On 21 April 2021, the European Commission published the final Delegated Act (DA) under the EU taxonomy as part of the wider EU sustainable finance package. The key goal of the package is to provide tools for investors to identify sustainable investment opportunities and to direct finance towards the European Green Deal.
Faced with great pressure on multiple fronts regarding the criteria under the EU taxonomy, the Commission decided to split the adoption of these criteria into two DAs: (i) the one that was published in April; and (ii) another one relating to many politically sensitive topics to be adopted as soon as possible, but not before the end of the "specific review process" expected in summer 2021.
The future DA will notably take a position on whether natural gas and related technologies (including networks) — as well as, notably, nuclear energy — are "sustainable" (i.e., taxonomy-aligned). Indeed, the current DA does not feature any natural gas-related activities and merely preserves the 100 g CO2e per kWh threshold (on a lifecycle basis) in terms of power production from renewable non-fossil gaseous and liquid fuels.
However, this first DA does specifically address hydrogen. The DA sets out greenhouse gas thresholds relating to hydrogen production and other criteria for other hydrogen-related activities. The most important criteria (i.e., those besides the "do no significant harm" criteria and minimum safeguards) are, in substance, as follows:
- The greenhouse gas emissions threshold for hydrogen production has been set at 3 tCO2e per tH2 (on a lifecycle basis), a threshold that clearly favours green hydrogen. However, although any taxonomy analysis must be carried out plant by plant, and will depend on a variety of factors (including the level and inclusion of fugitive methane emissions), it seems to make it possible for carbon-efficient blue and turquoise hydrogen to qualify as taxonomy-aligned.
- The production of hydrogen-based fuels (e.g. ammonia) is included as an eligible activity, with a variable greenhouse gas emissions threshold, based on a EU methodology analogous to that used for biofuels under the renewable energy directive and depending, e.g., on the energy density of the hydrogen-based fuel.
- The manufacturing of all machines that can produce hydrogen in a taxonomy-aligned way can itself be an aligned activity now. This means that the production of blue or turquoise hydrogen machines (not just electrolysers) appear to be taxonomy-aligned.
- The manufacturing of all machines that use hydrogen is included as an eligible activity and will be automatically taxonomy-aligned.
- Power generation from renewable non-fossil hydrogen is deemed sustainable if it meets the 100 g CO2e per kWh threshold. However, even independently of the said threshold, power generation from blue or turquoise hydrogen would not be taxonomy-aligned even if the hydrogen itself were taxonomy-aligned. Moreover, even for renewable hydrogen, the 100 g CO2e per kWh threshold will most likely be challenging to meet and only very low carbon and renewable hydrogen will be able to meet it.
The lack of further progress on the threshold for hydrogen production compared to the previous draft version of the DA is disappointing, but not unexpected. Indeed, the final position adopted in the DA published in April is already more favourable to low-carbon hydrogen than the original "green-only" approach adopted in the original draft DA and there were no internal indications that further changes would be implemented.
The Commission made it clear that "there is no obligation on companies to be Taxonomy-aligned, and investors are also free to choose what to invest in." However, we expect that many finance market participants looking for green and sustainable investments will rely upon the taxonomy.
Moreover, we also expect the rules and criteria used by the EU taxonomy to spread into other areas of EU law, such as state aid and guarantees of origin. In fact, this has already happened to some extent as taxonomy rules have already been referred to in Commission proposals and regulations. Firstly, in the European Recovery Plan, the Resilience and Recovery Facility Regulation (i.e., the biggest instrument in the recovery plan) includes a reference to the "do no significant harm" principle laid down in the taxonomy regulation, notably to require that member states' national recovery plans ensure that their investments and support do not violate this principle. Secondly, taxonomy rules have been referred to in the Commission's proposal for reform of the Trans-European Network for Energy Regulation (TEN-E).
Overall, the EU taxonomy is good news for the hydrogen industry and should help to channel much needed private investment towards it.