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EU Taxonomy First Delegated Act Draft Largely Contested

The EU Taxonomy Regulation entered into force in July 2020. From then on, the European Commission has been tasked to issue a series of technical screening criteria in the form of delegated acts. These delegated acts are designed to develop taxonomy further and facilitate EU’s transition to a green and sustainable economy as part of the overarching EU Green Deal objectives.

The Taxonomy Regulation establishes an EU-wide classification framework to provide businesses and investors with a “common language”, to identify to what degree economic activities can be considered environmentally sustainable. In other words, it aims to provide clarity and transparency on environmental sustainability to investors, financial institutions, and companies by establishing criteria to determine the extent to which an activity can be described as environmentally sustainable through a series of delegated acts. These criteria will be determinants for all industries as they will guide investors interest for the future.

The European Commission published the draft of the first delegated act in November 2020 and triggered a strong wave of criticism. Initially, the official publication of the first delegated act was due 1 January 2021 but the European Commission was forced to revise its agenda. The postponement follows an overwhelming amount of feedback received during the public consultation period as well as a fierce opposition from many industries. The draft delegated act proposal was largely criticized for being unrealistic and too demanding.

In its initial proposal, the European Commission proposed to set a one-size-fits-all emission threshold of 100g CO2/kWh for energy production to sectors listed in climate change mitigation activities. For some producers, the ability to meet such a high requirement is considered as unfair and too hard to reach. Some sectors have a CO2 footprint in electricity production well above the European average, which is now 275g CO2/kWh. Nevertheless, compared to the global average these sectors are doing well. In this regard, adopting an EU threshold of 100g CO2/kWh would disadvantage industries located in Europe despite their relatively good performance on the international scene. This is the case for aluminium producers in Europe whose CO2 footprint in electricity production depend on their geographical localisation. Indeed, only those with access to high volumes of nuclear or hydropower can hope to respect the new EU threshold. Pushing investments away from these producers will provoke the exact opposite of what taxonomy intends to do, which is to help companies transitioning towards a more sustainable business model.

Furthermore, the current proposal is doomed to be blocked by EU member states. Many have already presented their National Energy and Climate Plans for the next 10 years and this new delegated act could push investors away from projects that do not fall under taxonomy criteria.

Within the European Parliament there seems to be a wide agreement that the first delegated act needs to be reviewed to avoid too many sectors being excluded from the Taxonomy regulation.

In Spring, the European Commission will present an updated draft - but no official timeline has been disclosed yet. DG FISMA, DG GROW and DG CLIMA are currently working together on the file, which leaves time to ensure that the proposed emission thresholds will not block the industry strive in the energy transition.

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