EU taxonomy for sustainable activities

The preparatory work started in 2018, when the Commission set up a Technical Expert Group on Sustainable Finance, to assist in developing the EU-Taxonomy, with the OECD as an observer.[11] In the case of Taxonomy, the core task of the TEG was to develop technical screening criteria that will be used to determine whether an activity is environmentally sustainable. A first report was published by TEG at the end of 2018 which introduced the first criteria for activities contributing to climate change mitigation, one of the six environmental objectives of the taxonomy, and was accompanied by a call for feedback regarding the proposed criteria on climate change mitigation and on the usability of the taxonomy.[12] The final report on EU taxonomy was published by the TEG in March 2020, containing the responses to the call for feedback, recommendations to the commission on taxonomy design, a practical guide for taxonomy users on how to make disclosures, and recommendations to the Platform on Sustainable Finance,[13] which had not yet been established at the time of the publication of the report. The TEG final report was accompanied by a technical annex, which contains an updated methodology for assessing the "substantial contribution" of an economic activity to climate change mitigation, updated technical screening criteria, and new criteria regarding activities whose inclusion in the taxonomy may be taken into account in the future.[14] The TEG mandate, which was originally supposed to end in June 2019, was extended until September 2020, due to the high volume of feedbacks received after the publication of the first report. The TEG continued to operate with advisory functions after the publication of the final technical report, waiting for the Platform on Sustainable Finance to be operational.[13]

In spite its potential to providing a sustainable finance to its proponents, the EU taxonomy remains a voluntary action. It is made available for companies and investors who desire to ameliorate their climate and environmental stakes, to use this as an adaptable framework. For those who wish to rely on the EU taxonomy, there is a provision of attainable and consistent objectives which provides a common understanding of what green economic activities are and therefore part of the EU environmental goals.[15][16] A Technical Expert Group (TEG) was assigned in July 2018 to draft the first version of technical assessment criteria, make certain that the said criteria are in accordance with the EU's climate protection goals. this led to the submission of the first proposal in for the EU taxonomy in March 2020.[17] This identified six (6) environmental objectives which an economic activity must adhere to into to be included in the EU taxonomy. The 6 EU environmental objectives laid by the Taxonomy Regulation lays are:[13]

• climate change mitigation,
• climate change adaptation,
• sustainable use and protection of water and marine resources,
• transition to a circular economy,
• pollution prevention and control, and
• protection and restoration of biodiversity and ecosystems.

For an economic activity be certified as being environmentally sustainable in keeping with respect to the Taxonomy, substantial contribution must be made to at least one of the abovementioned objectives and simultaneously have no significant detrimental impact on the other five.[17] The principle in accordance with this is called 'Do No Significant Harm' (DNSH).[17] Aside the 6 environmental objectives, the EU taxonomy also set forth four (4) requirements to be met by an economic activity in order to be taxonomy oriented:[18]

• making a substantial contribution to at least one environmental objective.
• doing no significant harm to any other environmental objective.
• complying with minimum social safeguards.
• complying with the technical screening criteria.

The first one, the EU Taxonomy Climate Delegated Act, was adopted in June 2021 and published on the Official Journal in December of the same year. It establishes technical screening criteria to determine whether an economic activity substantially contributes to climate change adaptation and climate change mitigation. Despite the significant political debate on the possible inclusion of nuclear power and natural gas as green investments, neither of them is labelled as green asset in the first delegated act. In its preamble is stated that for nuclear energy the assessment is still ongoing, and natural gas will be included in a future delegated act if it fulfilled the requirements to be considered a transitional activity.[19]

The Disclosures Delegated Act was adopted by the Commission in July 2021 and published on the Official Journal in December 2021. It supplements art.8 of the Taxonomy Regulation, and specifies the content, methodology and presentation of the information to be disclosed by both financial and non-financial undertakings.[20] It helps companies who are subject to disclosure requirements under art.8 of the Taxonomy Regulation, to translate technical screening criteria into Key Performances Indices[21] with regard to turnover, capital expenditure and operating expenditure. Disclosure requirements are laid down in the annexes of the delegated act, and they may differ depending on the nature of the entity (financial, non-financial undertakings), between financial entities (asset managers, credit institutions, investment firms, insurance and reinsurance companies).[22]

The Complementary Climate Delegated Act was approved in principle by the Commission in February 2022, but not yet formally adopted. It's the most controversial of the three delegated acts and has reignited the debate about the inclusion of nuclear energy and natural gas in the taxonomy. In the delegated act, certain activities in the gas and nuclear sector are included in the taxonomy as transitional activities substantially contributing to climate change mitigation. The inclusion of such activities follows the publication of two reports, one from the TEG in 2019 and the second from the Joint Research Committee (JRC), in 2021, as well as consultations with the PSF and the Member States Expert Group, that led to different conclusions.[23]

The classifications of fossil gas and nuclear energy are controversial.[26] The debate about the inclusion of certain nuclear and gas activities in the green taxonomy is the result of two reports that preceded the Complementary Climate Delegated Act: one from the TEG and one from the JRC. In the technical annex of its report, the TEG concluded that nuclear energy could contribute to the objective of climate change mitigation but recommended not to include it in the taxonomy at that stage, for the difficulties in reaching a conclusion in respect of the compliance of nuclear energy with the principle of "do no significant harm".[27] Instead, the report published by the JRC concluded that, with currently available technologies and under the current regulatory framework, the impact of nuclear energy would remain below harmful levels. The report was reviewed by a Commission Expert Group which assessed it positively, while the Scientific Committee on Health, Environmental and Emerging Risks (SCHEER) criticized the approach used to assess the compliance with the "do not significant harm" principle.[23][28] The Platform on Sustainable Finance, in a report published in January 2022 raised concerns about the inclusion of nuclear in the taxonomy, arguing that nuclear activities should not be considered taxonomy aligned as they fail to ensure compliance with the "do no significant harm" principle. Also, the PSF noted, the technical screening criteria applied to new nuclear power plants would cover installations receiving the construction permit by 2045. Therefore, is possible that nuclear activities starting their operations too late would fail to comply also with the objective of substantially contributing to climate change, as the target of climate neutrality has to be achieved by 2050.[29] Regarding natural gas, in the same report the PSF suggested to maintain only the criteria setting a certain threshold for GHG emissions, leaving door open for some of the activities generating higher emissions to be considered as "intermediate transition"- even though still not sustainable - activities, but only under an additional extended taxonomy.[29][30]

Natural gas is seen by some countries as the bridge between coal and renewable energy, and those countries argue for natural gas to be considered sustainable under a set of conditions.[31] Gas constitutes 22% of the energy mix of Europe and Nuclear power 13,6% of nuclear power in 2015.[32] On the one hand, NGO's and several experts consider that the inclusion constitutes greenwashing. In addition, several academics consider that there is no scientific support for considering gas and nuclear power as green. Indeed, the extraction of gas and the process of power generation emits nitrogen oxide and methane. Moreover, it still constitutes a fossil energy that could not be considered as renewable. Regarding nuclear power, concerns were raised on the safety of this energy source (with regard to the "do no significant harm" criteria) and on the management of the nuclear waste.[33] These fears have led several member states to be more cautious about the use of nuclear energy. For instance, Spain, Belgium and Germany had committed to abandoning nuclear power in the coming years.[34] On the inclusion of nuclear power in the taxonomy, a group of four countries (Spain, Denmark, Austria and Luxembourg) has co-signed an open letter[35] to criticize the inclusion project of the Commission. Austria and Luxembourg have even threatened to sue the Commission in the Court of Justice if it included the two power sources into the taxonomy.[36] They argue that this decision would weaken the credibility of the taxonomy. On the other hand, France is promoting the inclusion of nuclear power into the taxonomy, supported by Bulgaria, Croatia, Czechia, Finland, Hungary, Poland, Romania, Slovakia and Slovenia. The economy and energy minister of these countries published a joint opinion article on the 11th October 2021 to defend the role of nuclear power in the fight against climate change. Moreover, they support that it would lead to a better control on the energy prices, as nuclear power price is more stable than the power of gas[33] which is mainly imported. In addition, other countries of the EU defend one of the two energy sources. That is the case of Sweden and the Netherlands which push for the inclusion of nuclear, but refuse on the other hand to include gas into the list of sustainable activities, and the inclusion of nuclear and gas in the taxonomy in the draft Complementary Delegated Act disappointed some Member States. The compromise between gas and nuclear has been eased by the fact that the Commission opted for the inclusion of the two controversial energy sources in the taxonomy in one single delegated act, implying that Member States and European Parliament can either refuse the whole proposition or adopt it.[37] That led the commission to officially propose the inclusion of both nuclear and gas into the Taxonomy in February 2022.[36]

FORATOM, representing the European nuclear industry, welcomed the inclusion of nuclear activities in the Taxonomy, arguing at the same time that it shouldn't be considered just as a transitional activity, and pushed for nuclear to be part of the EU energy mix beyond 2050.[38] EUROGAS, the association representing European gas sector, in its response to the call for feedback following the first TEG report in August 2019, emphasised the crucial role of investments in gas infrastructures in order to contribute to the energy transition. For this reason, they pushed for investments in gas infrastructures to be labelled as sustainable activities under the EU Taxonomy.[39]