European Commission Q&As on the Climate Delegated Act

At the end of December 2022, the European Commission published a draft Commission Notice on the interpretation and implementation of certain legal provisions of the EU Taxonomy Climate Delegated Act (Delegated Regulation (EU) 2021/2139). The document is highly relevant for all parties interested in the details of the EU classification system or EU Taxonomy for sustainable economic activities created by Regulation (EU) 2020/852 (Taxonomy Regulation).

The EU Taxonomy Climate Delegated Act, applicable since 1 January 2022*, set out a list of Technical Screening Criteria (TSC) for certain economic activities that are to be considered as substantial contributions to the objectives of climate change mitigation and climate change adaptation with no significant harm to any other environmental objective.

With the purpose of facilitating the effective application of the Climate Delegated Act, the Commission Notice clarifies its provisions, responding to a number of questions raised on the TSC, which are a crucial element to enable relevant activities to demonstrate Taxonomy-alignment. A better understanding of the TSC is also useful to encourage Taxonomy-eligible, but not yet aligned, activities to achieve Taxonomy-alignment in the future.

The Notice is structured in three separate sections:

  1. Section I addresses general questions regarding the expected updates of and developments to the Climate Delegated Act, its scope, the methodology for the calculation of certain values, and the interpretation of a range of aspects of economic activities and TSC included in the Climate Delegated Act;
  2. Section II deals with sector-specific questions on the TSC;
  3. Section III answers questions on recurring Do No Significant Harm (DNSH) criteria with respect to three of the six environmental objectives listed in Article 9 of the Taxonomy Regulation, i.e.: climate change adaptation, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems.

Throughout the three sections of the Notice, the Commission sheds light on some of the key challenges faced by the undertakings subject to the Taxonomy Regulation.

Green Investment Portal to Clear the Path for Green Investment

In this context, ENGAGE for ESG Activation Investments, a market-led and EU-funded project**, aims to address the complexities in navigating the EU Taxonomy Regulation and its derived legislation by creating a Green Investment Portal (GIP) to help financial institutions check the alignment of their mortgages and home renovation loans with the Taxonomy.

Technical Screening Criteria on Construction and Real Estate Activities

Of particular relevance for individual dwellings as well as for buildings is the chapter on construction and real estate activities of the Commission Notice (Section II).

This chapter provides several helpful clarifications, such as:

  • The distinction between the “as-built” and “as-designed” Energy Performance Certificates (EPCs), under point 115.

While the Climate Delegated Act only envisaged the plain “EPC” and “as-built EPC” terms, stating that alignment with the Taxonomy would require the construction of new buildings under Section 7.1 of the Taxonomy Regulation to substantially contribute to climate change mitigation, demonstrating the prescribed Primary Energy Demand (PED) via an “as-built EPC”, the Commission Notice introduces the “as-designed EPC” term.

The European Commission explains in the Notice that for new buildings, either an EPC (valid for 10 years) or an EPC as-built are valid. The Commission further acknowledges that construction projects for the loan is provided before the works start and funds are made available as work progresses, it is not possible to obtain the as-built EPC until the very end of the project. In such cases, the Commission considers that it should be possible to obtain and use an as-designed EPC as a provisional measure. Upon completion of the works, the as-built EPC needs to be obtained to certify that the building complied with the criterion 10% better than Nearly Zero-Energy Building (NZEB).

  • The definition of “major renovation”, under point 129.

The Commission refers to the Energy Performance of Buildings Directive (EPBD) to define the concept “major renovation” under Section 7.2 of the Climate Delegated Act. In this regard, a major renovation is defined by Article 2(1)(10) of the EPBD as the renovation of a building where: a) the total cost of the renovation relating to the building envelope or the technical building systems is higher than 25% of the value of the building, excluding the value of the land; or b) more than 25% of the surface of the building envelope undergoes renovation.

Member States can choose to apply option (a) or (b) or both. As a consequence, there is no unique definition of major renovation uniformly applied throughout the European Union.

  • The methodology to determine whether the reduction of PED of at least 30 % is achieved in the renovation of existing buildings, under point 132.

The Commission Notice clarifies that the calculation should be based on the EPC before and after the renovation based on the numeric indicators in kWh/m2 indicated in the EPC.

  • The methodology to determine the starting PED value, under point 133.

According to the Commission guidance, if no EPC is available, the initial PED and the estimated improvement can be based on a detailed building survey, an energy audit conducted by an accredited independent expert, or any other method which is transparent and proportionate.

  • The applicable definitions of the specifications of energy efficiency equipmentunder point 135.

The Notice claims that the specifications of energy efficient windows, doors, light sources, and highly efficient heating, ventilation and air-conditioning technologies listed under Section 7.3 of the Climate Delegated Act are defined at national level.

  • The methodology to determine the top 15% for climate change mitigation and top 30% for climate change adaptation of the national or regional building stocks in the acquisition and ownership of buildings, under point 149.

The Commission Notice confirms that there are no specific rules for defining the top 15% and top 30% benchmarks.

The Notice suggests that EPCs should be the first source of information in this regard. In the absence of a relevant EPC, the Notice states that a technical study can be performed to estimate the top 15% of the national (or regional) building stock for that category of building.

The European Commission further notes that the EPC availability and accessibility challenge is being considered in the revision of the EPBD.

  • With regard to the acquisition and ownership of buildings built before 31 December 2020, the way to demonstrate compliance with the top 15% of the national or regional building stock when data on the performance of the dwelling or building is not available, under point 150.

The Commission Notice reaffirms the wording of Section 7.7 of the Climate Delegated Act confirming the acceptability of an EPC class A as an alternative way to comply with the substantial contribution to climate change mitigation requirement of the TSC for this economic activity.

The Notice also foresees the possibility to conduct a study based on energy consumption -estimated or real depending on the type and size of building- to perform the assessment on the top 15% benchmark.

The clarifications on the TSC will be integrated into ENGAGE’s GIP solution, with the aim of helping financial institutions regularly review and assess their mortgage and loan books in terms of EPC, emissions, etc., as well as to facilitate the calculation of relevant sustainability values, such as the Green Asset Ratio (GAR).

Apart from the Commission Notice on the interpretation and implementation of certain legal provisions of the EU Taxonomy Climate Delegated Act, the European Commission issued a draft Commission Notice in December 2022 on the interpretation and implementation of certain legal provisions of the Disclosures Delegated Act under Article 8 of EU Taxonomy Regulation.

Working towards a greener economy

While the journey is just beginning, important steps are being made to help facilitate the transition toward a greener economy.

In this sense, the guidance and assistance of European Institutions is extremely valuable for a common interpretation of the Taxonomy Regulation and its derivative legislation. A unified approach to Europe’s ESG challenges will definitely support the successful accomplishment of the European Union´s sustainability goals.