The EU Taxonomy is a leading science-based classification system expected to become the global standard for determining whether an economic activity can be considered environmentally sustainable.
EU taxonomy system is expected to support the energy transition and help redirect capital flows to renewables and green assets, despite its faults and shortcomings and the taxonomy will have a profound impact on the level of green investments in the future, including renewables, batteries, and hydrogen.
Outlining its Taxonomy Regulation, the European Commission states that “by clearly defining what is green, the EU Taxonomy seeks to incentivize and encourage companies to launch new projects, or upgrade existing ones, to meet these criteria.” It adds that the goal is to prevent greenwashing and help investors identify economic activities in line with environmental and climate objectives.
The focus lays on the following 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
- Protection and restoration of biodiversity and ecosystems
Among criteria set for solar and wind are, in the context of the circular economy, that investors should make sure “the activity assesses availability of and, where feasible, uses equipment and components of high durability and recyclability and that are easy to dismantle and refurbish.”
With Europe increasingly turning to coal to keep the lights on, CO2 emissions are on the rise. According to Eurostat estimates, emissions from energy use grew in 2021 in almost all EU member states. The increase was mainly due to the rising use of solid fossil fuels, or coal, which contributed to over 50% of the increase, Eurostat said. In the EU as a whole, emissions from fossil fuel combustion increased by 6.3% in 2021 compared with the previous year.
As the EU taxonomy takes shape, it may be applied in new ways. For example, the forthcoming EU proposal for an EU Green Bond Standard is expected to use the Taxonomy as the benchmark for eligibility. Linking the EU taxonomy to the Green Bond Standard would create a more direct link with EU – and potentially global – capital markets.
Whether further EU policy measures may be tied to the Taxonomy remains to be seen.
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