European Union Taxonomy: what is it and how will it work?

Nataly Machado (Master’s student in EU Law at UMinho).

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Taxonomy: where does this word come from? “The term is derived from the Greek taxis (“arrangement”) and nomos (“law”). Taxonomy is, therefore, the methodology and principles of systematic botany and zoology and sets up arrangements of the kinds of plants and animals in hierarchies of superior and subordinate groups”^[1]In accordance to Maria da Gória F.P.D. Garcia:“it is the verification by scientists emerging from the community and from various quarters, sometimes against each other, that warns of the need to base political decisions on scientific knowledge if the very continuity of life in society is to be preserved.”^[2] (free translation)

Let us make a brief Taxonomy’s history background. The first records of biological classification, which gave rise to taxonomy, the area of biology responsible for identifying, naming and classifying living beings, take us back to the Greek philosopher Aristotle (384-322 BC). However, it was in the 18th century that the botanist Carolus Linnaeus developed the binomial nomenclature system, written in Latin, which is still used today. A well-known example that identifies us as a species: Homo sapiens.

All this to talk about the European Union Taxonomy^[3] (EU Taxonomy): a robust tool that creates a common language to help investors understand whether an economic activity is environmentally sustainable and navigate the transition to a low-carbon economy^[4]. And it might be considered the world’s first “green list certification system”^[5].

In line with the targets set out in the European Green Deal and in the Paris Agreement – limiting global warming to less than 1.5 degrees Celsius by 2100 compared to pre-industrial levels -, the Regulation (EU) 2020/852^[6], on the establishment of a framework to facilitate sustainable investment, is the foundation of the EU Taxonomy and represents a key step towards the objective of achieving a climate-neutral Union by 2050 and which is to come into force in several stages. First partially, at the beginning of 2022, then fully, at the beginning of 2023^[7].

The idea of creating a “green taxonomy” for economic activities has driven the European Commission mandated a High-Level Expert Group to develop an overarching and comprehensive Union strategy on sustainable finance through a report that represents the basis for the EU Taxonomy^[8]. Is therefore based on a simple principle: defining a threshold of CO2 emissions below which a company will be considered green.

Identifying is not simple. It is adding knowledge, it is first carrying out a deep analysis to only then synthesise this knowledge and conclude the name, the list, the desired classification. And the list of economic activities which can make a substantial contribution to climate change mitigation and criteria to do no significant harm to other environmental objectives covered in that report is not exhaustive and additional activities should be added to the EU Taxonomy in future^[9].

To establishing the degree to which an investment is environmentally sustainable, an economic activity shall qualify as environmentally sustainable where that economic activity is sustainable in terms of six environmental objectives: 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^[10]. Furthermore, the compliance with minimum human and labour rights safeguards should be a condition for economic activities to qualify as environmentally sustainable added to two other requirements: making a substantial contribution to at least one of the six environmental objectives and doing not cause significant harm to the other five objectives. Therefore, an economic activity aligned with the taxonomy will have to respect qualitative and quantitative criteria specific to each objective.

Moreover, the EU Taxonomy conceptualises three types of economic activities: low carbon activities, such as renewable energy; activities that enable emission reductions in other activities, i.e. ‘enabling activities’; and, activities that are hyper-carbon, and there is no low carbon technology yet known, but it engages in some way in climate change mitigation by supporting the transition to a climate-neutral economy, which are the transitional activities^[11]. About the enabling activities these should contributing substantially to one or more of the six environmental objectives set out in Article 9 of the Regulation (EU) 2020/852, “provided that such economic activity: (a) does not lead to a lock-in of assets that undermine long-term environmental goals, considering the economic lifetime of those assets; and (b) has a substantial positive environmental impact, on the basis of life-cycle considerations”^[12]. About the transitional activities, these activities fit as transitional when they meet the following requirements when there is no feasible low carbon alternative both technologically and economically 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”^[13].

Indeed, although these activities are not green, they have to reflect the best performance within de EU market and be on the right pathway to achieve all the objectives listed in Article 9 of the of the Regulation (EU) 2020/852.

In this context, the European Commission considered, on 31 December 2021, natural gas and nuclear energy in the EU Taxonomy as transitional energies with some conditions: “for both gas and nuclear, that they contribute to the transition to climate neutrality; for nuclear, that it fulfils nuclear and environmental safety requirements; and for gas, that it contributes to the transition from coal to renewables”^[14]. Nevertheless, this situation has generated several discussions between the Member States, such as Luxembourg and Austria^[15], in civil society and in the European Parliament itself, given the controversy that these very energies cause to the various criticisms of regulating as green energies.

On February 2nd 2022, the Commission adopted this new delegated act, Taxonomy Complementary Climate Delegated Act^[16], after consulting Member State experts, on climate change mitigation and adaptation covering certain gas and nuclear activities. European Parliament and the Council then have four months (both institutions may request an additional two months of scrutiny time) to reject the text. A reinforced qualified majority would be needed to object to the Delegated Act., i.e. an objection from at least 20 Member States representing at least 65% of the EU population, which seems out of reach^[17]. Once the scrutiny period is over, a simple majority vote of MEPs is needed to reject the text. Otherwise, it will apply from 1 January 2023.

There are considerable controversies surrounding the inclusion of energies such as gas and nuclear power in the Eu Green Taxonomy, the failure, for example, to specify the differences in environmental impact between hydrogen produced from fossil fuels and green hydrogen. However, it is paramount to make clear that the EU Taxonomy is absolutely necessary and indispensable in to redirect private sector investments towards green technologies and businesses in order to the EU to become the first climate-neutral continent by 2050, as well as to urgently fight biodiversity loss and other environmental challenges. And the criteria for environmentally sustainable economic activities should be adapted regularly to reflect such changes to contribute substantially to the achievement of environmental objectives.

In time, based on the objectives already listed above, firming up sustainability as the central position it already holds in the Union’s project through the development of both an environmental and social taxonomy is a primary step to ensure an investment strategy convergent with the objectives of the Paris Agreement and the European Green Deal.

[1] For further development, see https://www.britannica.com/science/taxonomy.

[2]See Maria da Gória F.P.D. Garcia, O Lugar do Direito na Protecção do Ambiente (Coimbra: Almedina, 2015), p.25.

[3] European Commission, Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee And The Committee of the Regions COM/2021/188 final, Brussels, 21.04.2021, available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52021DC0188

[4] Information available at https://ec.europa.eu/commission/presscorner/detail/en/ip_21_1804

[5] For further information, see https://ec.europa.eu/commission/presscorner/detail/it/qanda_19_6804

[6]See the Regulation (EU) 2020/852 at https://eur-lex.europa.eu/legal-content/PT/TXT/?uri=celex:32020R0852

[7] For further information, see https://eu-taxonomy.info/info/eu-taxonomy-timeline

[8]See the Taxonomy Technical Report at https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/190618-sustainable-finance-teg-report-taxonomy_en.pdf

[9]For further development, see https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/190618-sustainable-finance-teg-report-taxonomy_en.pdf

[10] See Article 9 of the Regulation (EU) 2020/852.

[11] See Article 10 (2) of the Regulation (EU) 2020/852 and Recital 18 of the same Regulation.

[12] See Article 16 of the Regulation (EU) 2020/852.

[13] See Article 10 (2) of the Regulation (EU) 2020/852 and Recital 41 of the same Regulation.

[14] Information available at https://ec.europa.eu/commission/presscorner/detail/en/IP_22_711

[15]Information available at https://www.dw.com/en/austria-luxembourg-eye-legal-steps-in-eu-nuclear-energy-row/a-60515621