The EU Commission aims to enshrine into law the 2050 climate-neutrality target and has taken further steps to establish a unified EU “green” classification system.
By Paul A. Davies, Michael D. Green, and Federica Rizzo
The European Green Deal, presented on 11 December 2019, provides a roadmap with actions aimed at boosting the efficient use of resources and the circular economy, decarbonising the energy sector, and investing in environmentally friendly technologies.
On 4 March 2020, the EU Commission (the Commission) published its Proposal for a Regulation of the European Parliament and of the Council establishing the framework for achieving climate neutrality and amending Regulation (EU) 2018/1999 (the proposed European Climate Law). This year, the Commission will also present measures to increase the EU’s greenhouse gas emission reduction target for 2030, which will require additional investments of €260 billion a year by 2030, and to promote a climate-neutral EU by 2050.
The transition to a sustainable economy will entail significant investment efforts across all sectors. In this respect, other European Green Deal initiatives, such as the European Green Deal Investment Plan[i] and the proposal for a Regulation establishing the Just Transition Fund[ii], have also been adopted. The Commission also announced that the EU will provide financial support and technical assistance to facilitate the shift towards the green economy through the “Just Transition Mechanism”, to mobilise approximately €100 billion through 2021-2027.
Moreover, since 2018, the EU has been working to implement a common classification system to encourage private investments in sustainable growth and contribute to a climate-neutral economy.
The proposed European Climate Law
The proposed European Climate Law is a key element of the European Green Deal and sets a statutory target for the EU to be carbon neutral by 2050. In particular, it provides that greenhouse gas emissions should be avoided at source as a priority, in order to compensate for removals of greenhouse gases in sectors in which decarbonisation remains challenging.
The proposed EU Climate Law also requires the European Parliament, the Council, the Commission, and Member States to take the necessary measures at the EU and national level to achieve this objective. The Commission can issue recommendations to Member States whose actions are inconsistent with such climate-neutrality objective and require them to explain their reasoning if they fail to do so.
Moreover, every five years, in accordance with the Paris Agreement timelines, the Commission will review the actions taken at the national and EU level.
On 30 March 2020, the Commission also launched an online public consultation, open until 23 June 2020, to seek input into the EU’s updated climate target for 2030 and determine whether the EU should target a reduction of greenhouse gas emissions by 50% or 55% compared to 1990 levels. Indeed, the Commission will review the EU’s 2030 target by September 2020, before the bilateral summit with China in the same month and the COP26 in Glasgow (which has been postponed due to COVID-19).
In order to meet the revised 2030 target and the new 2050 target by 30 June 2021, the Commission will also have to review other EU legislation, including:
- EU Emissions Trading System (EU ETS)
- Land use, land use change, and forestry regulation
- Energy Efficiency Directive
- Renewable Energy Directive
- Carbon dioxide (CO2) emissions performance standards for cars and vans
Lastly, the proposal for the European Climate Law is expected to encounter resistance in the EU legislative process.
A unified EU classification system on sustainable finance
On 15 April 2020, the Council adopted a regulation setting out an EU-wide classification system, or “taxonomy”, which will provide businesses and investors with a common language to identify the economic activities that are considered environmentally sustainable.
In May 2018, the Commission presented a proposal for a Regulation establishing a framework to facilitate sustainable investments that aims to:
- Define economic activities that can be considered environmentally sustainable
- Empower end-investors to channel capital towards environmentally sustainable activities
- Avoid market fragmentation by providing a single point of reference for investors, companies, and Member States
The aim of the taxonomy is to enable investors to refocus their investments on more sustainable technologies and businesses. In particular, the future regulation is based on certain EU environmental objectives in:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems
The taxonomy for climate change mitigation and climate change adaptation is to be established by the end of 2020, in order to ensure its full application by end of 2021 and by 31 December 2021,[iii] the Commission is expected to publish a report on extending the scope of the taxonomy to cover other sustainability objectives, including social objectives.
Furthermore, a unified EU classification system would facilitate the development of standards and labels for green financial products and be included as an integral part of sustainability-related reporting by financial and non-financial companies.
Latham & Watkins will continue to monitor and update on any developments.
[i] COM(2020) 21 final of 14 January 2020.
[ii] Proposal for a Regulation of the European Parliament and of the Council establishing the Just Transition Fund, COM (2020) 22 final.
[iii] With regard to timelines, the Commission will be required to adopt delegated acts specifying the technical screening criteria, for the two climate objectives by 31 December 2020 (which will entry into application on 31 December 2021), and for the other four environmental objectives by 31 December 2021 (entry into application on 31 December 2022).
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