On April 21, 2021, the European Commission approved “in principle” a Delegated Regulation establishing the criteria under which different economic activities substantially contribute to climate change mitigation and adaptation under Regulation 2020/852 on the Establishment of a Framework to Facilitate Sustainable Investment (“Taxonomy Regulation”). Among other things, the Delegated Regulation defines the climate mitigation and adaptation criteria that the manufacture of hydrogen must meet to be considered a “sustainable investment” in the European Union.
The Delegated Regulation’s criteria on hydrogen constitute an additional step in the implementation of the European Commission’s Hydrogen Strategy. While the European Commission must still adopt detailed rules on what should be defined as renewable (green) and low-carbon (blue) hydrogen, the Delegated Regulation sets the “gold standard” for the sustainable production of hydrogen.
Sustainable Finance: the EU Taxonomy Regulation
The Taxonomy Regulation implements the European Commission’s European Green Deal and follows up on an earlier Commission’s Action Plan on ‘Financing Sustainable Growth’. The Regulation is intended to provide companies and investors with uniform criteria on economic activities that can be considered to be environmentally sustainable, in order to redirect capital flows and generate sustainable economic growth in Europe. The Regulation’s criteria are expected to increase transparency on the classification of economic activities that can be considered environmentally sustainable and, therefore, to limit the risk of greenwashing and fragmentation.
The Taxonomy Regulation establishes the principles, and requires the Commission to adopt specific criteria for the following environmental objectives: (i) climate change mitigation; (ii) climate change adaptation; (iii) sustainable use and protection of water and marine resources; (iv) transition to a circular economy; (v) pollution prevention and control; and (vi) protection and restoration of biodiversity and ecosystems.
The Delegated Regulation: Criteria for Sustainable Hydrogen Activities
The Delegated Regulation approved on April 21 establishes technical screening criteria to assess whether the listed economic activities may qualify as contributing substantially to climate change mitigation and adaptation. With respect to hydrogen, the Delegated Regulation establishes the following criteria:
- Mitigation. The manufacture of hydrogen will be considered to contribute substantially to climate change mitigation if, among other requirements, “[t]he activity complies with the life cycle greenhouse gas [“GHG”] emissions savings requirement of 73.4% for hydrogen [resulting in 3tCO2eq/tH2] and 70% for hydrogen-based synthetic fuels relative to a fossil fuel comparator of 94g CO2e/MJ.” The Delegated Regulation also explains that the 73.4% savings threshold is in analogy to the approach set out in Article 25(2) of and Annex V to the Renewable Energies Directive, which “requires that GHG emissions savings from the use of renewable liquid and gaseous transport fuels of non-biological origin in transport be at least 70% by 2021.” Thus, the approved Delegated Regulation provides for a lower GHG emissions savings requirement than the threshold of 80% for hydrogen relative to a fossil fuel comparator of 94g CO2e/MJ (resulting in 2.256 tCO2eq/tH2) that the European Commission suggested in earlier drafts of the Delegated Regulation.
The Delegated Regulation also requires that the GHG emissions savings be calculated using the methodology of the international standard ISO 14067:2018 or ISO 14064-1:2018the methodology that the Commission must adopt under Article 28(5) of the Renewable Energies Directive (“RED II”), i.e., the methodology for assessing GHG emissions savings from renewable liquid and gaseous transport fuels of non-biological origin.
- Adaptation. The manufacture of hydrogen will meet the taxonomy criteria for climate change adaptation if it complies with four requirements:
- The economic activity must implement physical and non-physical solutions (“adaptation solutions”) that substantially reduce the most important physical climate risks related to the manufacture of hydrogen;
- The physical climate risks that are material to the activity must be identified by performing a robust climate risk and vulnerability assessment;
- The climate projections and assessment of impacts must be based on best practice and available guidance and take into account the state-of-the-art science for vulnerability and risk analysis and related methodologies (e.g., the Intergovernmental Panel on Climate Change reports); and
- The adaptations solutions must not adversely affect the adaptation effort of other people, nature, cultural heritage, assets, and other economic activities. The solutions must rely on blue or green infrastructure to the extent possible; and must be consistent with regional or sectoral adaptation plans. Finally, the solutions must be monitored and measured against pre-defined indicators and remedial action must be considered where those indicators are not met.
The Delegated Regulation Within the Broader EU Hydrogen Strategy
The Delegated Regulation’s criteria for sustainable hydrogen are part of the Commission’s broader Hydrogen Strategy, which the Commission is still trying to define and implement. While the Delegated Regulation sets the “gold standard” for what is considered sustainable manufacture of hydrogen, it does not necessarily define what is green or blue hydrogen.
The Hydrogen Strategy that the Commission presented in July 2020 announced that the Commission will adopt a “common low-carbon threshold/standard for the promotion of hydrogen production installations based on their full life-cycle greenhouse gas performance, which could be defined relative to the existing [benchmark under the EU Emissions Trading System Directive]” and “a comprehensive terminology and European-wide criteria for the certification of renewable and low-carbon hydrogen.”
The Commission may take into account these aspects of its Hydrogen Strategy during its full review of RED II, which is likely to result in a legislative proposal to significantly amend, and perhaps adopt a new, RED.
Moreover, in 2021, the Commission must also adopt two Delegated Regulations under RED II and establish:
- a methodology to assess GHG emissions savings from renewable liquid and gaseous transport fuels of non-biological origin (which include hydrogen); and
- a methodology with detailed rules on how electricity obtained from direct connection to an installation generating renewable electricity may be fully counted as renewable electricity where it is used for the production of “renewable liquid and gaseous transport fuels of non-biological origin” (which includes hydrogen) and on how electricity that has been taken from the grid may be counted for this purpose (“additionality requirements”).
The Commission may also consider the different aspects of its Hydrogen Strategy, including the regulation of low carbon hydrogen as part of its upcoming proposal for a Gas Regulation. This proposal is intended to replace Directive 2009/73/EC on the Common Rules for the Internal Market in Natural Gas, and could introduce a detailed regulation of hydrogen and hydrogen infrastructure.
The Commission has approved the Delegated Regulation “in principle.” Its official adoption will only take place once it will be published in all the official languages of the EU. This means that the criteria under the Delegated Regulation may still be subject to changes. This is because (i) the Parliament and Council of the EU may oppose the content of the Delegated Regulation within a period of four to six months after its official adoption (expected in the coming weeks); and (ii) some changes may be required to ensure consistency in light of the upcoming review of RED II, scheduled to take place in June 2021.