EU taxonomy: What’s new in the final recommendations?

The European Commission’s expert group on sustainable finance has published its final recommendations on the EU taxonomy, a framework for classifying green investments. We take a deep dive into what’s new in the latest report, including sector-specific highlights.

 

Cover page of the EU taxonomy final recommendations

The EU Technical Expert Group (TEG) on Sustainable Finance has released its highly anticipated final recommendations for the EU taxonomy, including a technical annex with updated technical screening criteria.

The taxonomy is one of the key elements of the EU Action Plan, with the purpose of reorienting capital flows towards sustainable investments to achieve sustainable and inclusive growth. To encourage this shift of capital and to motivate investors, the taxonomy aims to create a uniform and harmonised classification system, protect against greenwashing, avoid market fragmentation and provide a basis for future regulation and standards.

The March report is the third from the TEG and follows over 20 months of technical work involving more than 200 technical experts and two open consultations. We delve into some of the specific changes since the TEG’s previous June 2019 report in the text and charts below.

A brief TEG timeline

Dec 2018: TEG published the first set of climate change mitigation criteria and their technical screening criteria for feedback.

June 2019: TEG published a first version of its technical report, proposing technical screening criteria for 67 climate change mitigation activities.

Dec 2019: The European Parliament and European Council adopted the Taxonomy Regulation.

March 2020: TEG released its final report on the EU taxonomy as well as a technical annex with updated screening criteria for climate change mitigation and adaptation activities.

TEG developments to date

The TEG published the first set of climate change mitigation activities with associated technical screening criteria in December 2018. Subsequent feedback led to the first draft of a taxonomy on sustainable finance in June 2019. One year after the initial report, the European Parliament and European Council adopted the Taxonomy Regulation in December 2019.

After a second round of feedback, the TEG released its final version of the EU Taxonomy on Sustainable Finance in March 2020.

A common ground for sustainable investments

The taxonomy includes three layers of green activities that can be taxonomy aligned. The first and most obvious layer is activities that are already low carbon, such as renewable energy. The second layer is activities that enable emission reduction in other activities, for example, manufacturing of components essential for renewable energy production (“enabling activities”). The third layer includes activities that are not low carbon today, where the techniques required might not exist yet, but can transition to become green in the future, such as best-in-class buildings.

To be taxonomy aligned, activities must meet minimum social safeguards, such as fundamental labour rights, but there is no social taxonomy included in the final version. However, the TEG recognizes that a fully comprehensive taxonomy should incorporate social objectives as well as technical screening criteria for significant levels of harm to environmental objectives, i.e. a brown taxonomy. This opens the door for the development of both a social and brown taxonomy in the future.

Changed thresholds for real estate, construction and forestry

The TEG’s call for feedback following its first draft of the taxonomy back in December 2018 covered all of the proposed climate change mitigation criteria, climate change adaptation criteria, usability and future development of the taxonomy, with the vast majority of responses directed towards mitigation activities.

In its final version, the TEG altered multiple taxonomy mitigation activities, with the biggest changes to forestry and building-related activities (see the tables below for an overview of the main changes).

The final report broadens the scope of activities under the forestry category, which now includes conservation forest, and clarifies how to conduct the alignment assessment.

The building category’s criteria have also been changed and the reference to energy classes removed. The criterion for construction of new buildings has now harmonized around the near-zero energy building concept. It is worth highlighting that the thresholds for buildings use a transitional approach, i.e. the thresholds are not necessarily low carbon today and will be tightened until they reach zero emissions.

In addition, the latest report finalises the climate change adaptation technical screening criteria and divides them into adaptation criteria focused on building resilience to climate change and activities that enable adaptation.

Notably, no new sectors were included in the final version of the taxonomy, and omissions include aviation, shipping and pulp/paper. Some of these sectors could certainly contribute to climate change mitigation if techniques were developed to lower their emissions. The TEG found it too difficult to agree on relevant and credible thresholds for some sectors, which will be developed in the future, and also stressed that there will be sectors excluded which cannot substantially contribute to climate change mitigation.

Mandatory disclosure for companies and investors

When the European Commission endorsed the taxonomy regulation in December 2019, the relevant compliance target group expanded from previously including manufacturers of sustainable financial products to now covering all financial market participants as well as companies subject to the Non-financial Reporting Directive (NFRD).

“Manufacturers” of financial products (i.e. investors) should disclose how and to what extent the criteria for environmentally sustainable economic activities are used to determine the environmental sustainability of the investments, to which environmental objective the investment contributes and the proportion of underlying investments that are taxonomy aligned. Companies under the NFRD (i.e. companies with over 500 employees) will have to report the share of their revenues, capex and opex that is taxonomy aligned.

The aim of the taxonomy is to provide investors with more knowledge of sustainable investment opportunities and thereby steer investments towards sustainable activities and solutions. We believe that there will be additional applications of the taxonomy in the future. One existing example is the EU Green Bond Standard, which links to the taxonomy and declares that a bond cannot be labelled as an EU Green Bond if the use-of-proceeds is not aligned with the taxonomy. We expect to see other labelling schemes, regulations and standards refer to the taxonomy in the future.

Sector-specific updates in the final report

Forestry

Metric/Threshold Comments
Afforestation, rehabilitation/restoration, reforestation, existing forest management and conservation forest
Continued compliance with the Sustainable Forest Management (SFM) requirements is demonstrated and disclosed at 10-year intervals through a forest management plan (or equivalent) that shall be reviewed by an independent third-party certifier and/or competent authorities (as described in Criteria 3). The previous version required a disclosure of a 5 year interval through a forest management plan.
Verified GHG balance baseline is calculated for above-ground carbon pools, based on growth-yield curves for species per m3/year/ha, carbon convertible. Calculating the GHG balance baseline requires knowledge of the area, the species and number of trees (in case of afforestation and reforestation). Using the growth-yield curves, information will be given on the annual increment in m3/year/ha, which can be used for the basis of the GHG balance. The methodology is consistent with the approach in the Revised 1996 IPCC Guidelines for National Greenhouse Gas Inventories (IPCC Guidelines), it recommends recalculation of the amount of carbon sequestered; 1 ton of biomass representing approximately 0,5 ton of carbon. Further one ton of carbon equals 44/12 = 3.67 tons of carbon dioxide. In the latest version the baseline has to be verified and details around the methodology have been added.
Above ground Carbon stocks shall increase above carbon baseline over a period of 20 years. Changes in carbon stocks should be disclosed based on growth yield curves in 10 year intervals through a forest management plan (or equivalent instrument) that shall be reviewed by an independent third-party certifier and/or competent authorities. The previous version required a disclosure based on growth yield curves in 5 years intervals.

 

Construction and Real estate activities

Metric/Threshold Comments
Construction of new buildings
To be eligible, the net primary energy demand of the new construction must be at least 20% lower than the primary energy demand resulting from the relevant NZEB requirements. This reduction can be met through a direct decrease of the primary energy demand via a more efficient design or by offsetting with on-site and off-site renewable generation, or a combination of both strategies. Off-site energy generation must be limited to district heating and cooling systems and local renewable energy sources. The methodology used for the measurement of floor area should be stated referring to the categories defined in the International Property Measurement Standards. In previous version an energy class of B was required.
Acquisition and ownership
This activity has been separated into two cases, A and B New
Case A – Acquisition of buildings built before 31 December 2020: The calculated performance of the building must be within the top 15% of the local existing stock in terms of operational Primary Energy Demand, expressed as kWh/m2y. Read more at p. 388. In previous version an energy class of B was required.
Case B – Acquisition of buildings built after 31 December 2020. The building must meet the criteria established for the ‘Construction of new buildings’ that are relevant at the time of the acquisition. Large non-residential buildings must meet an additional requirement: efficient building operations must be ensured through dedicated energy management. In previous version an energy class of B was required.

 

Manufacturing 

Metric/Threshold Comments
Manufacturing of low carbon technologies 
1. Manufacture of products, key components and machinery that are essential for eligible renewable energy technologies (Geothermal Power, Hydropower, Concentrated Solar Power (CSP), Solar Photovoltaic (PV), solar thermal energy for district heat production (new), Wind energy, Ocean energy, bio energy technologies that meet the conversion efficiency requirements set in the Renewable Energy Directive (2018/2001/EU) and Green hydrogen and hydrogen electrolysis installation (new) Supplements: solar thermal energy for district heat production and green hydrogen and hydrogen electrolysis installation.
Manufacture of low carbon transport vehicles and their respective key components , fleets and vessels meeting the following criteria is eligible: For category L vehicles, threshold: Zero tailpipe emission vehicles (incl. hydrogen, fuel cell, electric). Supplement: L vehicles
Manufacturing of aluminium
Manufacture of primary aluminium is eligible if Criteria 1 (see below) is met in combination with either criteria 2 or 3 In previous version: all criteria’s needed to be fulfilled
Manufacturing of iron and steel
Hot metal = 1.328 tCO2e/t product. Sintered ore = 0.171 tCO2e/t product. Iron casting = 0.325 tCO2e/t product. Electric Arc Furnace (EAF) high alloy steel = 0.352 tCO2e/t product. Electric Arc Furnace (EAF) carbon steel = 0.283 tCO2e/t product. Coke (excluding lignite coke) = 0.286 tCO2e/t product. No changes in threshold but production from coke is added.
Manufacturing of hydrogen
The following thresholds need to be met:
• Direct CO2 emissions from manufacturing of hydrogen: 5.8 tCO2e/t
Hydrogen in alignment with energy thresholds in the taxonomy.
• Electricity use for hydrogen produced by electrolysis is at or lower
than 58 MWh/t Hydrogen
• Average carbon intensity of the electricity produced that is used for
hydrogen manufacturing is at or below 100 gCO2e/kWh (Taxonomy
threshold for electricity production, subject to periodical update).
Old thresholds:
• Direct CO2 emissions from manufacturing of hydrogen: 0.95 tCO2e/t
• Electricity use for hydrogen produced by electrolysis is at or lower than 50 MWh/t Hydrogen
• Third thresholds hasn’t changed.
Manufacturing of chlorine: 
Electricity use for chlorine manufacturing is at or lower than 2.45 MWh/t Chlorine (includes both electrolysis and chlorine treatment, threshold subject to periodical update) Old threshold: 2.75MWh/t
Manufacturing of plastics in primary form
Additional criteria the activity needs to comply with: Single use consumer products: Independent sector study confirms that at least 90% of the type of plastic manufactured is: (1) not used for single use consumer products, or (2) based on recycled plastics as feedstock. Updated criteria

 

Electricity, Gas, Steam and Air Conditioning Supply

Metric/Threshold Comments
Production of electricity from bioenergy (biomass, biogas and biofuels)
Production of electricity from biofuels shall be assessed in relation to the relative fossil fuel comparator set out in RED II. Facilities operating above 80% of GHG emissions-reduction in relation to the relative fossil fuel comparator set out in RED II increasing to 100% by 2050, are eligible Updated. In previous version 85 % of GHG emissions
Storage of hydrogen New
Currently construction of hydrogen storage assets is eligible under the Taxonomy, subject to regular review, Operation of hydrogen storage assets is eligible under the Taxonomy if: • The Infrastructure is used to store taxonomy-eligible hydrogen (see Manufacture of hydrogen). Infrastructure that is required for zero direct emissions transport (e.g. hydrogen fuelling stations) is eligible under the transport section. New
Storage of thermal energy New
Metric/Threshold
Currently all thermal energy storage is eligible under the Taxonomy (including Thermal Energy Storage (UTES) or Aquifer Thermal Energy Storage (ATES)), subject to regular review. New
Installation and operation of electric heat pumps
Currently, installation and operation of electric heat pumps is eligible, if:
Refrigerant threshold: GWP ≤ 675; and Old threshold < 10 GWP
Must meet energy efficiency requirements stipulated in the implementing regulations under the Eco-design Framework Directive. The criterion is subject to regular review. New
Production of heat/cool from gas combustion
Declining threshold: The Cogeneration Threshold is the combined heat/cool and power threshold of 100 gCO2e/kWh. Old threshold: Facilities operating at less than 30g CO2e/kWh (th), declining to 0g CO2e/kWh (th) by 2050, are eligible
Production of bioenergy (biomass, biogas and biofuels)
Facilities operating above 80% of GHG emissions-reduction in relation to the relative fossil fuel comparator set out in RED II increasing to 100% by 2050, are eligible Old threshold: Facilities operating at less than 30g CO2e/kWh (th), declining to 0g CO2e/kWh (th) by 2050, are eligible

 

Water, sewerage, waste and remediation

Metric/Threshold Comments
Anaerobic digestion of bio waste
In dedicated bio-waste treatment plants, bio-waste shall constitute a major share of the input feedstock (at least 70%, measured in weight, as an annual average). Co-digestion is eligible only with a minor share (up to 30% of the input feedstock) of advanced bioenergy feedstock listed in Annex IX of Directive (EU) 2018/2001. If energy crop feedstock covered by Annex IX is used (with a minor share up to 30%) it shall be produced
according to criteria defined for Taxonomy Activities “Growing of perennial crops” or “Growing of non-perennial crops” and respect any additional national limitations established for the purpose of biogas production.
New threshold
Material recovery from non-hazardous waste 
Material recovery from separately collected non-hazardous waste is eligible provided that: at least 50%, in terms of weight, of the processed separately collected
non-hazardous waste is converted into secondary raw materials
New threshold
Transport of CO2
Assets or activities that enable carbon capture and use (CCU) will deem all the connected elements of an existing transport network ineligible. New threshold
Assets which increase the flexibility and management of an existing network, without expanding the network to include carbon capture and use activities is eligible. New threshold

Source: Nordea Research

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