EU Taxonomy Regulation – proposed technical screening criteria for climate change mitigation and adaptation

On 20 November 2020 the European Commission published the proposed draft technical screening criteria for climate change mitigation and adaptation in the form of a draft delegated regulation, which was open to consultation until 18 December 2020.

The Taxonomy Regulation came into force on 12 July 2020, and establishes the framework for the EU taxonomy by setting out conditions that economic activities must meet in order to qualify as environmentally sustainable. In so doing, the draft regulation seeks to fulfil its environmental objectives of:

• Climate change mitigation
• Climate change adaptation
• Sustainable use and protection of water and marine resources
• Transition to a circular economy
• Pollution prevention and control
• Protection and restoration of biodiversity and ecosystems

The Taxonomy Regulation will be supplemented by delegated acts containing technical screening criteria, and will be informed by the recommendations of the Technical Expert Group on Sustainable Finance. The different technical screening criteria will be developed in two phases:

• the first technical screening criteria for activities which contribute to climate change mitigation or adaption (which was published in draft form on 20 November 2020) will be adopted as soon as possible after the evaluation of the stakeholder feedback and will apply from the end of 2021 (see more detail below); and
• the second technical screening criteria which will cover economic activities for the other four environmental objectives being sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control and protection of healthy ecosystems, will be adopted by the end of 2021 and apply from the end of 2022.

The Draft Delegated Regulation and the first Technical Screening Criteria

For renewable energy and fossil or carbon based energy (including oil and gas), bioenergy, manufacturing, steel and iron production, construction, and transport, the draft delegated regulation establishes technical screening criteria to determine which economic activities qualify for contributing to climate change mitigation and climate change adaptation.

We look briefly below at the key points for climate change mitigation and adaptation and see for more detail our note European Commission Consultation on Draft Delegated Regulation Supplementing the Taxonomy Regulation.

Climate change mitigation

Under the draft regulation, the DNSH (“do no significant harm”) criteria is to be used to assess a range of activities with the regulation setting out the steps to be taken for different activities in order to mitigate climate change. All activities are to be subject to an Environmental Impact Assessment (EIA) or screening in accordance with Environmental Impact Assessment Directive (2011/92/EU), or equivalent national standards outside the EU.

The regulation excludes power generation using solid fossil fuels and other solid fuels such as waste-to-energy from the remit of sustainable activity, and captures both the construction and operation of electricity generation facilities that produce electricity using gaseous and liquid fuels (such as oil and gas). Such energy generation is considered to be a transitional activity as referred to in Article 10(2) of the draft regulation provided it complies with the technical screening criteria of Annex I.

Climate change adaptation

All activities are subject to the same assessment criteria, which requires both physical and non-physical solutions to be implemented in an effort to reduce the most important climate risks relevant to the activity. A climate risk and vulnerability assessment is to be used to identify physical risks with climate-risk hazards classified as acute or chronic as relating to temperature, wind, water and solid mass; assessments should be proportionate to the scale of the activity and its expected lifespan. Additionally, all assessments and projected impact of activities should be based on best practice and available guidance, and consider open source models, best available science for vulnerability and risk analysis and related methodologies in accordance with the most recent Intergovernmental Panel on Climate Change reports and scientific peer-reviewed publications.

Nuclear power and energy from waste

It its current form the draft regulation does not include nuclear power, energy from waste or coal. On nuclear power, the Commission has requested the Joint Research Centre (JRC) to assess whether nuclear power should be included in the regulation as an environmentally sustainable activity. The JRC is expected to submit a technical report on the DNSH aspects of nuclear energy in 2021.

Implementation and enforcement

The regulation required delegated acts on technical screening for both climate change mitigation and climate change adaption to be adopted by 31 December 2020, for these to apply from 1 January 2022 – however, to date, there appears to be a delay in the timetable.  The Commission is currently considering feedback received from the public consultation before finalising the draft regulation for adoption by the European Parliament and Council of the EU. For the four other environmental objectives under the regulation (ie 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), the delegated acts should be established by the end of 2021 and will apply by the end of 2022.

The regulation allows for EU Member States to enforce these criteria at national level and encourages the creation of a national authority to do so; it is therefore likely that the enforcement of these criteria will become clearer following individual guidance from each Member State.

UK and Brexit

As the Brexit transition period ended on 31 December 2020, the UK is not obligated to implement the Draft Delegated Regulation when it comes into force at the end of the legislative procedure (or any of the other future Delegated Regulations). The UK has however indicated that it may decide to align itself with the EU with regard to the Taxonomy Regulation, but such a decision would only be taken once the relevant Delegated Regulations are finalised.

We will continue to monitor developments in this area, and encourage you to subscribe to be kept informed of latest developments. Please contact the authors or your usual Herbert Smith Freehills contacts for more information.