Table of contents GLOSSARY LIST OF FIGURES LIST OF TABLES LIST OF BOXES 1.Introduction: Political and legal context 1.1. How does the delegated act on climate change mitigation and adaptation fit with the political priorities of the Commission and the EU? 1.2. Legal and policy context of the delegated act – the Taxonomy Regulation 1.3. The uses of the EU Taxonomy and interactions with other initiatives 1.4. Scope and structure of the report 2.Problem definition 3.Why should the EU act? 4.Objectives: What is to be achieved? 4.1.General and specific objectives 4.2.Operational objective 5.Key methodological choices 5.1.Prioritisation, selection and classification of economic activities 5.2.Approaches to set technical screening criteria 5.3.Level of ambition for technical screening criteria

6.Assessing the proposed approaches and technical screening criteria against the requirements of the Taxonomy regulation 6.1.Substantial contribution to climate change mitigation 6.1.1 Policy Coherence 6.1.2. Environmental integrity 6.1.3. Level playing field 6.1.4. Usability of the criteria 6.1.5. Consistency with the requirements in Article 19(2)-(4) of the Taxonomy Regulation 6.2. Substantial contribution to climate change adaptation 6.2.1. Policy Coherence 6.2.2. Environmental integrity 6.2.3. Fair treatment of sectors, avoid distortion, and set right incentives 6.2.4. Usability of the criteria. 6.3. Do no significant harm 6.3.1. Assessment of the DNSH to climate change mitigation criteria against the requirements of the Taxonomy Regulation 6.3.2. Assessment of the DNSH criteria against the requirements of the Taxonomy Regulation for climate change adaptation 6.3.3. Assessment of the DNSH criteria against the requirements of the Taxonomy Regulation for objectives 3 to 6 7. How the Taxonomy will be used, monitored and evaluated 7.1 Monitoring and review of the technical screening criteria 7.2 Uses of the EU Taxonomy, indicative impacts and broader monitoring and evaluation provisions ANNEX 1: PROCEDURAL INFORMATION

1.1. Lead DG, Decide Planning/CWP references 1.2. Organisation and timing 1.3. Consultation of the RSB 1.4. Evidence, sources and quality ANNEX 2: STAKEHOLDER CONSULTATION 2.1. Technical Expert Group on Sustainable Finance (TEG) and Member States Expert Group (MSEG) 2.2. TEG’S first call for feedback 2.3. TEG workshops with additional experts 2.4. First stakeholder dialogue on sustainable finance 2.5. TEG’s second call for feedback 2.6. Second stakeholder dialogue on sustainable finance 2.7. Feedback by Member States on TEG report 2.8. Feedback on inception impact assessment 2.9. Consultation on the Renewed Sustainable Finance Strategy 2.10. Feedback on the draft delegated act: November-December 2020 ANNEX 3: WHO IS AFFECTED AND HOW? 3.1 Practical implications of the initiative 3.2 Summary of costs and benefits ANNEX 4: KEY METHODOLOGICAL CHOICES 4.1Classification of economic activities - NACE

4.2 Methodology for selecting economic sectors and activities for climate change mitigation 4.2.1. Prioritisation of sectors and activities for assessment 4.2.2. Inclusion logic of activities in the EU Taxonomy 4.3 Methodology for selecting economic sectors and activities for climate change adaptation. 4.3.1. First category of included activities: Activities for which DNSH criteria for environmental objectives 3-6 were developed under the mitigation Taxonomy. 4.3.2. Second category of included activities: (i) Activities not assessed by the TEG but for which DNSH criteria for activities already assessed can apply or (ii) Activities that have no or a very low impact on other environmental objectives. 4.3.3. Third category of included activities: Enabling activities identified by the TEG. 4.4 Approaches to set technical screening criteria 4.5 Level of ambition for the technical screening criteria ANNEX 5: CLIMATE CHANGE MITIGATION 5.1. Sector-specific assessment of the approaches and criteria for substantial contribution to climate change mitigation 5.1.1. Forestry 5.1.2. Agriculture 5.1.3. Manufacturing 5.1.4. Energy sector 5.1.5. Water, sewage, waste and remediation (WSWR) 5.1.6. Transportation 5.1.7. Information and communications (ICT) 5.1.8. Construction and real estate activities 5.2. Inclusion of additional sectors and activities for climate change mitigation

ANNEX 6: CLIMATE CHANGE ADAPTATION 6.1. Assessment of the proposed criteria 6.2.Overview of the relevance of the proposed sectors and activities for climate change adaptation. 6.2.1. First category of included activities: Activities for which DNSH criteria for environmental objectives 3-6 were developed under the mitigation Taxonomy. 6.2.2. Second category of included activities: (i) Activities not assessed by the TEG but for which DNSH criteria for activities already assessed can apply or (ii) Activities that they have no or a very low impact on other environmental objectives. 6.2.3. Third category of included activities: Enabling activities identified by the TEG. ANNEX 7: DO NO SIGNIFICANT HARM 7.1. Analysis on DNSH to climate change mitigation 7.2. Analysis on DNSH to climate change adaptation 7.3. Analysis on DNSH to sustainable use and protection of water and marine resources (in short: “DNSH to water”) 7.4. Analysis on DNSH to the transition to a circular economy (in short: “DNSH to circular economy”) 7.5. Analysis on DNSH to pollution prevention and control (in short: “pollution DNSH”) 7.6. Analysis on DNSH to protection and restoration of biodiversity and ecosystems (in short: “DNSH to biodiversity”) ANNEX 8: EXPECTED USES OF THE EU TAXONOMY 8.1. Overview of the potential uses of the EU Taxonomy 8.2. Illustrations of potential coverage and alignment with the EU Taxonomy 8.3 More detailed overview on literature and case studies referenced in this annex ANNEX 9: LIST OF PROPOSED ECONOMIC ACTIVITIES IN THE DRAFT DELEGATED ACT AND APPROACHES TO SET TECHNICAL SCREENING CRITERIA 9.1 List of activities for climate change mitigation 9.2 List of activities for climate change adaptation

9.3 Major deviations from the final recommendations of the Technical Expert Group on Sustainable Finance (TEG) in the draft delegated act as published in November 2020 ANNEX 10: RELEVANT EU LEGISLATION AND POLICY INITIATIVES 10.1 Interaction between the EU Taxonomy and other legislation in the field of sustainable finance 10.2 EU legislation relevant for setting technical screening criteria for the delegated act ANNEX 11: RELEVANT EXCERPTS TAXONOMY REGULATION 11.1 Requirements relevant for the delegated act for climate change mitigation and adaptation LIST OF REFERENCES GLOSSARY Term or acronym Meaning or definition AFOLU Agriculture, Forestry and Other Land Use AIFM Alternative Investment Fund Manager API Application Programming Interface AuM Assets under management BAT Best Available Technique BERD Business expenditure on R&D BREEAM Building Research Establishment Environmental Assessment Method BREF BAT Reference Documents C3S Copernicus Climate Change Services CAP Common Agriculture Policy CCS Carbon Capture and Sequestration CDS Climate Data Store CEPA (European standard statistical) Classification of Environmental Protection Activities COM European Commission CreMA Classification of Resource Management CSRD Corporate Sustainability Reporting Directive EU CTB EU Climate Transition Benchmark DA Delegated Act DNSH Do No Significant Harm EcAMPA Economic Assessment of GHG mitigation policy options for EU agriculture EGD European Green Deal EPBD Energy Performance of Buildings Directive EPC Energy Performance Certificate ESG Environmental, social and governance ETS Emissions Trading System EU 27 or EU 28 27 or 28 Member States of the European Union FSC Forest Stewardship Council GBS Green Bond Standard GHG Greenhouse Gas HDV High-Duty vehicles HVD High Value Datasets ICT Information and Communication Technology IBIP Insurance-based Investment Product IFRS International Financial Reporting Standards IORP Institution for Occupation Retirement Provision ISSG Inter-Service Steering Group JRC Joint Research Centre KBA Key Biodiversity Area KPIs Key Performance Indicators LCE Life Cycle Engineering LULUCF Land Use, Land-use Change and Forestry MFF Multiannual financial framework MSEG Member States Expert Group NACE Nomenclature des Activités Économiques dans la Communauté Européenne NFRD Non-financial Reporting Directive NGO Non-government Organization NZEB Nearly Zero-Energy Buildings EU PAB EU Paris Aligned Benchmark PEFC Program for the Endorsement of Forest Certification Schemes PEPP Pan-European Personal Pension Product PESETA Projection of Economic Impacts of Climate Change in Sectors of the European Union based on bottom-up Analysis R&D Research and Development R&I Research and Innovation RCA Recycled Concrete Aggregates RED II Renewable Energy Directive II RSB Regulatory Scrutiny Board RTS Regulatory Technical Standards SC Substantial Contribution SFM Sustainable Forest Management SMEs Small and medium-sized enterprises TEG Technical Expert Group on Sustainable Finance TFEU Treaty on the Functioning of the European Union TR Taxonomy Regulation TRL Technology Readiness Level UCITS Undertakings for Collective Investments in Transferable Securities WSWR Water, Sewerage, Waste and Remediation





LIST OF FIGURES Figure 1: The four basic conditions for economic activities in the Taxonomy Regulation Figure 2: Timeline of files related to the Taxonomy Regulation Figure 3: Uses of the EU Taxonomy Figure 4: Framework for assessment Figure 5: Typology for substantial contribution to climate change mitigation. Figure 6: Representation by type of stakeholder Figure 7: Visualisation of EU Taxonomy assessment process in a non-financial company operating in multiple economic activities. Figure 8: GHG emission in the EU27 in 2018. Figure 9: Typology for substantial contribution to climate change mitigation. Figure 10: EU greenhouse gas emissions by sector 1990-2017. Figure 11: International Hydropower Association data on GHG emissions and power density. Figure 12: Gross inland consumption of biomass and waste. Source: COM(2018) 773 Figure 13: Shares in power generation. Figure 14: Partial reproduction. Figure 15: Categorisation of companies in relation to Ecolabel pockets. Figure 16: Results of the fund-level assessment. Figure 17: Estimated split between types of potentially aligned activities based on Nordea report Figure 18: Estimated split of potentially aligned activities per macro-sector based on Nordea report Figure 19: Estimated share of potentially aligned activities in different sectors based on Nordea report

Figure 20: Sectoral shares of insurer’s eligible holdings, EIOPA, 2020 Figure 21: Issuers by potentially aligned revenue share (MSCI, 2020) Figure 22: Number of relevant companies per sector within MSCI ACWI IMI Index (MSCI, 2020) Figure 23: Sector representation of MSCI ACWI and potentially Taxonomy-eligible companies Figure 24: Potentially Taxonomy eligible companies in MSCI ACWI Figure 25: Comparison of Taxonomy-relevant and Taxonomy-aligned revenue shares Figure 26: Possible Covid-19 recovery packages, Hepburn et al., 2020 Figure 27: Interaction between Taxonomy Regulation, NFRD, and SFDR Figure 28: NFRD overview



LIST OF TABLES Table 1: Overview of annexes Table 2: Proposed approaches by macro sector Table 3: Relevant pieces of Union legislation that set rationale of intervention Table 4: Measuring success of the EU Taxonomy for climate change mitigation and adaptation as established by the delegated act Table 5: High-level comparison of studies on Taxonomy alignment and eligibility Table 6: Possible broader monitoring provisions for the EU Taxonomy Table 7: Overview of benefits

Table 8: Overview of costs Table 9: Analysis for inclusion of adapted activities beyond TEG recommendation Table 10: Presentation of the generic types of approaches Table 11: Relevance of the different approaches depending on the type of substantial contribution of the activity Table 12: Deduction of the assessment grid: conditions under which an approach can be selected for a given economic activity Table 13: Assessment of proposed approaches to set criteria for forestry Table 14: Assessment grid for agriculture activities Table 15: Assessment grid for manufacturing activities Table 16: Assessment grid for electricity and/or heat generation activities not including those relating to biomass, biogas and bioliquids Table 17: Assessment grid for water, sewerage, waste and remediation activities Table 18: Assessment grid for transportation activities Table 19: Assessment grid for information and communication activities Table 20: Assessment grid for Construction activities Table 21: Climate risks Table 22: Sensitivity Matrix for information and communication Table 23: Sensitivity Matrix for financial and insurance activities Table 24: Potential uses (mandated and voluntary) of the EU Taxonomy Table 25: Initiatives under the European Green Deal that reference the EU Taxonomy Table 26: Studies of the European Commission on EU Taxonomy Table 27: Clustering of Revenue Segments

Box 10: Definition of economic sectors and activities Box 11: Types of approaches to set criteria for substantial contribution to climate change adaptation Box 12: Types of approaches to set DNSH criteria Box 13: Deviations from the TEG recommendation for technical screening criteria for substantial contribution to climate change adaptation Box 14: Peseta IV 1.Introduction: Political and legal context 1.1. How does the delegated act on climate change mitigation and adaptation fit with the political priorities of the Commission and the EU? This impact assessment underpins the first delegated act under the Taxonomy Regulation that sets out economic activities and related technical screening criteria for the first two (out of six) environmental objectives. This delegated act provides the technical details to establish the EU Taxonomy for climate change mitigation and climate change adaptation. The Taxonomy Regulation establishes the framework for developing a list of environmentally sustainable economic activities (or “EU Taxonomy”) and was underpinned by a separate impact assessment. The EU Taxonomy is an important piece of the puzzle to enable and scale up sustainable investment and thus to implement the European Green Deal. The Taxonomy aims to channel capital towards activities that substantially contribute to reaching the objectives of the European Green Deal, such as climate neutrality, zero pollution, preservation of biodiversity, a circular economy and a high degree of energy efficiency. This framework coherent with the European Green Deal will help limit the risk of greenwashing and avoid market fragmentation. Taxonomy In light of the ongoing post-crisis fiscal stimulus and the EU27’s estimated financing needs after the crisis, the European Green Deal will help provide for the European recovery strategy and the EU Taxonomy can be a valuable tool to help channel finance towards the green recovery. 1.2. Legal and policy context of the delegated act – the Taxonomy Regulation (I)it contributes substantially to one or more of the six environmental objectives set out in the Taxonomy Regulation ; (II)it does not significantly harm any of the other environmental objectives; (III)it is carried out in compliance with minimum (social) safeguards set out in the Taxonomy Regulation; and (IV)it complies with the “technical screening criteria” that are established by the European Commission through delegated acts. The technical screening criteria specify the conditions under which an economic activity meets criteria (i) and (ii). The Taxonomy Regulation acknowledges different means for an activity to make a substantial contribution for each objective. Across all objectives, it is recognised that activities may not only qualify due to their own performance, but also by enabling another activity or activities to substantially contribute. For climate change mitigation, the Regulation additionally stipulates in Article 10 (2) that “transitional activities”, for which no feasible low-carbon alternative exists, can qualify under certain conditions.

The first delegated act that establishes the activities and technical screening criteria for the climate objectives (and which is accompanied by this report) is adopted by the Commission in April 2021. A second delegated act will set out the activities and technical screening criteria for the remaining four environmental objectives under the Taxonomy Regulation, to be developed over 2021. A third delegated act due by mid- 2021 will establish the key performance indicators that companies need to disclose under the Taxonomy Regulation. This timeline is illustrated in Figure 2. In order to assist with the development of the first delegated act, the Commission tasked the Technical Expert Group on Sustainable Finance (TEG) with providing advice on the development of the technical screening criteria on the objectives of climate change mitigation and adaptation. Their final recommendations are publicly available . The final recommendations serve as a basis and main technical input for the Commission’s analysis in this impact assessment. In order to assist the Commission in the preparation of subsequent delegated acts and to update the EU Taxonomy, the Taxonomy Regulation creates a Platform on sustainable finance (“Platform”) that is composed of a balanced representation of public and private, financial and non-financial stakeholders. This Platform started its work in October 2020 and does not only assist the Commission with developing the EU Taxonomy for the remaining environmental objectives (and advise on potentially extending it to other objectives), but also advises the Commission on the need to update the technical screening criteria and the list of activities for all objectives. The iterative introduction of the EU Taxonomy and its dynamic natureThe Taxonomy Regulation puts forward an iterative approach to develop the EU Taxonomy, starting with the two climate objectives and followed by the Taxonomy for the other four environmental objectives. In this “second round” of delegated acts developed over 2021, the Commission could further amend the first delegated act in order to include additional activities for climate change mitigation and adaptation. This step-by-step introduction of the Taxonomy and prioritisation of some sectors over others stems from the urgent need to realise the EU green policy agenda. While this overall legislative architecture prioritises those sectors and activities with the highest potential for positive environmental impact, it also allows to include other activities in the Taxonomy, once screening criteria for how they can demonstrably make a substantial contribution to an environmental objective can be worked out and agreed upon in a methodologically sound way. The iterative approach mitigates the risk for activities for which this process has not yet been able to conclude in time for the first round of delegated acts which contains priority sectors and activities backed by broad scientific evidence and consensus. It ensures an objective and rigorous path for their potential inclusion, while safeguarding the integrity of the Taxonomy. The incremental roll-out of the Taxonomy also allows market actors to familiarise themselves with the Taxonomy criteria in stages and facilitates learning how to use the Taxonomy before disclosure obligations become mandatory and other initiatives, which build on the Taxonomy, begin to apply. More information on the monitoring and evaluation of the Taxonomy including its incremental roll-out are given in section 7. In addition, the EU Taxonomy is dynamic in its nature. This has been a political choice in the Regulation itself to allow the Taxonomy to evolve with technological and market developments. The Regulation requires the Commission to regularly review the technical screening criteria and, where appropriate, to amend the delegated acts. Notably the Commission has to review the technical screening criteria for transitional activities at least every 3 years and for other activities at least every 5 years. Such updating frequency should strike the right balance between the costs of updating relevant systems and creating potential uncertainty for investors on the one hand, and reflecting technical progress and policy changes in a timely manner on the other. Any changes will be carefully considered as regards their expected impacts such as the risk of stranded assets. A more detailed discussion on stranded assets is provided in Annex 3.Box 3: The iterative introduction of the EU Taxonomy and its dynamic natureThe iterative introduction of the EU Taxonomy and its dynamic natureThe Taxonomy Regulation puts forward an iterative approach to develop the EU Taxonomy, starting with the two climate objectives and followed by the Taxonomy for the other four environmental objectives. In this “second round” of delegated acts developed over 2021, the Commission could further amend the first delegated act in order to include additional activities for climate change mitigation and adaptation. This step-by-step introduction of the Taxonomy and prioritisation of some sectors over others stems from the urgent need to realise the EU green policy agenda. While this overall legislative architecture prioritises those sectors and activities with the highest potential for positive environmental impact, it also allows to include other activities in the Taxonomy, once screening criteria for how they can demonstrably make a substantial contribution to an environmental objective can be worked out and agreed upon in a methodologically sound way. The iterative approach mitigates the risk for activities for which this process has not yet been able to conclude in time for the first round of delegated acts which contains priority sectors and activities backed by broad scientific evidence and consensus. It ensures an objective and rigorous path for their potential inclusion, while safeguarding the integrity of the Taxonomy. The incremental roll-out of the Taxonomy also allows market actors to familiarise themselves with the Taxonomy criteria in stages and facilitates learning how to use the Taxonomy before disclosure obligations become mandatory and other initiatives, which build on the Taxonomy, begin to apply. More information on the monitoring and evaluation of the Taxonomy including its incremental roll-out are given in section 7. In addition, the EU Taxonomy is dynamic in its nature. This has been a political choice in the Regulation itself to allow the Taxonomy to evolve with technological and market developments. The Regulation requires the Commission to regularly review the technical screening criteria and, where appropriate, to amend the delegated acts. Notably the Commission has to review the technical screening criteria for transitional activities at least every 3 years and for other activities at least every 5 years. Such updating frequency should strike the right balance between the costs of updating relevant systems and creating potential uncertainty for investors on the one hand, and reflecting technical progress and policy changes in a timely manner on the other. Any changes will be carefully considered as regards their expected impacts such as the risk of stranded assets. A more detailed discussion on stranded assets is provided in Annex 3.Box 3: The iterative introduction of the EU Taxonomy and its dynamic nature1.3. The uses of the EU Taxonomy and interactions with other initiatives The EU Taxonomy is a classification system, establishing a list of environmentally sustainable economic activities. The delegated act that is considered in this impact assessment only represents the first two environmental objectives of this list. The Taxonomy as a whole aims to incentivise the mitigation of GHG emissions and adaptation to climate change compared also in sectors that are not yet recognised as “green” by the market. The Taxonomy is, however, not a mandatory or prescriptive list to invest in. The different uses of the EU Taxonomy can broadly be grouped in four categories (Figure 3): First, the Taxonomy Regulation sets out several mandatory uses. First, the Regulation sets out disclosure requirements for large companies in the scope of the Corporate Sustainability Reporting Directive (CSRD) that will amend the Non-Financial Reporting Directive (NFRD) and financial market participants under the Sustainable Finance Disclosure Regulation (SFDR) . The EU Taxonomy thus forms an integral part of sustainability-related reporting over the investment chain. Annex 11 provides more detail on these initiatives and their interaction with the EU Taxonomy and also lists existing EU legislation relevant for this delegated act. The Taxonomy Regulation also mandates the use of the Taxonomy criteria when Member States and the Union set out EU or (public) national labels and standards for financial products and corporate bonds that are made available to investors as “environmentally sustainable”. The possible EU Green Bond Standard and the expected EU Ecolabel for retail financial products are examples of where this requirement applies on EU level. Market-based labels for green funds and green bonds are not required to use the EU Taxonomy. The Taxonomy technical screening criteria therefore draw from existing market-based initiatives as much as possible to allow for coherence when Member States and the EU apply it in this context. Second, the Taxonomy is set to serve as a basis for various future and ongoing initiatives in sustainable finance. The EU Taxonomy will facilitate the development of Union-wide standards for environmentally sustainable financial products and the establishment of labels that recognise compliance with these standards. Notably, the potential EU Green Bond Standard (EU GBS) and the future EU Ecolabel for financial products are set to use the EU Taxonomy to define a pool of eligible green assets in which a certain percentage of investment will be mandatory to obtain the label. The Taxonomy is also a reference point for climate transition and Paris-aligned benchmarks. Furthermore, the Taxonomy Regulation complements the disclosure obligations on financial market participants that will increase transparency towards investors about sustainable financial products and the entities that issue them. In order to allow for this transparency on financial product level, information is needed from companies. In this context, not only the disclosure obligation for companies under the Taxonomy Regulation, but also the revision of the NFRD through the proposal for a CSRD will be important. Third, the Taxonomy may be used in public instrument and further EU initiatives. Application of the EU Taxonomy on a European level is foreseen in the proposed Regulation establishing the InvestEU Programme, where the EU Taxonomy will be used in an appropriate way to track the achievements of the InvestEU Fund to the climate objectives by establishing guidance for investment projects. Projects will need to do a sustainability proofing for their projects to be supported by InvestEU and can use the Taxonomy criteria in an appropriate way to do so. Finally, the Taxonomy may be used in a voluntary way by the market. Investors may use it to reorient their investment decisions towards Taxonomy-aligned activities and projects; companies might use it to increase their share of Taxonomy-aligned activities to become eligible for these investments. The degree of uptake of the Taxonomy by the market cannot be estimated at this stage. 1.4. Scope and structure of the report This report underpins the first delegated act under the Taxonomy Regulation. Notably, this report assesses the activities and technical screening criteria that are proposed for the delegated act for climate change mitigation and climate change adaptation. It notably assesses the technical screening criteria that have been published in the draft delegated act for stakeholder feedback in November 2020. The changes that have been made to the criteria as part of the stakeholder feedback gathered in this process are not part of the assessment. The feedback received and resulting changes are summarised in Annex 2.10 of this report. The Taxonomy Regulation itself was accompanied by an impact assessment that outlined the underlying challenges and the relevant problem drivers that resulted in the need to develop a granular, EU-wide Taxonomy. The establishment of the screening criteria is a necessary step to achieve the objectives of the Taxonomy Regulation and to help address the wider problems analysed in the impact assessment that accompanied it. Hence the assessment of these problems and the analysis of the impacts of the broader EU Taxonomy will not be duplicated here.

While the Taxonomy Regulation sets out the overarching framework to develop the EU Taxonomy, the Commission establishes – by means of delegated acts – the list of activities and associated technical screening criteria within the boundaries of the Regulation. In order to propose criteria that comply with the Regulation’s requirements in a coherent, transparent and accountable manner, this report sets out a framework to translate the Regulation’s requirements and provisions to a more granular level and assess the proposed technical screening criteria. First, the requirements for technical screening criteria (Article 19 of the Taxonomy Regulation) have been grouped around four main categories of requirements (section 4) that present the background (and objective) against which the content of the delegated act is assessed. The assessment structure, including the different steps and choices that are made to operationalise the Regulation’s requirements to set technical screening criteria at the level of economic activities are presented in section 5. This assessment structure is applied to the criteria for climate change mitigation, climate change adaptation and do no significant harm (summary in Chapter 6) to ensure that the content of the delegated act complies to the best degree possible with the Regulation’s requirements. Finally, section 7 outlines how the success of the EU Taxonomy can be monitored in the future, again taking into account the limitations of data availability. Due to the nature of this content, the report deviates from the usual template for impact assessments. For usability purposes, the below table presents an overview of the annexes that substantiate the sections in this report. Section 1: Introduction, legal and policy context, uses of the Taxonomy Annex 10 (Linkages between sustainable finance files, relevant EU legislation) Section 2 and 3: Problem definition, intervention logic / Section 4: Objectives Annex 11: Relevant excerpts of the Taxonomy Regulation (Overview and mapping of the objectives) Annex 4: Methodology to use the Regulation’s requirements to assess approaches in assessment grids. Section 5: Methodology, selection of sectors and activities, introduction of approaches, level of ambition Annex 4 (4.1: Classification of activities, 4.2: Selection methodology for climate change mitigation, 4.3: Selection methodology for climate change adaptation, 4.4: approaches to set technical screening criteria, 4.5: level of ambition) Section 6.1: Climate change mitigation Annex 5, (sector-specific assessment, additional evidence for added activities) Annex 9 (overview of activities and approaches) Section 6.2: Climate change adaptation Annex 6 (detailed assessment), Annex 9 (overview of activities and approaches) Section 6.3: Do no significant harm (DNSH) Annex 7 (objective-specific assessment), Annex 9 (overview of activities and approaches) Section 7: Monitoring and evaluation, coverage, uses, potential impacts, estimated costs. Annex 3 (expected impacts, estimated costs and benefits for users of the EU Taxonomy, practical implications), Annex 8 (expected uses, summary and detailed information on studies about the coverage of the EU Taxonomy) 2.Problem definition This initiative is a precondition for the establishment of the EU Taxonomy as a classification system for environmentally sustainable economic activities. Without the list of economic activities and associated technical screening criteria that determine under what conditions an activity makes a substantial contribution to climate change mitigation or adaptation and does not significantly harm any of the other five environmental objectives, the problems that led to the development of an EU Taxonomy would not be addressed. These underlying problems were analysed in the impact assessment underpinning the Taxonomy Regulation and two other sustainable finance proposals. With regards to the EU Taxonomy, the impact assessment established that investors face high search costs in order to identify sustainable economic activities. Together with other factors, this results in limited transparency on sustainability in the financial sector and affects investment behaviour with the ultimate consequence of limiting capital flows into sustainable investments including across borders; necessary in supporting the transition to a climate-neutral and climate-resilient economy. A lack of clarity on what can be considered an environmentally sustainable economic activity for investment purposes was found to be one of the biggest drivers of this problem, and ultimately one of the main obstacles to scaling up green investment, particularly in countries where different definitions of sustainability are used. This was evidenced through relevant literature as well as stakeholder responses to the related public consultation. In this regard, the conclusion from the original impact assessment that market failures prevent the establishment of a commonly accepted Taxonomy for environmentally sustainable economic activities still holds. The impact assessment presented an overview of existing sustainability classification systems as of May 2018, but concluded that none of these was ready to be used by European investors in a comprehensive way to address the problem. In the two years since then, no commonly accepted classification system has been developed by market operators or public bodies. The EU co-legislators have during that period agreed on the Taxonomy Regulation. However, this Regulation still needs to be fully implemented to become operational. Hence, without the delegated act, the lack of clarity, uncertainty and fragmentation on environmentally sustainable economic activities would continue, against the backdrop of an accelerating climate and ecological crisis and the rising need for investments in environmentally sustainable economic activities. In a context characterized by pervasive and increasing climate change, only those businesses which implement methodologies to control the risks, can ensure corporate value in the long run. At the same time, it is likely that investors would continue to seek more sustainable financial products, driven by greater awareness and higher preferences to invest sustainably particularly among the younger generations. Due to the absence of clear information on what can be considered environmentally sustainable for investment purposes or on the exposure of operations to climate risks, this capital could be allocated in a sub-optimal manner with regards to its environmental impacts. To be successful, this initiative has to solve a problem stemming from the agreement to set-up the EU Taxonomy: it has to set technical screening criteria for climate change mitigation and adaptation aligned with the Taxonomy Regulation, especially within the requirements of Article 19. Notably, technical screening criteria need to be environmentally ambitious and science-based, consistent with EU legislation, easy to use and should not lead to market distortion and inconstant incentives when used by companies and investors. 3.Why should the EU act? Subsidiarity and the need for action at EU level were established in the impact assessment accompanying the legislative proposals on sustainable finance put forward by the Commission in May 2018. The present initiative is required under Articles 10(3) and 11(3) of the Taxonomy Regulation in order to establish the EU Taxonomy for the environmental objectives regarding climate change mitigation and climate change adaptation. Under this framework, the Commission has been empowered to adopt delegated acts pursuant to Article 23 of the Taxonomy Regulation. The legal basis of the Taxonomy Regulation is Article 114 of the Treaty of the Functioning of the European Union (TFEU). Article 114 TFEU confers the European Parliament and the Council the competence to adopt measures for the approximation of provisions laid down by law, regulation or administrative action in Member States, which have as their object the establishment and functioning of the internal market. The EU derives the right to establish the EU Taxonomy from Article 114 TFEU, as it aims to create harmonised definitions of what can be considered a sustainable economic activity. 4.Objectives: What is to be achieved? Similar to the problem definition and legal basis/subsidiarity, the objectives for this initiative stem from the impact assessment accompanying the legislative proposals on sustainable finance. 4.1.General and specific objectives The general and specific objectives of this initiative are the same as those already established in the 2018 impact assessment, as the delegated act links to the objectives of the Taxonomy Regulation. Specifically, the development of a uniform and granular EU Taxonomy together with other sustainable finance policies aims to address two out of three general objectives presented there – reorienting capital flows towards sustainable investments (general objective 3) and fostering transparency in financial and economic activity on sustainability (general objective 2) – by reducing investor search costs in identifying sustainable economic activities. To do so, it needs to meet the relevant specific objective (specific objective 3) of providing clarity at EU level on what sustainable economic activities are. 4.2.Operational objective The operational objective of this initiative is to ensure that the technical screening criteria in the delegated act are calibrated in a way that is likely to provide clarity at EU level on what are sustainable economic activities. This objective is more specific to this delegated act, although it arises from the Taxonomy Regulation, which has set out requirements in Article 19 that aim to make the technical screening criteria that are established in the delegated act robust, credible, and usable. For practical reasons, the requirements for the technical screening criteria in Article 19 are grouped around four broader categories of requirements based on their common elements and the potential trade-offs between them. An overview of the requirements and their mapping around the four groups of requirements is outlined in Annex 11. It is important to note that the requirements for technical screening criteria in the Regulation refer to both criteria for substantial contribution and criteria for do no significant harm. The requirements reflect some of the main concerns from stakeholders that were raised in the process of developing and negotiating the Taxonomy Regulation and ensure that these concerns will be addressed in the adoption of the delegated act.

This requirement ensures the overall environmental integrity of the EU Taxonomy. For this purpose, the technical screening criteria have to be based on available scientific evidence if it is robust enough and apply the precautionary principle otherwise. They have to take into account life-cycle considerations in addition to the environmental impact of the activity itself, wherever possible. The inclusion of life-cycle considerations in the Taxonomy Regulation for the development of technical screening criteria ensures that positive environmental impacts (especially important in determining enabling activities as set out in Article 16 (b)) and harmful impacts for both upstream and downstream impacts for products and services provided by the economic activity (“production, use and end of life”) must be considered, including existing life-cycle assessments. When setting the technical screening criteria, short and long-term impacts of an activity must have been considered. 5.Key methodological choices The broader framework of the EU Taxonomy has been set by the European Parliament and the Council in the Taxonomy Regulation, determining the key aspects of the EU Taxonomy including the requirements and scope for the delegated acts. The framework determines the setup of the Taxonomy, such as its gradual development through delegated acts. It sets out the definition of the environmental objectives, the definition of “substantial contribution” and “do no significant harm” as well as the requirements for the technical screening criteria. The provisions adopted in the Taxonomy Regulation cannot be reopened at the level of a delegated act and leave the Commission with limited discretion. The empowerment under the Taxonomy Regulation obliges the Commission to adopt technical screening criteria in line with the specific requirements of the Taxonomy Regulation. In terms of expected impacts, the decisions being taken at the level of this delegated act are expected to play a smaller role compared to those taken at the level of the Taxonomy Regulation. However, implementing the broader framework of the Taxonomy Regulation required several important choices to set technical screening criteria in line with the operational objective of this initiative. These choices follow a certain sequence that is illustrated below and determines the logic of the assessment in this report: 1)First, developing the Taxonomy in a gradual way required a prioritisation of certain sectors and activities along with a choice of an appropriate classification system for economic activities. 2)In order to systematically establish on which grounds economic activities could make a substantial contribution and could be included (or not), the rather high-level definitions of substantial contribution from the Taxonomy Regulation needed to be interpreted further. 3)Third, there was a need for a methodology to translate the provisions of the Regulation into technical screening criteria on economic activity level for different types of economic activities. For this purpose, different approaches for setting technical screening criteria are assessed in this report and the most suitable approaches are selected, based on how likely the technical screening criteria resulting from them will be to meet the different requirements in the Taxonomy Regulation. 4)Once an approach was chosen, the right level of ambition for the technical screening criteria had to be determined to calibrate the thresholds and practices that would need to be met in order for an activity to be considered EU Taxonomy-aligned, resulting in the formulation of the draft criteria. 5)Finally, the resulting technical screening criteria were checked against the requirements of the Regulation again to make sure that the proposed content is aligned with the requirements of the Regulation. 6)Following completion of this impact assessment, the draft technical screening criteria were published for stakeholder feedback. Feedback was carefully considered by the Commission before final publication.

The work of the Technical Expert Group on Sustainable Finance (TEG) has been instrumental in the preparation of the technical screening criteria as well in the choices discussed in this section. The Commission services established clear parameters for the TEG’s work and followed it closely. The TEG’s work was supported by several rounds of extensive feedback from stakeholders and targeted scientific and technical inputs involved industry representatives, academia, environmental experts, civil society, Member States and other stakeholders. The outreach activities of the TEG are described as part of the synopsis report (Annex 2). In certain areas this proportionate impact assessment evaluates the technical inputs with a view to inform policy decisions concerning the delegated act up to the publication of the draft delegated act in November 2020. Given the close involvement in the TEG deliberations and their extensive outreach to stakeholders, this work is not duplicated at this stage and the focus lies in particular on areas where deviations from the TEG were recommended (including where activities were added) or where the recommendations by the TEG could be substantiated with more scientific evidence. Together, the assessment of these choices aims to ensure the proposed delegated act is aligned with the requirements of the Taxonomy Regulation and that it strikes the right balance between these requirements, where trade-offs exist. 5.1.Prioritisation, selection and classification of economic activities The EU Taxonomy is based on EU’s NACE classification system of industries as recommended by the TEG. This choice is aligned with the requirement that technical screening criteria are built upon EU statistical classification systems, where appropriate, and are easy to use. Despite some limitations, NACE ensures that the technical screening criteria can be set in a comparable framework and thus provides a high degree of usability and comparability when the Taxonomy is applied by companies across Europe, but also internationally. A more thorough assessment is available in Annex 4.1. Given the urgency of this initiative in the light of an ongoing climate crisis, the work on economic sectors and activities with the highest expected potential to contribute had to be prioritised. This sets the basis for further gradual development of the Taxonomy (as set out in Box 3 above). The assessment of economic sectors (and activities within these sectors) for climate change mitigation focused on sectors with the greatest potential to make a substantial contribution to climate change mitigation based on their share of overall emissions and their potential to reduce emissions (their own emissions or those of other activities). For climate change adaptation, all sectors and activities are expected to be able to make a substantial contribution. Nevertheless, it was not feasible to conduct the DNSH assessment for all sectors of the economy for this delegated act. Hence, the starting point for the assessment was the same set of activities as for mitigation. Within the selected sectors, activities with the highest potential to make a substantial contribution to one or more environmental objectives were prioritised for inclusion. In this process, the assessment carefully considers different ways in which an activity can make a substantial contribution – with the main categories being its own performance and enabling the performance of others, which is recognised in the Taxonomy Regulation for all environmental objectives. In case of climate change mitigation, a guiding principle for identifying low carbon activities was the potential to substitute high impact activities. While many activities across the economy have low carbon impact, not all of them can replace high impact activities and not all of them are therefore included. Another way for low-carbon, or more generally low-impact activities, to make a substantial contribution is to enhance the status of (or “heal”) the environment. This typology of substantial contribution is illustrated in Figure 5 below. As explained above, such prioritisation was not considered applicable for climate change adaptation. Explicit exclusions made at the level of the Taxonomy Regulation (electricity production from solid fossil fuels) and other, rather practical considerations (e.g. technological readiness levels, but also data availability and ongoing work within the Commission) were also reflected in the choice of which activities should be included at this stage. The prioritisation of sectors and activities also means that not all sectors and activities in the economy that could have the potential to make a substantial contribution, are included in the EU Taxonomy at this point. Some high emitting manufacturing and transport activities, as well as those activities that are not among the most high-emitting sectors but might be relevant as enabling activities, could not be included in the first round. As further explained in Annex 4.1, this results from the methodologic choice, but also from practical constraints such as limited time, ongoing scientific work and inconclusive evidence on certain issues. As explained in section 7, the impact of the delay in inclusion is expected to be limited. Climate-oriented investors are still likely to invest in activities perceived as green for which criteria have not been developed yet. The addition of further activities, as well as activities that could qualify for substantial contribution to other environmental objectives, will be carefully considered based on technical advice of platform on sustainable finance. Annexes 4.2 and 4.3 provide more detail about the logic of selecting different sectors and activities as well as on the inclusion logic, the former for climate change mitigation and the latter for climate change adaptation. 5.2.Approaches to set technical screening criteria EU climate and environmental objectives do not translate automatically into technical screening criteria for individual economic activities. In the absence of commonly recognised transition pathways and metrics for various sectors, there are different ways in which criteria could be set – for instance, they could require that selected activities meet a specific quantitative threshold or require that a specific process is followed. The European Commission’s Joint Research Centre (JRC) identified a set of feasible approaches to set criteria for climate change mitigation derived from the technical work with the TEG. These approaches are used to determine what types of metrics and criteria would be the most appropriate for a given economic activity considering aspects such as existing policy targets and legislation, data availability, current levels of scientific knowledge and technology feasibility. Usability aspects and risks to create market distortion were also considered, with the Taxonomy Regulation requirements used as a guiding framework. It is important to note that different types of approaches still leave some flexibility to determine the level of ambition needed to define the substantial contribution criteria, which is discussed further below. Approaches identified by the JRC for setting substantial contribution criteria to climate change mitigation are the following: 1.Impact-based: Criteria set according to this approach require an activity to demonstrate a certain level of impact regarding the environmental objective considered. The impact is defined as the result of certain pressures (e.g. GHG emissions, water abstraction, etc.) that the activity exerts on the state of the environment (e.g. local water availability of the activity area, atmospheric GHG concentration, etc.). Hence, the impact will depend on the environmental performance of the activity (i.e. the pressures it exerts) but also on the context in which the activity takes place. Activities qualify if they operate above or below a given threshold. For climate change mitigation, where the state of the environment (atmospheric GHG concentration) is not location-specific but global, the context refers to the alternative activities potentially substitutable: an impact-based approach would lead to criteria not on the levels of emissions the activity is responsible for but the effect the activity has on greenhouse concentrations in the atmosphere (e.g. life cycle GHG emission savings resulting from carrying out the activity compared to the likely alternative scenario).

2.Performance in relation to the environmental target: criteria set according to this approach require an activity to demonstrate a certain level of performance. Performance is usually defined in terms of a pressure that the activity exerts on the environment (e.g. GHG emissions, water abstraction, etc.), although it could refer both to a positive or a negative pressure (i.e. a pressure leading to a worsening or to an improvement of the state of the environment). The performance is measured with a specific performance metric (direct or proxy) relating to the environmental objective considered. Activities qualify if they achieve a certain level of performance (such as meeting a threshold for CO2e/km), derived from environmental considerations (e.g. with reference to scientific literature or EU policy that is based on scientific evidence). In contrast to the first approach, this performance-based approach is independent of the context in which the activity takes place and only relies on the intrinsic performance of the activity. 3.Best-in-class performance: Like for the previous approach, criteria set according to this approach require an activity to demonstrate a certain level of environmental performance of the activity, defined as a pressure on the environment (which may be negative or positive), and measured under a relevant metric. Activities qualify if they operate above a threshold that is based on the performance currently achieved by the best performers (e.g. the level of performance achieved by the top 10% best activity operators in the EU). 4.Relative improvement: In this approach, the criteria require a minimum evolution of a given metric over time. This can be the performance improvement of an underlying activity or asset (e.g. improving the energy performance of a building for a renovation activity), the improvement of the state of the environment (e.g. reducing the amount of water pollutants by X% for a cleaning activity), etc. Activities qualify if they can demonstrate an improvement by at least a defined relative threshold, for instance an energy efficiency improvement of at least 20% compared to a previous point in time. 5.Practice-based: Criteria set according to this approach require an activity to demonstrate implementation of or compliance with a set of defined practices or a list of qualitative requirements that are likely to reduce substantially the pressure on the environment or to improve substantially the state of the environment. These criteria describe how the activity must be performed. Activities qualify if they follow those practices. 6.Process-based: Criteria set according to this approach define a number of qualitative process-based steps to determine how to reduce the pressure or enhance the state of the environment in the case of the specific activity. This approach allows to cather for activities for which both a quantitative threshold or a defined list of qualitative requirements do not work well because the actual thresholds or qualitative criteria need to be defined on ad-hoc basis and the criteria determine how to define them. Activities qualify if they follow the process steps detailed in the criteria and implement or achieve the requirements stemming for them. 7.Nature of the activity: Criteria set according to this approach define the exact scope and description of the activity. Activities qualify if they fall within such scope/description. Such activities are then Taxonomy-aligned without being subject to quantitative or qualitative requirements. As valid for all approaches – activities qualify only provided they also meet the respective DNSH criteria and minimum safeguards. Box: 4 Types of approaches to set criteria for substantial contribution to climate change mitigation 1)Practice-based criteria: Develop a set of precise practices that the activity has to implement to be deemed aligned (what practices to implement), tailored to the individual economic activity category. 2)Process-based criteria: Define a number of process-based steps that the activity has to follow to be deemed aligned, tailored to the individual economic activity category. Note: criteria can be set for the whole economy or over just one or several sectors containing several activities. While these approaches were derived primarily from the work for defining substantial contribution to climate change mitigation, it was concluded that these could also serve as a starting point for other environmental objectives. Hence, the impact assessment analysed these approaches also for their relevance to substantial contribution to climate change adaptation and retained two approaches for more thorough assessment, reflecting the highly context- and location-specific nature of adaptation needs and solutions and a lack of established quantitative metrics. The do no significant harm (DNSH) criteria are developed following a similar logic. The approaches identified as most appropriate for substantial contribution to climate change mitigation and adaptation were also followed for DNSH criteria to these objectives – the only tangible difference between the two being a different ambition level. To develop DNSH criteria for the other four environmental objectives, four approaches were retained for more thorough assessment, given the vast differences between the four environmental objectives. Annex 4.4 provides more detail on the approaches considered in this impact assessment, first explaining them and then showing how the applicability of the different approaches can be tested through the lens of the four requirements, to assess which approaches are more suitable for a given sector or group of economic activities. 1)Minimum performance: On the basis of quantified environmental impact data, set a threshold to ensure minimum performance of a given economic activity against a given objective to ensure this activity does not cause significant harm (quantitative criteria). 2)Process-based criteria tailored to the individual economic activity category: Define a number of process-based steps that the activity has to follow to be deemed not causing significant harm (how the activity selects what to do) tailored to the individual economic activity category (qualitative criteria). 3)Process-based criteria common to many economic activities for one environmental objective: As above, with the difference being that criteria are not tailored to the individual economic activity category, but apply to many economic activities (qualitative criteria). 4)Practice-based criteria: Develop a set of practices that the activity has to implement to be deemed aligned (what practices to implement) tailored to the individual economic activity category (qualitative criteria). 5.3.Level of ambition for technical screening criteria After choosing an appropriate approach to setting the technical screening criteria (resulting for instance in a quantitative metric), a consistent level of ambition had to be calibrated to set the technical screening criteria. The Taxonomy Regulation sets an overall ambition level based on applicable EU climate and environmental objectives. While alignment with these objectives was used as a guiding principle, this overall ambition level had to be translated into specific thresholds for different activities in the absence of commonly recognised transition pathways for all sectors. Particular attention was paid to what is actually feasible for market players, based on available solutions and current market practices. When setting the ambition level, this report considers all available scientific reference points that can be applied to the selected activities. These include climate scenarios, sectoral pathways, and requirements stemming from existing sectoral legislation. When sectoral legislation defines mandatory standards for a whole sector, the Taxonomy uses them as a baseline to set a (higher) level of ambition, such as for buildings. Where EU legislation already defines best practices and directly contains sustainability criteria, the EU Taxonomy draws from these critiera to set coherent incentives. Nevertheless, these reference points were often not available or could not be directly linked to economic activities or operators, as described in further detail in Annex 4.5. In such cases, the preferred option proposed here is to follow the ambition level recommended by the TEG, which was carefully calibrated based on vast stakeholder outreach. The technical screening criteria will be updated regularly in order for the EU Taxonomy to evolve with the legislative framework. The ambition level proposed for substantial contribution in the EU Taxonomy is generally higher than existing EU legislation. Existing EU legislation typically specifies only minimum requirements that all (large) economic operators in a given sector have to meet. Since it was a political choice that the EU Taxonomy aims to “channel capital flows towards sustainable investments” and is thus set to “help achieving the SDGs in the EU”, it has to identify what top environmental performance means in order to achieve this aim and incentivise performance improvements. Considering that in the EU economy as a whole, practices are still far from being climate neutral and climate resilient, the criteria for substantial contribution by definition have to be set much higher than “business as usual”. Setting ambition level at the same level as existing EU law would lead to defining whole sectors as environmentally sustainable, which would not fulfil the main objectives of the EU Taxonomy. By contrast, DNSH criteria aim to prevent significant harm to the environment and have a similar objective as existing sectoral legislation. Hence, for DNSH criteria, compliance with EU law or mandatory practices is largely considered a suitable starting point for defining technical screening criteria. This motivates the difference in the ambition level between SC and DNSH criteria. The difference in this ambition is explained in more detail in section 6. The technical screening criteria also take good note of established practices among the best environmental performance in different sectors. A more detailed discussion of the ambition level in the EU Taxonomy is available in Annex 4.5. 6.Assessing the proposed approaches and technical screening criteria against the requirements of the Taxonomy regulation

This section summarises the results of the selection of appropriate approaches for setting technical screening criteria and of the assessment of the resulting technical screening criteria against the Regulation’s requirements. The assessment follows the methodology introduced in Chapter 5 (detailed in Annex 4) and draws from sector-specific assessments that apply this methodology. Stakeholder feedback received in the various rounds of outreach outlined in Annex 2 is duly considered. This chapter also outlines the rationale for the major deviations from the TEG. The conclusions presented in this section are substantiated by detailed analysis for climate change mitigation in Annex 5, for climate change adaptation in Annex 6 and for do no significant harm in Annex 7. Across the objectives and criteria, the main technical input for this analysis is the final report of the TEG. The deviations from the TEG, the supporting rationale and underpinning evidence is therefore presented in the respective annexes and a summary table can be found in Annex 9.3. Changes compared to the TEG report are proposed in order to (i) achieve a better balance between the requirements from the Regulation where trade-offs exist between them and thus to improve the overall calibration of the delegated act; (ii) include additional activities where sufficient and mature methodological underpinning was available; (iii) improve the overall clarity of the criteria; and (iv) outline areas where stakeholder feedback was particularly divided. Additional analysis and evidence has been presented to underpin these suggestions. The analysis is complemented by in-house expertise on the different sectors and policy areas across different Commission services. While this impact assessment concludes that the delegated act can largely follow the TEG advice, some deviations are suggested to align the calibration of the technical screening criteria better with the requirements of the Taxonomy Regulation. The deviations aim to improve the balance of the requirements and some eventual deviations might also reflect political decisions as described below. All substantive deviations are displayed in a simplified manner in Annex 9.3 and explained in more detail in the sector annexes (5, 6 and 7). There are different types of deviations recommended in this impact assessment. Some deviations simply add more clarity and precision to the specific criteria. The inclusion of some additional activities are a proportionately bigger deviation, most notably in the case of climate change adaptation. Only very few deviations actually change the thresholds and metrics, considering that these were developed based on technical inputs, most common practices and in line with the approaches introduced in Chapter 5 and Annex 4.2. Different trade-offs between the Regulation’s requirements were considered carefully and are reflected in choosing the best suitable approaches to set technical screening criteria. For example, while policy coherence is desirable, ambition levels in some areas of existing EU legislation do not correspond to the level of ambition required to make a substantial contribution and do not support the overall objective of the EU Taxonomy. At the same time, the ambition level needs to be considered in the light of the usability of the criteria, as latest scientific evidence might not be operational enough to be used in the assessment and relevant disclosures against the EU Taxonomy. Based on these types of reflections, the resulting approaches that determine the nature of the technical screening criteria are specific to substantial contribution to climate change mitigation, substantial contribution to climate change adaptation and do no significant harm. Setting a coherent level of ambition within the chosen approach results in concrete technical screening criteria. The criteria are attached in Annex 10 and were checked again against their compliance with the Regulation’s requirements. While a detailed analysis for the choice of approaches was carried out for substantial contribution, the resulting approaches and criteria are checked directly against the Regulation’s requirements for climate change adaptation and DNSH. With the deviations from the TEG’s recommendations proposed, the resulting content for the delegated act is considered aligned with the Regulation’s requirements. Sector-specific political choices Besides the methodological choices explained in previous sections, there are certain economic sectors where the choice of economic activities and technical screening criteria have been informed by separate political choices in preparing the draft delegated act that has been published in November 2020. Apart from the sectors discussed below, several other political choices were taken resulting from the feedback received on the draft delegated act in November/December 2020 (Annex 2.10). These include the removal of the agricultural sector in light of the ongoing negotiations between the co-legislators on the Common Agricultural Policy reforms. These choices are not assessed in this report. While this impact assessment proposes preferred options for the inclusion of economic activities and technical screening criteria for the delegated act, on these three issues, it only identifies several feasible options but does not conclude any preferred option at this stage. The need for a political decision is supported as these issues have received extensive (and much divided) stakeholder feedback. In the case of forestry, the choice involves whether to include all, none or some of the forest activities proposed by the TEG for inclusion in the EU Taxonomy based on their capacity to make a substantial contribution to climate change mitigation, or whether to await progress in evolving EU policy work under the Biodiversity and future Forest Strategies to inform the appropriate technical screening criteria. In the evolving policy context around the Biodiversity and Forestry Strategies, a decision is required on whether and which forestry activities to include in the delegated act on the climate objectives. -One option is to include those forestry activities identified for their potential to contribute significantly to climate change mitigation based on the TEG recommendations, and to set accompanying technical screening criteria. -The alternative is to delay these choices as the evolving policy context may lead to changes regarding what are considered sustainable forestry practices (and thus the appropriate technical screening criteria), and given that they could either conceivably qualify under the Taxonomy Regulation for the other environmental objectives or be included as updated activities in a revised climate Taxonomy. In the case of bioenergy, the choice involves the appropriate design of the technical screening criteria, and to what extent these are based on the sustainability criteria for bioenergy contained in the revised Renewable Energy Directive (RED II) as well as to what extent new policy developments (notably the Biodiversity Strategy) are taken into account. Bioenergy is the only energy source that is already subject to mandatory environmental sustainability criteria at EU level in order to be accounted towards the renewable energy target of the Member States and to be eligible for state subsidies, as set out in the revised Renewable Energy Directive (RED II). The Directive and sustainability criteria are the outcome of extensive discussions among the European Parliament and the Council, and are set to be applied as of June 2021. The TEG recommendations put forward tighter emission savings thresholds compared to those defined in RED II and established a stricter definition of feedstock eligible for the manufacture of solid biomass, biogas and liquid biofuels. Against this background and considering some of the trade-offs between the requirements in section 4.2, there are three main options for bioenergy for the delegated act, notably in terms of the scope of eligible bio-feedstocks: ·Follow the TEG advice and restrict the scope of eligible feedstocks to advanced biofuels in Annex IX, part A of RED II. This would increase environmental ambition but at the possible expense of consistency with EU law and the need to ensure a level playing-field and usability for economic operators. ·Restrict the scope further by excluding some of the feedstocks in Annex IX, part A of RED II. This would further prioritise environmental ambition, but at the further possible cost in terms of the other requirements. ·Broaden the eligible scope to the full Annex IX (Parts A and B). This would increase overall consistency with EU law, better level the playing-field and improve usability, but at the possible expense of a higher level of environmental ambition. A detailed discussion can be found in Annex 5.1.4. The European Commission continues to evaluate these options at the time of submission of the Impact Assessment. In the case of nuclear energy, the choice involves carrying out further technical work on do no significant harm aspects before considering its (possible) place in the Taxonomy Regulation. While nuclear energy contributes to climate change mitigation and the achievement of the climate targets through its low GHG emissions, it is not included as an activity in the delegated act. Its potential contribution to climate change mitigation has been recognised by the Taxonomy Regulation, as well as by the TEG, which considered nuclear energy from a climate mitigation perspective. However, both the Taxonomy Regulation and the TEG underline the importance of the ‘do no significant harm’ requirement applicable to all economic activities under the EU Taxonomy, including nuclear energy. The TEG did not put forward a conclusive recommendation on this issue and recommended “that more extensive technical work is undertaken on the (DNSH) aspects of nuclear energy in future and by a group with in-depth technical expertise on nuclear life-cycle technologies and the existing and potential environmental impacts across all objectives”. Such analysis is to be carried out with the objective of deciding whether this activity, depending on the outcome of the assessment, should be included in the EU Taxonomy by a complementary delegated act on climate change mitigation and climate change adaptation.

In 2020, the European Commission launched in-depth work to assess whether or not to include nuclear energy in the EU Taxonomy of environmentally sustainable activities. As a first step, the Joint Research Centre, the in-house science and knowledge service of the Commission, drafted a technical report on the ‘do no significant harm’ aspects of nuclear energy . This publication is a Science for Policy report by the JRC, which aims to provide evidence-based scientific support to the European policy-making process. The scientific output expressed does not imply a policy position of the European Commission. This report will be reviewed by two sets of experts: the Group of Experts on radiation protection and waste management under Article 31 of the Euratom Treaty and the Scientific Committee on Health, Environmental and Emerging Risks on environmental impacts. They are expected to issue their reports within three months. These three reports will inform the Commission’s decision. 6.1.Substantial contribution to climate change mitigation This section summarises the sector-specific assessment of the approaches and technical screening criteria for climate change mitigation that is presented in detail in Annex 5. It outlines the coverage of the sectors, the outcomes of the assessments of the different approaches to set technical screening criteria against the Taxonomy Regulation’s requirements and the main deviations for substantial contribution criteria from the TEG’s recommendations. It provides a view to how each policy requirement is met – and which direct relevance it has for the technical screening criteria for substantial contribution. The assessment carried out for the different categories of activities per sector resulted in proposing specific approaches for each sector under substantial contribution to climate change mitigation, as illustrated below. A summary of the proposed approaches for each category of activity in the sectors can be found in the table below (Annex 9.3). The types of criteria proposed vary not only according to the sectors specificities, but also according to the nature of the activities proposed in each of the sectors. As such, no “one-size-fits-all” solution is proposed. Given the trade-offs between the different policy objectives involved that are explained further below, the recommended approaches to set criteria and the calibration of the actual criteria are considered to strike a good balance between the requirements based on the assessment which is detailed below, supported by additional analysis in Annex 5. Macro sector Proposed approaches Forestry Combination of practice-based criteria, process-based criteria and performance improvement Agriculture Combination of practice-based criteria, process-based criteria and performance improvement Manufacturing Nature of the activity criteria Best-in class performance Energy Impact-based Performance in relation to the environmental target Best-in-class performance Performance improvement Water, Sewage, Waste, and Remediation Different approaches depending on activity (as diverse activities are included): Combination of nature of the activity and practice-based criteria Nature of the activity criteria Performance in relation to the environmental target Performance improvement Practice-based criteria Process-based criteria Transport and Storage Combination of nature of the activity criteria and performance in relation to the environmental target Nature of the activity criteria Performance in relation to the environmental target Best-in-class performance Performance improvement Practice-based criteria Information and communications Nature of the activity criteria Practice-based criteria Construction and real estate activities (mitigation)/ Buildings Nature of the activity criteria Best-in-class performance Performance in relation to the environmental target Performance improvement criteria Practice-based criteria Process-based criteria Table 2: Proposed approaches by macro sector Setting a coherent level of ambition, consistent with the overall objective of the EU Taxonomy to channel capital into the SDGs within the different approaches, resulted in determining the technical screening criteria that were then checked for their alignment with the four categories of requirements in the Taxonomy Regulation. It looks at the way that the ambition level was set for all criteria. 6.1.1 Policy Coherence EU legislation has been taken into account in several ways resulting into the choice of different approaches to set criteria across sectors. First, it can serve as the source of a recognised and prevalent metric. This is the case for the use of the metrics established and reported by all installations under the EU ETS. Second, the data collected for setting the ETS benchmarks for 2021-2030, which are set up to allocate free allowances to sectors that are exposed to carbon leakage, can be repurposed to establish for the technical screening criteria the level of emission performance of e.g. the 10% best installations on EU markets. This existence resulted in selecting best-in-class performance approaches for the manufacturing sector for transitional activities (Annex 5.1.3), for example, while ensuring that the other three requirements do not imply trade-offs. Third, the sector legislation can also provide directly the criteria and threshold for substantial contribution, like in the case of passenger cars and heavy duty vehicles for which both specific measuring protocols and emission standards have been set which define low carbon vehicles (Annex 5.1.6). Likewise, the EU law sets parameters for specific sustainability performance for construction of new buildings, as the nearly zero-energy buildings (NZEB) that can be used for this purpose. While for the renovation of existing buildings, the energy performance certificates (EPC) are useful tools to measure the energy performance and can be used also to measure the substantial contribution (Annex 5.1.8). In addition, based on scientific evidence and market practices as well as underpinned by in-house expertise, the new metrics and thresholds have been developed where a better balance could be achieved in order to set approaches for the technical screening criteria that meet the Taxonomy Regulation’s requirements to a higher degree. This is for example the case for defining sustainable transport infrastructure (Annex 5.1.6) or combining elements for anaerobic digestion of sewage sludge (Annex 5.1.5). 6.1.2. Environmental integrity A central issue in setting the technical screening criteria for substantial contribution to climate change mitigation is linked to the lack of a set of sector pathways, which is linked to the uncertainties around technological developments and political choices. In the absence of those, in line with the intentions of the Taxonomy Regulation, substantial contribution to mitigation should target limiting temperature increases to 1.5°C.translated into the technical screening criteria in a range of ways, according to the sector specificities. In the context of the long-term EU objective, a choice has been made to systemically include activities, which are consistent with a decarbonised economy in 2050 in their own right, like zero emission transport (cf. Annex 5.1.6) and renewable energy generation (cf. Annex 5.1.4). An approach that qualifies the nature of such activities has been taken for these activities. The substantial contribution criteria for such sectors reflect the need to expand investment in sectors where technical solution on the market are already at near-zero carbon levels. In high-emission sectors where near-zero GHG solutions are not yet viable, the EU Taxonomy should reflect the need to rapidly decarbonise these sectors. A zero carbon target for a manufacturing sector where there are currently no technologies on the market capable of reaching that performance would be ambitious and Paris-aligned, but would not be usable. Therefore, the EU Taxonomy in such contexts should aim to recognise for activities that are best-in-class, provided that they are not locking in activities that are incompatible with a decarbonised economy. This is notably the case for heavy industries. For example, iron and steel productions are emissions intensive both through high energy use and also due to the process of emissions. In addition, this should also be complemented by recognising in the EU Taxonomy to investment in research activities aiming to bring new technologies to the market that support activities to meet and go beyond the respective sector criteria in the EU Taxonomy. Another type of transitional activity is linked to sectors where near-zero carbon activities exist, but are not yet practicable at scale. For example, this rationale underpins the importance of addressing building renovation with thresholds linked to the relative improvement of the energy performance, not equal to the required performance level of a new building. As in the previous paragraph, an exclusion of such improvements would mean excluding in practice a major part of the actions needed for decarbonisation. Therefore, the calibration of the ambition level on the basis of market presence is also a key element of consideration. Such transitional activities would need to be reassessed as part of the regular review (Section 7). The analysis also includes criteria reflecting the specific role of certain activities that enable other activities to decarbonise. Such activities are for example manufacture of low-carbon technologies (e.g. production of solar panels, high efficiency windows) and IT solutions that are exclusively aimed at GHG emission reductions. While the emissions performance of such manufacturing might not be the top class within the sector, these are considered to substantially contribute to GHG emission reductions through the benefit their products provide.

Also, in the specific context of activities that do not need to reduce emissions but actually can have negative emissions, the ambition level considered for substantial contribution should be that in addition to reducing emissions, they significantly increase carbon sequestration, such as for forestry. The technical screening criteria have been set taking into account the latest scientific evidence on both the objectives and of the potential to mitigate emissions in a specific sector. For example in manufacturing hydrogen, for which the current EU ETS benchmark defines a value of 8.85 tCO2/t H2, such level was deemed not sufficiently ambitious to ensure substantial contribution to climate change mitigation, since much lower performance levels and the consideration of life-cycle GHG emissions is possible. 6.1.3. Level playing field 6.1.4. Usability of the criteria 6.1.5. Consistency with the requirements in Article 19(2)-(4) of the Taxonomy Regulation

The balance between the categories of requirements for technical screening criteria has been further analysed. Annex 5 shows in more detail the considerations for setting the criteria for each macro-sector. With these elements, the criteria would be consistent with the Taxonomy Regulation and fulfil the parameters of substantial contribution to climate change mitigation, as set out in Article 10 of the Taxonomy Regulation, and the requirements for technical screening criteria, as set out in Article 19. 6.2. Substantial contribution to climate change adaptation This section summarises the more specific analysis in Annex 6, notably how the operationalisation of the requirements in the Taxonomy Regulation as outlined in Annex 4, is applied when setting criteria for substantial contribution to climate change adaptation. As a starting point, any activity that is considered to make a substantial contribution to climate change adaptation must prevent or reduce physical climate risks that are material (i.e. may lead to damage) to an asset, operation, activity or infrastructure in a given location and context, aligned with the definitions in the Taxonomy Regulation (Article 11) based on climate risk assessments. Prevention and reduction of risks may lead to different adaptation solutions depending on the context, location of the activity, size, institutional and financial capacity of the entity to deal with climate risk and evolution of the risk over time (for instance increased sea-level rise or repetitive drought). Depending on these factors, an economic operator (company) can either implement adaptation solutions within the economic activity itself (adapted activity) or procure the adaptation solution from another operator (a so-called enabling activity) in order to account for the respective risks (e.g. early warning systems) or to reduce them (insurance product or climate resilient crops) and thus to make a substantial contribution. This is set through the new Article 7 of the Taxonomy Regulation where: An economic activity shall be considered to contribute substantially to climate change adaptation where: •Adaptation of an activity (=adapted activities): that economic activity includes adaptation solutions that substantially reduce the (risk of) adverse impact of the current and expected future climate on that economic activity itself; •Enabling adaptation activity: that economic activity provides adaptation solutions that contribute substantially to preventing or reducing the (risk of) adverse impact of the current and expected future climate on other people, nature or assets. For substantial contribution to climate change adaptation, technical screening criteria are set that are uniform and mostly qualitative and process-based for most adapted activities as well as specific, tailor-made criteria for a limited number of enabling activities. The primary qualitative nature of the criteria results from the lack of measured baselines or accepted metrics for defining quantitative screening criteria for adaptation at this point in time, and relative lack of quantitative adaptation targets defined at the national, sectoral, or subnational level. Setting uniform and qualitative criteria for adapted activities, consistent across all sectors of the economy, was also supported by the feedback on adaptation received from stakeholders in the 2019 call for feedback by the TEG. The analysis below supported by Annex 6 illustrates why these criteria are proposed, how they differ from the approach that the TEG proposed and how they fulfil the requirements of the Taxonomy Regulation including how potential trade-offs between them are handled and addressed. It is important to note that the approach to climate change adaptation differs conceptually from the approach to climate change mitigation. This is reflected in the different structure of the annexes that support this part of the assessment. Notably, a sector-specific assessment is not carried out. 6.2.1. Policy Coherence EU Civil Protection Mechanism Furthermore, investment based on the proposed screening criteria should not undermine sectoral, regional or national adaptation efforts. All Member States now have national adaptation strategies, adaptation plans and many local adaptation plans exist. A number of sectoral adaptation strategies or standards exist or are under development. The investments that are directed into activities that qualify under the proposed criteria should be consistent with the objectives of the adaptation policy in the location it is carried out. An activity that undermines this effort would not meet the substantial contribution criteria and consequently not qualify under the EU Taxonomy. The construction of a floodplain in an area where local bans exist and where it clearly risks adverse impacts on other activities would not qualify. A measure that puts additional strains on water use in an already water stressed area where local adaptation plans clearly highlight water scarcity as a constraint would not qualify. 6.2.2. Environmental integrity

Second, priority is given to green (nature-based) solutions instead of grey-engineered solutions where they exist, because of the numerous co-benefits they bring. Various examples can illustrate these co-benefits. An example for such a co-benefit would be to include green roofs and water retention systems using green elements, flood protection through wetland restoration, creating thermal comfort in buildings by planting trees around buildings instead of technical air-conditioning systems. Third, the proposed criteria ensure that adaptation solutions are based on the latest available scientific evidence. Notably, the company is required to carry out climate risk and vulnerability assessments based on robust climate data to identify most important material physical climate risk. Risk and vulnerability assessments are the primary tools to define the type and level of risk that an asset or entity face, to help identify priorities and plan the most appropriate measures in response. Ensuring high quality of these assessments in the criteria for substantial contribution to climate change adaptation is therefore crucial and the increased use of these assessments would entail to bring co-benefits for an effective policymaking on risk prevention and management. Risk and vulnerability assessments need to be comprehensive, multi-sector and consider changing risks dynamics. These can still remain challenging as the case study of a large Asset Owner illustrates. However, this consideration of initial difficulties in usability seemed to be acceptable given the need and opportunity for all companies to learn. It is considered that the experience is on the rise and the EU Taxonomy will even help to build learning opportunities further. The private sector, think tanks and academia are currently developing ready-to-use climate risk assessment tools, which are partially free of charge. It is expected that the development of such tools will grow in the future, also because of initiatives like the TCFD. Please also refer to Section 6.2.4 for information on climate risk assessments. Scenario analysis - best practice approach for climate risk assessment for single sectors: The analysis starts with the identification of climate risks and the financial impacts they might have on companies. In the next step, sector-specific climate scenario(s) are defined. Usually, companies choose different climate scenarios, like a 1.5° scenario and a 2° scenario. Within these scenarios, it needs to be defined how the identified climate risks are evolving. Lastly, companies calculate the financial impact according to the financial impact mechanisms identified in the first step for different climate scenarios. For example, an agricultural company might face the risk of heat stress. The financial impact could cause higher costs through higher water consumption or revenue loss through crop failures (this would be the financial impact mechanism). In a 1.5° scenario, the heat stress is potentially lower as in a 2° scenario. Therefore, a result of the assessment would be lower negative financial impacts in the 1.5° scenario. 6.2.3. Fair treatment of sectors, avoid distortion, and set right incentives 6.2.4. Usability of the criteria. While the criteria are generally set in a way that they are usable across the sectors, a concern around usability is that good understanding and acknowledgement of increased climate change risks and their evolution over time is still poorly understood by many companies. Adaptation and the notion of physical climate risks may be still poorly understood in many sectors of the economy beyond the insurance industry, despite featuring highly in the last annual Global Risks Reports by the World Economic Forum, in numerous scientific articles, and even in mainstream media reports on climate impacts. A number of companies still either underestimate or completely overlook climate risks to their economic activity. In the EU, 65% of direct economic losses from climate disasters are not covered by insurance (EIOPA, 2019). This happens despite the gradual development of the policy, permeating into number of policy areas (energy, infrastructure, transport or buildings), and already pronounced impacts of weather events on assets, business operations or water resources and ongoing standardisation. On the positive side, top-down knowledge on climate change impacts, vulnerabilities and risks has improved sizably over recent years with Copernicus Climate Change Services and granular risk assessment are becoming available at very high resolution. Please also refer to Section 6.3.2 for recent development on economic climate risk assessments.

Many companies have their own risk analysis teams, and include a risk register, and/or have corporate teams that look at due diligence and safeguards, or environment. They report to the operational teams, investors, financial department, management/board of directors are the primary decision makers. Most companies, however, do not have the expertise to do these assessments, and thus may use climate or management or technical consultancies to undertake these assessments (Annex 6.3.2). The service providers for those assessments do exist. These have recently been assessed in the ClimINVEST project, focusing on services for businesses. 6.3. Do no significant harm This section contains the summary of the assessment of the approaches used to set do no significant harm criteria as well as the assessment of the actual technical screening criteria for activities that make a substantial contribution to climate change mitigation and adaptation. This includes both the approaches for setting criteria for do no significant harm to the other four environmental objectives set out in the Taxonomy Regulation, as well for the climate objectives. As a result of the different nature of the do no significant harm criteria to climate change mitigation and adaptation, these criteria are assessed by objective, while the do no significant harm criteria to the remaining four objectives are assessed together in this section. More detail is provided for the assessment in Annex 7. The section first outlines the do no significant harm approach, how it is in line with the broader EU environmental policy ambitions and how it is reflected in the EU Taxonomy. The section then assesses the proposed approaches to set technical screening criteria against the requirements of the Taxonomy Regulation. For each of the environmental objectives, this section presents areas where this report recommends to adjust the technical input received from the TEG in order to better meet the Taxonomy Regulation’s requirements and support them with additional analysis in the relevant annex. It also takes into account stakeholder feedback received in the various rounds of outreach as presented in Annex 2 into account. The Taxonomy Regulation puts forward a “do no significant harm” (DNSH) principle alongside the need for economic activities to make a substantial contribution to at least one of the environmental objectives. This is to avoid that an economic activity that makes a substantial contribution to one objective causes significant harm to any of the remaining five environmental objectives. As such, this principle helps safeguard internal coherence of the EU Taxonomy. This “DNSH logic”, recently embraced by the Commission at a more general level as the “do no harm oath” under the European Green Deal, intends to ensure that progress against one objective is not made at the expense of others and recognises the reinforcing relationships between different environmental objectives. In that sense, DNSH criteria play an essential role in ensuring the environmental integrity of the EU Taxonomy. The DNSH assessment requires some preliminary horizontal considerations ahead of the actual assessment that specify the operationalisation of the four broader requirements set out in Annex 4: ·While the DNSH to adaptation criteria are the same principle-based criteria for all activities, and apply to all activities, DNSH criteria to the other five environmental objectives have been put forward only in those cases where a given economic activity presents a risk of significant harm to a given objective. ·The DNSH technical screening criteria contain quantitative thresholds where possible. Where this is not possible, the criteria are qualitative, describing an action or set of actions to be undertaken in order to avoid significant harm.

·EU legal requirements were considered as minimum requirements and were in general not repeated in the DNSH evaluation. ·However, when environmental impact was considered significant, the relevant requirements stemming from EU legislation (for example best available techniques, or BAT, conclusions and BAT reference documents, or BREFs ) were included in the DNSH criteria unless more specific requirements were deemed necessary to avoid significant harm. This is also to ensure the applicability and environmental integrity of the EU Taxonomy globally. While some DNSH risks may be effectively mitigated by EU legislation, this is not the case globally, hence “repeating” EU requirements in the form of DNSH criteria in the EU Taxonomy ensures global applicability and a global level playing field.

6.3.1. Assessment of the DNSH to climate change mitigation criteria against the requirements of the Taxonomy Regulation The DNSH criteria are assessed for their compliance with the parameters for defining significant harm to climate change mitigation as set out in Article 17(a) of the Taxonomy Regulation, and the requirements for technical screening criteria as set out in Article 19. The DNSH to mitigation is considered on the basis of whether the activity leads to significant GHG emissions at activity level, taking into account also the life-cycle aspects. The criteria for DNSH to mitigation were developed by the TEG for the economic activities that would be included in the adaptation part of the EU Taxonomy. For ensuring the objective, it should be noted that even though the sustainable contribution to adaptation can be defined through specific measures that are taken, the DNSH to mitigation should apply to the whole activity, not to the specific measure. The potential of leading to high GHG emissions and thus significantly harming the climate change mitigation objective has been considered for each economic activity. For activities which present such potential, the DNSH to mitigation criteria are developed. For activities which present low risk of high GHG emissions, no criteria should be proposed. For DNSH to mitigation to ensure environmental integrity, it is important to ensure that the criteria reduce the risk of maladaptation (i.e. adaptation that induces net harm), even