s recommendations were made clearer and discussion was added with regards to how they align to the Taxonomy Regulation’s requirements.

·Estimations of the coverage of the EU Taxonomy within the economy are presented in more detail in the impact assessment report. This is based on a comparison of relevant studies.

·An illustration of the expected magnitude of administrative costs for the users of the EU Taxonomy is added as usual Annex 3 (that was originally left out). In addition, the sector annexes explain where criteria draw from current market practices already, pointing out that no new costs are imposed on best performers in the market.

·In general, more pedagogical explanations and examples are included with regards to applying the criteria and the potential different uses of the EU Taxonomy.

·Other, smaller changes were made in order to address the more detailed comments of the Board.

The second version of the impact assessment was submitted on 9 September and the Board issued its second opinion on 2 October 2020.

The Board issued a positive opinion with reservations. It requested however, that:

·It should be made clearer in the report why certain sectors were not included and what potential risks might arise for those sectors that are not yet included in the EU Taxonomy;

·How such risks could be mitigated and how the evaluation and monitoring framework could be made stronger in order to account for these risks;

·The report should include the technical screening criteria for substantial contribution to climate adaptation and for enabling activities and make clear the difference between substantial contribution and do no significant harm.

In order to address the Board’s points, the draft impact assessment report was strengthened to explain the inclusion and prioritisation logic for the different sectors and activities in Section 5. The objectives against this requirement were assessed and refined in Section 4. The potential impacts of these exclusions were addressed more thoroughly in Sections 5 and 7. In addition, further clarifications were provided regarding the monitoring and evaluation framework. In particular, a mechanism was proposed that would allow the Platform on Sustainable Finance to accommodate stakeholder feedback on unintended impacts of the EU Taxonomy. With regard to the last reservation, a clarification was provided that this report assesses the technical screening criteria that have been published in the draft delegated act for stakeholder feedback in November 2020. For practical reasons, draft criteria that were originally attached to this impact assessment were replaced by a reference to the draft delegated act published in November 2020 on the Commission website.

1.4. Evidence, sources and quality

This impact assessment report is based primarily on the work of the Technical Expert Group on Sustainable Finance (TEG) that was established in July 2018 to assist the Commission with, among other things, the development of technical screening criteria for the EU Taxonomy. As described in its reports, the TEG’s work was based on available scientific literature, international practice or evidence obtained by the TEG – either through existing market-based Taxonomy frameworks 114 or via evidence provided by additional experts – and through multiple iterations of extensive stakeholder consultation. Both the process of working with additional experts and stakeholder consultations by the TEG are described in more detail inAnnex 2.

In addition, the report has been informed by feedback from stakeholders through a large number of bilateral meetings between Commission services and stakeholders, the feedback on the inception impact assessment and the exchange of views by Member States on the reports of the TEG in the context of the Member State Expert Group on Sustainable Finance 115 .

Finally, the impact assessment report has drawn on extensive in-house expertise from the JRC and other DGs.

ANNEX 2: STAKEHOLDER CONSULTATION

Stakeholder consultation activities that informed the development of a granular EU-wide Taxonomy were covered in the impact assessment accompanying sustainable finance proposals. Stakeholder views were also collected at every stage of the development of the delegated Act. Notably, during the preparatory stage when the input provide by the Technical Expert Group leveraged on a number of stakeholder consultation and outreach activities. This is why no additional stakeholder consultation was conducted during the impact assessment as such. Stakeholders, however, could still provide feedback on the inception impact assessment. The Member States Expert Group established under the Taxonomy Regulation gives additional possibility for Member States to provide feedback. The draft delegated act itself is subject to a four week feedback period.

Overview of consultation activities outlined in this annex:

·Technical expert group on sustainable finance (TEG) and Member States Expert Group (MSEG)

·TEG’s first call for feedback

·TEG workshops with additional experts

·First stakeholder dialogue on sustainable finance

·TEG’s second call for feedback

·Second stakeholder dialogue on sustainable finance

·Feedback by Member States on the final TEG report

·Stakeholder feedback on inception impact assessment

2.1. Technical Expert Group on Sustainable Finance (TEG) and Member States Expert Group (MSEG)

The European Commission set up a Technical Expert Group on Sustainable Finance (TEG) to assist it in developing the EU Taxonomy, in line with the Commission's legislative proposals of May 2018. The TEG commenced its work in July 2018. Its 35 members from civil society, academia, business and the finance sector, as well as additional members and observers from EU and international public bodies worked both through formal plenaries and subgroup meetings for each work stream. To allow it to conclude its technical work and retain the expertise before the future Platform on Sustainable Finance is set up, the mandate of the TEG has been extended until 30 September 2020. The Taxonomy subgroup actively coordinated its work with subgroups working on corporate disclosures, EU Green Bond Standard and EU Climate benchmarks through monthly plenary meetings to ensure greater policy alignment.

The Commission also established the Member States Expert Group on Sustainable Finance (MSEG) to actively involve Member States in the development of the EU Taxonomy. Each member state had one or two representatives in the group. During MSEG meetings, which were held each two or three months, the Commission updated Member States on the EU Taxonomy and other important policy developments in sustainable finance. The meetings also provided a crucial feedback loop between the TEG and Member States, as the rapporteurs of the Taxonomy subgroup and other TEG subgroups frequently joined these meetings to present the latest state of play and took questions and comments from Member States. Through the MSEG, Member States were also encouraged to comment on the final TEG report on Taxonomy. This is described in further detail below in part 2.7.

2.2. TEG’S first call for feedback

From December 2018 to February 2019, the Technical Expert Group held a first consultation for stakeholder feedback on its proposed EU Taxonomy. The consultation targeted a first set of climate change mitigation activities and the usability of the EU Taxonomy.

A total of 257 respondents provided their feedback on climate change mitigation. Among these, 30% were industry associations, 21% businesses, 15% investors, 10% public authorities or international organisation, 8% non-governmental organisations, 3% consultancies or law firms and 13% from other groups or unspecified. Almost all of the respondents (95%) were based in Europe.

The questionnaire included seven questions for each proposed climate change mitigation activity from five sectors ‘Agriculture, forestry and fishing’, ‘Manufacturing’, ‘Energy’, Transportation and storage’, ‘Construction and Real Estate’. The questions focused on the proposed mitigation principles, metrics and thresholds, areas of ‘do no significant harm’, potential negative consequences from activity screening criteria and the use of the Taxonomy outside of the EU. Across the five sectors, stakeholders commented that the principles of the EU Taxonomy should focus on climate neutrality rather than on the reduction of emissions, include clear activity boundaries and value chain considerations and emphasize technology neutrality. They further asked for a clearer explanation on the distinction between economic activities, assets and projects.

On thresholds, many stakeholders underlined the importance of alignment with existing sector policies in the EU (e.g. RED II for bioenergy and agriculture) and requested a better articulation of the environmental yardsticks used to determine the thresholds. In the energy sector, respondents typically noted that the proposed DNSH considerations for Hydro, Ocean Energy, and solar PVs were either ambiguous or insufficient and needed to be reviewed. In order to make the EU Taxonomy globally applicable, some respondents argued that it should be put in alignment with other existing policies and international initiatives. One argued that this would be necessary to ensure an effective international cooperation and fair competition, reducing the potential of carbon leakage through a level playing field.

On the questions concerning the usability of the EU Taxonomy, 205 respondents provided their input to the questionnaire, consisting of 34% industry associations, 32% businesses, 7% public authorities, 5% private individuals, 5% non-governmental organisations and academic institutions, 2% trade unions and 15% from other groups or unspecified. Similar to the geographic representation for the climate change mitigation questions, 94% of respondents were based in Europe, the majority of which came from Belgium (22%), France (16%), Germany (12%) and Spain (7%). The remaining 6% consisted of contributions made from Asia (Japan, Hong Kong) and Multinational Offices (EU, US, Asia).

In this part of the questionnaire, stakeholders answered six usability questions, the feedback on which can be divided into four areas. First, respondents gave their views on the design of the EU Taxonomy, which should, in their opinion, account for transitioning and enabling activities 116 , incorporate science-based criteria that are aligned with existing market-practices, and be globally applicable. Second, some stakeholders noted positive and negative economic implications that could arise from the use of the EU Taxonomy, such as long-term savings effects for investor due to lower search costs or sudden capital shifts resulting from investors rapidly withdrawing from non-Taxonomy-aligned activities. Third, stakeholders expressed concerns on the limited quality and availability of data for investors to fulfil their disclosure obligations. 117 Lastly, respondents highlighted several implementation challenges of the EU Taxonomy, such as aligning it with existing environmental classification systems (e.g. CEPA or CreMA) and investors’ IT systems, or managing the short-term costs related to the set-up of monitoring and reporting processes and training of staff.

2.3. TEG workshops with additional experts

On 26 and 27 March 2019, the TEG held workshops on the EU Taxonomy with the additional experts that were selected following the registration of interest that was held between December 2019 and January 2019. Experts were asked to participate in eight workshop sessions to provide technical input to the following activities:

·The development of new criteria for further economic activities that have the potential to make a substantial contribution to climate change mitigation objectives. These are called the 2nd round climate change mitigation activities.

·The development of new criteria for activities expected to make a substantial contribution to climate change adaptation objectives of the EU. These are called climate change adaptation activities.

·The development of new criteria to assess ‘do no significant harm’ across all environmental objectives (climate mitigation, climate adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, waste prevention and recycling, pollution prevention control, and protection of healthy ecosystems).

For the workshops on climate change mitigation, a total of 107 stakeholders were invited, 29% of which came from the Manufacturing sector, 23% from Transport, 21% from Electricity, gas, steam and heating supply, 12% from ICT, 8% from Agriculture and 7% from Water, sewerage, waste and remediation. Additionally, 42 experts were invited to provide feedback on climate change adaptation issues and 30 on DNSH criteria for all environmental objectives.

2.4. First stakeholder dialogue on sustainable finance

On 24 June 2019, the Commission organized a first stakeholder dialogue on sustainable finance to exchange views on the three preliminary TEG reports on the EU Taxonomy, the EU Green Bonds Standard and the interim report on climate benchmarks and benchmarks’ ESG disclosures, which were published on 18 June 2019.

During the Q&A session on the EU Taxonomy report, a number of industry stakeholders expressed concerns on the exclusion of nuclear and waste-to-energy activities from the EU Taxonomy, as well as questions on how to ensure that the EU Taxonomy works for SMEs and supports the transition from brown to green. Furthermore, participants requested more information on the usability of the EU Taxonomy including, what share of the market would qualify, whether it would raise transactions costs and how companies could be incentivised to disclose data on the EU Taxonomy.

In addition to the reports of the TEG, the Commission hosted a separate session to present the new guidelines for companies on how to report climate-related information that had been built on the TEG’s proposals from January 2019. Lastly, the event featured a session on the role of sustainable finance in the context of the EU transition towards a resilient and climate-neutral economy by 2050, after which the audience was invited to present their ideas on the future of sustainable finance.

2.5. TEG’s second call for feedback

From 3 July to 16 September 2019, the TEG invited stakeholders to provide feedback on its July 2019 report on the EU Taxonomy 118 in four areas: climate change mitigation, climate change adaptation, usability of the Taxonomy and future developments of the Taxonomy. Within these areas, stakeholders were able to give their feedback on the boundaries of economic activities, metrics and thresholds for substantial contribution criteria, do no significant harm criteria (DNSH), as well as on the international applicability of these criteria. The questions typically gave respondents the opportunity to show agreement with the proposed Taxonomy report or request an alternative. In case of the latter, participants were invited to elaborate their opinion in an open response. The feedback was considered alongside other evidence by the TEG in drafting the final TEG report on the EU Taxonomy 119 , which was published on 9 March 2020. TEG indicated changes made based on stakeholder feedback in the respective sectoral chapters of the report.

A total of 830 respondents answered (parts of) the questionnaire, consisting of 48% private individuals, 24% business (general) stakeholders 120 , 10% business (finance) representatives, 9% civil society organisations, 6% public authorities or international organisations and 1% research and academia or other stakeholders (figure 6). Among the 203 business (general) respondents, most operated in the electricity, gas, steam and air conditioning supply (102) and manufacturing (85) sectors. In terms of geographic representation, 88% of respondents came from the EU, most notably from Germany (25%), Belgium (14%), France (13%), Italy (8%) and Poland (5%). The UK was also among the top five respondents, representing 6% of the total sample.

Figure 6: Representation by type of stakeholder    

On climate change mitigation, stakeholders provided their feedback on the seven sectors covered by the EU Taxonomy 121 . The sectors that received most responses were electricity, gas, steam and air conditioning supply (2,511 closed and 1,727 open responses) and agriculture and forestry (1,042 closed and 788 open responses), followed by transport and manufacturing. Stakeholders most commonly suggested changes in economic activities and criteria in electricity, gas, steam and air conditioning supply and agriculture and forestry, while for water, waste and sewerage remediation and ICT, more than half of the respondents agreed with the TEG’s proposals. Across all sectors, the economic activities that received most comments were existing forest management, production of electricity from gas combustion and manufacturing of low carbon technologies.

The sector Agriculture and Forestry received almost equal attention from stakeholders representing civil society organisations, public authorities or international organisations and business (general) representatives (around 280 closed and 200 open responses each). Business (general) stakeholders were mainly active in “agriculture and forestry”, “electricity, gas, steam and air conditioning supply” and “manufacturing”. Public authorities and international organisations were more likely to agree with the TEG’s recommendations compared to other stakeholder groups. On questions related to “existing forestry management”, “afforestation” and “reforestation”, some participants asked for greater alignment of the EU Taxonomy with EU’s net zero emissions 2050 ambition, while others asked for greater alignment with existing legislation such as the Common Agriculture Policy. A few respondents further noted the narrow scope of the EU Taxonomy in its definition of sustainable forest management and in its focus on CO2 issues. Generally, respondents criticised the proposed thresholds, often considering them as too ambitious or not aligned with current policies or methodologies.

Questions on the Manufacturing sector were mostly answered by business (general) representatives (more than 50% of responses), notably those active in “manufacturing” and “electricity, gas, steam and air conditioning supply”, followed by an even split between public authorities or international organisations, civil society organisations and business (finance) stakeholders. “Manufacturing of low carbon technologies” and “Manufacture of hydrogen” were the two economic activities that received most comments. For these activities, many stakeholders requested a better integration of a value chain approach. When determining the substantial contribution to climate change mitigation, some business (general) respondents thought that total GHG emissions should be considered and be based on a Life Cycle Assessment approach. Furthermore, most of the stakeholders saw the thresholds as being too strict and proposed an alternative. For the objectives where DNSH criteria had been identified, the majority of stakeholders thought that the criteria should better consider economic feasibility and legal requirements, and incorporate the SDGs. Most respondents also commented that the benchmarks and thresholds of the EU Taxonomy could not be used on manufacturing sites and processes outside of the EU.

Electricity, gas, steam and air conditioning supply included the largest number of economic activities and received the highest number of responses among the sectors in the survey, mostly from business (general) stakeholders (57% of total responses) that are active in this respective sector. Responses were also collected from public authorities or international organisations, civil society organisations and business (finance) stakeholders, the latter being the most likely to agree with the TEG’s proposals than to request alternatives. Several points were made consistently across the 23 activities covered in the questionnaire, including that the EU Taxonomy was not sufficiently aligned with existing legislation, that it was missing technology neutrality across activities and that it did not include social infrastructure considerations. Many respondents criticised the proposed thresholds, often considering them as too ambitious. Furthermore, the life-cycle assessment criteria (ISO 14044) for LCE assessments were often regarded as not being specific enough. Finally, several respondents commented that they would like to see nuclear energy, natural gas and waste-to-energy activities included in the EU Taxonomy.

Feedback on Water, Waste and Sewerage remediation was provided mostly by business (general) stakeholders active in “electricity, gas, steam and air conditioning” sector (only 16% of respondents came from the “water, waste and sewerage remediation” sector), public authorities or international organisations and to a lesser extent from business (finance) stakeholders, civil society organisations, research and academia, and private individuals. For most of the economic activities in this sector, stakeholders had a tendency to support TEG recommendations rather than suggest changes. Among these actors, public authorities or international organisations demonstrated the highest rate of agreement with the TEG proposal. Comments often related to the limited scope of the EU Taxonomy regarding the exclusion of certain activities in anaerobic digestion of bio-waste and the eligibility of only some specific pipelines for the transport of CO2. Similar to the responses received in the “manufacturing” sector, stakeholders expressed concerns that the EU Taxonomy could not be applied outside of the EU as third countries may not be compliant with EU legislation.

The Transport sector followed the general trend that the majority of responses were received from business (general) stakeholders (more than 55%) active in “electricity, gas, steam and air conditioning” and to a lesser extent in “manufacturing” and “transport”. Public authorities or international organisations and business (finance) representatives also responded to the questions and proved more likely to agree with the TEG recommendations than to request alternatives. Business (general) and civil society stakeholders were more likely to propose changes. Echoing the feedback received in “electricity, gas, steam and air conditioning supply”, some stakeholders argued that the proposed EU Taxonomy lacked technology neutrality, that its scope should be broadened to cover life-cycle and Well-to-Wheel approaches, while others criticised the inclusion of biofuels and noted the difficulties of applying such an approach; still other stakeholders – in particular civil society organisations – asked for a stricter approach, such as only including vehicles and vessels with zero-emissions at tailpipe, or excluding any fossil-based fuel, and to consider wider impacts beyond CO2 emissions. Many respondents also noted that without EU legislation being enforced in third countries, the EU Taxonomy could not be applied outside of EU borders.

With 44 respondents, the Information and Communication Technologies (ICT) questions on data processing, hosting and related activities and on data-driven solutions for GHG emissions reductions received the lowest traction among stakeholders. Especially business (general) stakeholders active in “electricity, gas, steam and air conditioning” and in the “ICT” sectors provided their feedback. Business (finance) representatives and private individuals had a tendency to agree with the proposed criteria, while business (general) and civil society were more likely to propose changes. The feedback received related mostly to extending the boundaries of the activity (to include edge computing and data centre power distribution equipment), modifications for DNSH criteria and clarity around standards and codes of conduct used by the sector.

The last sector covered in the climate change mitigation questionnaire was Buildings. It mainly attracted responses from business (finance) and business (general) stakeholders (76% of total responses), among which 33% operated in “electricity, gas, steam and air conditioning supply”, 22% in “manufacturing” and only 17% in “construction” or “real estate activities”. Business (general), business (finance) and civil society stakeholders were more likely to propose changes, while researchers, public authorities and individuals were mostly supportive. In their comments, stakeholders requested that on top of energy efficiency considerations, the EU Taxonomy should pay additional focus on GHG emissions in its boundaries and metrics. Moreover, several responses underlined that ex-ante predictions on buildings’ final energy demand are never accurate enough, suggesting to lay the focus on ex-post analyses and monitoring instead. Lastly, many stakeholders commented on the alignment of the proposed criteria with market standards in the building sector (e.g., BREEAM and LEED) and debated the use and harmonisation of the tools proposed by the EU legislation – Energy Performance Certificates (EPCs) and Nearly Zero-Energy Buildings (NZEB) - stressing the differences across EU Member States and the limited use outside of the EU.

The second part of the questionnaire on climate change adaptation received less attention 122 from respondents (with a total of 145 responses) than questions on climate change mitigation. The number of responses was almost even among business (finance) representatives, business (general) stakeholders, public authorities and private individuals, with the last two groups of stakeholders being the most likely to request alternatives than to agree with the TEG’s proposals. The section included five questions ranging from the applicability of qualitative criteria on climate change adaptation to areas of potential harm that should be considered in the DNSH criteria. In their comments, most stakeholders noted that the qualitative criteria of the EU Taxonomy should be applied equally across all sectors. To further improve their usability, stakeholders also recommended to develop illustrative templates for all sectors and to take regional/local specificities and limited access to and availability of data into consideration. Lastly, respondents listed several activities related to climate change adaptation, for which DNSH criteria should be developed, i.e. soil and farmland, consumption, biodiversity, education index, human health and energy poverty.

A total of 577 stakeholders shared their opinions on the future developments of the EU Taxonomy. Stakeholders expressed diverging views on what economic activities should be included in the next Taxonomy and what should be excluded from considerations, although there were typically more stakeholders requesting inclusion than stakeholders requesting exclusion. A large number of responses, notably from private individuals, requested inclusion of nuclear energy, while some respondents argued against. Several stakeholders were of the opinion that all forms of low-carbon electricity generators should be considered for the EU Taxonomy on an equal basis, including carbon capture utilisation and storage (CCUS), waste energy, forestry activities, as well as maritime and aviation. At the same time, some respondents, typically private individuals, listed natural gas, incineration of waste and livestock production among the activities whose inclusion should be reconsidered. This section also asked stakeholders for what economic activities an illustrative template for substantial contribution to climate change adaptation should be developed next. Stakeholders requested that all sectors receive illustrative templates for substantial contribution to climate change adaptation, with most commonly mentioned activities including nuclear energy, carbon capture and forestry management.

On usability of the EU Taxonomy, 223 stakeholders responded, mainly from the business (general) and business (finance) categories (a combined 74% of total respondents). Overall, stakeholders mentioned that they would use the EU Taxonomy in the long-term, but highlighted some usability issues – complexity of the EU Taxonomy, issues with data availability and short time to implement relevant disclosures. Some stakeholders requested further EU guidance on the use of NACE codes. A few stakeholders also requested more flexibility of the EU Taxonomy to ensure its applicability outside of the EU. Moreover, respondents generally shared the view that the EU Taxonomy could be made more useful for the disclosure of financial products (most notably in portfolio management). In some cases, stakeholders mentioned that the EU Taxonomy could narrow their investment portfolio, suggesting a voluntary use of the EU Taxonomy as a potential solution. Similarly, stakeholders across most asset classes outlined room for improvement on the use of the EU Taxonomy in public equity, corporate bonds and green bonds to go beyond “green issues” and support investment decisions for those aiming to reduce emissions in a transitory manner towards low-carbon solutions.

2.6. Second stakeholder dialogue on sustainable finance

On 12 March 2020, the European Commission organised a second stakeholder dialogue to accompany the final TEG report on the EU Taxonomy (including technical annex) and the user guidance report on the EU Green Bond Standard that were published on 9 March 2020. The meeting also provided an opportunity for stakeholders to discuss and express ideas on the upcoming Renewed Sustainable Finance Strategy, which was announced in the European Commission’s Communication on the European Green Deal.

The second stakeholder dialogue on sustainable finance was held in a virtual form due to the Covid-19 pandemic. Stakeholders were given the opportunity to ask TEG members and the Commission questions with regard to the TEG’s final reports and the Commission’s next steps. A document containing these questions and further frequently asked questions has been published on the Commission’s website to provide detailed and written answers to these questions. 123  

2.7. Feedback by Member States on TEG report

The Member States Expert Group, which has a formal legal base as an expert group under the Taxonomy Regulation, was given the opportunity to provide feedback on the final recommendations of the technical expert group in a four weeks period. Comments were received in written and were exchanged on 8 May 2020. Member States comments covered both usability aspects of the EU Taxonomy and its future implementation, as well as technical aspects in the different sectors.

Overall, the Commission received detailed feedback from 15 Member States (MS) on the final reports of the TEG. In general, MS welcomed the TEG reports including the updated technical screening criteria and pointed at opportunities for supporting the EU’s climate and energy objectives through the EU Taxonomy, as well as opportunities for specific sectors and activities. Most MS provided elaborate and sector-specific comments.

With regard to the scope of the feedback, MS commented on both the final report and the accompanying technical annex published by the TEG. Therefore, feedback also related to usability and design questions. Some MS referred in their comments to the Taxonomy Regulation and expressed the wish for the Commission to clarify certain disclosure requirements. While the Commission takes due note of these comments, it should be clarified, that the delegated act on climate change mitigation and adaptation will only establish the technical screening criteria for the objectives of climate change mitigation and climate change adaptation. Some comments provided by MS do therefore not fall in the scope of the Commission’s empowerment for the delegated act.

The summary of MS’ feedback is split into three parts: (1) design and usability questions related to the EU Taxonomy; (2) cross-cutting issues on the criteria and activities; and (3) sector-specific feedback on the technical annex. While the first section does not fall under the scope of the delegated act, the Commission would like to use the opportunity of the virtual meeting with MS to clarify outstanding questions. The feedback on the technical annex and cross-cutting issues will be considered by the Commission for the preparation of the delegated act.

I.Usability and Design questions

1.Further guidance on disclosure obligations

Almost all MS expressed a wish for additional usability guidance and tools from the Commission with regard to the disclosure obligations under the Taxonomy Regulation, in particular in relation to the KPIs that need to be disclosed by companies falling under the scope of the NFRD and by financial market participants. Member States wondered if the Commission would specify the guidance provided by the TEG, such as the narrative around disclosures. In particular, MS mentioned that it should be clearly identified for which activities turnover and/or capital and operational expenditures could be counted as green and that it should be clearly explained what the differences are between climate change mitigation and adaptation in this respect. MS also asked for more concrete examples for all types of asset classes and financial instruments, such as for private equity, funds of funds, hedge funds, infrastructure funds. Several MS asked for a clearer differentiation between transitioning and enabling activities and improvement measures. Many MS mentioned the need to establish coherence with regard to reporting requirements under the NFRD and the Taxonomy Regulation, as well as the requirements under the SFDR and to address the fact that there will be no corporate reporting available yet while financial market participants are expected to make their first disclosures against the EU Taxonomy.

2.Verification requirements

Some MS saw the need to introduce an obligation for verification to ensure credibility and a level playing field and to clarify which bodies could carry out this duty. However, other MS expressed the clear preference to leave verification to the market and not to reopen discussions on the supervisory division between MS and the EU.

3.Applicability of the EU Taxonomy

MS raised questions with regard to the applicability of the EU Taxonomy outside the EU and indicated that applicability would be hindered by missing data from companies. Some MS expressed concerns that the due diligence approach proposed by the TEG to comply with minimum safeguards and the ‘do no significant harm’ (DNSH) criteria would be difficult to apply. MS also asked for clarifications regarding the applicability of the minimum safeguards included in the Taxonomy Regulation and asked for example if the OECD guidelines also refer to non-multilateral companies. In addition, MS suggested making the DNSH criteria more user friendly, efficient and pragmatic.

II.Cross-cutting remarks

1.Inconsistencies and factual errors

Some MS pointed out concrete inconsistencies in the technical annex of the TEG report, such as incoherent language and some factual errors. MS also pointed at some missing references to legislation, leaving margin for subjectivity. Some MS advised to refer to specific parts of EU legislation rather than a general reference.

2.Inclusion of further sectors and activities

Several MS indicated that additional activities should be included, in particular other high-emitting activities in manufacturing, aviation and maritime shipping, as well as research and innovation activities. Almost all MS provided feedback on the inclusion of nuclear energy; further details are provided in Section V.

3.Clarify criteria for enabling activities

Two MS expressed the need to clarify the criteria for enabling activities, both for climate change mitigation and climate change adaptation.

III.Sector-specific remarks

1.Forestry

On forestry, MS generally recalled that the TFEU makes no reference to a common forestry policy and that therefore the delegated act should not prejudge any shift in competences between MS and the EU. MS noted that any measure on forestry should strictly respect the principle of subsidiarity and that MS competence in this field should be respected.

Many MS pointed out that large parts of forests are privately owned and that while forests are uneven distributed across the EU, the EU Taxonomy would have a large impact on private forest owners. The EU Taxonomy should therefore aim at minimising the burden for forest owners, especially with regard to new reporting schemes included in the criteria for forestry activities proposed by the TEG.

With regard to the definitions and criteria for forestry activities, it was noted that the Forest Europe definition of Sustainable Forest Management does not include a specific requirement to identify and apply forest management practices, while the TEG criteria do. MS also raised concerns about the first criterion under the climate change mitigation objective (increase existing carbon stocks) and saw a trade-off between the objectives of climate change mitigation and adaptation, as certain countries are replacing tree species with climate-resilient tree species that have a lower carbon storage capacity. In general, some MS noted that forestry should be linked to other sectors, such as manufacturing, buildings and waste management.

MS furthermore noted that alignment with existing legislation is important, in particular the alignment with the recast of Directive (EU) 2018/2001 on renewable energy (RED II) and Regulation (EU) 2018/841 on the inclusion of greenhouse gas emissions and removals from land use, land use change and forestry (LULUCF). In addition to those two legislative acts, MS referred to the EU Forest Strategy as a basis for the drafting of the delegated act. On forestry definitions, some MS noted that “close-to-nature” forestry was a new concept and should not be introduced in the delegated act.

2.Agriculture

MS commented on the activities of growing perennial- and non-perennial crops and livestock production. On growing perennial and non-perennial crops, main concerns were related to the use of the criteria and their alignment with existing EU legislation, as well as the applicability to the different types of soil and land across Europe. MS suggested alternative criteria, such as introducing maintaining soil organic carbon (SOC). MS also emphasized several times that the criteria should be compatible and consistent with the (future) Common Agriculture Policy (CAP) including the DNSH criteria. With regard to proposed criteria to regularly review carbon sinks and surveys of soil, it was noted that the period of 3 years was too short to make a significant difference and that it should be extended to 5 years. One MS noted that regarding the 20-years commitment in the agricultural sector (notably on carbon storage), it should be specified that these commitments are only valid if they are legally transferred to the future tenant or owner of the plots, or farm manager, in the event of a change.

3.Manufacturing

For manufacturing activities, MS commented mostly on manufacturing of low-carbon technologies and noted that the scope should be clarified in line with the Taxonomy Regulation. Furthermore, several MS expressed the need to differentiate between vehicle segments for this activity. Concerning the DNSH criteria for the environmental objective pollution prevention and control, MS criticized that waste incineration was not in line with the Taxonomy Regulation and that references to BAT (BREF) should be replaced by references to Industrial Emissions Directive. On the manufacturing of steel, some MS noted that steel should not be judged only on the basis of a reference to the EU ETS benchmark, but should be assessed in a more holistic way (supply chain) and that different criteria should be used. Furthermore, some MS argued that secondary aluminium and steel should not be eligible unconditionally, but should carry a metric on the intensity of direct emissions and potentially indirect emissions.

4.Electricity

For electricity, several MS commented on the TEG’s proposal to deviate from RED II, while the ones commenting explicitly criticised the deviation. This concerned the activities manufacture of biomass, biogas or biofuels, production of electricity from bioenergy, co-generation of heat/cool and power from bioenergy and the production of heat/cool from bioenergy. Few MS expressed disagreement with the threshold of 100gCO2e/KWh for electricity production (from all sources), while others explicitly agreed with this threshold. Finally, some MS argued for the inclusion of waste-to-energy.

5.Water, sewerage, waste and remediation

On the activity transport of CO2, one MS asked for clarification of the sentence in the TEG report “Assets or activities that enable carbon capture and use (CCU) will deem all the connected elements of an existing transport network ineligible” and how it would be put into practice. Some MS observed a need for a holistic analysis of this sector, and thus, also for the assessment of DNSH criteria for circular economy, noting that some activities did not have DNSH criteria.

6.Transport and storage

Concerning transport, some MS mentioned that the technical screening criteria for transport and storage should be consistent with current EU legislation on transport, in particular the recently updated Clean Vehicles Directive 2019/1611. Several MS also stated that not only electric and hydrogen propulsion technologies with zero emissions should be included as eligible activities under transport, but also other types of alternative fuels under Directive 2014/94/EU, as these could also contribute to achieving low carbon mobility. Several MS also mentioned it could be hard to meet RED II targets if those alternative fuels were not included. Finally, MS noted that the activity infrastructure for low-carbon transport should be broadened to other forms of transport, such as cycling and walking. Finally, one MS suggested that the threshold (for tail-pipe emissions) for interurban scheduled road transport was not suitable and should be replaced by a Well-to-Wheel approach.

7.Buildings

Several MS mentioned that embodied carbon in buildings should be part of the criteria for buildings, a practice already existing in a number of MS. Some MS noted that national circumstances vary across the EU and that therefore a focus on “carbon footprint” would be more accurate and effective. With regard to alignment of the criteria with existing EU legislation, it was noted that the reference to existing standards such as ISO14001 should be ensured.

Some MS feared that the "20% over national regulation" threshold may introduce distortions between national construction markets and argued that the methodology to calculate the indicators should be common to all MS for meaningful comparability. On thermal renovation, one MS suggested that the “30% improvement threshold” could be put in relation with the Energy performance certificate framework for better reporting.

Some MS raised concerns regarding the assessment and analysis required under the EU Taxonomy as proposed by the TEG, such as assessing relative improvements of buildings. While some MS acknowledged that certificates and audits were established, other MS feared that insufficient clarification of auditing and analysis could lead to confusion. One MS noted that the criterion for eligible renovation expenditures was not appropriate since it enabled renovations without energy efficiency elements.

IV.Adaptation

In general, fewer MS commented on the proposals by the TEG on climate change adaptation than on climate change mitigation. Some MS noted that additional work would be required regarding the climate change adaptation criteria as the assessment of relevant economic sectors such as health care or ecosystem services is missing in the TEG’s work. MS also expressed doubts about the selection of activities for climate change adaptation, as they considered that activities that have the most relevant potential contribution to climate change mitigation are not necessarily the most relevant for adaptation.

V.Nuclear energy

All MS provided their position on the inclusion or non-inclusion of nuclear energy as an environmentally sustainable activity in the EU Taxonomy. Almost all MS provided extensive feedback on the underlying reasoning why nuclear energy would (or would not) qualify and suggested possible evidence to support their position, including evidence related to substantial contribution and to DNSH. Some MS noted that social and economic impacts of nuclear energy should also be considered when assessing nuclear energy.

MS also commented on the way forward with regard to the assessment of nuclear energy. Some MS emphasized that they consider it unnecessary and even counterproductive to undertake a further assessment of nuclear energy and expressed concerns about negative impacts on the EU Taxonomy’s credibility towards public and private investors. Other MS considered it necessary to do a further assessment of nuclear energy and suggested concrete expert groups to undertake this assessment. MS also commented on the timing, as well as the frame, in which nuclear should – or should not – be addressed in the EU Taxonomy.

2.8. Feedback on inception impact assessment

The inception impact assessment was published on 23 March 2020, with the opportunity to provide feedback extended until 27 April 2020 124 . There were 409 respondents in total 125 . Most comments, approximately one third of the total, came from EU citizens. This stakeholder group was followed by business associations (22% of respondents), companies (17%), NGOs (15%) and environmental organisations (6%). Among companies and business associations, non-financial sectors were more commonly represented, in particular stakeholders from agriculture and forestry sector, energy, and manufacturing. In terms of geographic split, the responses came from 22 Member States, with the largest share of responses from France (35%), Belgium (20%), Germany (8%), and Finland, Poland, and Austria (4% each). Several responses came also from countries outside EU, notably from the UK and Norway (each with seven responses).  

Many stakeholders stated explicit support for the development of the EU Taxonomy and EU’s ambition to become climate neutral by 2050. Several have stated agreement with the overall approach taken by the TEG. While only a few made statements that could be read as overall disagreement with the approach taken, a number of stakeholders pointed out at some aspects in which TEG’s work does not fully reflect one or more of the requirements set out in the EU Taxonomy. Most of these contributions were focused on climate change mitigation. For the needs of this impact assessment, comments related to Article 19 requirements were analysed though the lens of the four specific objectives of this delegated act.

Relatively many citizens, companies and business associations made comments related to fair assessment of activities, arguing that TEG’s application of certain methodologies 126 was at times not consistent across activities within one sector (notably for energy sector). Some stakeholders also made comments on considerations for technology readiness level, where most of the comments argued for applying it consistently, and approximately even balance between comments suggesting the inclusion or exclusion of technologies with lower readiness level.

Many comments referred to alignment with existing legislation and suggested that the Commission should pay more attention to this aspect, notably for agriculture, forestry and manufacturing. These comments were more frequent among companies and business associations.

Some stakeholders, typically financial and non-financial companies, mentioned potential issues with usability and complexity of the EU Taxonomy. Most of these concerns were nevertheless broader than the calibration of the delegated act, notably in relation to the EU Taxonomy’s implementation. Some stated that several definitions and references used were not in line with legal clarity and could result in usability issues.

NGOs encouraged the Commission to focus more on environmental ambition and integrity, while this aspect was not very prominent among other stakeholders. Nevertheless, as mentioned above, a number of stakeholders referred to some of the elements of this objective (e.g. life-cycle assessment) in relation to their consistent application.  

Alongside these comments, many stakeholders from companies and business associations suggested that activities related to their business operations are included in the EU Taxonomy or that the relevant thresholds are set lighter. In contrast, NGOs and environmental organisations argued for exclusion of several activities (such as livestock and bioenergy) and tightening of the criteria for some others. The most debated activity was nuclear energy, followed by waste incineration and gas. Many NGOs were arguing for exclusion of livestock production and bioenergy. A full half of the respondents made comments related to nuclear energy, which was not fully assessed by the TEG. Out of these respondents, three fourths were in favour of including nuclear energy and the remainder was against, with both camps showing signs of campaigning. The pro-nuclear responses called for a nuclear expert group to be set up soon, while the anti-nuclear stakeholders were mostly against establishing such expert group.

A minority of companies have expressed concerns about possible negative economic impacts, notably in relation to risk of reduced access to finance if considered non-compliant. Several stakeholders made comments related to the current Covid-19 crisis: these were relatively evenly split between those saying that this highlights a greater need for the EU Taxonomy, and those stating their concerns about implementation costs related to Taxonomy disclosures or to voluntary measures needed in order to meet the criteria. Some stakeholders stressed the need for regulatory stability for long-term investments, also in relation to the frequency of updating the EU Taxonomy. On the other hand, some supported the need to update the EU Taxonomy sufficiently often to ensure relevant technologies are included.

With regards to Taxonomy-relevant disclosures, some stakeholders from the financial sector expressed concerns about availability of data for their first year disclosures and possible discrepancies between disclosures required by financial market participants and non-financial companies under NFRD. Several non-financial stakeholders also expressed concerns about potential costs of verification.

2.9. Consultation on the Renewed Sustainable Finance Strategy

In addition, stakeholders also had an opportunity to provide feedback on the possible use of the EU Taxonomy in the consultation on the Renewed Sustainable Finance Strategy , which took place between 8 April and 15 July 2020.

Stakeholders who currently market financial products that promote environmental characteristics or have environmental objectives were asked how likely is it that they would use the EU Taxonomy in their investment decisions 127 . First, it is important to note that 109 organisations noted that they market such financial products 128 . Among companies marketing their products as environmentally sustainable, responses indicated a very strong interest to use the EU Taxonomy in investment decisions – 76% of companies that responded to this question said that they are likely or very likely to use the EU Taxonomy, with the most positive answer being the most commonly selected.

The consultation also asked companies how likely it is that they would use the EU Taxonomy for their business decisions (such as adapting the scope and focus of their activities in order to be aligned with the EU Taxonomy). This question was focused on those who carry out economic activities that could substantially contribute to the environmental objectives defined in the Taxonomy Regulation based on their own understanding and assessment. Among those who responded to this question, 50% indicated that they carry out such activities; among companies who responded, this share stood at 75% 129 . Among companies who responded the following question, there was a strong interest in using the EU Taxonomy in business decisions, with 39% indicating a very high likelihood of such use and a total of 67% indicating a high or very high likelihood of using the EU Taxonomy in business decisions.

2.10. Feedback on the draft delegated act: November-December 2020

The draft delegated act was published on 20 November 2020 for a 4-week feedback period. Stakeholders were able to provide comments until 18 December 2020. The draft delegated act has attracted a great number of comments. Overall, the Commission has received 46 591 responses in total. There was a large campaigning activity detected, which was for the most part connected to one campaign by NGOs and citizens supporting their propositions (“stopfakegreen.eu” campaign). Specifically, 44 774 contributions received were clearly associated with this campaign. For this and further identified campaign, please refer to a short overview below. Feedback is further summarised per sector.

With regard to stakeholder types, EU citizens were the most represented category. Including the major campaign, 97.8% of responses came from citizens, around 0.8% from companies, 0.6% from business associations and 0.3% from NGOs. Outside this main campaign, 43% of responses came from citizens, while companies and business associations submitted 20.0% and 16.2% of contributions, respectively, and NGOs submitted 8.3% of the responses. Other stakeholder groups such as public authorities, academia or trade unions, amounted to 12.5% of responses outside the main campaign. Among company respondents, 54% were large, 28% were small and micro enterprises and 18% were medium-sized (between 10 and 249 employees).

The main campaign 130 has also largely impacted the geographic distribution of responses. With the campaign, responses were largely concentrated in France (38.5%) and Germany (34.4%), with Spain taking the third place (7.8%) and 1.7% of responses from outside the EU. Outside the main campaign, the responses were distributed more evenly, with 18.6% from France, 17.8% from Sweden, 13.5% from Belgium, 8.5% from Italy and 6.8% from Germany. Other EU countries accounted for more than one fourth of responses and further 7.4% came from outside the EU.

Stakeholders provided comments across a full range of sectors, albeit with large differences. Most comments related to the criteria for the energy sector (42% of respondents outside campaigns commented), followed by agriculture and transport. Many comments were also related to criteria for forestry, manufacturing, buildings and for hydrogen. The comments received were varied, with a large polarisation between those proposing more or less ambitious criteria. Many also focused on usability of the criteria and technical clarifications. This summary hence cannot cover comments received in their full entirety and detail 131 and only focuses on the main issues raised and on the aspects that showed greater polarisation of stakeholder views.

Main campaigns identified

Several campaigns were detected in the provided feedback, with one clearly standing out with its size. This table below provides a brief overview of the main identified campaigns, which were carefully considered in the balance of stakeholders requests under specific sectors. Several other responses could be potentially counted as campaigns, but these had up to 30 responses and were more disparate, hence they are not detailed in this table 132 .

Agriculture

Agriculture was the sector that attracted the second highest number of comments, with over 550 responses. Comments typically related to alignment with the Common Agricultural Policy (CAP), notably with regard to DNSH criteria for agriculture, and recognition of various agricultural practices. Many stakeholders also expressed concerns about usability of these criteria and potential burdens related among others to farm sustainability plans and verification. NGOs and citizens, mostly through the main campaigns described above, requested that livestock production would be completely dropped from the EU Taxonomy and that the text would exclude, or limit scope in which extensive agricultural production is included in the delegated act. Stakeholders also asked for some clarifications on classification of agro-forestry.

The Commission recognises that agriculture plays a central role in climate change mitigation, while also delivering benefits for adaptation, reversing biodiversity loss, and fostering other sustainable development goals. In this context, the Commission has come to the conclusion that it is appropriate to delay the inclusion of the agricultural sector to the next delegated act, in order to take into account the results of the ongoing inter-institutional negotiations on the Common Agricultural Policy (CAP). This will allow achieving a greater coherence across the different instruments to achieve the environmental and climate ambitions of the Green Deal. It was hence concluded that withdrawing the agricultural sector from the first round of delegated act related to the climate change objectives is needed to preserve the robustness, integrity and ambition of the EU Taxonomy objectives, not to prejudge an ongoing legislative process, and to examine ways to further exploit possible synergies between the new CAP and the EU Taxonomy. With respect to the importance of this sector, there is an intention to include this sector in the future. The next possible opportunity would be the adoption of the delegated act setting out criteria for the four environmental objectives which might include a revision for certain criteria set out in the climate delegated act.

Forestry

Forestry attracted a large number of comments out of which almost half came through a recognised campaign (see table above). Many stakeholders called for greater consistency with RED II and existing Forest Management Framework. Stakeholders also usually commented on the reference to “close to nature forestry” and the concepts of additionality and permanence. Many considered the preparation of a climate benefit analysis too burdensome, especially for small forest owners or public administrations, and asked to reduce the complexity of the proposed criteria. At the same time, there was feedback requesting additional elements and safeguards. There were also opposing views on DNSH criteria for biodiversity and for pollution, with some saying these should be strengthened and others proposing more lenient criteria.

With regards to improved/sustainable forest management, many stakeholders opposed the new definition of the activity and suggested that existing sustainable forest management should be automatically considered Taxonomy-aligned.

Based on the feedback provided, the Commission proposed changes that reduce complexity and burdens, extend the timeframe for demonstrating climate benefits, improve consistency with RED II and between adaptation and mitigation criteria, and clarify key concepts. The activity “improved forest management” is clarified to mean forest management, while ensuring that adequate environmental ambition is upheld in the criteria. Steps taken to simplify the criteria and reduce burdens include notably reduced frequency of audits and possibility for compliance with the criteria can be assessed at the level of a group of operators. In order to minimise administrative burden for small forest owners, forest holdings below 25 ha are not required to perform a climate benefit analysis. Further changes have been implemented to simplify the criteria and provide greater legal clarity.

Manufacturing

Manufacturing was an area where stakeholders provided many comments, which mostly focused on manufacture of iron and steel, aluminium, plastics, chemicals and other low carbon technologies.

Regarding iron and steel, comments notably focused on the use of the EU ETS benchmarks in the criteria and on possible alternative metrics. Stakeholders also commented on the criterion about the use of scrap steel. In the case of aluminium production, comments focused on the strictness of the criteria, disadvantaging Member States with a higher-carbon energy mix and the manufacture of secondary aluminium. Many comments on manufacture of plastics were linked to chemical recycling or to the exclusion of food and feed crops from the suitable feedstock for chemicals and plastics. Comments on manufacture of other low carbon technologies focused mainly on the scope, definitions and level of ambition. Further cross-cutting comments on manufacturing focused notably on use of the EU ETS benchmarks, application of thresholds and classification of activities as ‘transitional’.

Based on the feedback provided, a different share of minimum scrap used was included in the criteria for the manufacture of steel, depending on the type of steel manufactured in electric arc furnaces. Moreover, the criteria for substantial contribution to climate change mitigation for manufacture of aluminium was reverted to a formulation aligned with the TEG’s recommendations. The criteria for substantial contribution to climate change mitigation for the manufacture of ammonia was also reviewed, in order to ensure consistency with the activity ‘manufacture of hydrogen’.

After careful considerations, the EU ETS-based criteria were retained, as the Commission did not see a feasible alternative that could have been assessed in depths in the timeframe given and would guarantee environmental ambition, consistency among different manufacturing activities and scientific integrity. Nevertheless, possible changes will be carefully considered in the future reviews of the delegated act, as acknowledged in the recitals of the delegated act.

In light of the feedback received, the activity “manufacture of batteries” was included, as a separate activity (instead of being considered a ‘key component’ for the manufacture of low carbon technologies for transport), and the scope of some activities was widened (such as manufacture of equipment for the production and use of hydrogen or manufacture of low carbon technologies for transport). Additionally, a less stringent threshold for the manufacture of hydrogen was introduced, based on the public feedback received. Criteria for DNSH to pollution were also strengthened, to increase scrutiny in areas were some stakeholders expressed particular concerns.

Finally, in order to improve clarity and solidity of the criterion, the exclusion of food and feed crops as feedstock for the manufacture of plastics and organic chemicals was substituted by clear reference to the sustainability and greenhouse gas emissions saving criteria in the current legislative framework.

Energy

The energy sector attracted the largest number of responses (over 900). Stakeholders notably commented on bioenergy, hydropower, geothermal plants, hydrogen and gas. Some comments also concerned nuclear energy, but these were less frequent than in the feedback on the inception impact assessment. Many stakeholders suggested that natural gas should be recognised for its role as transition fuel in decarbonisation and that criteria for transitional activities should take into account different starting points and be attainable. Stakeholders also often commented on consistency with EU acquis (e.g. RED II, EED, CVD).

Regarding the 100gCO2e/kWh threshold, environmental organisations and civil society generally proposed to maintain this level of ambition, while many MS, industry and business associations proposed to make the threshold less ambitious. Regarding bioenergy, many stakeholders (such as businesses, associations and MS) requested the transitional label to be removed but views were especially split on alignment with RED II, notably in relation to the degree of ambition of the criteria. On hydropower, some suggested to simplify DNSH to water criteria by referring to applicable EU legislation and commented on equal treatment of hydropower to other renewable, while other stakeholders proposed to exclude smaller hydropower plants. There were polarized views whether to include or exclude hydrogen that integrates fossil fuels in the production process.

Based on the feedback provided, Commission services have notably revised criteria for hydropower, geothermal plants and hydrogen.

With regards to technology neutrality, the Commission decided to drop the ‘transitional’ label for activities that perform below 100gCO2e/kWh GHG emission threshold on a life cycle basis, including all bioenergy activities. Regarding hydropower, the criteria have been refined to ensure fair treatment with other activities while safeguarding possible risks. DNSH to water criteria have been revised to bring it into more explicit alignment with the Water Framework Directive.

Across energy activities, stakeholders suggested further clarifications and in most of these cases, Commission services have revised criteria accordingly.

Water and waste

Around 75 stakeholders commented on water and waste criteria. Respondents generally supported the inclusion of water and waste activities in the first delegated act as well as the suggested split of activities between renewal and new infrastructure. Nevertheless, they were generally critical on raised environmental ambition compared to the TEG’s proposal. With regards to criteria for drinking water, some stakeholders considered these as too ambitious and some proposed alternative metrics. Similar comments were made for waste water.

Most comments on waste-related activities were technical drafting suggestions. Several comments also focused on waste incineration, with views split between including this activity and keeping it outside of the EU Taxonomy. Some targeted adjustments were made in waste activities in response to comments, including factual corrections and better alignment with EU acquis in the area of waste. Regarding the anaerobic digestion of waste (activity 5.7), the final text refers to the Waste Framework Directive definition for bio-waste. Food and feed crops are no longer excluded, but remain limited to 10% of input material. The different approach here compared to manufacture of biogas in the energy chapter (4.13) is justified as in activity 5.7 the criteria do not require a minimum GHG savings threshold as per RED II, unlike in activity 4.13. This activity is about promoting an environmentally beneficial treatment option of bio-waste. Regarding activity 5.9 on the material recovery from non-hazardous waste, a recital was added to clarify that the uniform target does not fully address the climate mitigation potential of individual material streams and that it may therefore be necessary to further assess and review those technical screening criteria in the future.

Based on the feedback provided, the level of ambition was adapted to make it more accessible for more projects in relation to both drinking water supply and waste water treatment. For the drinking water supply activities, the value of the threshold of net average energy consumption of the water supply system did not change, but the distribution network has been excluded from its calculation, to focus on abstraction and treatment of drinking water, which was a demand by several stakeholders. A link with the recent recast Drinking Water Directive was included to open the possibility in the future to use another measurement index to assess leakage, as demanded by several MS and other stakeholders.

For the wastewater activities, the most notable change for new infrastructure and extension of waste water collection and treatment is that the delegated act does not maintain the zero-energy-use threshold in view of serious concerns on feasibility. The revised criteria include softened, but still ambitious thresholds on net energy consumption in kWh per population equivalent, as demanded by several stakeholders and MS, which are differentiated according to waste water treatment plant capacity.

Transport

Transport was among the sectors that attracted the most comments (almost 400), notably those from the transport industry. Stakeholders commented notably on the ambition of the criteria, scope of activities and their categorisation as enabling or transitional (such as in case of rail transport). There were diverging views on whether the criteria should be tightened or relaxed and stakeholder views also differed on whether maritime transport should be included. Stakeholders also commented on specific metrics and use of LCA as well as exclusion of vehicles, vessels, infrastructure “dedicated” to transport of fossil fuels.

Specific concerns were expressed on purchase, leasing and refinancing which led to specifying in the delegated act that both assets and operations are included and thus maintenance of vehicles can be considered Taxonomy-aligned when complying with technical screening criteria.

Based on the feedback provided, the ‘transitional’ classification from electrified rail and zero tailpipe emission transport was removed, while keeping it for those aspects of transport that are not low carbon. The revised delegated act also caters for a broader inclusion of waterways infrastructure in the adaptation Taxonomy, and improves the criteria for DNSH to biodiversity for maritime transport activities, which were criticised during public feedback. The criteria for interurban coaches were adjusted to reflect its role in modal shift. On all road transport, the Commission has simplified the DNSH requirement on pollution, regarding tyres regarding rolling noise and rolling resistance requirements. Further, a full range of suggestions for more clarity in the criteria across the sector was taken on board.

With regard to substantial contribution to climate change adaptation, some stakeholders suggested to add further activities, such as aviation. Commission services nevertheless concluded that relevant criteria could not be sufficiently developed in the timeline for this delegated act and hence noted the suggestion for future work on the EU Taxonomy.

Buildings

Criteria on buildings have attracted a large number of comments. Most comments concentrated on the activity “Acquisition and ownership of buildings”, specifically on the use of EPC labels. Comments typically considered the proposed requirement of EPC class A for existing buildings too strict and difficult to apply across Member States with different practices and standards. Mainly financial institutions, banking associations, companies, business associations, NGOs, MS, and citizens expressed this view. Some stakeholders shared specific suggestions on how to address this issue (e.g. keep the top 15%, include also EPC class B).

For the other activities, the feedback concerning the level of ambition was rather mixed, some stakeholders arguing it is too ambitious, some arguing it is not ambitious enough, and finally, some others indicating that the proposed level of ambition strikes the right balance. In addition, the Commission received many suggestions for adjusting some of the proposed criteria, and suggestions for including additional activities. Regarding renovation of existing buildings, stakeholder views were split on the proposed 30% threshold. Construction of new buildings and individual renovation measures attracted relatively fewer comments.

Based on the feedback provided, Commission services have notably changed the requirement related to the use of EPC labels and reverted to the proposed approach by the TEG for the acquisition and ownership of buildings – notably to allow the top 15% of national or regional building stock to be eligible. DNSH criteria on water were simplified, and made less strict (water flow increased for showers, and residential building units excluded from these requirements) to reflect stakeholder concerns and reduce potential burdens.

The scope of energy efficiency equipment in buildings and instruments and devices for measuring, regulation and controlling energy performance of buildings has been increased to include notably maintenance and repair and energy efficient light sources.

Information and communication

Relatively infrequent stakeholder comments on ICT activities mostly related to a need for clarification of the criteria, to allow more flexibility for data centres, and broaden the scope of “Data-driven solutions”.

Based on the feedback provided, Commission services have notably made the criteria clearer and addressed technical concerns such as on the order and complementarity of the criteria, definition of “data centres”, and references to specific documentation. The comment to broaden the scope for the enabling activity of “Data-driven solutions” has also been taken into account.

Research, development and innovation

Relatively infrequent stakeholder comments on RD&I mostly requested to broaden the scope of the activity by including the enabling and transitional activities as target activities. Some stakeholders also suggested including lower technical readiness levels as eligible. Stakeholders also suggested to remove or clarify third-party verification of life cycle emissions calculation for RD&I activities.

Based on the feedback provided, Commission services have notably included RD&I linked to enabling and transitional activities in the delegated act, provided that it meets the relevant criteria. The Commission added specific safeguards for RD&I linked to transitional activities to take into account the fact that their thresholds are not low-carbon yet. The reference to NACE codes was also adjusted in order not to excessively limit the scope of RD&I aligned with the EU Taxonomy. At the same time, the delegated act retains focus on RD&I at higher technical readiness levels as it was concluded that lower TRL levels would require further reflection and sufficient safeguards to ensure that the research actually delivers on the required substantial GHG benefits.

Climate change adaptation

Around 65 respondents commented on climate change adaptation criteria. The most common comments were, on the one hand, on the usability and lack of clarity of the criteria notably for SMEs and individuals (e.g. in relation to buildings), and, on the other hand, on the limited scope of inclusion of activities enabling adaptation. Stakeholders also often commented on the coherence of the criteria, the lack of difference in level of ambition between DNSH and screening criteria to adaptation. Some stakeholders called for inclusion of more enabling activities and for expansion of the scope of research, development and innovation beyond nature-based solutions. Some also enquired about the relationship between annexes I and II and what counts as Taxonomy-compliant, asking for more guidance and clearer definitions.

On the point on usability and clarity, Commission services have improved the wording and simplified the requirements of the criteria in several aspects. For the do no significant harm to adaptation criteria, the steps that need to be followed were made clear to strengthen the usability and applicability of the criteria. Further clarifications were provided to show that the list of climate-related hazards was not exhaustive.

Financial and insurance activities

There were relatively few comments on insurance and reinsurance, most of which came from the insurance sector. Stakeholders notably expressed concerns on demanding the nature of the proposed criteria and their usability (in particular as regards the reference to price signals and data sharing as well as some DNSH criteria).

Based on the feedback provided, Commission services have added clearer references to existing sectoral legislation for the definition of eligible business lines and clarified the text of the criteria to provide more flexibility.

ANNEX 3: WHO IS AFFECTED AND HOW?

The perspective of this impact assessment has been the compliance of the technical screening criteria and do no significant harm criteria with the requirements of the Taxonomy Regulation. By itself, the delegated act will only increase information available for companies and investors, without any direct impacts. As established in Section 7, the impacts will depend on the level of uptake of the EU Taxonomy in business and investment decisions. The calibration of the technical screening criteria can influence the levels of uptake only to some degree, for example as regards the overall credibility and usability of the EU Taxonomy. As such, robust technical screening criteria would bring more decision-useful information to the market. This would allow stakeholders to reflect this information in their business and investment decisions alongside other factors such as expected risk and return. Arguably, these external factors will continue to play a decisive role for how economic and environmental impacts play out.

This annex presents an illustration of the potential impacts of the EU Taxonomy. A full assessment of the actual financial, economic, social and environmental impacts of the EU Taxonomy for climate change mitigation and adaptation falls outside the scope of this report. This is because these impacts will depend heavily on the future choices of investors, designers of financial products and companies to consider the EU Taxonomy in their decisions. These choices, rather than the set-up of the EU Taxonomy and specifically the information contained in the technical screening criteria as such, will ultimately determine how much capital will be redirected into Taxonomy-aligned activities. These financial flows will largely also determine the environmental impact of the EU Taxonomy, both in terms of financing activities contributing to reducing or preventing GHG emissions and actions increasing climate resilience. This annex is also complemented by Annex 8, which illustrates potential uses of the EU Taxonomy.

3.1 Practical implications of the initiative

Broader practical implications of the information contained in the EU Taxonomy will ultimately depend on its use. However, the information will substantiate two disclosure obligations included in the Taxonomy Regulation in order to improve transparency. First, companies under the scope of the Non-financial Reporting Directive (NFRD) will have to disclose the Taxonomy-aligned percentage of their turnover and expenditures. This disclosure obligation will be further specified through a delegated act, notably for financial undertakings 133 . For non-financial entities, this will imply mapping their operations against relevant NACE activities, collecting relevant sustainability information and linking them with data on revenues, CAPEX/OPEX at an appropriate NACE level. The process is likely to involve multiple steps which are outlined for illustrative purposes on the visualisation below.

Figure 7: Visualisation of EU Taxonomy assessment process in a non-financial company operating in multiple economic activities.

Source: based on input by a listed non-financial company, which preferred not to disclose its name

Second, financial market participants 134 will have to disclose the degree of alignment of their financial products with the EU Taxonomy. This disclosure obligation will be further specified through a Regulatory Technical Standard proposed by the European Supervisory Authorities that will be subject to a consultation 135 . These disclosure obligations aim to ensure that information related to the EU Taxonomy is accessible, coherent and consistent along the investment chain among companies subject to the NFRD, financial market participants under the SFDR 136 . Box 13 explains how the EU Taxonomy alignment at activity level, translates into alignment at company level and into alignment at portfolio or fund level. Ultimately, such information is expected to be more available also for retail investors, such as through the EU Ecolabel, websites of financial intermediaries and financial advice. It is expected that the introduction of the EU Taxonomy and relevant disclosures will help investors make more informed choices. This is likely to trigger behavioural changes among institutional investors that will help channel more money from investors into sustainable economic activities. For instance, the new information provided by companies will allow investors to assess the degree to which their portfolio captures companies likely to benefit from the opportunities related to climate change or companies that are progressing well with their transition. As such, companies with higher Taxonomy alignment are likely associated with lower expected transition risks (for climate change mitigation) and greater resilience towards physical risks of climate change (for climate change adaptation).

A recent paper looked at these issues involving the application of the EU Taxonomy by investors 137 . Compiled from 37 case studies mostly by asset managers, and based on the TEG recommendations for the technical screening criteria, the study was optimistic that the EU Taxonomy can be operationalised by financial market participants. Several challenges noted in this impact assessment were however confirmed by the studies, for example related to the availability of granular information on Taxonomy alignment from economic operators, and the need to reconcile data from several sources for this purpose. The paper proposes a series of practical steps that financial market participants should consider taking in order to facilitate their task to determine the Taxonomy alignment of their portfolios. This covers recommendations for how to go about checking and reconciling NACE codes with portfolio exposures, as well as determining compliance with the environmental performance requirements of the technical screening criteria and social safeguards. Regarding the levels of alignment at present, the paper confirms the low percentages quoted in the other studies referred to in this impact assessment.

3.2 Summary of costs and benefits

This part of the annex elaborates on potential broader costs and benefits of the EU Taxonomy. These aspects are not the focus of this report and only complement it by providing illustrative complementary information. It is not possible to comprehensively assess impacts at this stage, as they are dependent on specific uses (as explained at the start of this annex). This section thus presents only an illustrative overview of costs and benefits related to disclosure by entities under the scope of NFRD. Similarly, impact assessment accompanying initiatives that introduce use cases related to the EU Taxonomy will assess the use of the EU Taxonomy where relevant and to the degree that there is optionality to applying it given the adopted primary legislation.

The following tables present a qualitative overview of expected benefits and costs related to the use of the EU Taxonomy, attempting to distinguish which benefits and costs can be expected to directly arise from obligations under the Taxonomy Regulation (direct) and those expected to arise as a result of the uses of the EU Taxonomy including possible second-order effects of these obligations and uses (indirect). This is followed by a further elaboration on possible impacts related to SMEs and potential cross-cutting impacts.

Table 7: Overview of benefits

Table 8: Overview of costs

Approximate magnitude of costs under CSRD/NFRD scope

As described above, large companies under the scope of CSRD (former NFRD) are expected to bear administrative costs related to the EU Taxonomy. These would be notably the incremental costs of collecting relevant environmental data, matching them with financial data at activity level and disclosing on the resulting alignment. These costs have to be distinguished from substantive compliance costs which refer to costs incurred to meet the thresholds of a particular activity in the EU Taxonomy. As the EU Taxonomy is a voluntary tool, no substantive compliance costs are mandated under the Taxonomy Regulation.

The administrative costs related to the EU Taxonomy are very hard to estimate at this stage, as previously explained in Section 7. This report nevertheless attempts to support the assessment of the criteria for the delegated act with an illustrative estimation of an order of magnitude of these costs. This delegated act could influence these costs only to a limited extent. Notably the direct impact of the criteria on administrative costs results from the usability of the technical screening criteria (which was assessed under requirement IV in this report). 

This estimation draws from a survey that was run by the Centre for European Policy Studies (CEPS) in spring 2020 as part of its study supporting the NFRD review (CEPS, 2021). As part of its survey, CEPS asked several questions to companies in relation to costs of Taxonomy-related disclosures. Only 13 non-financial companies provided some estimates of administrative costs in the survey, with only two of them providing estimates for all three cost categories listed 143 . The Commission has substantiated this information further through targeted outreach with companies and data providers.

Here there is an attempt to illustrate the expected magnitude of costs per company for large companies under the scope of the current NFRD, including companies brought under the NFRD due to national transposition of the Directive 144 . The input provided in this limited exercise suggested one-off costs approximately in the range of 40 000 – 125 000 EUR per company 145 , and recurring costs in the range of 20 000 – 50 000 EUR per year, albeit with a certain degree of uncertainty around these estimates.

In any case, costs would differ greatly between companies depending on a number of factors, notably:

·Complexity of the company: The number of economic activities that the company carries out overall and the number of their activities that are (already) covered by the EU Taxonomy; the number of different geographic areas in which the company operates and finally the number and structure of its facilities/sites.

·The degree to which the company is already collecting data on environmental impacts 146 and the degree to which it has systems for collecting such data in place.

·The degree to which the company’s existing accounting system and legal structure is aligned with NACE or other industry classification systems that can be mapped to NACE 147 as well as checking for compliance with both substantial contribution and DNSH-criteria.

·The company’s decision to internalise or externalise certain tasks and the extent to which companies will seek verification of these data.

Given the small sample and uncertainty about costs, it is difficult to extrapolate this to arrive at an estimate of total costs. Assuming that the above cost ranges can be applied to each of the approximately 11 700 companies currently subject to the NFRD, and taking account of how Member States have transposed the Directive 148 , this would translate into an approximate magnitude of aggregate Taxonomy-related disclosure costs in the range of 280 – 875 million EUR for one-off costs and recurring costs in the range 140 – 350 million EUR per year. Meanwhile, the CSRD proposal as adopted by the Commission on 21 April 2021 proposes an extended scope of 49 000 companies that are subject to the reporting requirements. Extending the expected magnitude of costs accordingly, while keeping the same assumptions, would amount to approximately EUR 1 200 – 3 700 million one-off costs and EUR 600 – 1 500 million recurring costs per year. Again, there is a large level of uncertainty around this estimate. In this estimation, it is assumed that 40% of the companies under the CSRD/NFRD would likely not face additional costs, as they would not have any Taxonomy-eligible revenues 149 .

An important limitation of the CEPS survey is that it did not ask about costs of investments – e.g. additional equipment for measuring emissions – as desk research, and preliminary testing of the questionnaire with stakeholders suggesting that these costs would be negligible in the current NFRD context. Nevertheless, the Commission acknowledge that these could be more significant in the case of the EU Taxonomy for companies that have not yet measured GHG emissions or other environmental data in a granular way 150 . This is complemented by a targeted outreach with several companies and data providers. One company that has already completed its self-assessment against the EU Taxonomy criteria pointed at an approximately similar or slightly lower range for one-off costs. The most relevant cost items were setting up data collection (around 35% of one-off costs), updating internal processes (around 25%) and costs related to familiarisation/training of staff and matching financial and non-financial information at an appropriate NACE activity level (each around 15% of one-off costs). Recurring costs consisted mostly of annual data collection and update of the information (around 80%) as well as internal controls related to the publication of this information. An interview with a mid-sized company active in more than 10 countries and over five economic activities confirmed these cost categories and highlighted that costs may indeed be higher for companies that are more complex, as outlined above 151 . It also showed that even some relatively complex entities might not modify their reporting systems and rather compile relevant information from across the company through a survey or other methods.

In case of financial companies, responses from the CEPS survey were even fewer and much more heterogeneous, thus not allowing to draw any meaningful conclusion. This could result from the differences between the relevant portfolios and assets to which the EU Taxonomy would be applied, but also, importantly, from the lack of clarity at this stage about relevant indicators and methodologies to follow in the disclosures, which will be specified only through the delegated act on Article 8 of the Taxonomy Regulation. In the above approximation of costs under NFRD/CSRD scope, financial companies are implicitly included, assuming for simplicity a similar magnitude of costs per company. While this assumption may not fully hold in all cases, the overall effect on the estimated magnitude of costs should not be very large as financial companies form only a small subset of companies disclosing information under the NFRD scope 152 .

To give at least a qualitative sense of the types of costs that financial companies will face, based on the interaction with a limited number of financial and data providers, the following cost categories would be expected:

I)Recurring costs related to purchasing external data from a provider (or expanding existing data subscriptions to cover the EU Taxonomy);

II)Recurring costs related to mapping available data against loan books and portfolio holdings and potential engagement with investee companies; and,

III)Potential one-off costs related to upgrading IT systems and processes.

The costs need to be considered in the context of the anticipated benefits outlined in the table above, which will be spread across a range of actors. As regards non-financial companies, the introduction of the EU Taxonomy could lead to better access to capital and the diversification and expansion of the investor base (as “green” companies could attract both investors with higher sustainability preferences and more institutional investors). The Commission nevertheless acknowledge that costs may be higher than benefits for some actors, at least in the short term, as the potential improvement in access to capital could be influenced by a number of factors. Positive benefits are likely to materialise in particular for those with Taxonomy-aligned activities that were not recognised as “green” in the past (for instance steel and cement producers with outstanding environmental performance). At the same time, companies which were previously considered sustainable by investors and will disclose a lower than expected share of Taxonomy-aligned activities could become less attractive for investors. Some stakeholders also expressed concerns that this may be the case for companies operating in activities that are not included in the EU Taxonomy at this stage (e.g. in their feedback on the inception impact assessment). Nevertheless, if such impact were to materialise, this is expected to be marginal for any given entity, as the expected Taxonomy alignment across the markets is rather low at this stage 153 , and as the resulting reallocation of capital would likely be gradual and driven also by broader policies related to climate and environment.

Together with possible public incentives, this better access to finance for sustainable projects should encourage steps towards reducing carbon footprints, improving climate resilience, and preventing and reducing large long-term consequences of climate change. There are potentially far-reaching positive effects that could arise from the EU Taxonomy in conjunction with other EU Green Deal policies that could together help to significantly reduce negative externalities (e.g. preventing flooding, droughts, etc.). Such benefits cannot yet be quantified, as they must be seen in light of the long-term costs of inaction and resulting heightened physical and transition risks of climate change. Thus, the Commission expects that overall and in the mid- to long-term, benefits (in particular environmental) will significantly outweigh the costs.

The second TEG call for feedback as well as the consultation of the Renewed Sustainable Finance Strategy (see Annex 2.9) both indicated an intention to use the EU Taxonomy among a number of respondents. The intention to use the EU Taxonomy and the need to provide more transparency to end-investors from financial market participants will in turn lead to greater demand for non-financial information from companies. In this context, the NFRD review, which is also undergoing an impact assessment, is central in order to ensure it meets users’ needs. More standardised and credible disclosure of relevant non-financial information along the investment chain could be expected to help investors to obtain the necessary information. Such disclosures will also complement other non-financial information from companies, making it easier for civil society to hold companies accountable, as well as for public authorities to monitor the situation and design future policies, but it could also spur new areas of research and innovation.

Potential impacts for SMEs

SMEs are outside of the scope of the NFRD. At this stage, no direct impact of the broader EU Taxonomy on SMEs is thus envisioned 154 . However, the growing demand among market participants for better, more comprehensive and more reliable non-financial information, potentially including how SMEs’ activities align with the EU Taxonomy, may affect them as well. Therefore, it is understood that there are certain indirect impacts for SMEs which can result from the EU Taxonomy.

As part of investment portfolios and supply chains of large companies, SMEs may be pressurised to disclose Taxonomy alignment to investors or NFRD companies. This is already the case for some non-financial information and could be further intensified. As the SME panel on NFRD showed, 43% of surveyed SMEs that are part of the supply chain of a large company, received requests to disclose ESG data from companies, to which they supply goods or services. Similarly, 76% of the medium sized SMEs that are part of a large company supply chain also received requests from their customers, compared to 36% and 33% for small and micro sized SMEs respectively. 155 Therefore, although SMEs may not fall under the scope of the NFRD, pressure from market participants may nonetheless require them to disclose Taxonomy-aligned activities. These issues and their extent will be monitored in light of potential changes for companies under the Taxonomy Regulation which may result from the review of the NFRD.

In addition, some stakeholders have expressed concerns that their access to finance could worsen unless they disclose according to the EU Taxonomy. For example, stakeholders noted that banks could choose to limit lending to non-Taxonomy-compliant entities or that asset managers could remove them from their investment funds. However, it seems that these concerns are not shared across the board of SMEs. While some companies may choose to disclose EU Taxonomy alignment voluntarily, it is also not likely that a high share of SMEs would do so. Thus it is not very likely that the non-disclosing SMEs would face substantial negative impact. Rather, against the backdrop of growing costs of climate-related events, it could become more feasible for them to increase their resilience to climate-related risks as the EU Taxonomy is expected to help the market develop greater experience with implementation of such climate change adaptation solutions (as explained in Annex 6). Greater use of adaptation solutions and practices by larger companies could foster economies of scale and learning effects, which could in turn make it easier and less costly for SMEs to become more climate-resilient as well.

At the same time, the EU Taxonomy could encourage businesses including SMEs to improve their resilience to climate change adaptation by raising awareness about recommended practices. While climate change will impact SMEs in a similar manner as large corporations, there are indications that SMEs may be less prepared to manage the risks that arise from climate change as they may have less resources and expertise to deal with and recover from the crisis 156 than larger companies. The risk perception of SMEs has changed accordingly. As a survey of the Zurich Insurance Group (2016) showed that 78% of the 2,600 SMEs surveyed expected risks associated with climate change to have a significant effect on their business. Among these, one third of the stakeholders regarded material damage the most critical risk to business due to climate change, followed by the threat of business interruptions. 157 In this context, the EU Taxonomy may play an important, indirect role at several levels as a tool to spur investments in greater resilience.

Cross cutting impacts on stakeholders

Throughout the development of the EU Taxonomy, stakeholders have also expressed concerns on further impacts that could materialise in the case of a widespread use of the EU Taxonomy.

Some stakeholders view a risk of generating financial disruptions: green bubbles, disorderly correction of current market distortions, or stranded assets. By increasing transparency, the EU Taxonomy indeed intends to attract investors to finance sustainable economic activities. This can make some investments more attractive than others and influence cost of financing for companies to some degree. In case of a very high uptake of the EU Taxonomy in investment decisions and a lack of green investment opportunities, such increased demand might generate a green asset bubble with potential adverse consequences on financial stability. However, it is unlikely that investors would use this information in isolation from financial information. In fact, the design of the EU Taxonomy which stretches across a number of sectors rather than a handful of “green sectors” would encourage investors to consider Taxonomy-relevant information in the context of other information relevant for a given sector. Thus if the share price of a highly Taxonomy-aligned company was to greatly diverge in value from its non-Taxonomy peer company (as a “green premium”), any crowding in of investors would, all things being equal, lower the returns on offer, and the premium would likely be kept at a reasonably level as investors with lower sustainability preferences would take their money elsewhere. It is also important to consider that the EU Taxonomy will operate as a part of the broader framework of EU climate strategy, which aims to generate more opportunities related to a low-carbon economy and therefore generate more sustainable activities that fulfil demand.

In relation to activities which are not considered sustainable, the risk of creating stranded assets (e.g. assets which might be subject to a price depreciation resulting from the implementation of climate policies, prior to the end of their economic life, and to the attached investment) does not result from the EU Taxonomy by itself, but rather from the implementation of climate policies (especially in the case of a disorderly transition) and the lack of long-term perspectives from the investors. In this regard, by setting out greater transparency and being designed as a dynamic tool reflecting market developments, the EU Taxonomy would rather help the market to integrate this information in asset prices over a longer-term. The EU Taxonomy could also help avoid some stranded assets by making EU climate and environmental objectives more tangible for different sectors and thus discouraging some new investments 158 that may end up being stranded (e.g. from technological or market developments, or from a lack of resilience to climate change physical impacts). From the investor perspective, the EU Taxonomy could signal activities which are less exposed to transition risks and therefore it can help preserving long-term financial stability by helping to diversify exposures of financial institutions before more stringent sectoral climate policies are implemented. Similar consideration also applies in case certain operations are no longer considered Taxonomy-aligned following an update of the EU Taxonomy. As in the example discussed in the paragraph above, investors would likely weight this information against other relevant information (e.g. financing metrics), hence financing would not be likely to dry out suddenly and cause stranded assets.

ANNEX 4: KEY METHODOLOGICAL CHOICES

4.1Classification of economic activities - NACE

The EU’s NACE classification system of industries (Nomenclature des Activités Économiques dans la Communauté Européenne 159 ) is used to classify economic activities within the EU Taxonomy. The reason for taking NACE as the basis for the EU Taxonomy is that the European classification system promotes comparability and usability. NACE is subject to legislation at the European Union level 160 , which imposes the use of the classification uniformly within all Member States. This guarantees comparability not only across EU Member States, but also across international statistical frameworks – NACE is based on classifications from the UN Statistical Commission (UNSTAT), Eurostat as well as national statistical bureaus. All of these systems are strongly related to each other 161 . The Taxonomy Regulation requires that technical screening criteria be built upon Union statistical classification systems where appropriate (Article 19 (d)) and be easy to use. NACE ensures that the technical screening criteria can be set in a comparable framework and thus ensures a high degree of usability and comparability when the Taxonomy is applied by companies across Europe, but also internationally 162 .

The use of NACE codes for economic activities has several limitations. First, some important activities are not captured by the NACE classification system. For example, urban and regional planning for low carbon development, including avoided journeys, the support for lower carbon personal choices, such as vegetarian diets, or investments to sustainably managed natural capital, such as forests and wetlands lack a specific NACE code 163 . It is therefore likely that additional NACE codes will need to be added at a later stage to enable coverage of all relevant activities in the EU Taxonomy or that certain economic activities need to be included in the EU Taxonomy at this stage without reference to a specific NACE code. Second, the attribution of revenue stemming from an economic activity that is classified in one of the NACE codes may not always be clear to users 164 . 

In order to account for these limitations, activities that fall under several NACE codes but are important for climate change mitigation and adaptation, have been attributed to a dedicated code or a cross-cutting sector (and related economic activities). The latter was the case for both climate change mitigation and adaptation. In addition, to enhance usability for companies and investors, consistency between the EU Taxonomy and NACE must be ensured. Therefore, the work on the EU Taxonomy will be taken into account in the review process of NACE. However, as NACE is used for a wide range of purposes, needs to fit a broad frame put in place for the international economic classifications (e.g., be compatible with ISIC) and serves as reference for many other statistical classifications, alignment with the EU Taxonomy constitutes only one of many considerations. Hence, it might not be possible to ensure a seamless alignment between the two. Moreover, it should be noted that consistency between NACE and the EU Taxonomy will only make it easier for users to determine which criteria apply to a given activity. In each case, it needs to be examined whether a producer, its specific business segment or project belonging to a given NACE code comply with the technical screening criteria of the EU Taxonomy for that activity.

4.2 Methodology for selecting economic sectors and activities for climate change mitigation

This annex complements section 5.1 concerning the classification and selection methodology of economic sectors and activities for the EU Taxonomy.

When considering the selection of economic sectors and activities for the EU Taxonomy, one has to differentiate between prioritisation of certain economic sectors and activities for further assessment on one hand, and the eventual inclusion of these activities in the EU Taxonomy on the other. While the Taxonomy aims to assess the whole economy eventually, this does not mean that all economic activities can make a substantial contribution and will thus be included. This section looks first at why the assessment of certain sectors and activities was prioritised over others and continues by explaining the logic of including certain activities in the Taxonomy based on their potential to make a substantial contribution to climate change mitigation.

4.2.1. Prioritisation of sectors and activities for assessment

The assessment of economic sectors (and activities within these sectors) for climate change mitigation focused on sectors with the greatest potential to make a substantial contribution to climate change mitigation based on their share of overall emissions and their potential to reduce emissions. This impact assessment has evaluated the prioritisation used by the TEG and endorses it. This prioritisation is based on the GHG emissions of the (each) sectors/activities and their mitigation potential, as well as their potential to enable other sectors on the basis of Scope 1 emissions data. The analysis is based on Scope 1 emissions data, as Scope 2 and 3 data by NACE code is not available. Additionally, the methodology recognises energy efficiency improvements, consistent with the requirements of the Taxonomy Regulation. This is also necessary, because failure to address the carbon performance of buildings, which alone contribute 36% of CO2 emissions in the EU28 165 , would risk causing harm to climate objectives.

This prioritization logic matches the EU’s objective to decarbonise the economy. European decarbonisation in the medium-term is defined through the climate and energy targets until 2030, while the 2050 climate-neutrality ambition sets out the long-term vision. The EU has set binding targets for the EU comprised of the GHG emissions reduction target of 40% below 1990 levels by 2030, minimum 32% share of renewable energy in the Union's gross final consumption of energy by 2030 166 ; and the target of 32,5% improvement in energy efficiency to be achieved by 2030 167 . The Commission is currently preparing to propose new emissions targets for 2030.

The input received from the TEG covers 8 sectors that account for over 93% of GHG emissions in the European economy. Prioritization of these sectors for further assessment reflects the objective to decarbonise the EU economy by 2050 168 as it ensures that the main levers for reducing emissions are considered. However, some high-emitting activities within these sectors have not been assessed yet. The percentage of GHG emissions generated by the subset of economic activities that have ultimately been included in the Taxonomy thus represents a smaller fraction of the overall 93%. With respect to the economic significance of included activities, Chapter 7 and Annex 8 contain some early estimations of potentially Taxonomy eligible and aligned shares of activities based on studies available to the Commission.

The TEG used Eurostat GHG emissions inventory data from 2016, which are consistent with the more recently published data from 2018 169 . More recent emissions data is now available 170 . There has been no disruptive change in sectoral GHG emissions in terms of proportions in the recent years, therefore GHG inventory of the EU remains an appropriate basis for determining which sectors of our economy are responsible for the bulk of GHG emissions. The current impact assessment relies on the most recent data available – as illustrated below.

Figure 8: GHG emission in the EU27 in 2018.

Source: European Commission based on European Environment Agency EU's 2020 GHG inventory submission under the UNFCCC, May 2020 - https://www.eea.europa.eu/themes/climate/eu-greenhouse-gas-inventory/eu-greenhouse-gas-inventory 

On the basis of these data, the Technical Expert Group on Sustainable Finance started narrowing down the universe of economic activities (as classified by NACE codes). Of the 21 broad sectors covered by NACE codes, the TEG has selected 8 (including the sector “buildings”, which was added as it was not assigned to a separate NACE code), with four levels of sub-codes. At the fourth level, of the 615 classes of economic activities the TEG has selected 70 activities for inclusion. The selection takes into account that not all sectors or economic activities have high emissions, or the potential to mitigate their own emissions or the emissions of other activities. The latter category is associated with ‘enabling activities’, which as the name suggests, enable other selected sectors to make a substantial contribution to climate change mitigation. In that spirit, complete sectors become relevant for assessment under the technical screening criteria, such as J - Information and Communication - and M - Professional, Scientific Technical activities - due to their potential to be enabling activities.

4.2.2. Inclusion logic of activities in the EU Taxonomy

The eventual inclusion of assessed activities in the Taxonomy is based on the potential of an activity to make a substantial contribution to one or more environmental objectives. As explained in chapter 1.2 (Box 2) “inclusion” means that the respective economic activity has to meet certain technical screening criteria (performance thresholds) in order to be considered environmentally sustainable 171 .

The Taxonomy Regulation acknowledges different means for an activity to make a substantial contribution for each objective. Across all objectives, it is recognised that activities may not only qualify due to their own performance, but also by enabling other activities to substantially contribute. For climate change mitigation, the Regulation additionally stipulates in Article 10 (2) that “transitional activities”, for which no low-carbon alternative exists, can qualify under certain conditions. Transitional activities, such as cement manufacturing, are high impact activities as they are associated with high levels of GHG emissions. However, their environmental pressures can be reduced substantially, for instance by switching to alternative fuels, reducing the clinker to cement ratio, improving energy efficiency etc.

Low carbon activities on the other hand, which are not specified by the Regulation, make a substantial contribution because they have the potential to substitute high impact activities. While many activities across the economy have a low carbon impact, such as education, not all of them can replace high impact activities and are therefore included. An example is electricity generation from wind, capable of making a substantial contribution by replacing electricity generation with much higher levels of GHG emissions. The same applies for electric cars that are able to substitute thermic vehicles. Another way for low-carbon activities to make a substantial contribution is to enhance the good status (or “heal”) the environment. These are economic activities that make a net positive contribution to the environment. In the case of climate change mitigation, this category includes activities that remove carbon from the atmosphere, for instance afforestation or direct air capture.

The typology of substantial contribution described is illustrated in Figure 9 below.

Figure 9: Typology for substantial contribution to climate change mitigation.

When looking at explicit exclusions, the only – ex-ante – exclusion of economic activities stems from the Taxonomy Regulation and refers to electricity production from solid fossil fuels. The other activities that have been assessed, but not included, do simply not have the potential to make a substantial contribution as described above.

While this explains the overall inclusion and exclusion logic of activities, other activities could not be included at this stage due to practical constraints. First, a specific technology that would allow an activity to make a substantial contribution might not yet be mature enough to be included. Some solutions are very innovative, but are not yet commercially available on the market. Second, data availability for the activity’s potential to make a substantial contribution might still be missing. In this case, no scientific base could be provided to include the activity and a prudent approach was chosen to delay inclusion. Third, for some activities, data existed but no widely shared understanding of their benefits was available. In this context, work has been ongoing for several activities within the European Commission, but was not mature enough to be used in this round. Finally, the TEG had phased a very ambitious task in a limited amount of time. It has to be acknowledged that not all activities in assessed sectors have been assessed yet (for example aviation or maritime shipping in the transport sector or oil refineries in the energy sector –again, not preempting the decision to assign technical screening criteria to these activities or not). The Platform on sustainable finance will continue to work on this task to include any relevant sectors and activities as timely as possible.

In general, the Taxonomy aims to provide incentives for investors to invest in green projects and activities by giving them additional clarity; it does not aim to create disadvantages or change incentives for activities that are not included. Moreover, the potential disadvantages in terms of potential financial investments due to the delay of inclusion (probably one year) for certain sectors is expected to be marginal. The ultimate goal of the Taxonomy is, however, to assess the whole spectrum of economic activities.

4.3 Methodology for selecting economic sectors and activities for climate change adaptation.

For climate change adaptation, the logic of the assessment and inclusion of activities is different from the one for climate change mitigation where sectors were assessed by their potential to make a substantial contribution to mitigation based on their GHG emission profiles. Indeed, all sectors and activities through the economy are expected to be able to make a substantial contribution to climate change adaptation. This “whole-economy” approach is essential as climate change will affect all sectors of the economy. All sectors need to adapt to climate impacts in order to become resilient. Boosting climate resilience in all sectors helps avoid economic losses and provides co-benefits across other objectives. For instance, urban reforestation can provide co-benefits such as natural flood control, air pollutant and particulate matter removal, and regulate thermal stress in populated areas.

Nevertheless, it was not possible to include the whole economy for climate change adaptation in this first delegated act within the given timeframe. In order to preserve the integrity of the EU Taxonomy, relevant ‘do no significant harm’ criteria had to be considered and developed for every included activity. Three categories of activities were therefore included in this first delegated act based on a selection methodology described below. The approach taken implies that some key economic sectors for adaptation to climate change might not yet be included in the recommended list of activities that make a substantial contribution to climate change adaptation and will be added at a later stage through the work of the Platform. As the Taxonomy is set to be a dynamic tool that will develop and change over time, this gradual inclusion of activities and sectors is also a part of the essential characteristics of the Taxonomy.

4.3.1. First category of included activities: Activities for which DNSH criteria for environmental objectives 3-6 were developed under the mitigation Taxonomy.

The starting point for the adaptation Taxonomy in this first delegated act was the same list of activities that the TEG proposed for climate change mitigation, with some limited deviations to include further sectors and activities with high relevance for climate change adaptation (annex 6.1). The Commission services acknowledge that this approach implies that some key economic sectors for adaptation to climate change might not yet be included in the recommended list of activities that make a substantial contribution to climate change adaptation and therefore need to be assessed by the Platform on Sustainable Finance.

Nevertheless, by taking the activities proposed by the TEG as a starting point, it is possible to include these activities without compromising the environmental integrity of the Taxonomy as DNSH criteria for environmental objectives 3-6 were already developed under the mitigation Taxonomy. Only DNSH criteria to climate change mitigation had to be established for these activities.

These activities across 8 sectors are also of high relevance for adaptation as they should also be made resilient to climate impacts along with the whole economy. The rationale for their relevance to adaptation is developed in this annex under section 6.2.1.

4.3.2. Second category of included activities: (i) Activities not assessed by the TEG but for which DNSH criteria for activities already assessed can apply or (ii) Activities that have no or a very low impact on other environmental objectives.

For climate change adaptation, it is proposed to include a limited number of ‘adapted activities’ in the delegated act in addition to those that were proposed and analysed by the TEG. The selection of these additional activities for inclusion has been made rigorously, based on in-house expertise of the sectors within the Commission and according to the following methodology:

1.First step: screening of all remaining activities in NACE in order to identify activities that were partially covered or not covered by the work of the TEG.

2.Second step: identifying these activities screened in step one that (i) can follow the do no significant harm criteria for activities already assessed by the TEG (due to their similarity, e.g. additional manufacturing categories or buildings for warehouses), or (ii) have no or a very low impact on other environmental objectives and as such do not need DNSH criteria. This is typically the case for education or health systems 172 that are important enablers for a successful collective resilience 173 . This work was done by the JRC and the result is shown in the table below.

3.Third step: expert judgment within the Commission and the precautionary principle were used to eliminate the some activities from the list resulting from step 2. If, for any activity, there was a slight risk of harm to other sustainability objectives or further analysis was needed to assess potential impact, it would not be included.

For example:

oAlthough “Gambling and Betting” has no obvious environmental impact, it has been left out due to significant social impact it can cause.

o“Public Administration and Defence” has been left out, as defence can be one of the largest greenhouse gases emitters in many countries.

o“Publishing” has been left out as further analysis is need to assess harm potential to circular economy

4.Fourth step: assessing the potential for these activities to be considered as enabling activities in the future (i.e. providing solutions for adaptation).

The result of this analysis is summarised in table 9. The criteria that are set for these activities are the same as for all other activities that need to be adapted. The assessment of the criteria against the Taxonomy Regulation’s requirements is therefore part of section 6.3.2 in the main text.

The rationale for their relevance to adaptation is developed in annex 6.2.2.

4.3.3. Third category of included activities: Enabling activities identified by the TEG.

For enabling activities to climate change adaptation, the approach taken by the Technical Expert Group has been reviewed. Based on studies 174 and in-house desk reviews it is suggested to establish more tailor-made criteria for enabling activities (in particular insurance) instead of a universal set of criteria. Two sectors that contain enabling activities are (i) Insurance and reinsurance, and (ii) Research, development and innovation allowing other activities to become adapted.

The rationale for their relevance to adaptation is developed in annex 6.2.3.

Table 9: Analysis for inclusion of adapted activities beyond TEG recommendation

4.4 Approaches to set technical screening criteria

As explained in section 5.2, EU climate and environmental objectives do not translate automatically into technical screening criteria for individual economic activities. This impact assessment used the approaches identified by the JRC 175 as a tool to determine what types of metrics and criteria would be the most appropriate for a given economic activity. The applicable approaches were selected by using the Taxonomy Regulation requirements as a guiding framework. This was reflected in the use of an assessment grid described further below (Table 10) throughout Annex 5 with the results of this assessment summarised in Section 6.

For the climate change mitigation objective, there are different ways in which criteria to substantial contribution can be set. The criteria are developed in line with the net-zero emissions by 2050 objective and a 50–55% reduction by 2030, consistent with the commitments under the European Green Deal. While this can be used as a guiding principle, this does not translate automatically into criteria for individual economic activities. A starting point is therefore to recognise that the criteria in the Taxonomy can be set in different ways. The approaches outlined for climate change mitigation have been identified based on the types of criteria that have been analysed during the work of the TEG.

The list of approaches is not exhaustive, but comprises the approaches that have been identified by the JRC as most feasible ways to set criteria for climate change mitigation so far. The concept of each approach, presented below, describes how the substantial contribution criteria for climate change mitigation can be formulated for each of them. Further tables explain how the approaches were applied in the assessment grids and provide some illustrative examples.

Table 10: Presentation of the generic types of approaches

Depending on the activity assessed, the different approaches presented in Table 10 are not equally suitable (e.g. as there is no well-established metric for a given activity’s environmental footprint). This explains the need for a methodology to select the most appropriate one. The table below (Table 11) presents a primary analysis of the intrinsic relevance of each approach with regards to the four categories of requirements defined in Section 4. We acknowledge the fact that there are trade-offs between some of the requirements: for instance, the ‘usability’ category pushes for criteria as simple and easily verifiable as possible while the ‘environmental integrity’ category requests scientific evaluation of life-cycle footprints that requires more effort to create and assess. As such, the most promising approach will be the one meeting the requirements to the best degree possible potentially for the different requirement categories, while ensuring at least minimum alignment with each.

As displayed in Table 11, in most cases, the suitability of the approach for a certain activity depends on the specificities of the activity considered. A further step in the analysis is hence required to determine which conditions on the activity assessed may influence the selection of the approach (see Table 12). We provide below a summary of the key findings for each approach.

The impact-based approach is a result-oriented approach and is the most scientifically robust as there can be a strong matching between the environmental needs and the criteria requirement without proxy. However, as it depends on the context in which the activity takes place it has a lower alignment regarding the ‘level playing field’. Its ‘usability’ and ‘coherence with EU policy’ depend on the activity itself (existence of such policies, measurability and availability of relevant data at activity level etc.) and can’t be assessed a priori.

The performance in relation with environmental target approach is also result-oriented but under a number of implicit assumptions (e.g. on the fact that the activity is replacing an activity with worse performance). It has a strong solution-neutrality component, compatible with the level playing field requirement. Depending on the quality of the quantitative performance metric selected, there may be a strong scientific linkage between the metric and the environmental impact. Thus the alignment with the ‘environmental integrity’ requirement is strong where the information used to set the threshold is also science-based. The usability of the approach and its coherence with EU policy depend on the activity itself and cannot be assessed a priori. For this criteria to be usable, one has to ensure that the level of ambition set for the threshold (from policy or scientific source) is actually reachable by the market players. Note: this approach does not recognize even very substantial performance improvement, as long as the target threshold is not reached.

The best-in-class performance approach has similar alignment with the ‘environmental integrity’, the ‘level playing field’ and the ‘usability of the criteria’ requirements than the performance in relation with environmental target approach, as they both rely on a result-oriented performance metric. Regarding policy coherence, it depends on whether policy related to the activity assessed recognises the performance of the best market players. However, as the threshold derives from technologies and practices available on the market rather than being directly linked to policy or scientifically established performance minimum requirement, ‘environmental integrity’ needs careful checking. This approach also requires frequently updated performance data for the whole EU market. This approach is likely to be more appropriate for high impact activities (selecting the best performers among high emitters may be, perhaps temporarily, good enough) than for low impact activities (if impacts below a given threshold are considered acceptable by the environmental imperative, a best-in-class approach might be too stringent).

The relative improvement approach does not reward the best absolute performers, but the ones having the best improvement. It encourages the whole market to take action and not just the most advanced players, leveraging a potentially bigger impact. The compliance with the four requirement categories depends on the activity assessed. This approach can be especially relevant for activities enabling a minimum improvement of underlying activities or assets, or net positive impact activities directly improving the state of the environment.

The practice-based approach that defines a set of practices to implement is not a result-oriented approach, but a means-oriented one. As such, the linkage between those means and the actual impact has to be established in a way that ensure compliance of the ‘environmental integrity’ requirement. Furthermore, as only one type of solution may be eligible (the set of practices chosen), it has to prove to be the best available one in order to respect the ‘level playing field’ requirement to make sure no ineligible other solutions performing at least as well exist. To be usable, the criteria have to be designed in a way that do not leave a large margin of interpretation for the activity user or the verifier. We note that in the case of activities improving the state of the environment, it is often difficult to clearly identify the results of the activity in isolation from anything else and thus a means-oriented approach like this one can prove more suitable.

The process-based approach, as a qualitative means-oriented approach, can leave a high margin of interpretation when applying the criteria and is harder to connect with scientific impact evidence. It can, however, be easier to write (e.g. when no other approach proves feasible) as it explicitly outlines the qualitative steps the activity has to follow without pre-empting the way in which the activity has to complete them). We note that in the case of activities improving the state of the environment, it is often difficult to clearly identify the results of the activity in isolation from anything else and thus a means-oriented approach like this one can prove more suitable

The nature of the activity approach automatically rewards the activities that correspond to the description. This is the most usable criteria as it is unambiguously and immediately assessable. It can be used as an extension of another approach if one type of solution is always eligible regardless of the way the activity is conducted. However, there must be sound scientific evidence of the fact that the activity would always comply to avoid level playing field issues vis-à-vis other activities that need to prove compliance with e.g. a performance based criteria. For activities improving the state of the environment, this approach can be particularly suitable.

Based on this primary analysis, we can identify that some approaches can prove less suitable for certain categories of activities, based on the type of substantial contribution these activities can do. By default, any approach is potentially suitable and would require further analysis taking into account activity specificities, but some approaches already can show less suitable or not suitable for a given type of activity. Table 12 summarizes these findings.

Table 11: Relevance of the different approaches depending on the type of substantial contribution of the activity

In this section, a way forward is proposed to select the most promising approach to develop the TSC for a given activity. We will illustrate this methodology with an example: electricity generation from geothermal energy.

For a given economic activity to assess, the legislator has to select the most suitable approach. A systematic screening of the potential approaches for that activity can be used based on the alignment of each approach with the Taxonomy Regulation requirements with regards to the specificity of the activity. Table 12 below shows a list of conditions that can be assessed. As these requirement can sometimes prove conflicting, we don’t expect an approach to perform to the highest extend to each requirement categories and some trade-offs may be necessary. The selected approach should be the one that deemed to have the best overall compliance.

For a given economic activity or group of similar activities, a systematic screening methodology will:

1)Check the level of compliance of each approach with the four categories of requirement. For that purpose, one can evaluate to what extent the conditions in the guidance Table 12 are met;

2)Compare the different approaches based on this analysis to narrow down the number of promising approaches;

3)Select the approach which offers the best overall alignment.

Table 12: Deduction of the assessment grid: conditions under which an approach can be selected for a given economic activity

For climate change adaptation, technical screening criteria are mostly qualitative and process-based. Their primary qualitative nature results from the lack of measured baselines or accepted metrics for defining quantitative screening criteria for adaptation at this point in time, and lack of adaptation targets defined at the national, sectoral, or subnational level. Even with the availability of methodologies, targets or baselines, quantitative screening criteria could exclude small-scale activities that may deliver significant climate-resilience benefits in specific contexts. The interaction of climate exposure, resources and socioeconomic characteristics related to a specific economic activity determines the nature and scale of adaptation that would be appropriate.

The highly context- and location-specific nature of adaptation needs and solutions explains why the criteria to determine substantial contribution are process-based and practice-based. Sectoral climate sensitivity matrixes in Annex 6.1 identify the main hazards in sectors and underline potential vulnerabilities that justify the inclusion of the sectors by Taxonomy. Process-based criteria allow to determine whether an activity contributes to adaptation and to the broader system’s climate resilience. The actual assessment of climate risks (“climate risk assessments”) that are material to the activity lies at the core of the adaptation approach.

Following this logic, when considering the different approaches introduced in the previous section, the criteria that are set for adaptation can be practice-based and process based.

As for adaptation, one set of criteria is proposed for substantial contribution for adapted activities. Therefore, no analysis per sector is carried out such as for climate change mitigation. Instead, for adaptation it was possible to check the compliance for all criteria against the requirements of the Taxonomy Regulation directly (Section 6.2 and Annex 6.2).

In addition to requiring that an activity makes a substantial contribution to one environmental objective, the Taxonomy Regulation requires that the activity does no significant harm (DNSH) to any of the other environmental objectives under the Taxonomy Regulation, in order for the activity to be Taxonomy-aligned. While Article 3 of the Taxonomy Regulation contains the general conditions for an activity to qualify (including that it has to meet the DNSH criteria), Article 17 of the Taxonomy Regulation sets out concrete requirements for the meaning of DNSH to a given objective. In the delegated act, an approach needs to be taken on what this means in a given objective-activity combination. DNSH criteria reflect a sector-specific assessment of the respective impacts that a given activity can have on the different environmental objective. When setting criteria for DNSH, this impact assessment differentiated between (i) the environmental objectives that are at risk of being significantly harmed by an activity; and, (ii) those that are not at such risk. For each activity, the risk of harm to each of the objectives separately has been assessed. If an activity does not risk causing significant harm to an environmental objective, no DNSH criteria were specified for that combination of activity and objective (“minor harm” is addressed by applicable legislation). Conversely, if an activity risks causing significant harm to an environmental objective, DNSH criteria were specified.

It could be argued that for many activities the risk of significant harm to one or several of the objectives is effectively mitigated by EU legislation. However, legislation of non-EU countries does not necessarily effectively mitigate this risk, so that activities not subject to EU law (e.g. because they take place outside the EU) entail such a risk. In view of the global applicability of the Taxonomy Regulation, for such cases, DNSH criteria mirroring EU legal requirements have therefore been proposed.

There are also cases (for a given activity and given objective) where existing EU legislation itself does not effectively mitigate the risk of significant harm as defined in the Taxonomy Regulation, for example because EU legislation is not developed for a given sector with such focus (e.g. some of the DNSH criteria to circular economy). For these cases, (approximately 10% of the criteria), additional criteria for DNSH were developed as further explained in Chapter 6 and accompanying Annex 7.

DNSH criteria have the form of either qualitative (including process-based) or quantitative performance criteria: For DNSH to climate change adaptation, the criteria are process-based. This is also the case for most activities for DNSH to the sustainable use and protection of water and marine resources (where criteria require identifying and addressing risks to this objective, including through management plans); as well as for DNSH to the protection and restoration of biodiversity and ecosystems (where criteria require that an environmental impact assessment has been conducted, where relevant, and mitigation measures have been implemented). For DNSH to the transition to a circular economy, criteria are often qualitative, e.g. requiring recyclability of components. For DNSH to the objectives climate change mitigation and pollution prevention and control, the criteria are primarily quantitative (e.g. references to emission limit values / ranges from best available technique conclusions adopted under the EU’s Industrial Emissions Directive in the case of DNSH to pollution). These differences reflect the different nature of the environmental objectives (e.g. location-specific impacts), as well as the availability of quantitative data that needed to be accounted for, e.g. minimum performance thresholds.

The do no significant harm criteria can generally be set in different ways as outlined above. As they are set across all six environmental objectives and for each sector, where necessary, as explained above, a detailed analysis for each sector and each objective was not carried out. Rather, the relevant approaches chosen for each objective are assessed per objective. In addition, the principles for setting do no significant harm criteria are outlined and assessed to make sure that all proposed approaches meet the Taxonomy Regulation’s requirements to the best degree possible.

4.5 Level of ambition for the technical screening criteria

For the climate change mitigation Taxonomy, the main points of reference to set the level of ambition for technical screening criteria on economic activities are the Paris Agreement and the EU climate neutrality target by 2050 177 . For climate change mitigation, the Taxonomy Regulation therefore aims to include activities that support the transition to a climate-neutral economy consistent with a pathway to limit the temperature increase to 1,5°C above preindustrial levels. In Article 10, the Regulation sets out means in respect to these reference points. However, other public policies or sectoral pathways consistent with these references could also be used as point of reference, if relevant.

While alignment with the EU’s and international environmental objectives as outlined above can be used as a guiding principle, the application to individual economic activities is complex. First, different climate scenarios have not been sufficiently translated into concrete pathways per sector in an unanimously accepted way. Not all technical screening criteria can thus directly be deducted from pathways to climate neutrality. Second, ambition levels of sectorial legislation in the EU varies greatly. Third, if environmental legislation exists, it does usually not set ambition levels directly on economic activity level or tailored to economic operators, but it rather exists in the form of Directives that contain obligations for Member States who then implement EU legislation and set out obligations on economic operators. Therefore, determining the exact ambition level for technical screening criteria is very specific to the considered sectors. However, the grounds on which EU legislation is taken into account to implement this ambition is done in a coherent way across the Taxonomy.

Generally, compliance with EU law or mandatory practices is a minimum requirement for all technical screening criteria. However, the aim of the Taxonomy is the “channelling of capital flows towards sustainable investments” in order to achieve the Sustainable Development Goals (SDG) 178 . Ultimately, it is about improvement in environmental outcomes, either through impact amelioration for existing activities or through new green activities that substitute non-green activities. The Taxonomy and its criteria should provide incentives for such improvements. The substantial contribution criteria therefore usually go beyond EU legislation as exemplified below. Setting general EU law compliance as a threshold for substantial contribution would lead to defining whole sectors as environmentally sustainable without incentivising improvement beyond what the EU legislation already does.

For example, for the construction of new buildings, the EU legislation (the Energy Performance of Buildings Directive) already requires that as of 1 January 2021 all buildings are nearly zero-energy buildings. For the EU Taxonomy it is proposed that the new buildings have a performance at least 20% better than the one of nearly zero-energy buildings. Where the EU legislation contains clear sustainability criteria, the Taxonomy draws directly from these critiera to set coherent incentives. This is the case for some (very few) sectors, for example the Clean Vehicles Directive. As mentioned before, setting an existing ambition level from EU law cannot be understood literally as technical screening criteria reproducing content of EU law. It rather means this ambition can be translated into criteria that apply to economic activities.

When translating the ambition level of the EU Taxonomy to economic activies, it is an important consideration that the technical screening criteria have to be reachable by current market practices. The criteria should therefore take into accound what is actually feasible for the market players, based on the performance available solutions on the market. Practices available on the market have to be proven to be applicable by best performers in the sector (for substantial contribution); it is not required that the majority uses them already. For DNSH, this consideration does not only apply to the level of ambition of a quantiative threshold, but also to qualitative criteria that require certain practices, such as verification requirements, assessment practices or management plans.

To define the level of ambition, there is an important difference between activities that can already be performed in a low-carbon way today (if continue to be performed as today until 2050, they would be consistent to reach climate neutrality) and the ones that cannot, but that need to be incentivised to change in particular. When an activity can already be performed in a “low-carbon way”, the criteria are set according to these practices. When it is currently not feasible to carry out an activity with low-emissions, the criteria are set to incentivise the best market practices, provided that they are still aligned with the transition to a climate-neutral economy consistent with a pathway to limit the temperature increase to 1,5°C, do not hamper the development of low-carbon alternatives and avoid lock-in of carbon intensive assets.

Accordingly, one can then set the threshold based on scientific or policy targets and check that the ambition level is reachable with the current level of technololy. Or (in particular for transitional activites) set the level of ambition based on the performance of the market and ensure that the level of ambition proposed is not in contradiction with EU policy and scientific conclusions.

ANNEX 5: CLIMATE CHANGE MITIGATION

5.1. Sector-specific assessment of the approaches and criteria for substantial contribution to climate change mitigation

5.1.1. Forestry

This section assesses the criteria recommended in the draft delegated act as published in November 2020 for the forestry sector with regard to substantial contribution to climate change mitigation. It provides the context and scope of this sector and takes stakeholder feedback into account. It also outlines where major deviations from the TEG final recommendations are proposed. Applying the Taxonomy Regulation’s requirements, the section eventually assesses the suitability of the different types of approaches to substantial contribution to set criteria for the forestry sector and checks the resulting criteria against the Regulation.

Context

Why is forestry covered: Forests cover around 30% of the global landmass (in Europe this figure is higher at ~40-45%) and absorb roughly 2 billion tons of carbon dioxide each year. The EU forests already account for more than 20% of the global forest carbon sink, and yet an increase in carbon sequestration from forests is essential to the achievement of a net-zero target by 2050 in Europe and globally, especially in times that forests are experiencing many challenges due to climate change.

Which activities would be covered 179 : On the basis of the importance of this sector in carbon sequestration potential, it is considered necessary to cover a range of types of activities that take place to create, improve and enhance the forests to contribute to various objectives, including climate. To this end, the TEG proposed five activities in the forestry sector, namely afforestation, rehabilitation and restoration, reforestation, existing forest management, and conservation forests, with the proposed criteria applying up to the forest gate (i.e. not considering downstream uses of wood). The Draft Delegated Act proposes criteria covering these activities. This is done without prejudging the evolving forest policy framework, notably the ongoing processes stemming from the Biodiversity Strategy and the Forest Strategy, and with the expectation that the future requirements can be integrated into the Taxonomy criteria at the later stages. Agroforestry is not explicitly addressed at this stage. However, the respective elements from the forestry criteria could be applied to the related parts of the economic activities. In addition, the importance of wetlands as carbon sinks is recognised and the inclusion of an according economic activity is proposed for the draft delegated act.

Assessment of the proposed criteria

The Taxonomy Regulation’s requirements are assessed for each of the specific approaches to set technical screening criteria that have been described in chapter 5.2. Aiming to strike the best balance between the different requirements, this assessment results in a combination of performance in relation to the environmental target criteria, performance improvement criteria, practice-based criteria and nature of the activity criteria that is consequently proposed for technical screening criteria for economic activities in the forestry sector. The table below presents the summary of this assessment.

Table 13: Assessment of proposed approaches to set criteria for forestry    

Resulting from this assessment, a combination of criteria that are process, practice and performance based are proposed for the forestry sector. The below analysis assesses in more detail how the parameters for the criteria that result from these approaches are set with a similar ambition level across forestry activities that reflect – and meet the Taxonomy Regulation’s requirements.

In light of the specific role of forestry in decarbonising the EU economy, but also in light of the importance of forests to a broader range of EU environmental objectives, a comprehensive approach to forestry is embedded in the proposed criteria for substantial contribution to climate change mitigation. This reflects the strong interconnectedness of the various services that the forests provide and the balance of environmental outcomes that result from these services. This approach also reflects feedback from stakeholders that forestry activities should take a holistic approach in the Taxonomy. The proposed criteria ensure applicability in a range of situations and avoid prescribing specific practices that might not be suitable in all locations and circumstances.

The criteria reflect in particular the Regulation’s requirement to set the criteria in a fair and usable way, so that users can set their baseline reflecting the specific situation in which they operate, while a high level of ambition is maintained. The proposed criteria build on existing legislation and definitions in parts, as also requested in the stakeholder feedback. At the same time, these are not sufficient for defining substantial contribution to mitigation, and an acceptable level of ambition, delivering on the Taxonomy objectives, needs to be ensured through combining a range of elements and the need to ensure transparency.

Proposing elements in the criteria that foster transparency had to be weighed up against the administrative burden it would pose on the reporting entities and users of the Taxonomy. The proposed criteria in the November draft delegated act are, therefore, predominantly based on the main elements of already existing forest management and sustainability processes. The benefits of additional data availability were a key element in the stakeholder feedback. In forestry, the specific measures and potential is context specific and thus the ambition level is hard to ascertain without in-depth knowledge. Building on existing processes, a verification requirement is therefore required for the forest management plan to allow greater certainty about the alignment of the practices, which would be too hard to verify otherwise.

Based on the main elements of already existing forest management and sustainability processes 180 , the criteria clearly define forests for the purposes of the Taxonomy through existing definitions and additional elements regarding the suitability of the location and activity, and cover the main elements that are important for ensuring good long-term GHG performance in forestry. It is essential that the Taxonomy does not facilitate deforestation or conversion of high carbon stock lands, but would only cover activities which take place on suitable areas. The Taxonomy criteria ensure a sufficiently high ambition level further by promoting additionality of measures, going beyond the business as usual baseline. There are three key parameters that could be used for assessing the substantial contribution to climate change mitigation, and the following evidence is further considered regarding these:

-Forest management/afforestation plan: in light of the context specificity of forestry, the best measures and potential for carbon savings vary. To allow identifying these measures, a verified and regularly updated plan detailing the situation and the measures taken or foreseen is proposed. Such plans are a common aspect of forest management, and are at places also already mandated under national legislation. To ensure that the plans are sufficient, the sustainability of the measures needs to be specifically verified.

-Climate benefit analysis: In light of the complexity and interconnectedness of forest ecosystems, the evolution of GHG savings and carbon stock requires context specific calculation. To avoid measures that benefit in the short term but are detrimental in the longer term, both the baseline calculations and the benefit analysis need to be based on conservative assumptions and regularly verified. The calculations of GHG savings and carbon stock should follow the international guidelines which define methods to calculate both above and below ground carbon pools, both of which are essential to maximising the long term sequestration of CO2. While this can increase administrative effort to some extent, such tools are available and they reflects an essential element of a comprehensive approach to carbon stock considerations in forests. This analysis needs to demonstrate climate benefit over the baseline. At the same time, the emissions and removals that occur due to natural disturbances should not be considered as disqualifying.

-Permanence: Given the importance of long-term action to achieve GHG savings, the criteria should also ensure that the permanence of the climate benefit is ensured in the above plans.

In light of the lack of a fully agreed and verifiable reference point for sustainable forest management, and the ongoing processes following the EU Biodiversity Strategy and the forthcoming new EU Forest Strategy, it is difficult to define a fixed set of practices for all identified forestry activities at this point in time. While these discussions are ongoing, the criteria build on the basis described above ensuring a verified forest management plan, or equivalent, together with other safeguards listed above to ensure a high level of climate contribution. While covering the same main parameters, this represents a notable difference to the TEG analysis, which was built around the use of Sustainable Forest Management practices.

This difference meets the requirements of the Taxonomy Regulation better. From policy coherence perspective, the Commission proposal offers better alignment to the current situation in the EU, while also improving usability with clear requirements.

In addition to forestry and agriculture activities, the importance of wetlands is recognised in the context of strengthening land carbon sinks. Wetland restauration is therefore considered to have potential to significantly contribute to climate change mitigation provided that the parameters listed above are addressed. Apart from spelling out criteria for the restoration of forests, the work by the TEG did not recognise the role of nature-based solutions for climate change mitigation and adaptation, mainly due to technical capacity constraints. To make up for this shortcoming and to ensure coherence with recent policy initiatives, notably the European Green Deal and the EU Biodiversity Strategy for 2030 181 , it is proposed to consider to include the activity “restoration of wetlands” in the delegated act. This also follows directly from the Taxonomy Regulation, where co-legislators included in Article 10.1.f strengthening land carbon sinks among the means to substantially contribute to climate mitigation 182 . The European Green Deal recognises the intrinsic links between biodiversity and climate action. The 2030 Biodiversity Strategy, in following the assessment by IPBES 183 , refers to nature as a “vital ally in the fight against climate change”, and highlights in particular the role of nature-based solutions such as protection and restoration of wetlands for both emissions reductions and climate adaptation.

5.1.2. Agriculture

This section assesses the criteria recommended in the draft delegated act as published in November 2020 for the agriculture sector with regard to substantial contribution to climate change mitigation. It provides the context and scope of this sector and takes stakeholder feedback into account. It also outlines where major deviations from the TEG final recommendations are proposed.

Context

Why is agriculture covered (in the draft proposed in November 2020): The agricultural sector plays a central role in climate change mitigation. At present, the food supply chain is responsible for 19-29% of global greenhouse gas (GHG) emissions, the majority of which occurs at the farm level (80-90%). In the EU, 10% of GHG emissions are attributed to agriculture (see Figure 8 in Annex 4.2.1), that include notably non-CO2 GHG emissions, particularly from manure management and enteric fermentation in case of livestock and from agricultural soils 184 . In addition to potential GHG reduction, agriculture sector can also act as a sink for GHG emissions.

Which activities are covered: Three broad economic activities are proposed to be covered: growing of non-perennials, growing of perennials, and animal production. Plant propagation, support activities and hunting are not covered at this stage, and represent a lower GHG savings potential. Agroforestry is not explicitly addressed at this stage. However, the respective elements from agriculture and forestry criteria could be applied to the related parts of the economic activities. The proposed criteria target three types of behaviour: increased sequestration, reduced emissions, and avoidance of converting high-carbon lands.

Assessment of the proposed criteria

The Taxonomy Regulation’s requirements are assessed for each of the specific approaches to set technical screening criteria. Aiming to strike the best balance between the different requirements, this assessment results in a combination of performance improvement criteria, practice- and process-based criteria that is consequently proposed for the technical screening criteria for economic activities in the agriculture sector. The table below presents the summary of this assessment.

Table 14: Assessment grid for agriculture activities

Resulting from this assessment, performance in relation to performance improvement criteria, practice-based criteria and process-based criteria are proposed for the agriculture sector. The below analysis assesses in more detail how the parameters for the criteria that result from these approaches reflect – and meet the Taxonomy Regulation’s requirements. In light of the specific role of food production in decarbonising the EU economy, but also of agriculture to a broader range of EU environmental objectives, the agriculture criteria need to embed a comprehensive approach in the criteria for substantial contribution to climate change mitigation. This reflects the strong interconnectedness of the specific practices and the balance of environmental outcomes. Therefore, the criteria should ensure applicability in a range of situation and avoid the potential of prescribing specific practices that might not be suitable in all circumstances. The relevance of specific practices to an activity should subsequently be assessed taking into account the local context.

The criteria reflect in particular the Regulation’s requirement to set the criteria in a fair and usable way, in that users are given a choice to comply with the criteria in different ways (quantitative and qualitative) and set their context specific baseline, while a high level of ambition is maintained. This partly addresses the concern raised by a number of stakeholders over the difficulty in demonstrating compliance with the criteria proposed by the TEG. While the proposed criteria maintain the core elements of the TEG recommendation, these are restructured and simplified for usability. The proposed criteria build on existing legislation and definitions as far as possible, as also requested in the stakeholder feedback; notably a number of essential management practices are aligned with existing regulation, but go beyond them in ambition. The detail of the criteria had to be balanced against the additional administrative effort for reporting entities and users of the Taxonomy. The proposed criteria build on the practices already standard in the implementation of the EU Common Agriculture Policy, and thus would not constitute a noticeable increase in administrative effort for the best market practice. Like in forestry, the specific measures and potential are context specific and thus the ambition level is hard to ascertain without in-depth knowledge, and therefore a verification requirement that builds on existing processes is warranted.

Similar to forestry, agriculture is location and context specific, and it is essential to ensure flexibility of criteria, while maintaining a high level of ambition. It is essential that the Taxonomy does not facilitate deforestation or conversion of high carbon stock lands, but would only cover activities which take place on suitable areas. Building on the existing practices and requirements under EU regulations, there are two key dimensions that should be used for assessing the substantial contribution to climate change mitigation, and the following evidence is further considered regarding these:

1)Farm Sustainability Plan. To ensure maximum feasible ambition and balanced treatment in light of the variability of farming situations, a regularly verified farm sustainability plan should map the specific conditions and establish baselines and identify key management practices that achieve best results in that context. This should as a minimum cover the essential elements linked to farm management and keeping a regular record of interventions. This reflects the existing practice and work under the CAP, and adds further clarity and safeguards in addition to TEG recommendations.

2)High climate ambition. Reflecting the range of situations, existing practice and the current penetration of greenhouse gas emission calculation practice, the criteria should allow for alternative avenues for demonstrating substantial contribution, one based on essential management practices, and the other on quantified GHG savings. Regarding essential management practices, these incentivise the best practices in key aspects of land management that bring best results in a specific context, building on the TEG recommendations and making the requirements more precise. Regarding GHG targets, these should aim at both reduction of emissions and increase in carbon sinks, thereby setting the incentive to address both of the key aspects. Like for forestry, the calculation of baseline and emission performance should be based on conservative assumptions and be done in line with internationally recognised methods, notably the relevant IPCC guidelines. Force majeure should be recognised in these approaches. With these elements the criteria can ensure high ambition that is in line with the best market practice. The alternative pathways of either proving GHG savings over a 20% threshold or following a set of essential practices supports recognition of efforts in different contexts.

The questions raised by stakeholders regarding the inclusion of livestock in the Taxonomy have also been considered. It is recognised that the Long Term Strategy and the Farm to Fork Strategy include a clear direction of travel regarding diets, which could be seen as an argument for reconsidering the inclusion of livestock production in the Taxonomy. At the same time, the specific role of the Taxonomy in supporting improvements within activities balances towards the incentivising improvements in one of the major emitters in the form of livestock, which is why this sector is included in the Taxonomy. Commission is cognisant of the need to consider plant-based alternatives in the further development of the Taxonomy.

5.1.3. Manufacturing

This section assesses the criteria recommended in the draft delegated act as published in November 2020 for the manufacturing sector with regard to substantial contribution to climate change mitigation. It provides the context and scope of this sector and takes stakeholder feedback into account. It also outlines where major deviations from the TEG final recommendations are proposed.

Why macro-sector covered: The manufacturing sector is the third largest source for GHG emissions in the EU, being responsible for about 17% of the EU GHG emissions in 2017 185 . At the same time, it is also a key sector in enabling GHG emission reductions in other sectors by producing the products and technologies needed to become low-carbon and is as such, a fundamental part of the low-carbon economy. The manufacturing section of the Taxonomy Regulation therefore includes both the manufacturing of low-carbon technologies as well as those manufacturing activities associated with the highest levels of GHG emissions (energy intensive and hard-to-abate manufacturing sectors). It aims to give support to those economic activities that are low in carbon emissions and first movers who are engaging in a transformational shift.

Scope/which activities covered: on the one hand, the manufacturing sectors that account for the largest shares of industrial GHG emissions are included to stimulate large GHG emissions reductions. This includes the manufacturing of aluminum (NACE 24.42); the manufacturing of iron and steel (NACE 24.1, 24.2, 24.3); the manufacturing of cement (NACE 23.51); and the manufacturing of chemicals (NACE 20.13, 20.14, 20.15, 20.16). The manufacturing of chemicals include several different types of products (e.g. carbon black, disodium carbonate, chlorine, organic basic chemicals, anhydrous ammonia, nitric acid, plastic in primary form) that are presented separately in the Taxonomy because of their different production processes and thus the need for separate technical screening criteria. On the other hand, the manufacturing of low-carbon technologies is also included in the manufacturing section of the Taxonomy as enabling activities: manufacture of (i) renewable energy technologies, (ii) equipment for production of hydrogen (iii) low carbon technologies for transport, (iv) energy efficient equipment for buildings, (v) other low carbon technologies.

The manufacturing activities that are not covered yet (for instance manufacture of glass, manufacture of pulp and paper, manufacture of food and beverage) are also able to reduce their environmental pressure on climate change, but have not been prioritized since their sectorial GHG emissions are lower than the ones from the industrial sectors currently covered. In the future development of the climate change mitigation Taxonomy, more sectors can be included, aiming at having a complete list of manufacturing activities.

Assessment of the proposed criteria

The Taxonomy Regulation’s requirements are assessed for each of the specific approaches to set technical screening criteria. Aiming to strike the best balance between the different requirements, this assessment results in a combination of best-in-class performance criteria and nature of the activity criteria that is consequently proposed for technical screening criteria for economic activities in the manufacturing sector. The table below presents the summary of this assessment.

Table 15: Assessment grid for manufacturing activities

Resulting from this assessment, the approaches best-in-class performance and nature of the activity are selected as the most suitable for all the manufacturing activities covered. In fact, they result the most suitable to meet the policy requirement defined in Article 19 of the Taxonomy Regulation.

The other approaches instead result less adequate, because of the limitations in the availability of reference points (from EU legislation or scientific literature) to base the criteria, issues in ensuring a level playing field or environmental integrity due to the heterogeneity of the manufacturing activities covered and context-specific considerations.

The analysis below assesses in more detail how the approaches chosen were applied to formulate the technical screening criteria for the manufacturing activities covered – and meet the Taxonomy Regulation’s requirements.

Currently, there is no low-carbon option commercially available for the most carbon intensive manufacturing sectors covered in the scope. These activities are thus considered transitional, as they fulfil the criteria defined in Article 10(2) of the Taxonomy Regulation. In order to do so, for each of the manufacturing sectors included in the scope, the first step was to identify the best performing industries and, consequently, set the technical screening criteria at a level that would be achievable only by the best performers of each sector. Different options to assess the substantial contribution to climate change mitigation of these manufacturing activities (e.g. absolute yearly GHG emissions, achieved % reduction of GHG emissions) were assessed and GHG emissions per unit of output production (e.g. tCO2e/t output) was selected as, in general, the most appropriate indicator to be used in the screening criteria. Such an indicator captures the substantial contribution to climate change mitigation in the sector, spurred by any change in the production output of the economic activity. Such assessment of GHG emissions would be most meaningful if carried out over the life-cycle of the product manufactured and not only accounting the direct GHG emissions of the manufacturing process. However, because of the scarce availability of public data and the limited practice of the industry to collect relevant information from suppliers, setting criteria on the upstream GHG emissions was not considered viable. Thus, for the formulation of the technical screening criteria, the wealth of information and data provided by the EU emission trading system (ETS) is proposed, that for almost all manufacturing sectors covered in the scope (excluding the manufacture of chlorine and plastics) define the industrial installations with the least impact on climate change mitigation (i.e. the best 10% installations in the EU). Hence, the screening criteria build on EU legislation and include, in the majority of cases, the requirement to meet the threshold (tCO2e/t output) defined in Commission Decision 2011/278/EU (i.e. EU ETS benchmark) resulting in an easy use for the economic activities. However, the use of the EU ETS benchmarks implies a limitation for those economic activities where thresholds are defined at single production step (e.g. manufacturing of steel): in these activities different production routes from the ones defined in Commission Decision 2011/278/EU cannot be recognised, even if they could potentially have a better environmental performance.

For activities relying on heavy use of electricity in the production processes, in order to complement the technical screening criteria, requirements on the carbon intensity of the electricity used (life-cycle greenhouse gas emissions lower than 100 g CO2e/kWh) were added directly for the manufacture of chlorine or indirectly, in the case of the manufacture of aluminium. In the case of manufacturing of hydrogen, for which the current EU ETS benchmark defines a value of 8.85 tCO2/t H2, such level was deemed not sufficiently ambitious to ensure substantial contribution to climate change mitigation, since much better performance levels (i.e. higher environmental ambition), and the consideration of life-cycle GHG emissions are possible. For the activity of manufacturing of plastics and chlorine, since they are not covered by the EU ETS, the definition of the screening criteria relies on experts’ judgment, life-cycle analysis and literature review of best performing industries within these sectors. Finally, for activities that could rely on fossil fuel or bio-based feedstock (i.e. manufacture of organic chemicals and plastic in primary form), the screening criteria require to calculate the life-cycle carbon footprint of the product manufactured from bio-based feedstock and compare it with the corresponding product manufactured from fossil fuel feedstock. Such comparison needs, moreover, to be verified by a third party in order to ensure that the calculation is carried out implementing a solid methodology and results are not manipulated in order to meet the screening criteria.

As just explained in the paragraphs above, the technical screening criteria reflect the environmental performance achieved by the best performers (for transitional activities). The fact that the technical criteria rely heavily on the EU ETS benchmarks, ensures that the EU Taxonomy recognises the best 10% of the activities. Instead, for the criteria not based on the EU ETS benchmarks, an equivalent level of ambition (i.e. best 10%) is achieved thanks to experts’ judgment, life-cycle analysis and literature review of best performing industries.

The scope of activities for the manufacturing sector includes also five enabling activities, for which the assessment has identified, relying on literature review and reference to other legal texts, a combination of qualitative (e.g. manufacture of façade and roofing elements with a solar shading or solar control function, including those that support the growing of vegetation) and quantitative (e.g. manufacture of windows with U-value lower or equal to 0.7 W/m2K, manufacture of M1 and N1 category vehicles with tailpipe emissions lower than 50 gCO2e/km) criteria that would be of simple use and ensure that the manufactured products can make a substantial contribution to climate change mitigation in other sectors of the economy. The activity 'manufacturing of other low carbon technologies', in the screening criteria defining substantial contribution to climate change mitigation, requires third party verification for the results of the life-cycle carbon footprint calculation. Such requirement was introduced to ensure that the calculation is carried out implementing a solid methodology and results are not manipulated in order to meet the screening criteria.

In the preparation of the Delegated Act, Commission services relied on the recommendations from the TEG, when drafting the technical screening criteria for the manufacturing activities. In this sector, there is no major deviation from TEG’s recommendation, but Commission services only ensured that the technical screening criteria are formulated accurately, and with the correct terminology and references, for a legal text.

The definition of the technical screening criteria relied at different stages on the input from relevant stakeholders. Such contributions were taken into account and allowed to refine and improve the screening criteria. For instance, the most common comments received highlighted the potential for iron, steel and aluminium products to be easily recycled and, therefore, contribute to climate change mitigation. Such input from stakeholders led to the integration of the screening criteria with specific provisions that recognise the contribution to climate change mitigation of manufacture of new metal from scrap iron, steel and aluminium. Another comment received from stakeholders was about the risks of undermining the contribution to climate change mitigation in the manufacturing of plastic in primary form from chemical recycling. Such comments triggered a more detailed formulation of the required life-cycle GHG emissions assessment of the manufactured plastics that excluded the GHG emission benefits from any fuel produced.

Stakeholder feedback

The majority of responses from the public consultation were in relation to the list of low carbon technologies with most submissions requesting additional technologies to be included. These were reviewed and appropriate amendments were made to the list in light of these comments.

Stakeholders also expressed concerns about the stringency of the thresholds for the manufacture of hydrogen given the need for green hydrogen to contribute to a 2050 net-zero future. As a result of this feedback, the thresholds were amended.

There were multiple requests for a life-cycle analysis of steel to be taken into account in thresholds proposed to acknowledge that steel is a material that can fully be recycled and will continue to play a role in a low carbon economy. We acknowledge the role that steel may play in the supply chain efficiencies, but for practical reasons have limited the scope of thresholds proposed to the production of primary steel and steel recycling only. In this respect - the manufacturing of e.g. aluminum - cement is dealt with in a similar way.

It was noted that many of the submissions were not of a purely of technical nature but were rather presented as a position and the assessment ensured that the thresholds applied promote low-carbon production. Stakeholders voiced considerable concern about the manufacture of plastics, particularly single use plastic production.

Finally, many of the submissions recommended that a circular economic perspective be introduced. In response, emphasis in the criteria has been placed on recycling.

5.1.4. Energy sector

This section assesses the criteria recommended in the draft delegated act as published in November 2020 for the energy sector with regard to substantial contribution to climate change mitigation. It provides the context and scope of this sector and takes stakeholder feedback into account. It also outlines where major deviations from the TEG final recommendations are proposed.

 Context

Why macro-sector covered: The energy sector as a whole is accountable for 75% of GHG emissions in the EU27. These emissions are partially associated with the downstream consumption of energy, such as transport, manufacturing industries, industrial processes, which are addressed as separate sectors in the structure of EU Taxonomy (see Figure 8 in Annex 4.2.1). The energy industry (particularly, heat/cool and electricity generation) accounts for over a quarter of the EU’s greenhouse gas emissions (see Annex 5.1). The energy sector has been at the forefront of GHG emissions reduction: since 1990 GHG emissions have declined in all sectors of the economy except for transport, while the energy sector has seen the most significant declines in GHG emissions 186 . (The impact of COVID-19 is clearly visible in declines in energy demand in Q1 2020 in comparison to Q1 2019 with correlation of declines high-emitting electricity- and heat generation 187 .) Emission reductions in this sector continue to be vital for decarbonisation and the transition to a net-zero emissions economy. 

Figure 10: EU greenhouse gas emissions by sector 1990-2017.

Source: European Commission (2018) In-depth analysis in support of the Commission Communication COM(2018) 773, Figure 3. https://ec.europa.eu/clima/sites/clima/files/docs/pages/com_2018_733_analysis_in_s  

Scope/which activities covered:

Given the importance of the energy sector for climate change mitigation, it is necessary to cover a wide range of activities pertaining to the energy supply chain from generation, through networks and storage and some activities around the meter. Use-cases of power and heat, as economic activities, however are outside the control of the energy market participants, therefore the scope of energy sector activities is better kept in alignment with the logic of EU energy policy making. The activities under the energy sector cover electricity generation, combined heat and power generation and heat/cool production – distinguishing by the source of energy per each activity. They also address electricity transmission and distribution, district heating, gas transmission and distribution, storage activities, heat pumps and the manufacture of biomass, biogas and biofuels. The list of activities proposed largely builds on the recommendations of the TEG, although the scope of activities requires more precision, for example in the case of solar heat, electricity generation and heat production using gaseous fuels etc..Stakeholder feedback provided to the Commission was the basis for finessing the scope of some of these activities. As referred to in Chapter 5.1, the Taxonomy is a dynamic tool, hence is not exhaustive concerning the list of activities. Even if the assessment of the energy sector aimed at the widest possible coverage of activities, there remain activities, which are not included in the Taxonomy. The Taxonomy Regulation explicitly rules out electricity generation from solid fossil fuels, therefore that is not part of the assessment. For instance, hybrid electricity (or heat) generation solutions which combine different energy sources on a single site, have not been identified as individual activities given their rather innovative nature but the scope of activities included in the assessment should suffice for assessing the elements of these solutions.

Assessment of the proposed criteria

The Taxonomy Regulation’s requirements are assessed for each of the specific approaches to set technical screening criteria. Aiming to strike the best balance between the different requirements, this assessment results performance in relation to the environmental target criteria that are consequently proposed for technical screening criteria for economic activities in the energy sector. The table below presents the summary of this assessment.

Selection of approaches for activities relating to electricity and/or heat generation in the energy sector, except those fuelled by biomass, biogas and biofuels.

Table 16: Assessment grid for electricity and/or heat generation activities not including those relating to biomass, biogas and bioliquids

Resulting from this assessment, an approach based on performance has been found to be the most suitable to setting the criteria for electricity and/or heat generation activities. The below analysis assesses in more detail how the parameters for the criteria that result from these approaches reflect – and meet the Taxonomy Regulation’s requirements. The overwhelming majority of GHG emissions from the covered activities (and in fact the energy sector) is associated with electricity and heat generation. The generation technologies, however are very different in terms of their environmental impact beyond climate change mitigation, which in a Taxonomy framework makes the distinction between different technologies necessary (DNSH). Contribution to climate change mitigation is quantifiable through GHG emissions data, although there is a wealth of metrics used across industries. One of these metrics is expressed in term of grams of CO2 emitted per kWh of electricity generated (gCO2e/kWh). The metric of gCO2e/kWh is a well-established, often quoted unit of measurement in life-cycle emission analysis with respect to electricity and heat generation technologies (see for example IPCC 2018), therefore has been found as a suitable quantitative and technology-neutral threshold to be applied for contribution to GHG emission reduction with clear compliance with all three quantitative, technology-neutral and life-cycle-based requirement of the Taxonomy Regulation. The use of such a metric introduces a level of simplicity, which – weighing its advantages and disadvantages – appears desirable given the purpose of Taxonomy, which requires disclosures concerning financial products and aggregate figures for undertakings under the Non-Financial Reporting Directive. The TEG has recommended the use of 100gCO2e/kWh threshold for electricity and heat generation (including combined heat and power generation – see below) activities with a requirement to carry out life cycle assessments (LCA). In order to provide clarity and fragmented solutions to quantify life-cycle emissions, the criteria also has to integrate optional methodologies to users to make sure the assessment is robust and comparable and can be carried out with limited administrative burden. Beyond the well-established approach of the ISO 14067 standard, the alternative use of the carbon emission-related methodology defined in Commission Recommendation 2013/179/EU 188 is proposed. (In case of hydropower, the optional methodologies are extended to the G-res tool, designed by the hydropower industry (IHA) together with UNESCO and the support of the World Bank and to the IEA Hydro Framework, a guidance document.) Given the evidence on the performance of the various electricity and heat generation technologies, notably that several technologies perform below the 100gCO2e/kWh threshold on a life-cycle basis, these technologies are derogated from performing an LCA and are considered significantly contributing to climate change mitigation 189 . The administrative burden associated with the Taxonomy compliance of Solar PV, solar thermal, CSP, wind, ocean technologies, which have widely evidenced low GHG emissions would this way not be increased beyond the legal obligations the activities would have to comply with, irrespective of the Taxonomy. Similarly, hydropower plants with a power density above 5W/m2 would be exempted from carrying out a LCA. According to the International Hydropower Association’s GHG emission data, hydropower plants above 5W/m2 do not emit more than 100gCO2e/kWh. In cases of electricity and heat generation activities, where the life-cycle emissions data are not widely evidenced to be lower than the threshold, the LCA analysis needs to be carried out in accordance with any of the methodologies identified to underpin performance vis-a-vis the threshold.

The use of a single emission performance criterion allows for abatement technologies to be applied to reduce the emissions of a certain activity. In line with the necessary decarbonisation of the technologies, in case of electricity or heat generation from gaseous and liquid fuels the criteria serve to incentivise the use of abatement – leaving the abatement solution flexible, but where applicable, compliant with the Taxonomy. Carbon capture is one of the examples of abatement, where the criteria are linked with the carbon transport and storage criteria in the Water, sewerage, waste sector. Carbon capture is predominantly integrated on electricity/heat and manufacturing sites, therefore the relevant activities and associated criteria include the solution.

The TEG recommended the Taxonomy to integrate a declining threshold across electricity and heat generation activities “in line with the trajectory to a net-zero economy”. It is considered that the climate change mitigation threshold has been set in alignment with the net-zero 2050 ambition, so given the compatibility of activities with a decarbonised economy by 2050, tightening of criteria would deliver limited benefits. Should the emission performance of activities be necessary to revise, the Commission is entitled to review the delegated act, providing an opportunity to make adjustments to the technical screening criteria.

The extension of the single 100gCO2e/kWh threshold to combined heat and power generation runs a number of trade-offs, including the lack of consideration of the efficiency of the technology and existing European legislative requirements concerning high-efficiency cogeneration, and the positive substitution effect delivered by CHP in comparison to high-emitting technologies. Setting the same threshold for cogeneration as for electricity-only or heat-only generation does not fully reflect the different functions of CHP, as those plants are configured differently to meet primarily a heat or electricity demand. It nevertheless brings cogeneration closer to the climate change mitigation ambition. Given the shortcoming of applying the electricity threshold to co-generation, it is proposed to consider complementing the criteria by an aspect better aligned with the Energy Efficiency Directive 2012/27/EU, emphasizing the benefits of combined heat and power for primary energy savings under the circular economy objective.

Evaluating the substantial contribution of eeconomic activities using bioenergy and bio-based products

Disclaimer: The economic activities that are covered in this section are subject to a political decision by the Commission before the adoption of the delegated act, as discussed in section 5.4.2. The technical screening criteria discussed in this section reflect the technical background to the topic and the work of the Commission services, but do not represent an agreed position. The technical screening criteria for activities using bioenergy and bio-based products are therefore not included in Annex 10.

The contribution of bioenergy-related activities to climate change mitigation are best evaluated in the European energy policy framework for the purposes of the EU Taxonomy. New developments need to be taken into account as well, most notably the European Commission’s commitments in the Biodiversity Strategy.

Bioenergy plays an important role in the achievement of the EU 2020 and 2030 energy and climate targets and the long-term goal of decarbonisation by 2050. Today, bioenergy is the main renewable energy source in the EU, accounting for over 10% of EU final energy consumption and about 60% of renewable energy consumption in 2017. Bioenergy contributes to all final use forms of energy, i.e. heat, transport and electricity. It is storable, dispatchable and Europe is world leader in bioenergy technologies/patents. Biomass is mainly produced in European rural areas and is seen as an important contribution to growth and jobs, particularly in rural areas. Bioenergy is the largest renewable energy source in terms of direct and indirect employment, providing 703200 jobs and a turnover of EUR 66.6 billion.

Three quarters of all bioenergy is used for bioheat production, mainly for households and industry. Bioelectricity and biofuels for transport represent around 13% and 12% of bioenergy final consumption, respectively. Bioelectricity is produced largely (60%) through efficient Combined Heat and Power (CHP) technologies. Comparatively, only 23% of fossil-based electricity is CHP-based. Solid biomass is the main type of bioenergy carrier used in the EU (accounting for 70% of the total gross consumption of bioenergy), followed by biogas (12%), liquid biofuel (11%), and energy from municipal waste (7%). Differently from the general perception, wood pellets are a minor biomass fuel as they account for only 6% of the total solid biomass use.

All scenarios analysed in the 2050 decarbonisation strategy 190 rely on a substantial use of biomass for energy. By 2050, biomass (and waste) could supply 14-19% of final energy demand in 2050, depending on the scenario (gross inland consumption of biomass ranges from 190 Mtoe to just over 250 Mtoe in full decarbonisation scenario - so-called 1.5TECH scenario). In 2018, the energy sector consumed 140 Mtoe of biomass.

As shown in the figure below, the demand for biomass is similar for all scenarios analysed until 2030, but diverges afterwards with more demand in the full decarbonisation scenario than in the scenarios achieving 80% GHG reduction until a peak in 2045. Post-2045, biomass demand is decreasing in full decarbonisation scenario, partly due to the deployment of other energy carriers (including the introduction of e-fuels).

Figure 12: Gross inland consumption of biomass and waste. Source: COM(2018) 773

The European legislative framework for bioenergy is mainly composed by the LULUCF Regulation 2018/841 and the Directive (EU) 2018/2001, the so-called recast Renewable Energy Directive (RED II). The reported information under LULUCF actually provides the most complete estimate of biomass emissions, as it directly and immediately attributes all the carbon stock change in forests (including for example to soils) as emissions in the year of harvest – balanced by the sequestration in the forest system. It is therefore the most robust point to estimate biomass emissions related to bioenergy.

The EU policy framework is complemented by the recast Renewable Energy Directive (RED II) which sets out binding requirements to avoid unsustainable forest harvesting and negative impacts of forest carbon stocks. More specifically, under these new sustainability criteria, EU bioenergy operators need to demonstrate that the forest biomass used in their bioenergy installations (equal or above 20 MW) is sourced from:

1.LULUCF criteria

-Evidence a) – countries or regional economic organizations (e.g. the EU) that: are a Party to the Paris Agreement, and account any changes in carbon stock associated with biomass harvest towards its national GHG reduction target, or have national laws ensuring that the reported LULUCF-sector emissions do not exceed removals; or, in case evidence a) is not available,

-Evidence b) – forest sourcing areas subject to management systems ensuring that forest carbon stocks are maintained or increased over the long term.

2.Sustainable harvesting criteria

-Evidence a) – countries that have national or sub-national legislation and enforcement mechanisms ensuring: legal logging, forest regeneration, protection of sensitive areas, minimization of harvesting impacts on soil quality and biodiversity; and long-term productivity of the forests; or, in case evidence a) is not available,

-Evidence b) – forest sourcing areas subject to management systems that meet all the above-mentioned requirements.

Furthermore, the revised Directive includes land criteria to avoid conversion of biodiversity and carbon-rich land for the production of agricultural biomass and to address/minimize soil quality and soil carbon impacts associated to the extraction of agricultural waste and residues. The Directive requires minimum lifecycle GHG emission savings for biomass heat and power plants (70% fewer emissions that fossil fuels, increasing to 80% by 2025). The Directive includes also minimum energy efficiency standards for biomass-based electricity only installations, promoting further use of efficient Combined Heat and Power technology. Finally, the Directive establishes minimum EU-wide sustainability criteria for solid biomass and biogas used for energy. However, Member States can introduce more stringent sustainability criteria and/or apply them to installations with a lower capacity than 20 MW.

The TEG report recommendations concerning several activities depart from the established European legislative framework for bioenergy that rests on sustainability criteria established in RED II. The TEG recommendations depart from the applicable sectoral legislative framework in terms of ambition and deviate substantially in terms of sourcing criteria for biomass and biofuels. The TEG recommended that, for the manufacture of solid biomass, biogas and liquid biofuels, eligible feedstock should be restricted compared to RED II and notably exclude used cooking oils and specific animal fats. For electricity generation and cogeneration and production of heat/cooling from biomass, biogas and biofuels, the TEG recommended stricter emissions savings thresholds than in RED II. In addition, the feedstock used recommended exclusive sourcing from the narrower list eligible under the manufacture of solid biomass, biogas and liquid biofuels. The same would apply for the manufacturing of bio-based plastics and organic basic chemicals.

Although compliance with RED II ensures alignment with the requirement of policy consistency in the European context (requirement I), conditions additional to those in RED II are under consideration in order to reach a higher level of environmental ambition (requirement II) described in section 4. This is specifically the case regarding the higher emission savings threshold that could be set for electricity generation and co-generation and production of heat/cooling from biomass – all based on the RED II methodology, and an exclusion of crop/food-based biofuels for transport. An additional deviation from the RED II provisions would be a stricter set of conditions in case of biomass sourcing, which would take recent EU strategies, such as the Biodiversity Strategy and the Circular Economy Action Plan into much stronger consideration. Beyond increasing the ambition, stricter conditions could look to introduce further compliance criteria for the sustainable management of land used to source bio-feedstock, or could extend to further restricting eligible feedstock, i.e. beyond the recommendations of the TEG. At the same time, the options should be not create undue problems notably (i) for usability (requirement IV) among operators familiar with the parameters of RED II, and (ii) a risk of market dislocation (requirement III) if swaths of business considered sustainable under RED II would lose that label under the Taxonomy. In particular, the proposal to limit the eligibility of biomass to feedstock listed in RED II Annex IX Part A, would require a substantially different certification scheme which would lead to an increase of administrative burden and costs for the individual forest owners. The concerns above reflect the view of a large section of stakeholders active in bio-energy production and use. They are of the view that RED II criteria already guarantee sufficient environmental safeguards and ambition.

Against this background and considering some of the trade-offs between the requirements in Section 4.2, there are three main options for bioenergy for the delegated act, notably in terms of the scope of eligible bio-feedstock.

·Follow the TEG recommendation and restrict the scope of eligible feedstock to advanced biofuels in Annex IX, part A of RED II. This would prioritise the requirement of environmental ambition, but at the possible expense of the requirements of consistency with EU law and level playing-field and usability for economic operators.

·Restrict the scope further by excluding some of the feedstock in Annex IX, part A of RED II 191 . This would further prioritise environmental ambition, but at further possible cost in terms of the other requirements.

·Broaden the eligible scope to the full Annex IX (Parts A and B). This would prioritise the requirements of overall consistency with EU law, level playing-field and usability, but at the possible expense of a higher level of environmental ambition.

Electricity transmission and distribution infrastructure is critical for the EU decarbonisation goals. These networks serve as the backbones of the electricity system ensuring that the increasingly renewable energy-generated electricity reaches consumers 192 . A recent study 193 from several German universities concludes that both CO2 emissions and variable costs of electricity generation would increase if interconnector expansion in the EU is delayed. This would be most significant in scenario 2050, where lower connectivity leads roughly to a doubling of both CO2 emissions and variable costs of electricity generation. Notably, in Southern and Central Europe, less interconnection leads to higher use of natural gas power plants since less renewable electricity from Northern Europe can be integrated into the European grid. Developments in the European power market structure in the last two decades allowed the integration of an increasing share of variable renewable generation. Connecting markets through appropriate infrastructure and cross border trading rules allowed significant increases liquidity and security of supply significantly. The Trans-European Network policy framework in energy is a key enabler towards the Union’s decarbonisation objectives for 2030 and 2050 as outlined in the Green Deal, while contributing to sector and market integration. The contribution of networks to climate change mitigation can be seen through the electricity mix they supply. The European Commission modelling underpinning the 2050 long-term strategic vision for a climate-neutral economy 194 , has shown that by 2050 the electricity mix will be composed of over 80% renewables, while nuclear energy will represent over 10% and fossil fuels will see a decline to 2% to 6% share of Europe’s total electricity generated. Consequently, in the European energy policy framework committed to and already delivering on decarbonisation as evidenced by JRC (2019), electricity transmission and distribution networks are significantly contributing to climate change mitigation, also ensuring consistency with the TEN-E policy. 

Figure 13: Shares in power generation.

Source: European Commission (2018) In-depth analysis in support of the Commission Communication COM(2018) 773, Figure 3.

With the increasing share of intermitted renewable energy in electricity generation, the role of flexibility becomes more prominent. This is acknowledged by the TEG recommendations that established a list of activities that would always be considered environmentally sustainable. Energy storage (through various vectors) is a key enabling technology for addressing flexibility requirements. Currently, electricity and thermal storage solutions are developing fast, but their deployment needs to be scaled up to meet the demands of the decarbonized and increasingly electrified economy. The TEG report recognizes the importance of storage and considered the construction and operation of storage environmentally sustainable (with the exception of hydrogen storage, where the operation of the facility is conditional to the hydrogen meeting the Manufacture of hydrogen criteria). Electricity storage is to be extended to pure pumped hydropower storage, which provides storage functions and is not connected to the natural stream network. Mixed hydropower pumped storage connected to a free-flowing water source shall comply with the criteria for electricity generation from hydropower. This complementary element improves the scope of the activity and ensures environmental integrity.

The scope of the energy sector also extends to the gas transmission and distribution network, which with the decarbonisation of gas as laid out in the European Green Deal and underlined in the energy sector integration strategy, will continue to play an important role. The TEG recommendations capture those activities that target primarily the repurposing of networks for the supply of hydrogen and low-carbon gases, as well as the repair of pipelines for the reduction of methane leakage if the pipelines are hydrogen- or low-carbon gases-ready. Complementing the TEG criteria by those activities that concern the construction and operation of new, dedicated hydrogen transmission and distribution is proposed to complement the spectrum of relevant activities. These will be essential for the establishment of a well-functioning hydrogen market in the long run as underlined in the Commission’s Hydrogen Strategy. Further complementing the criteria is proposed with regards to/for the repair or pipelines with repair of other (non-pipeline) network elements, as well as adding leak detection to the criteria to better reflect the Commission’s work on the methane strategy.

Existing legislation has been the predominant basis for defining criteria for district heating and cooling. The Energy Efficiency Directive defines efficient district heat/cool systems 195 and has been used by the TEG in the recommendations. It is proposed to complement the criteria through the rehabilitation of those district heating and cooling systems, which do not yet meet the efficiency criteria but provide assurance that the threshold for efficiency will be met within a limited timeframe. A best available technology approach has been used to identify a quantitative criteria for heat pumps. Heat pumps with a Global Warming Potential of less than or equal to 675 represent the direction of travel for the market. Reinforcing that level through the Taxonomy criteria would serve as an incentive for the market-uptake of the technology. Since the stock of heat pumps is extremely low, it appears appropriate to incentivize the uptake of already existing technologies instead of pushing the market into scarcely available solutions. The cumulative criteria must also take into account the energy efficiency requirements stipulated in the implementing regulations under the Ecodesign Framework Directive 196 , as proposed by the TEG.

Stakeholder feedback

Stakeholders highlighted the need for technology neutrality and noted different levels of ambition across different activities: this includes some respondents referred to some technologies being exempted from LCE analysis requirements, while other respondents suggested increasing the exemption list from LCE assessments. The need to align the Taxonomy with current legislation (particularly the Renewable Energy Directive) for DNSH and bioenergy was outlined by some respondents. Some respondents noted that the EU Taxonomy should be structured in a way that minimizes additional burdens. Respondents commented on the proposed thresholds, some considering them as too ambitious and some as not ambitious enough. Several stakeholders would have liked to see the inclusion or a stronger acknowledgement of nuclear energy, waste-to-energy and unabated natural gas.

5.1.5. Water, sewage, waste and remediation (WSWR)

This section assesses the criteria recommended in the draft delegated act as published in November 2020 for the WSWR sector with regard to substantial contribution to climate change mitigation. It provides the context and scope of this sector and takes stakeholder feedback into account. It also outlines where major deviations from the TEG final recommendations are proposed.

Context

Why macro-sector covered: Water, Sewerage, Waste and Remediation (WSWR) contributes to a comparatively small share of the EU’s total greenhouse gas emissions —water 0.2% and sewerage, waste and remediation 4.4% in 2016 — but advanced solid waste management has great potential to trigger greenhouse gas emissions reductions in other sectors of the economy through waste prevention, separate waste collection, reuse and recycling.

Scope/which activities covered: the following activities are considered necessary to cover WSWR: they are classified under NACE sectors E36.0.0 (Water collection, treatment and supply); E37.0.0 (Centralized wastewater treatment; Anaerobic digestion of sewage sludge); E38.1.1 (Separate collection of non-hazardous waste in source segregated fractions); E38.2.1 (Anaerobic digestion of bio-waste; Composting of bio-waste); E38.3.2 (Material recovery from non-hazardous waste); E39.0.0 (Landfill gas capture and utilization; Transport of CO2; Permanent storage of CO2). While two additional activities, Direct air capture of CO2 and Capture of Anthropogenic CO2 emissions have been part of the TEG recommendations as part of the WSWR sector, the maturity and nature of the two activities leads to a proposal integrating the activities under other relevant activities. Direct air capture (DAC) cannot yet be considered as a commercially available technology at large scale, hence is best addressed under the scope of the ‘Research, development and innovation’ activity. Once the technology matures, the Taxonomy will have an opportunity to extend the list (and criteria) of activities that bring well-evidenced contribution to climate change mitigation (c.f. 5.1 on the dynamic nature of Taxonomy). The ‘capture of anthropogenic CO2 emissions’ is barely a self-standing activity, rather a solution most often integrated into industrial (e.g. steel and cement manufacturing) and electricity generation. To better reflect the deployment of ‘carbon capture’, it is proposed to integrate it under the most relevant activities under the manufacturing and energy sectors. The utilisation of CO2 (CCU) is an activity of high complexity. In the Circular Economy Action Plan the Commission undertakes to explore the development of a regulatory framework for the certification of carbon removals, including through CCU, based on robust and transparent carbon accounting to monitor and verify the authenticity of carbon removals. The Commission is already starting a study which will help preparing this framework and design a pilot phase. Under the RED II, the Commission is also working on a delegated act that will help establish the carbon intensity of CCU fuels by the end of 2021. Given this parallel policy work in the European Commission that would improve the methodological framing of evaluating CCU, the activity requires further assessment and at present, is there is a proposition to exclude it from the delegated act. Rather, it would be included in the further work of the Platform on Sustainable Finance.

As regards the water and waste sectors, these will be addressed again much more comprehensively with the view of developing criteria for the other four environmental objectives. In line with Annex 5.1, the focus here was on activities that have the potential to make a substantial contribution to the climate objectives. For example, material recovery from non-hazardous waste is included based on the recognition in EU strategies and literature 197 of the climate mitigation potential of better waste valorisation and ultimately of moving to a circular economy. On the other hand, the scope of the WSWR subsector excludes activities falling under E38.1.2. collection of hazardous waste, E38.2. treatment and disposal of hazardous waste and E38.3.1. dismantling of wrecks as they have been considered as being less relevant for climate change mitigation.

It is finally worth noting that the issue of waste incineration has received a lot of, granted mixed, stakeholder feedback. Some stakeholders in particular represent the incineration industry, with Member States asking for the inclusion of waste incineration with energy recovery, while others (NGOs in particular) highlighted that the TEG was right in not proposing it as part of their recommendations. The TEG was given a mandate at the time to work on the basis of Commission’s proposal for the Taxonomy Regulation, which, under the circular economy article, required to “avoid” incineration and considered a significant increase in incineration to constitute significant harm to the circular economy.

The Taxonomy Regulation stipulates that minimising incineration is one of the means to make a substantial contribution to the circular economy (Article 13). The Taxonomy Regulation also considers that an activity that leads to a significant increase in the incineration of waste does ‘significant harm’ to the circular economy (Article 17.1.d). Hence, such an activity cannot qualify as ‘environmentally sustainable’ under the Taxonomy Regulation. The only exception is incineration of non-recyclable hazardous waste, introduced as part of the political agreement between co-legislators. The politically agreed exception does not cover incineration of non-recyclable non-hazardous waste.

As background, it should be noted that the Commission recognises the role of waste-to-energy, particularly for treating waste fractions containing hazardous substances that make their recycling problematic 198 . At the same time, in line with the Circular Economy Action Plan 199 , the aim is to redirect efforts towards options higher up the waste hierarchy (i.e. waste prevention, product reuse and recycling), where there are important investment gaps. Such efforts (eco-design, recyclability, less hazardous substances) will also decrease the amount of feedstock for incineration.

In view of all of the above, the inclusion of incineration in this delegated act is not proposed.

Assessment of the proposed criteria

The Taxonomy Regulation’s requirements are assessed for each of the specific approaches to set technical screening criteria. Aiming to strike the best balance between the different requirements, this assessment results in different approaches depending on the activity, with nature of the activity in combination with practice-based criteria dominating for waste activities, while for water activities performance improvement criteria dominate. The table below presents the summary of this assessment.

Table 17: Assessment grid for water, sewerage, waste and remediation activities

Resulting from this assessment were a number of different approaches depending on the activity proposed, the predominantly nature of the activity in combination with practice-based criteria dominating for waste activities, and the performance improvement criteria for water activities. The below analysis assesses in more detail how the parameters for the criteria that result from these approaches reflect – and meet - the Taxonomy Regulation’s requirements.

Carbon capture and storage (CCS) was included in the analysis due to the key role it plays in the Commission’s Long-Term Strategic Vision for the decarbonisation of Europe. To determine a screening criteria, the analysis of CCS was divided into its three main stages: capture, transport and storage. Carbon capture, often used as an abatement technology in heavy industry and electricity generation, is proposed to be included in the most relevant activities. Carbon transport and storage are evaluated as self-standing activities.

Due to the heterogeneity of activities covered under the WSWR, there is no clear value in attempting to establish a set of criteria that could fit all activities. For waste, the included activities are predominantly considered eligible per se (nature of the activity approach) with some additional practice-based requirements. Regarding waste collection, criteria are proposed that recognise as eligible all separately collected and transported non-hazardous waste that is segregated at source (including co-mingling) and sent to preparation for reuse or recycling. For anaerobic digestion activities (of sewage sludge and bio-waste, respectively), practice-based criteria are proposed, including requirements:

-that the resulting biogas is either used directly for the generation of electricity and/or heat, or upgraded to bio-methane for injection in the natural gas grid, or used as vehicle fuel or as feedstock in chemical industry;

-that methane leakage is monitored and addressed;

-on the handling of resulting digestants to be used as fertiliser and/or soil improver, which needs to meet the requirements for fertilising materials as set out in the recently adopted Fertiliser Regulation 203 or national rules on fertilisers/soil improvers for agricultural use.

In response to stakeholder feedback, it is proposed to extend the scope of the anaerobic digestion activities to recognise chemicals as an output from the digestion process.

Similarly, the treatment of separately collected bio-waste through composting (aerobic digestion) in dedicated facilities - with the resulting production and utilization of compost - is eligible.

Regarding material recovery from non-hazardous waste, the criteria require that the activity converts at least 50%, in terms of weight, of the processed separately collected non-hazardous waste into secondary raw materials that are suitable for the substitution of virgin materials in production processes. The figure of 50% was proposed by the TEG and considered adequate as an average across different waste streams (noting that while it is ambitious for some waste streams, it is easier to achieve for others) that would ensure, through the replacement of virgin materials, a substantial contribution to climate mitigation.

For landfill gas capture, it is proposed to limit eligibility to newly installed (or extended and/or retrofitted) landfill capture systems on landfills that are permanently closed and not taking further biodegradable waste, in order not to prolong in this way the lifetime of landfills, which would go against the EU’s waste hierarchy as well as the wording in Article 13 of the Taxonomy Regulation (“avoid landfilling”) and corresponding DNSH Article 17.1.d.

For activities falling under water collection, treatment and supply criteria aim to promote more efficient, i.e. less GHG intensive water supply/sewerage systems. For water supply, alternative criteria are proposed that are set following the performance against environmental target and performance improvement approach, respectively. The proposed criteria recognise that reduced GHG emissions can result either directly from reduced energy consumption in treating and supplying water, or from reducing water leakage, hence indirectly saving energy use needed for treatment and supply. It should be noted that while there is an extensive body of EU law in the area of water, criteria are not directly taken from legislation in the area. This is not surprising given that the focus here is on setting criteria for substantial contribution for climate mitigation, whereas EU law in the area of water has other primary objectives (such as ensuring good status of water bodies, ensuring safe drinking water, promoting – centralised – waste water treatment to improve water quality in receiving water bodies etc.). The majority of this legislation poses obligations on Member States and not directly on economic operators, while the criteria proposed are in line with the overall spirit of this body of law. For example, proposing for inclusion in the Taxonomy the centralised waste water treatment is in line with the objectives of the Urban Waste Water Treatment Directive 204 to promote centralised collection and treatment.

The proposed threshold values are considered ambitious, in line with the sectoral expert input received from the TEG, hence ensuring environmental integrity. To ensure both usability and a fair treatment standard among operators, the water supply sector was split into two activities. In both cases, two “compliance routes” are proposed, reflecting the different realities among operators in this sector:

1. For constructing (new) or operating (existing) water collection, treatment and supply plants, through demonstrating that the average energy consumption of the water supply system complies with a threshold of 0.5 kwh per cubic meter billed/unbilled authorized water supply 205 or that the water supply system has an Infrastructure Leakage Index (ILI) equal to or lower than 1.5 (performance against environmental target); or

2. For renovation activities of water supply system through demonstrating substantial energy efficiency improvements, by either directly decreasing the average energy consumption of the system, or reducing leakage and hence indirectly generating energy savings (performance improvement approach).

For centralised waste water treatment, an assessment of the GHG emissions from the centralized waste water system, including collection (sewer network) and treatment, needs to be performed and the results disclosed to investors and clients on demand. The environmental integrity of this approach is based on evidence that centralised waste water treatment systems generally lead to substantial emission reductions compared to decentralised alternatives (onsite sanitation systems) 206 . While a recommendation is made to established IPCC methods for calculating emissions from waste water treatment systems, it is left to the choice of the economic operator to select a method.

These elements are the basis for setting the criteria in the delegated act.

5.1.6. Transportation

This section assesses the criteria recommended in the draft delegated act as published in November 2020 for the transport sector with regard to substantial contribution to climate change mitigation. It provides the context and scope of this sector and takes stakeholder feedback into account. It also outlines where major deviations from the TEG final recommendations are proposed.

Context

Why macro-sector covered: Transport operations consume one-third of all energy in the EU, accounting for more than one quarter of the EU’s total GHG emissions 208 , the bulk of it coming from oil. Road, rail, aviation, and waterborne transport will all have to contribute to reductions in emissions in order to achieve the goal of climate neutrality by 2050, a 90% reduction needed compared to 1990 levels 209 . Growing transport demand 210 and a sluggish share of low-carbon solutions have outweighed the mitigating effects on GHG emissions achieved by vehicle efficiency improvements. Road transport is the dominant emissions source accounting for more than two-thirds of transport-related GHG emissions 211 . In accordance with the Green Deal Communication, the Commission aims to shift a substantial proportion of road freight to rail and inland waterways.

Which activities covered: Reflecting the main sources of emissions within the transport sector and alternatives, it would be necessary to cover land, water and air transport, as also recognised by the TEG. In light of the ongoing processes on shipping and aviation, at this stage the following economic activities could be covered: passenger and freight rail transport, public urban and interurban passenger transport, passenger cars and light vehicles, active mobility, road freight transport, inland and coastal water passenger and freight transport, and construction and upgrades of infrastructure for low carbon transport infrastructure. A number of these activities were welcomed in the stakeholder feedback. Most of these activities were also recommended by the TEG but for better usability the Commission has separated sectors, notably infrastructure and active mobility. While the TEG they did not propose criteria for coastal and sea transport, in light of long lead time and the overall modal shift required, the Commission has considered it important to cover these sectors. Similarly, the Commission has included criteria for no-regret airport infrastructure. The Taxonomy does not include at this stage aviation and maritime shipping, which both require in depth analysis and consultation.

Assessment of the proposed criteria

The Taxonomy Regulation’s requirements are assessed for each of the specific approaches to set technical screening criteria. Aiming to strike the best balance between the different requirements, this assessment results in a combination of performance in relation to the environmental target criteria, best-in-class and performance improvement performance criteria, practice-based criteria and nature of the activity criteria that is consequently proposed for technical screening criteria for economic activities in the transport sector. The table below presents the summary of this assessment.