EU Taxonomy for aviation and shipping: expanding the umbrella of transitional activities
The EC released a draft delegated act proposing the inclusion of new activities under the Taxonomy. These include for example aviation and shipping. Research shows that a significant share of existing aircraft complies with the proposed EU Taxonomy criteria, which brings into question whether the inclusion of these activities will in fact incentivise financing towards the development of sustainable aircrafts and jet fuel.
The EU Commission has released a draft delegated act proposing the inclusion of new activities under the Taxonomy Climate Delegated Act
These include for example aviation and shipping, with the addition not being positively received by the market
Research shows that a significant share of aircrafts complies with the proposed EU Taxonomy criteria, which brings into question whether the inclusion of these activities will in fact incentivise financing towards the development of sustainable aircrafts and jet fuel
Furthermore, the Commission has also published a first draft on the EU Taxonomy for the remaining four environmental objectives
On the 5th of April, the EU Commission released a draft delegated act on the EU Taxonomy for the remaining four environmental objectives. At the same time, the Commission has also published a draft proposing amendments to the EU Taxonomy for climate change mitigation and adaptation. The draft is open for feedback for a four-week period, where market participants can provide input. Below we have highlighted a few of the important take-aways from the drafts:
Amendments to the Taxonomy regulation
In 2020, the EU Taxonomy for two out of the six EU environmental objectives was published. This was commonly referred to as the Taxonomy Climate Delegated Act. Later on, in 2021, the Commission approved a Complementary Climate Delegated Act, which includes criteria for nuclear and gas energy, commonly known as “transitional” or “amber” activities. Now, the recently published draft refers to proposing amendments to the Taxonomy Climate Delegated Act. This includes the addition of new activities, and also the amendment of existing activities, the latter with the goal “to improve the usability, coherence and implementation of that Delegated Act”.
With regards to new activities, the proposal is to extend the EU Taxonomy for green activities such as: manufacturing of key components for low carbon transport (climate change mitigation) and flood risk prevention and protection infrastructure (climate change adaptation). But more than that, the draft also proposes to include new transitional activities (which until now were focused exclusively on nuclear and gas), such as aviation. The inclusion of these activities would, according to the Commission, “represent an effective way to help incentivise improvements beyond the status quo”. As it was with nuclear and gas, the Taxonomy regulation allows for inclusion of transitional activities if these refer to “an economic activity for which there is no technologically and economically feasible low-carbon alternative” and which “supports the transition to a climate-neutral economy consistent with a pathway to limit the temperature increase to 1.5 degrees above preindustrial levels”. That being said, the Commission’s inclusion of aviation was based on the fact that aviation plays a crucial role within the transport system – hence, there is a strong need to reduce emissions, but zero-emission air transport or sustainable aviation fuels is not yet technologically available. The definition of what a “green” (or better put – an “amber”) aircraft would be is then based on the best available technologies for airframe and engine fuel efficiency, and on the potential to reduce substantially GHG emissions through the progressive uptake of sustainable aviation fuels.
With regards to amendments of existing activities, these include as well waterborne activities (shipping). Technical screening criteria for shipping activities is already included in the existing Climate Delegated Act, but with a threshold until 2025. Under the existing regulation, after 1 January 2026, only vessels that have a zero direct (tailpipe) CO2 emissions would be considered “green” as per the EU Taxonomy. The draft proposes therefore an amendment to that, where ships which comply with certain GHG gas intensity thresholds (which gradually decline over the years) would also be compliant. This is solely however if it is not technologically and economically feasible to comply with the criteria of zero emissions (that is – the newly proposed criteria would only be valid until there is technology available which allows ships to run with zero emissions).
When it comes to transitional activities, it is set in current regulation that the technical screening criteria needs to be reviewed every three years in order to ensure that transitional activities remain on a credible pathway consistent with a climate-neutral economy.
A quick look at the feedback provided so far shows that market participants seem to not be very welcoming to the inclusion of both aviation and (transitional) shipping in the EU Taxonomy. With regards to aviation, according to Transport & Environment, an umbrella organisation of NGOs, said that, under the current draft proposal, “over 90% of Airbus’ future aircraft orders [could be considered green], despite them still running exclusively on fossil kerosene in the next decade”. Estimates are also that around a third of Air France and Lufthansa’s existing fleet complies with the proposed criteria (see ).
As it was with gas and nuclear, the goal of the Commission seems to be to use the EU Taxonomy to also finance transitional activities. Nuclear and gas are both extremely important to accelerate the reduction of greenhouse gas emissions, so financing towards those activities is also necessary in order to reach climate neutrality. However, as we pointed out when the Complementary Delegated Act was published (see ), in the case of gas, the criteria was so strict that we estimated that no natural gas power plant in Europe would comply with the proposed EU Taxonomy thresholds. The difference now is that it seems that the criteria for aviation, for example, is too loose, allowing for a significant share of (existing and future) aircraft to already be an eligible “green” activity. The technical screening criteria for transition activities should incentive the replacement of less efficient (and sustainable) aircraft, while at the same time, accelerate the development of environmentally efficient aircraft. If a significant share of aircrafts fulfils the criteria, perhaps a stricter criteria would have been appropriate. The criteria is nevertheless based on previous recommendations from the Platform on Sustainable Finance (see ).
The EU Taxonomy for the remaining four environmental objectives
As previously noted, on the same day, the Commission also published a draft delegated act on the EU Taxonomy for the remaining four environmental objectives, now commonly known as the “Taxonomy Environmental Delegated Act”. These four environmental objectives are: 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 draft is based on recommendations of the Platform on Sustainable Finance, which were published and open for feedback in 2021.
With this proposal, the Commission provides not only criteria for “green” activities that were not previously covered by the Climate Delegated Act (such as manufacture of pharmaceutical products and hotels, holiday, camping and similar accommodation), but also a new layer for assessing activities that were already covered by the Climate Delegated Act. For example, construction of new buildings and renovation of existing buildings is also included under transition to a circular economy, but now regarding the use of materials used in the construction and maintenance of buildings, which should come from re-used or recycled (secondary raw) materials, and are in turn prepared for re-use or recycling when the built assets are demolished.
Particularly with regards to transition to a circular economy, the technical screening criteria sets design requirements for products’ longevity, reparability, and reuse, as well as requirements on the use of materials, substances and processes that allow for quality recycling of the product. It therefore introduces a whole new set of thresholds and metrics, while the Climate Delegated Act is (naturally) focused on CO2 emissions.
Furthermore, interestingly, the proposal also highlights that the financing of activities that comply with the criteria of substantially contributing to a circular economy could “limit the dependency of the Union’s economy on materials imported from third countries, which is particularly important in respect of critical raw materials”. It therefore urges that there should be a focus first on “activities and sectors that have the greatest potential to achieve those aims”. One could argue that this highlights that the EU Taxonomy also has a (geo)political agenda, behind only exclusively targeting the decarbonization of the EU.
The draft also touches upon some rather specific activities, such as digital solutions, including the use of digital product passports, which can provide real-time data about an item’s location, condition, and availability. These should improve the transparency and efficiency of environmental monitoring and enforcement, and in turn, enable the move to circular business models.
The Taxonomy Environmental Delegated Act completes therefore the set of EU Taxonomy with regards to the environmental activities, opening up room for the Commission to focus in the future on for example, social activities. Still, important to note that not all activities are yet covered in the proposed draft. As the Commission highlights, for now, the analysis “prioritises those economic activities and sectors that were identified as having the biggest potential to make a substantial contribution to one or more of the four environmental objectives and for which it was possible to develop or refine the recommended criteria without further delay”. That being said, activities such as agriculture, forestry and fishing are not yet included and should be also developed in the upcoming future.
As companies and undertaking in general are required to report on the alignment of their activities towards the remaining four environmental objectives from 2024 onwards, the delegated acts will likely be finished this year and start application as of 1 January 2024.