Technical screening criteria (TSC) under the Taxonomy Regulation define when an activity is deemed sustainable (Draft report of 3 August 2021 by the Platform on Sustainable Finance on preliminary recommendations for technical screening criteria for the EU taxonomy, p. 9). They are the core of the EU taxonomy system defining when economic activities are taxonomy-aligned while intending to be as comprehensive as possible and covering all relevant parts of the economy. The technical screening criteria either relate to:
- the end product, e.g. in the case of zero emission vehicles or
- the production process, e.g. in the case of manufacturing of chemicals, metals and cement, and power and heat/cool generation (Transition finance report of March 2021, Platform on Sustainable Finance, p. 26).
The Taxonomy can be defined as the list of economic activities and associated technical screening criteria setting out the required level of environmental performance. The technical screening criteria address both how economic activities can be considered to make a substantial contribution to the environmental objectives and how to respect the DNSH criterion. |
TSC, in particular, should ensure that power generation activities that use solid fossil fuels do not qualify as environmentally sustainable economic activities. Hence, investments in coal are not considered environmentally sustainable and taxonomy-aligned (in turn, investments in natural gas (and nuclear) activities, despite initial controversies, are covered by the so-called 'Taxonomy Complementary Delegated Act - CDA).
Requirements for technical screening criteria are laid down in Article 19 of the Taxonomy Regulation (with clarifications in Recitals 38 - 50 and 54).
It is noteworthy, descriptions of economic activities in technical screening criteria include the references to NACE codes (established by Regulation (EC) No 1893/2006 of the European Parliament and of the Council) that can be associated with given activity. However, as Recital 6 of Commission Delegated Regulation (EU) 2021/2139 of 4 June 2021 explains, “those references should be understood as indicative and should not prevail over the specific definition of the activity provided in its description”.
Recital 11 of the said Regulation also underlines that "the technical screening criteria for certain activities rely on elements of considerable technical complexity and the assessment whether those criteria have been complied with may require expert knowledge and may not be feasible for investors. To facilitate that assessment, the compliance with such technical screening criteria for such activities should be verified by an independent third party".
The Taxonomy framework the assessment of environmental sustainability is carried out at the economic activity level. The TSC are sector-specific, granular criteria which are science-based.
At this stage, the EU Taxonomy does not provide TSC for all economic activities.
To support a robust classification system of environmentally sustainable economic activities the Commission has established TSC for the six environmental objectives., however, to ensure that investments are channelled towards economic activities that make the greatest positive impact on the environmental objectives, the Commission prioritised economic activities that potentially contribute most to the environmental objectives and developed TSC for those activities.
The Taxonomy Regulation imposes a requirement for financial and non-financial undertakings to report on how and to what extent their activities are associated with economic activities that qualify as environmentally sustainable. Non-financial undertakings are required to disclose the extent to which their turnover, CapEx and OpEx are associated with economic activities that qualify as environmentally sustainable. The relevant disclosures provide information for all economic activities that are ‘taxonomy-eligible’ (i.e. economic activities for which TSC criteria have been developed) and distinguish between those activities that are ‘taxonomy-aligned (i.e. environmentally sustainable) and those that are not. Hence, the TSC are key to establish whether given economic activity is taxonomy-aligned, i.e. environmentally sustainable. The disclosures also provide aggregated information on Taxonomy non-eligible economic activities (i.e. activities for which relevant TSC are not yet in place).
Financial undertakings (credit institutions, insurance and reinsurance undertakings, investment firms and asset managers) are also under an obligation to report on the taxonomy-alignment of their economic activities.
The Disclosures Delegated Act sets out the content and presentation of the information that should be disclosed by financial and non-financial undertakings as well as the relevant KPIs that financial undertakings should report.
First Taxonomy Climate Delegated Act
The first Taxonomy Climate Delegated Act has been published in the EU Official Journal on 9 December 2021: Commission Delegated Regulation (EU) 2021/2139 of 4 June 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives.
First Taxonomy Climate Delegated Act
Taxonomy Complementary Climate Delegated Act
Taxonomy Environmental Delegated Act)
Taxonomy - electricity generation from bioenergy
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When on 21 April 2021 the European Commission published its draft of this TSC {SWD(2021) 152} - {SWD(2021) 153}, C(2021) 2800/3) it stated as regards the energy that:
"The cross-cutting 100gCO2e/kWh lifecycle emissions threshold for energy activities was maintained, except where evidence clearly shows relevant technologies to be well below this level. Bioenergy is no longer labelled as transitional and the criteria for bioenergy were aligned more closely with applicable EU legislation, while those of hydropower were made more context-specific and likewise more aligned with existing EU law".
On 27 June 2023 the European Commission adopted the Delegated Regulation amending Delegated Regulation (EU) 2021/2139 establishing additional technical screening criteria for determining the conditions under which certain economic activities qualify as contributing substantially to climate change mitigation or climate change adaptation and for determining whether those activities cause no significant harm to any of the other environmental objectives (C(2023)3850 final), which lays down the amendments to:
- Annex I to the Taxonomy Climate Delegated Act by adding or complementing technical screening criteria for climate change mitigation for certain economic activities in the transport and manufacturing sectors. Annex I also includes targeted amendments of existing provisions that address certain technical and legal inconsistencies identified since the application of the Taxonomy Climate Delegated Act;
- Annex II to the Taxonomy Climate Delegated Act by adding the technical screening criteria for climate change adaptation for certain economic activities that are adapted to climate change or enable the adaptation of other economic activities from the water, construction, disaster risk management, information and communication, and professional services sectors. Annex II also includes targeted amendments of existing provisions that address certain technical and legal inconsistencies identified since the application of the Taxonomy Climate Delegated Act.
On 21 November 2023 Commission Delegated Regulation (EU) 2023/2485 of 27 June 2023 amending Delegated Regulation (EU) 2021/2139 establishing additional technical screening criteria for determining the conditions under which certain economic activities qualify as contributing substantially to climate change mitigation or climate change adaptation and for determining whether those activities cause no significant harm to any of the other environmental objectives has been published in the EU Official Journal.
The Taxonomy Climate Delegated Act covering climate change mitigation and adaptation has been up and running since January 2022 and includes a total of 107 economic activities that are responsible for 64% of greenhouse gas emissions in the EU 27 (Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, A sustainable finance framework that works on the ground (COM/2023/317 final)).
Taxonomy Complementary Delegated Act (CDA) - treatment of nuclear and gas activities
The first Taxonomy Climate Delegated Act did not include any transitional activities in the energy sector, hence, on 1 January 2022, the European Commission began the expert consultations on Complementary Delegated Act (CDA) covering - as transitional - certain nuclear and gas activities (Commission Delegated Regulation amending Delegated Regulation (EU) 2021/2139 as regards economic activities in certain energy sectors and Delegated Regulation (EU 2021/2178 as regards specific public disclosures for those economic activities).
The relevant European Commission's press release noted:
"Commission considers there is a role for natural gas and nuclear as a means to facilitate the transition towards a predominantly renewable-based future. Within the Taxonomy framework, this would mean classifying these energy sources under clear and tight conditions (for example, gas must come from renewable sources or have low emissions by 2035), in particular as they contribute to the transition to climate neutrality".
Taxonomy |
However, on 21 January 2022 the EU Platform on Sustainable Finance published its sceptical opinion regarding the draft Complementary Delegated Act (EU Platform on Sustainable Finance, Response to the Complementary Delegated Act). Nevertheless, on 2 February 2022 European Commission presented the Taxonomy Complementary Climate Delegated Act with minor amendments only.
Considering 3 types of activities the Taxonomy Regulation lays out: low-carbon (Article 10(1)), enabling (Article 16) and transitional (Article 10(2)), certain nuclear and gas activities are classified by the European Commission in the Complementary Climate Delegated Act as the third category.
The Explanatory Memorandum to Complementary Climate Delegated Act stresses that the taxonomy "covers more than climate neutral and renewable investments. It also covers economic activities that are clearly not climate neutral or renewable but could, under strict conditions and for a limited time, enable the transition towards a sustainable energy system, such as the economic activities in the natural gas and nuclear sector. They should not hamper the development of renewable sources".
The European Commission rejects the criticism insofar as it seems to be based on the assumption, which is contrary to the purpose of Article 10(2) of the Taxonomy Regulation, that only the technical screening criteria that ensure the most substantial contribution to the climate change mitigation objective and do no harm, or the least harm to the other environmental objectives could be included in the Delegated Act. The Commission argues that under Article 10(2) and (3) of the Taxonomy Regulation it is required to set out technical screening criteria for economic activities for which at present there is no technologically and economically feasible low-carbon alternative and which would be necessary in transition towards climate neutrality.
According to Recital 6 of the CDA, nuclear energy-related activities are low-carbon activities, they do not constitute energy from renewable sources as defined in Article 2, second subparagraph, point (1) of the RED II, and as referred to in Article 10(1), point (a) of the Taxonomy Regulation and do not fall under the other categories of economic activities listed in points (b) to (i) of that provision (the list enumerates economic activities that qualify as contributing substantially to climate change mitigation). Such nuclear energy related economic activities should be qualified under Article 10(2) of the Taxonomy Regulation, in the absence of technologically and economically feasible low-carbon alternative at a sufficient scale to cover the energy demand in a continuous and reliable manner.
Nuclear energy related activity should therefore be considered as complying with Article 10(2) of the Taxonomy Regulation, i.e. “an economic activity for which there is no technologically and economically feasible low-carbon alternative shall qualify as contributing substantially to climate change mitigation where it supports the transition to a climate-neutral economy consistent with a pathway to limit the temperature increase to 1,5 0C above pre-industrial levels, including by phasing out greenhouse gas emissions, in particular emissions from solid fossil fuels, and where that activity:
(a) has greenhouse gas emission levels that correspond to the best performance in the sector or industry;
(b) does not hamper the development and deployment of low-carbon alternatives; and (
c) does not lead to a lock-in of carbon-intensive assets, considering the economic lifetime of those assets”.
The Commission also rejects the criticism expressed by other Member States, contesting the qualification of nuclear energy activities under Article 10(2) of the Taxonomy Regulation and arguing that they should be qualified under Article 10(1) thereof.
The Commission points out that generating, transmitting, storing, distributing or using energy is limited, in Article 10(1), point (a), of the Taxonomy Regulation, to renewable energy in line with Directive (EU) 2018/11, and nuclear energy activities do not fall under the other categories of economic activities listed in points (b) to (i) of that provision.
The European Commission also recalls that what does not qualify as a sustainable economic activity under the EU Taxonomy is not by definition harmful.
Nevertheless, the Taxonomy Complementary Climate Delegated Act includes strict requirements for the activities to qualify (to ensure the respect of the do no significant harm principle).
In the case of fossil gas-related activities the facility should switch fully to renewable or low-carbon gases by 31 December 2035.
The Taxonomy Complementary Climate Delegated Act, as adopted by the Commission, is intended to ensure that any new gas-based power/heat plant (or refurbished combined heat and power plant or heat/cool plant) is either below the technology-neutral 100g CO2/kWh life-cycle emission threshold (i.e. using Carbon Capture and Storage technologies) or meets a number of stringent conditions and obtains a construction permit by 2030.
Importantly, the use of gas should act as a replacement of plants running on more polluting solid and liquid fossil fuels (e.g. coal).
As regards the co-generation of heat and power and heating/cooling activities, for every new natural gas-fired plant to be built, a coal-fired plant with the same capacity has to be removed for the technical screening criteria to be complied with.
Regarding the power generation, the capacity of the gas-fired plant cannot exceed the capacity of the coal-fired plant by more than 15%. Facilities have to integrate a rapid conversion towards renewables with a clear commitment for a full switch to renewables by 2035.
Taxonomy Complementary Climate Delegated Act (Commission Delegated Regulation (EU) 2022/1214 of 9 March 2022 amending Delegated Regulation (EU) 2021/2139 as regards economic activities in certain energy sectors and Delegated Regulation (EU) 2021/2178 as regards specific public disclosures for those economic activities) has been published in the EU Official Journal on 15 July 2022.
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Taxonomy Environmental Delegated Act
The next steps include further delegated acts on the other environmental objectives of the taxonomy: water, circular economy, pollution prevention and biodiversity (Environmental Delegated Act).
Draft Commission Delegated Regulation supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to the sustainable use and protection of water and marine resources, to the transition to a circular economy, to pollution prevention and control, or to the protection and restoration of biodiversity and ecosystems and for determining whether that economic activity causes no significant harm to any of the other environmental objectives and amending Delegated Regulation (EU) 2021/2178 as regards specific public disclosures for those economic activities (Taxonomy Environmental Delegated Act), Ref. Ares(2023)2481554 has been published on 5 April 2023.
European Commission's Q&As on Taxonomy Climate Delegated Act explain:
"The Taxonomy Climate Delegated Act is a living document and will continue to evolve over time, with more activities being added to its scope by means of amendments. It will also reflect technological progress. The screening criteria for climate change mitigation and adaptation in this Delegated Act are dynamic and will be subject to regular review. This ensures that new sectors and activities, including transitional and enabling activities, can be added to the scope over time".
The relevant Delegated Regulation has been adopted by the European Commission on 27 June 2023.
On 21 November 2023 Commission Delegated Regulation (EU) 2023/2486 of 27 June 2023 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to the sustainable use and protection of water and marine resources, to the transition to a circular economy, to pollution prevention and control, or to the protection and restoration of biodiversity and ecosystems and for determining whether that economic activity causes no significant harm to any of the other environmental objectives and amending Commission Delegated Regulation (EU) 2021/2178 as regards specific public disclosures for those economic activities has been published in the EU Official Journal.
Excerpts
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