Introduction to the EU Taxonomy for a Circular Economy
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REPORT ON BEHALF OF NATURSCHUTZ-
BUND DEUTSCHLAND e.V. (NABU)
Sustainable Finance
Introduction to the EU Taxonomy
for a Circular Economy
Holger Bär and Isabel Schrems
On behalf of
with the support of David Bohnenberger
April 2021
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget Germany
Introduction to the EU Taxonomy for a Circular Economy • Page 2 of 33 Imprint Forum Ökologisch-Soziale Marktwirtschaft (FÖS) Schwedenstraße 15a 13357 Berlin Tel +49 (0) 30 76 23 991 – 30 Fax +49 (0) 30 76 23 991 – 59 www.foes.de - foes@foes.de About FÖS Forum Ökologisch-Soziale Marktwirtschaft (FÖS) has and trade unions for its expertise in fiscal instruments, been researching and disseminating information about environmental and climate policy and foremost for its the potential and benefits of environmental fiscal re- capacity to evaluate and develop policy proposals in form (EFR), the application of market-based instru- the field of EFR. Over the last years FÖS has led and ments (MBI) and the removal of environmentally harm- participated in numerous research projects and has a ful subsidies for more than twenty years. FÖS is widely proven track record in the development, analysis and recognized among policy-makers, NGOs, companies evaluation of environmental policies. Picture Credits Foto Coverpage: Pixabay Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget Germany
Introduction to the EU Taxonomy for a Circular Economy • Page 3 of 33
Introduction to the EU Taxonomy for a Circular Economy
Table of contents
1 Scope and goals of this report ..................................................................................................................................... 6
2 Introduction to the EU Taxonomy .............................................................................................................................. 6
2.1 Overall goal of the Taxonomy ................................................................................................................................................... 6
2.2 Process and timeline ...................................................................................................................................................................... 7
2.3 Development of criteria ............................................................................................................................................................... 8
2.4 Review and strengthening of criteria over time............................................................................................................... 10
2.5 How to use the Taxonomy ........................................................................................................................................................ 10
2.5.1 Practical examples on climate mitigation...................................................................................................................... 10
2.5.2 Hypothetical examples related to the circular economy and biodiversity ...................................................... 10
3 The Taxonomy for a Circular Economy .................................................................................................................... 12
3.1 Overarching goals ......................................................................................................................................................................... 12
3.2 Identifying important industries and sectors ..................................................................................................................... 13
3.3 Substantial contribution to the transition to a circular economy.............................................................................. 14
3.3.1 What is a Circular Economy and what is the role of sustainable finance in the transition to a CE? ...... 14
3.3.2 How the EU taxonomy can accelerate the transition to a circular economy .................................................. 15
3.3.3 Economic activities in electronics and ICT .................................................................................................................... 19
3.3.4 Economic activities in construction and buildings ................................................................................................... 20
3.4 “No significant harm” to the circular economy ............................................................................................................... 20
3.4.1 Economic activities in electronics and ICT .................................................................................................................... 21
3.4.2 Economic activities in construction and buildings ..................................................................................................... 21
3.5 Activities to be excluded ............................................................................................................................................................ 21
4 Conclusion and next steps ......................................................................................................................................... 22
5 Literature ....................................................................................................................................................................... 23
6 Annex............................................................................................................................................................................. 25
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget Germany
Introduction to the EU Taxonomy for a Circular Economy • Page 4 of 33
Executive Summary
This report is an introduction to the EU Taxonomy, a) Circular design (and production) models
its relevance, primary goals and design. Its purpose is focus on the development of existing or new
to help environmental experts to understand the products and processes which allow and
development, structure and mode of operation of optimise circular uses.
the EU Taxonomy. The EU Taxonomy is a classifica- b) Circular use models aim to increase the
tion system for sustainable economic activities. Its value and use of a product during its (ex-
overall goal is to create transparency and disclose tended) lifetime.
the impact of investments. The Taxonomy aims to
c) Circular value recovery models focus on
enable the financial system to guide investment
maximising the recovery and recycling of
decisions into a more sustainable direction and
products and materials after use into new
thus accelerate the transition to a circular econ-
products or useful resources in order to re-
omy in Europe and beyond.
duce waste.
d) Circular support models focus on the man-
The European Commission is currently translating agement and coordination of networks and
the environmental objective of the transition to a cir- resource flows, provide incentives for circu-
cular economy (and three other objectives of the larity and other supporting activities.
Taxonomy) into criteria upon which the sustainability
We discuss these different types of substantial con-
of an investment is evaluated. Therefore, it develops
tribution in the two key sectors, outline points of ref-
criteria to measure substantial contribution to the
erence and some specific criteria to assess economic
transition to a circular economy, as well as for signifi-
activities that fall into these categories. The report
cant harm (“do no significant harm” (DNSH) criteria).
uses the Circular Economy classification system pro-
This report uses examples from key sectors to illus-
posed by the European Commission to discuss what
trate the application of the Taxonomy and highlights
the assessment of a substantial contribution as well
tasks in the further development of the Taxonomy. Its
as the do no significant harm principle on the transi-
intention is not to make recommendations to the on-
tion to a circular economy could look like. Finally, we
going process within the EU-Sustainable Finance
outline what economic activities could be excluded
Platform or to present in detail all issues involved in
from consideration under the taxonomy with regard
the development of criteria, but to enable readers to
to the circular economy. The examples and sugges-
follow and engage in the ongoing development of
tions presented in this report serve as a starting point
the Taxonomy.
for the continuous engagement with the taxonomy.
It specifically is does not present a list of recommen-
The transition to a circular economy affects all as- dations for criteria.
pects of a supply chains and requires fundamental
changes to business models. Overarching goals for it
The ability of the Taxonomy to successfully guide
do not exist yet, but the European Circular Economy
economic activities into a more sustainable direction
framework is evolving and can serve as a reference for
is dependent on whether the criteria for being taxon-
the development of criteria and thresholds.
omy-compliant are ambitious and science-based.
This reports outlines seven key industries and sec- Ambitious enough to lead to greater sustainability
tors in which challenges and opportunities of a tran- than the status quo and yet rooted in science and
sition to a circular economy are highest. We use two recent authoritative scientific research.
of them (electronics & ICT as well as construction &
It will be a critical task for readers and the non-gov-
buildings) as examples to discuss key questions re-
ernmental community to accompany the develop-
garding the development of criteria (for both sub-
ment of the Taxonomy and make sure that the appli-
stantial contribution and do no significant harm).
cation criteria, thresholds and benchmarks are actu-
There are a number of different types of substantial ally in line with science, and are being regularly re-
contribution to the transition to a circular economy: viewed and strengthened over time according to
newest research.
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget Germany
Introduction to the EU Taxonomy for a Circular Economy • Page 5 of 33
Zusammenfassung
Dieser Bericht ist eine Einführung in die EU-Taxono- b) Kreislaufnutzungsmodelle zielen darauf ab, den
mie und geht auf ihre Bedeutung, ihre Hauptziele und Wert und die Nutzung eines Produkts während seiner
ihren Aufbau ein. Er soll Umweltexpert*innen als Hilfe- (ehemaligen) Lebensdauer zu erhöhen.
stellung dienen, um ein Verständnis für die Entwick- c) Kreislaufwirtschaftsmodelle konzentrieren sich auf
lung, Struktur und Funktionsweise der EU-Taxono- die Maximierung der Rückgewinnung und des Recyc-
mie zu entwickeln. Die EU-Taxonomie ist ein Klassifi- lings von Produkten und Materialien am Ende des Le-
zierungssystem für wirtschaftlich relevante Aktivitäten. benszyklus und für deren Nutzung in neuen Produkten,
Ihr übergeordnetes Ziel ist es, Transparenz zu schaffen um Abfall zu reduzieren.
und die Auswirkungen von Investitionen offenzule-
d) Modelle zur Unterstützung der Kreislaufwirtschaft
gen. Die Taxonomie soll das Finanzsystem in die Lage
konzentrieren sich auf das Management und die Koor-
versetzen, Investitionsentscheidungen in eine nachhal-
dination von Netzwerken und Ressourcenströmen, bie-
tigere Richtung zu lenken und so den Übergang zu ei-
ten Anreize für die Kreislaufwirtschaft und andere un-
ner Kreislaufwirtschaft zu beschleunigen.
terstützende Aktivitäten.
Die Europäische Kommission arbeitet momentan daran,
Auf Basis dieser, von der Europäischen Kommission ver-
den Übergang zu einer Kreislaufwirtschaft (und drei
öffentlichten Klassifizierung für die Kreislaufwirtschaft,
weitere Ziele der Taxonomie) in messbare Kriterien zu
diskutieren wir in den beiden genannten Sektoren ver-
übersetzen, anhand derer die Nachhaltigkeit einer Wirt-
schiedene Arten von substanziellen Beiträgen und skiz-
schaftsaktivität bzw. Investition bewertet werden kann.
zieren Bezugspunkte und einige spezifische Kriterien,
Dazu werden Kriterien entwickelt, die den substanziel-
um wirtschaftliche Aktivitäten zu bewerten, die in diese
len Beitrag einer Wirtschaftsaktivität zum Übergang zu
Bereiche fallen. Der Bericht diskutiert Kriterien sowohl
einer Kreislaufwirtschaft erfassen können. Zudem sind
für die Frage des substanziellen Beitrags als auch für
Kriterien notwendig, um einen signifikanten Schaden
signifikanten Schaden. Abschließend diskutieren wir
für den Übergang zu einer Kreislaufwirtschaft abzubil-
die Frage, welche wirtschaftlichen Aktivitäten im Hin-
den. Dieser Bericht stellt anhand von Beispielen aus re-
blick auf die Kreislaufwirtschaft ausgeschlossen wer-
levanten Sektoren die Anwendung der Taxonomie dar
den sollten. Die in diesem Bericht vorgestellten Bei-
und zeigt Potenziale für ihre Weiterentwicklung auf. Da-
spiele und Vorschläge dienen als Ausgangspunkt für die
bei sollen weder klare Empfehlungen ausgesprochen
weitere Auseinandersetzung mit der Taxonomie. Sie
werden, noch auf alle Aspekte der Entwicklung von Kri-
sind ausdrücklich nicht als Liste von Empfehlungen zu
terien in Detail eingegangen werden. Der Bericht soll
verstehen.
den Leser*innen vielmehr ein Grundverständnis der Ta-
xonomie ermöglichen, um sich in Zukunft in den weite- Inwiefern die Taxonomie wirtschaftliche Aktivitäten er-
ren Ausgestaltungsprozess einbringen zu können. folgreich in eine nachhaltigere Richtung lenken wird,
hängt davon ab, ob die Kriterien für die Taxonomiekon-
Der Übergang zu einer Kreislaufwirtschaft betrifft alle
formität ambitioniert und wissenschaftlich fundiert sind.
Aspekte einer Lieferkette und erfordert grundlegende
Die Kriterien für die Einhaltung der Taxonomie müssen
Änderungen in Produktionsweisen und Geschäftsmo-
ehrgeizig genug sind, um tatsächlich eine nachhaltige
dellen. Übergreifende Ziele dafür gibt es noch nicht,
Entwicklung vorantreiben zu können. Gleichzeitig müs-
aber das europäische Rahmenwerk für eine Kreislauf-
sen sie in der Wissenschaft und neueren maßgebli-
wirtschaft entwickelt sich und kann als Referenz für die
chen wissenschaftlichen Untersuchungen verwurzelt
Entwicklung von Kriterien und Schwellenwerten der Ta-
sein.
xonomie dienen.
Es wird eine herausfordernde Aufgabe für die Leser und
Dieser Bericht identifziert sieben Schlüsselindustrien
die nichtstaatliche Gemeinschaft sein, die Entwicklung
und Sektoren, in denen die Herausforderungen und
der Taxonomie zu begleiten und sicherzustellen, dass
Chancen eines Übergangs zu einer Kreislaufwirtschaft
die Anwendungskriterien, Schwellenwerte und Bench-
am größten sind. An zwei davon (Elektronik sowie Bauen
marks tatsächlich im Einklang mit der Wissenschaft
& Gebäude) werden beispielhaft Schlüsselfragen in der
stehen und im Laufe der Zeit entsprechend der neu-
Entwicklung von Kriterien diskutiert (sowohl für den
esten Forschung regelmäßig überprüft und verstärkt
substanziellen Beitrag als auch für die Vermeidung von
werden.
signifikantem Schaden).
Für den Übergang zur Kreislaufwirtschaft gibt es eine
Reihe verschiedener Arten von substanziellen Beiträ-
gen:
a) Modelle für Kreislaufdesign- und Produktion kon-
zentrieren sich auf die Entwicklung von bestehenden o-
der neuen Produkten und Prozessen, die eine kreislauf-
orientierte Nutzung ermöglichen und optimieren.
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget Germany
Introduction to the EU Taxonomy for a Circular Economy • Page 6 of 33
The EU Taxonomy will affect a number of actors di-
rectly or indirectly. Companies that are already re-
1 Scope and goals of this report
quired to provide non-financial information (under
This report is an introduction to the EU Taxonomy, the CSR-Directive) will have to disclose the share of
its relevance, primary goals and design. Its purpose is their Taxonomy-aligned activities. For them, the EU
to help experts from various environmental fields and Taxonomy is improving access to capital for invest-
other interested readers to understand the devel- ments in (more) sustainable economic activities. It
opment, structure and mode of operation of the helps them measure the sustainability of a particular
EU Taxonomy. investment and gradually increase the share of a
The report discusses how the environmental objec- company’s sustainable economic activities (i.e. in line
tive of the protection and restoration of biodiversity with the Taxonomy). In order to serve these purposes,
and ecosystems is translated into criteria – both for a the Taxonomy needs to define sustainable economic
substantial contribution to an environmental objec- activities. It is very important to note that it does not
tive as well as for the assessment of the “do no signif- assess companies but only economic activities 3.
icant harm” (DNSH) principle. It uses examples from Further, the Taxonomy affects financial market par-
key sectors to illustrate the application of the Taxon- ticipants who are offering sustainable finance prod-
omy and to highlight tasks in the further develop- ucts. It will help them to avoid investments in green-
ment of the Taxonomy. This shall enable experts to washing and support institutional investors (such as
take part in the political debates on the develop- insurance companies or pension funds) to invest their
ment of the Taxonomy in 2021 and in the future. long-term capital in sustainable economic activities,
Its purpose is not to outline what the Taxonomy, its thus accelerating the transition to a more sustainable
points of reference and criteria, should look like in economy. For private persons interested in how
key sectors. Even attempting to do so would over- “their money” is invested, the Taxonomy makes it
whelm the scope of this paper 1 . It aims at helping easier to identify which banks or funds are most com-
readers to understand the Taxonomy’s mode of op- pliant with the Taxonomy. It enables them to move
eration and enable them to follow and engage in its their capital to banks with the highest level of sustain-
further development. ability (i.e. highest taxonomy compliance). In essence,
the taxonomy can spur a “virtuous cycle” 4 toward
greater sustainability.
2 Introduction to the EU Further, the EU Taxonomy could be used to define
Taxonomy green financial products via the EU Ecolabel or EU
green bond standards (DIW 2020).
In total, the EU Taxonomy has six environmental ob-
2.1 Overall goal of the Taxonomy jectives, which help to define sustainable economic
The EU Taxonomy is a classification system for sus- activities (see Figure 1).
tainable economic activities. Its overall goal is to
create transparency and disclose the impact of in-
vestments. It is part of the EU Action Plan Financing
Sustainable Growth (European Commission 2018a).
The Taxonomy aims to enable the financial system
to guide investment decisions into a more sustain-
able direction and thus accelerate the transition to
a circular economy in Europe and beyond 2.
1
The nearly 600 page technical annex outlining technical the IMF & World Bank the International Platform
screening criteria for the substantial contribution on sustainable finance (European Commission).
3
and DNSH to the environmental objectives of cli- This is important as the gradual transition is taking place
mate change mitigation and adaptation in all rele- within a company.
vant sectors is an indicator for the complexity of 4
Opposed to the concept of „vicious cycle“ of competition
the matter. based on lower environmental standards, the Tax-
2
While the Taxonomy’s reach is by definition European, it onomy’s transparency approach promises compet-
aims to ensure the harmonization of taxonomies itive advantages for those companies, banks, etc.
worldwide. To that end, the EU has initiated with that act more sustainably.
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget Germany
Introduction to the EU Taxonomy for a Circular Economy • Page 7 of 33
Figure 1: Six environmental objectives The Taxonomy Regulation was published on 22 June
established by the Taxonomy 2020 and entered into force on 12 July 2020. The en-
(Article 9 of the Regulation) vironmental objectives are translated into criteria
(technical screening criteria) to evaluate the sustain-
ability of an economic activity. The development of
these criteria requires a lot of attention to detail. They
are subsequently developed and adopted as dele-
gated acts.
The draft delegated act for the first two environmen-
tal objectives (climate change mitigation and adap-
tion) was foreseen to be published by the European
Commission in December 2020 and is now, with a
delay of four month foreseen to be published in April
2021, The Technical Expert Group (TEG) on Sustain-
able Finance played a crucial role in this process and
published recommendations for criteria for these two
objectives in March 2020 (TEG 2020).
The draft delegated acts for the remaining four envi-
ronmental objectives are expected to be published in
December 2021. The Platform on Sustainable Fi-
nance is advising the European Commission in this
process. This platform is composed of a wide range of
stakeholders from the private and public sector in-
cluding private stakeholders from financial, non-fi-
nancial and business sectors, academia, NGOs, civil
society and public institutions (European Commis-
Source: EU Technical Expert Group on Sustainable Finance (TEG sion 2021).
2020)
The Taxonomy is expected to go into force for the
first two environmental objectives by the end of 2021,
2.2 Process and timeline and for the remaining four objectives by the end of
2022 (see Figure 2), the Taxonomy will be fully oper-
The EU Taxonomy is a two-level regulation: it consists
ational by 2023.
of the Taxonomy regulation (level 1) and subsequent
delegated acts (level 2). Figure 2 presents the time-
line of the whole process.
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyIntroduction to the EU Taxonomy for a Circular Economy • Page 8 of 33
Figure 2: The EU Taxonomy timeline
* The delegated act for the first two environmental objectives was foreseen to be published by the European Commission in December 2020 and is
now foreseen to be published in April 2021.
Source: (NATIXIS 2020)
2.3 Development of criteria In order to evaluate an economic activity, criteria are
necessary to assess whether it contributes substan-
According to the Taxonomy Regulation, an eco- tially to an environmental objective and to ensure
nomic activity is considered taxonomy-compliant if it: that such an economic activity does not create signif-
makes a substantial contribution to at least one icant harm to another objective at the same time.
of six environmental objectives,
does no significant harm (DNSH) to the other Figure 4 below illustrates how environmental objec-
environmental objectives (where relevant), tives are translated into precise criteria to assess eco-
and meets minimum safeguards, e.g. with re- nomic activities.
gard to social and human rights. First, environmental objectives are translated into
overarching goals, such as the “net-zero CO2-emis-
Figure 3: Requirements for compliance with the sions by 2050 and a 50-55% reduction by 2030”
Taxonomy goals on EU-level for climate mitigation (cp. TEG
2020). These serve as the basis for the development
of specific criteria.
substantial
contribution Secondly, sectors are identified that are of particular
relevance for each environmental objective. In these
sectors, criteria are developed that can measure the
do no contribution of economic activities to the overarch-
minimum ing goals in this particular sector.
significant
safeguards
harm
The third step differentiates how an economic activ-
ity contributes to the overarching objective. It distin-
guishes different types of substantial contribution.
Source: own depiction based on Article 3 of the Taxonomy Regula-
tion For the objective of climate change mitigation, the
TEG (2020) differentiates between three types of
substantial contribution:
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyIntroduction to the EU Taxonomy for a Circular Economy • Page 9 of 33
1. “Green activities”: These activities directly activity can be considered compliant with the Taxon-
contribute to the overarching target as they omy. Criteria can be either qualitative or quantitative.
have already very low or no greenhouse gas Typically, they consist of three components: princi-
emissions. ples, metrics, and associated thresholds. An example
2. “Greening of activities” or “transitional ac- on climate mitigation in cement production is out-
tivities”: These activities support the transi- lined in (Germanwatch, E3G 2020):
tion to a carbon-neutral economy as there 1. Principles: The emissions from cement pro-
does not exist an environmentally sustaina- duction must be minimized
ble activity yet 5. 2. Metrics: Specific emissions of production
3. “Enabling activities”: These activities ena- (in tCO2e per ton of cement produced)
ble another economic activity to contribute 3. Thresholds: 0,498 tCO2e per ton of cement
to climate mitigation. An example is the pro- produced for substantial contribution 6
duction of certain product components,
Whereas the threshold for substantial contribution
which improve the environmental perfor-
must ensure that economic activities significantly en-
mance of an activity.
hance the environmental objective in question, the
In a fourth step, points of reference are developed to DNSH threshold is set lower. Its purpose is to ensure
distinguish different aspects that are relevant to a that economic activities, which substantially contrib-
type of contribution. They also serve as a basis for the ute to another environmental objective, do not do
selection (or development) of specific criteria. significant harm to other environmental objectives
Fifth, the criteria derived from the previous steps al- (as defined by the DNSH criteria & thresholds).
low answering the question whether an economic
Figure 4: Development of criteria
environmental
objective
sectors & How can economic activi-
economic ties contribute to the envi-
activities ronmental objective?
Which economic types of
activities can substantial
contribute sub- contribution
stantially to the
environmental
objective? points of
reference
How can this substantial
contribution be measured?
criteria
Source: own depiction
5
Examples are activities that still produce greenhouse aligned with an internationally recognised method
gases, but significantly lower than with previous for determining low carbon transition pathway or
technologies and lead to a transition towards cli- (2) (…) lower than the average global emissions
mate-neutrality – e.g. in cement production or car (based on emission performance standard deter-
manufacturing, etc. mined by internationally recognised data) for that
6
For DNSH, the criteria are not quantitative, but qualita- economic activity (EU Technical Expert Group on
tive. The technical annex stipulates that economic Sustainable Finance 2020)
activities would need to be either: (1) proven to be
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyIntroduction to the EU Taxonomy for a Circular Economy • Page 10 of 33
2.5.1 Practical examples on climate mitigation
2.4 Review and strengthening of Manufacturing of cement
criteria over time A company produces cement in five plants. Two of the
five cement plants emit less than 0,489 tons of CO2 on
The Taxonomy shall serve as a tool to distinguish sus- average in the production of one ton of cement. There-
tainable from non-sustainable economic activities. For fore, they operate below the relevant threshold value
companies, it should serve as a transition tool to in- and contribute substantially to climate change miti-
crease the sustainability of their operations over time. gation.
This idea of continuous improvement toward greater In order to be taxonomy-compliant, these two plants
sustainability underscores the need to regularly review must do no significant harm to any of the other five en-
and update the Taxonomy’s criteria 7 . Criteria that are vironmental objectives. One of these plant is located in
connected with political goals that have a certain date an area with a precarious water situation. Due to its high
(e.g. to achieve a certain threshold by a certain year) water consumption, cement production of this plant is
can require an updating the criteria. Similarly, as over- detrimental to the goal of sustainable use of water re-
arching goals for environmental objectives are sources and thus not taxonomy-compliant, while the
strengthened over time, the criteria to assess economic other plant, being located in an area with sufficient wa-
activities must be updated accordingly. There is no ter supply, does not significantly harm this environ-
fixed schedule for the review of criteria, but the TEG mental objective.
has signalled a recommended trajectory for many of
In conclusion, one of the five plants is considered a sus-
the quantitative climate change mitigation criteria.
tainable economic activity according to the Taxonomy.
The TEG emphasised the need for the Taxonomy to be Depending on how much this plant is producing and
predictable and therefore suggests to review criteria contributing to the company’s sales, this percentage of
that are relevant for “transitional activities” every third the company’s sales would be taxonomy-compliant
year (Platform on Sustainable Finance 2020). (BMWi 2020).
2.5 How to use the Taxonomy Production of offshore wind energy
When assessing economic activities and their compli- A company produces offshore wind energy. According
ance with the Taxonomy, it is key to keep in mind possi- to the Taxonomy, this economic activity is substan-
ble trade-offs between different environmental objec- tially contributing to climate change mitigation.
tives (for substantial contribution and DNSH). An eco- However, the production and operation of offshore
nomic activity might substantially contribute to one wind energy may do significant harm to biodiversity,
environmental objective, and yet causes significant especially if badly sited (NABU/BirdLife 2020). The
harm to another. Such activities do not comply with the company must ensure that underwater noise emitted
Taxonomy Regulation in the end. during the construction and operation of the wind tur-
We use two sets of examples to illustrate how the Tax- bines stays within permissible limits to ensure protec-
onomy helps to identify sustainable economic activi- tion of local marine biodiversity and avoid negative im-
ties in practice. The first two are examples on climate pacts on ecosystems such as the bird habitat (regard-
mitigation, for which criteria have already been devel- ing the biodiversity/ecosystem-goal) (Germanwatch,
oped by the TEG (EU Technical Expert Group on Sus- E3G 2020).
tainable Finance 2020). The latter two are hypothetical
examples that illustrate possible trade-offs and how 2.5.2 Hypothetical examples related to the
the Taxonomy logic would be consequently applied to circular economy and biodiversity
them. The criterion of minimum safeguards is not ex-
plicitly addressed in this report. The following examples are hypothetical examples in-
tended to illustrate how economic activities that are
substantively contributing to one environmental ob-
jective may conflict with others. They illustrate why it is
necessary to evaluate the substantive contribution of
7
Thus, the TEG report describes it as a dynamic, flexible tool: should be tightened later have been signalled in ad-
“The Taxonomy design includes quantitative criteria vance to provide predictability to markets, while of-
wherever possible so that solutions can be specified fering a clear review mechanism for the future Plat-
by the market and evolve over time. Criteria which form on Sustainable Finance.” (TEG 2020)
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyIntroduction to the EU Taxonomy for a Circular Economy • Page 11 of 33
an economic activity as well as whether it harms other
environmental objectives.
Greater use of materials from biomass
One approach to advance the circular economy is the
wider use of biomass materials as substitutes for con-
ventional materials that are environmentally harmful
and hard to recycle (e.g. timber in construction). Their
use could make a substantial contribution for the
transition to a circular economy.
However, expanding the production of such materials
puts stress on ecosystems such as forests or
croplands 8 . Therefore, this could also negatively im-
pact ecosystems and violate the do no significant
harm criteria regarding the protection of biodiversity
and ecosystems.
An app for more clothes sharing
Digital tools that enable us to use products collectively,
for a longer time or more intensively, can be important
components of and make a substantial contribution
to a circular economy in line with the EU Waste Hierar-
chy. A number of digital tools for sharing or re-selling
already exist. In the apparel sector such digital tools are
already established.
While such platforms are likely to contribute to a more
circular use of clothes, they could also support the “fast
fashion” trend and thereby cause an ever higher speed
of circulation of clothes along with increased resource
needs for packaging and transport emissions. There-
fore, a thorough assessment of such an app would have
to consider both its contribution to the circular econ-
omy and the fulfilment of the do no significant harm
criteria.
8
In the case of food crops, higher demand for material uses of biomass (material, food, feed, energy, as ecosys-
could also intensify conflicts between different uses tems) (EEA 2018).
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyIntroduction to the EU Taxonomy for a Circular Economy • Page 12 of 33
3 The Taxonomy for a Circular following frameworks might help defining the most im-
portant overarching goals for the circular economy:
Economy
Sustainable Development Goals: Several SDGs touch
Due to rising living standards and population growth, upon important components of a circular economy –
particularly the share living in cities, levels of material the circular economy concepts itself is not part of the
consumption are likely (to continue) to grow. UNEP SDG framework. Proponents of the circular economy
and the International Resource Panel expect them to emphasize that the concept contributes to the
double between 2015 and 2050. The World Resources achievement of the SDGs (van Kruchten/van Eijk
Institute suggests that business-as-usual could lead to 2020; Schroeder et al. 2019). Key SDGs with relevance
a tripling of our total resource consumption (European to the circular economy are:
Investment Bank 2020; van Kruchten/van Eijk 2020). 1. SDG 6 (Ensure availability and sustainable
Transforming our largely linear (take-make-waste) management of water and sanitation for all),
mode of industrial production holds a lot of potential
2. SDG 7 (Ensure access to affordable, reliable,
environmental benefits – in addition to opportunities in
sustainable and modern energy for all),
other areas (innovation, employment, reduced import
dependence for raw materials, etc). 3. SDG 8 (Promote sustained, inclusive and sus-
tainable economic growth, full and produc-
Doing so can address environmental and social chal-
tive employment and decent work for all),
lenges related to the mining and production of virgin
materials and the harm they create when they are 4. SDG12 (Ensure sustainable consumption and
wasted. Further, it can reduce 45% of global green- production patterns) and
house gas emissions that are not related to energy 5. SDG 15 (Protect, restore and promote sus-
consumption and often overlooked in the debate. Cir- tainable use of terrestrial ecosystems, sus-
cular economy approaches can significantly cut down tainably manage forests, combat desertifica-
these emissions in five key sectors: steel, aluminium, tion, and halt and reverse land degradation
cement, plastics and food (Ellen MacArthur Founda- and halt biodiversity loss).
tion 2020). 9 In total, a circular economy (CE) is found to directly
The following sections discuss the overarching goals on contribute to 21 SDG targets (and indirectly to 28 more)
the global and European level that guide the develop- and to synergies with other SDGs, e.g. between eco-
ment of the circular economy concept; identify chal- nomic development, poverty reduction and ending
lenges in key sectors. The second part of the chapter global hunger (Schroeder et al. 2019). A CE contributes
shows how the categorisation system for the CE pub- to achieving the SDGs, but the SDG framework does
lished by the European Commission (2020a) derives not help us in defining points of reference and criteria
from the CE concept. It further presents the structure to assess an economic activity’s contribution to the cir-
of the proposal, possible criteria to assess economic ac- cular economy.
tivities with regard to their circularity. Using two exem- EU Circular Economy Action Plan: The EU’s 2020 Cir-
plary sectors, we discuss which aspects the application cular Economy Action Plan comprise a broad range of
of the Taxonomy could possibly consider when as- measures to advance the CE. It emphasizes the im-
sessing a substantial contribution and the “do no signif- portance of making circular design the norm for pro-
icant harm” criteria as well as the question which activ- duction in Europe, empowering consumers (e.g. right
ities to exclude entirely. to repair) and public buyers. It further addresses the
need to reduce waste, establish recycling processes
and create markets for secondary raw materials (Eu-
3.1 Overarching goals
ropean Commission 2020b).
While there is an emerging understanding of what a The current EU monitoring framework for the Circu-
circular economy is and how circular business models lar Economy adopted in 2018 comprises ten indicators
differ from linear ones, there are hardly specific over- in four groups. It does not (yet) include specific over-
arching goals for it. The Sustainable Development arching goals, such as to halve the material footprint
Goals provides guide rails and the EU Circular Econ- (European Commission 2018b). The current action
omy framework is evolving. Therefore, it will become plan outlines the goal of updating this framework and
more specific and thus could be useful as a frame of ref- including new indicators to strengthen the positive
erence for the implementation of the Taxonomy. The
9
The EIB lists a large number of studies highlighting the posi- climate mitigation (see Annex 4 in European Invest-
tive spillovers between adressing the circularity and ment Bank 2020).
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyIntroduction to the EU Taxonomy for a Circular Economy • Page 13 of 33
spillover effects between circularity, climate and elimi- approaches can reduce environmental pres-
nation of pollution. 10 In this context, the European Par- sures of the growing demand for key materials
liament adopted a resolution calling on the Commis- (such as lithium, cobalt nickel and manga-
sion “to propose binding EU targets for 2030 to signif- nese) as well as the EU’s import dependence
icantly reduce the EU material and consumption for such raw materials. 12 In the long-term, up
footprints and bring them within planetary boundaries to 40% of global lithium demand in 2050
by 2050” and “to introduce by 2021 harmonised, com- could be met from recovered secondary lith-
parable and uniform circularity indicators” (European ium, at least partly reducing the need for virgin
Parliament 2021). The Parliament did not specify these lithium (Öko-Institut 2017). For that to hap-
targets, while a number of environmental organizations pen, the development of second-life uses for
called for a halving the material footprint by 2030 batteries and efficient and safe recycling
(DNR 2021). practices must be developed as quickly as
possible.
3. Packaging: The per capita consumption of
3.2 Identifying important industries
packaging materials is still on a growth trajec-
and sectors tory and only about 80% is recovered, respec-
tively only two-thirds recycled in the EU
The EU Circular Economy Action Plan highlights key
sectors where challenges as well as environmental op- (2018) 13. The 2030 goal to ensure all packing
portunities related to greater circularity are highest: is reusable or recyclable can be addressed
through reducing demand for (over)packag-
1. Electronics and ICT: The fastest growing
ing/packaging waste, improved circular de-
waste streams in the EU stem from electronic
sign and strategies that fully replace the need
and electrical equipment. Products become
for packaging.
waste, when they are not repairable, a battery
cannot be replaced, a software is no longer 4. Plastics: The EU has adopted a Strategy on
supported or materials incorporated into de- Plastics in the Circular Economy in order to
vices are not recoverd. Only about 40% of the manage the expected continued growth in
electronic waste is currently recycled in the the consumption of plastic products. Ad-
EU. Under the Circular Electronics Initiative, dressing the sector’s circularity includes regu-
the European Comission will mobilise existing lations, such as the ban on certain single-use
and new instruments to promote longer life- plastic products, phasing out certain types of
times. This should be achieved by strengthen- plastics, setting waste reduction targets and
ing eco-design requirements (for energy effi- recycling contents for key products. In addi-
ciency, durability and reparability, upgradabil- tion to recycled plastics, expanding the use of
ity and recycling), the right to repair, require- bio-based and compostable materials to re-
ments for longer durability and improving place today’s plastics is also part of the strat-
waste collection and treatment through take- egy.
back schemes. 5. Textiles: The sector is a key driver for the de-
2. Batteries and vehicles: Electric mobility will mand for primary raw materials as well as a
be the dominant driver of an enormous major source of greenhouse gases. Circular
growth in demand for lithium-ion batteries in approaches can greatly contribute to reduc-
ing both environmental pressures. Specific
the coming decades. 11 Developing circular
measures are for instance:
10
The action plan says specifically: “The Commission will also dominate demand. The World Economic Forum ex-
update the Monitoring Framework for the Circular pects total demand for batteries to increase tenfold
Economy. Relying on European statistics as much as between 2020 and 2030, with electric mobility ac-
possible, new indicators will take account of the fo- counting for 89% of demand in 2030 (World Eco-
cus areas in this action plan and of the interlinkages nomic Forum; Global Battery Alliance 2019),
between circularity, climate neutrality and the zero 12
Lithium and cobalt are both included on the EU’s list of
pollution ambition. At the same time, projects under critical raw materials and European demand for them
Horizon Europe and Copernicus data will improve is expected to increase by 2030 five-fold for cobalt
circularity metrics at various levels not yet reflected and 18-fold for lithium (European Commission
in official statistics” (European Commission 2020b). 2020c).
11
While demand for batteries will also grow in electronics and 13
See Eurostat: https://ec.europa.eu/eurostat/statistics-ex-
battery storage, electric mobility application will plained/index.php/Packaging_waste_statistics
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyIntroduction to the EU Taxonomy for a Circular Economy • Page 14 of 33
o eco-design measures (e.g. design for Investment Bank 2020). Environmental improvements
repairability and easy access to re- can originate from all steps of the supply chains – from
pair services and materials), the production of raw materials, the production pro-
o use of secondary raw materials, cesses, the design of products, the way we use and re-
use them to the question what we do with them after a
o eliminating the use of hazardous
product has reached the end of its life.
materials,
The proposed categorisation system identifies these
o supporting products-as-a-service
different types of contribution and its criteria for the
business models that promise longer
circular economy. First of all, the difference between a
lifespans,
linear and circular economy and its implications for
o high levels of collection, re-use and business models is addressed in chapter 3.3.1. The next
recovery of materials. section (3.3.2.) focuses on the Taxonomy regulation
6. Construction and buildings: The construc- framework for the circular economy before we turn to
tion sector accounts for half of all extracted the proposed categorization system in the section
materials and 35% of the EU’s total waste 3.3.3.
generation. CE approaches can have a major
impact on reducing these negative impacts
3.3.1 What is a Circular Economy and what is the
and turning waste into new (secondary) mate-
role of sustainable finance in the transition
rials for (circular) construction in the future.
to a CE?
Key strategies to promote circularity include
increasing the use of recycled materials, im- The environmental objective of the transition to a cir-
proving the durability and adaptability of cular economy is very different in its nature from other
buildings over time, improving recovery tar- environmental objectives, such as climate mitigation or
gets for waste and its use as secondary raw biodiversity. It cannot be derived from the carrying ca-
materials. pacity of an ecosystem or measured in one indicator,
7. Food: About 20% of food is either lost or such as CO2.
wasted in the EU. This means that the area Rather, it is a management approach to transform our
used for food production (including its eco- linear production mode into a circular one step-by-
system services) is unnecessarily cultivated. It step. It fosters changes in all kinds of step in the supply
further intensifies the conflicts between na- chain to make production more circular. The funda-
ture and the production of food and bio- mental goal of the approach is to ensure that produc-
based materials. Reducing waste and envi- tion and consumption fits within planetary bounda-
ronmentally sound uses of biomass waste and ries and to reduce harm as much as possible. Scientific
residues are key challenges in the sector. literature is full of varying definitions of what the circu-
The production of renewable energy and the efficient lar economy is and what the different challenges are in
use of energy are key components of a circular econ- particular sectors (see for example Bocken et al. 2019).
omy, but are not included in the categorization system In essence, they differentiate two cycles through which
for the circular economy on purpose. biological and technical materials return after their use.
While biological materials return to nature and their
waste is the food for the growth of new materials, tech-
3.3 Substantial contribution to the nical materials (such as metals), are finite. For both, it is
transition to a circular economy true that their production requires many resources and
we should use them as often (in cascades 14) and as in-
The purpose of the Taxonomy is to guide capital into tensively as possible before their end of life and prevent
innovations that are (or have the potential to be) more waste.
circular than the status quo and to accelerate changes
Transitioning to a circular economy is not “just” a ques-
towards the circular economy. Without any interven-
tion of materials or production or the way we use things.
tion, prices for scarcer resources would surely rise and
It is all of the above. The transition from a linear to a cir-
businesses would use resources more efficiently in the
cular economy affects basically all aspects of a product:
long run. In order to avoid the (environmental) dam-
from the materials it is made of to its design principles,
ages from ever-growing resource consumption, it is
its manufacturing processes, its durability and ability to
prudent to use tools like the Taxonomy to accelerate
be repaired, refurbished, repurposed, reused, etc.; the
the development of the circular economy (European
14
This is particularly true for biological resources, such as resource efficient use of wood and wood products
wood. Examples, how cascading can contribute to a (Mair-Bauernfeind/Stern 2017).
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyIntroduction to the EU Taxonomy for a Circular Economy • Page 15 of 33
way and intensity with which a product is being used vented. The business model changes with the transi-
and – at the end-of-life of a product, the question tion from a linear to a circular economy. In a linear
whether its biological materials can be fed back into the economy, businesses focus on improving the left side
biological cycle as nutrients and whether its technical of the hill (pre-use and use phases) and maximize the
materials can be recycled in the same quality and used amount of products that can be sold. The right side of
in a new product. the hill represents destroyed value (products in a land-
For businesses and investors, this means that in order fill).
to realize the environmental improvements of a circular
economy, business models must change and be rein-
Figure 5: The value hill in a linear economy (left) and in a circular economy (right)
Source: (Achterberg et al. 2016)
In a circular economy, “value” is not added on one side o the recovery of high-quality materials
of the hill and lost on another, but added or retained on from recycling processes for high-quality
all. It is the core concept of nature that there is no use 16 in new products
waste and that all resources that are no longer used in Investments that substantially contribute to the circu-
one system are the nutrients/ food in another. For a lar economy can therefore be located in many different
business, this means that improving circularity can parts of the value chains and address entirely different
take place at every aspect of the value chain, for in- aspects.
stance:
- in the pre-use phase:
3.3.2 How the EU taxonomy can accelerate the
o the production and the share of recycled transition to a circular economy
materials used for it;
- the design of products focused on durability, mod- 3.3.2.1 Circular economy in the taxonomy
ularity and repairability in the use-phase: regulation
o the ability to repair, refurbish, upgrade or
Article 13 of the Taxonomy outlines the goals of the
repurpose products;
Taxonomy with regard to the transition to a circular
o the development of sharing or products- economy. The breadth of the article and the criteria for
as-a-service business models in order for a “substantial contribution” illustrate the complexity of
each product to be used more inten- the subject (e.g. compared to the relative simplicity of
sively 15 criteria for climate mitigation).
- in the post-use phase:
o the collection of redundant products and
wastes
15
As one example, if hardware stores offer high-quality overall in the long term (compared to many people
power tools as a service rather than (cheap) prod- owning cheap tools that are hardly used).
ucts, less people will “need” (or want) to own their 16
A true circular economy must avoid downcycling and
own drills, saws, etc. and the more durable, more in- downgrading of materials with every circulation.
tensively-used products will require less resources
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyIntroduction to the EU Taxonomy for a Circular Economy • Page 16 of 33
Figure 6: Requirements for a substantial 3.3.2.2 A categorisation for contributions
contribution to the transition to a to a circular economy
CE (article 13)
In order to operationalize what is laid out in Article 13 of
1. An economic activity shall qualify as contributing the Taxonomy Regulation, a framework is necessary to
substantially to the transition to a circular economy, translate the circular economy into criteria upon which
including waste prevention, re-use and recycling,
to judge whether an investment (into a new or into ex-
where that activity:
isting projects) can be deemed to substantially contrib-
(a) uses natural resources, including sustainably
ute to the circular economy – or not. A special task
sourced bio-based and other raw materials, in pro-
duction more efficiently, including by: force of the EU Commission’s Directorate-General
(i) reducing the use of primary raw materi-als or Research and Innovation has put forward such a pro-
increasing the use of by-products and second- posal (European Commission 2020a). The proposal in-
ary raw materials; or corporates previous work on the CE (e.g. by the Ellen
(ii) resource and energy efficiency measures; MacArthur Foundation and by financial institutions).
(b) increases the durability, reparability, upgrada- The structure of the proposal is based on the Value Hill
bil-ity or reusability of products, in particular in de- Business Model Tool developed by Achterberg et al.
sign-ing and manufacturing activities; (2016). The proposal contains:
(c) increases the recyclability of products, including
the recyclability of individual materials contained in • “a generic, sector-agnostic circular econ-
those products, inter alia, by substitution or re- omy categorisation system that defines dis-
duced use of products and materials that are not tinct categories of activities substantially con-
recyclable, in particular in designing and manufac- tributing to a circular economy;
turing activities;
• a set of minimum criteria to be met by activi-
(d) substantially reduces the content of hazardous
ties under each defined category in order to
substances and substitutes substances of very high
concern in materials and products throughout their
be considered as substantially contributing to
life cycle, in line with the objectives set out in Union a circular economy; and
law, including by replacing such substances with • methodological guidance including an indic-
safer alternatives and ensuring traceability; ative list of typical investments/projects for
(e) prolongs the use of products, including through each circular economy category” (European
reuse, design for longevity, repurposing, disassem-
Commission 2020a).
bly, remanufacturing, upgrades and repair, and
sharing products; The categorisation system proposed by the European
(f) increases the use of secondary raw materials and Commission’s task force (European Commission
their quality, including by high-quality recycling of 2020a, ‘the proposal’) consists of four groups of circu-
waste; lar categories:
(g) prevents or reduces waste generation, including
1) Circular Design and Production
the generation of waste from the extraction of min-
erals and waste from the construction and demoli- 2) Circular Use
tion of buildings; 3) Circular Value Recovery
(h) increases preparing for the re-use and recycling
4) Circular Support
of waste;
(i) increases the development of the waste man- Each group presents an area in which changes can sig-
agement infrastructure needed for prevention, for nificantly improve circularity and therefore reduce
preparing for re-use and for recycling, while ensur- emissions, environmental impacts related to the pro-
ing that the recovered materials are recycled as duction or use of products and services. For each circu-
high-quality secondary raw material input in pro-
lar category, there are specific criteria, which an eco-
duction, thereby avoiding downcycling;
nomic activity must meet. The structure of the catego-
(j) minimises the incineration of waste and avoids
risation system is in line with the Taxonomy, but uses
the disposal of waste, including landfilling, in ac-
cordance with the principles of the waste hierarchy; slightly different terms: its “groups of circular catego-
(k) avoids and reduces litter; or (l) enables any of the ries” correspond to different types of substantial con-
activities listed in points (a) to (k) of this paragraph tribution; its “circular categories” to points of reference
in accordance with Article 16 and its “specific circularity criteria” to criteria (technical
screening criteria).
Source: EU Taxonomy regulation, Article 13, paragraph 1.
Figure 8 gives an overview on the structure of the cat-
egorisation system. Table 2 in the annex provides the
full classification system.
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