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Glossary · Energy industry & energy transition

EU Taxonomy

EU Taxonomy sustainable finance Energy Climate protection Investments regulation power system Capital market

The EU Taxonomy is a binding European classification system. It sets out the conditions under which an economic activity may be reported as environmentally sustainable. Its legal basis is the Taxonomy Regulation (EU) 2020/852. What is assessed is not companies as a whole but individual activities. Examples include the construction and operation of a wind farm, the operation of an electricity grid, the manufacture of batteries, building renovation or certain forms of electricity generation. It matters for the power system because it structures capital flows, reporting obligations and the language of sustainable finance. Its stated aim is to steer financial flows towards sustainable activities and thereby support the EU's goal of climate neutrality by 2050.

The Taxonomy is neither a technical standard for grid operation nor permitting law. It neither allows nor prohibits a plant, and it does not prescribe a technology mix. It works through financing, corporate reporting, communication with investors and supervision. One can think of it as an official dictionary. It does not regulate what is built. It regulates what may be described as "environmentally sustainable" when marketing financial products or in the management report.

Structure: environmental objectives, criteria and delegated acts

The Regulation names six environmental objectives: climate change mitigation, climate change adaptation, the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems. An activity counts as environmentally sustainable only if four conditions are met together. It makes a substantial contribution to at least one objective. It does no significant harm to the other objectives, known in technical jargon as "Do No Significant Harm" (DNSH). It complies with minimum social safeguards, for example on human rights and labour standards. And it meets the technical screening criteria laid down by the European Commission.

The specific thresholds are not in the Regulation itself. They are found in delegated acts of the Commission. For climate change mitigation and adaptation this is the Climate Delegated Act (EU) 2021/2139, for the other four objectives the Environmental Delegated Act (EU) 2023/2486. The reporting obligations are governed by the Disclosures Delegated Act (EU) 2021/2178. In addition there is the Act (EU) 2022/1214 on natural gas and nuclear energy. The Regulation also distinguishes two special categories. Transitional activities are those for which there are not yet any technologically and economically feasible low-carbon alternatives. Enabling activities directly enable other activities to make a substantial contribution. Many grid and storage activities are best described by this logic of enabling.

Taxonomy-eligible is not Taxonomy-aligned

Taxonomy eligibility and Taxonomy alignment are often confused. An activity is Taxonomy-eligible if it is described in one of the delegated acts. It is Taxonomy-aligned only once it meets, in the individual case, all technical criteria, the DNSH assessment and the minimum safeguards. A company can therefore report that a large share of its investment is Taxonomy-eligible without that share being environmentally sustainable within the meaning of the Taxonomy.

In the energy sector this distinction is particularly important. Covered are, among others, electricity generation from renewable energies, transmission and distribution grids, energy storage, heat pumps, hydrogen production, building technology and certain industrial processes. Whether a specific activity is aligned depends on, for example, emission limits per kilowatt hour, life-cycle analyses, the emission profile of the connected grid, environmental assessments at the site or transitional periods. The Taxonomy therefore has no simple "green" or "not green". Each activity is assessed individually against criteria.

Indicators and reporting obligations as of 2026

Reporting covers three indicators: the share of turnover, capital expenditure (CapEx) and operating expenditure (OpEx) attributable to Taxonomy-eligible and Taxonomy-aligned activities. An energy supplier can, for example, disclose what part of its turnover comes from aligned activities and what part of its investment flows into such activities. For the energy transition the CapEx indicator is particularly informative, because today's expenditure shapes tomorrow's generation fleet. A company that still has high fossil turnover can have a high aligned CapEx share if it demonstrably invests in eligible generation, grids or storage.

Simplified rules have applied since 2026. Delegated Regulation (EU) 2026/73 was published on 8 January 2026 and applies retroactively from 1 January 2026. It introduces a materiality threshold: activities that together account for less than 10 percent of turnover, CapEx or OpEx do not have to be assessed in detail. The threshold is applied separately for each indicator. In addition, the reporting templates were streamlined and the DNSH criteria on pollution were simplified. For the 2025 financial year, companies could still apply the old rules, but then in full.

Who has to report at all follows from the Corporate Sustainability Reporting Directive (CSRD). Its scope has been significantly narrowed by the Omnibus I Directive (EU) 2026/470. It has been in force since 18 March 2026 and must be transposed into national law by 19 March 2027. According to it, essentially only EU companies with on average more than 1,000 employees and at the same time more than 450 million euros of net turnover are still covered. The earlier statement that "large companies" generally have to report on the Taxonomy therefore now applies only to a limited extent. Smaller companies nevertheless still encounter the Taxonomy indirectly, for example in conversations with banks and investors.

Relevance for the power system and financing

The power system is capital-intensive. Wind farms, solar parks, substations, lines, electrolysers, battery storage and digital grid technology entail high initial investment, while running costs are comparatively low. Financing costs therefore largely determine what electricity ultimately costs. If Taxonomy alignment makes it easier to access sustainability-oriented investors or makes financing more credible, it can indirectly lower the cost of capital. This effect does not occur automatically and is not equally large for every plant.

This becomes particularly clear with electricity grids. Grids do not generate electricity. But they are the precondition for connecting renewable plants, electrifying consumers and balancing regional surpluses. The Taxonomy recognises transmission and distribution as a climate change mitigation activity if the grid is on a decarbonisation pathway and the other criteria are met. Sustainability in the power system thus covers not only generation plants but also infrastructure, controllability and connectability.

The same applies to storage, load management and hydrogen. Battery storage can make renewable feed-in more usable, relieve grids or provide balancing power. An electrolyser converts electricity into hydrogen, which makes the most sense where direct electrification is difficult. Whether such activities are aligned depends, besides the plant, also on the electricity supply, the emissions balance over the life cycle and the context of use. The Taxonomy thus forces a close look at system boundaries.

Natural gas, nuclear energy and transitional activities

The public debate centred strongly on the complementary Delegated Act (EU) 2022/1214. It included certain activities in the fields of natural gas and nuclear energy. This does not mean that these technologies are deemed sustainable across the board. They are covered only under narrow conditions and predominantly as transitional activities. To qualify for the transitional category, a new gas-fired power plant must, to our knowledge, among other things comply with strict limits on direct emissions. These are given as 270 g CO2 equivalent per kilowatt hour or, alternatively, an annual budget averaged over 20 years of 550 kg per kilowatt of capacity. In addition, a construction permit is needed by the end of 2030, it must replace a more emission-intensive plant using solid or liquid fossil fuels, and it must switch completely to renewable or low-carbon gases by the end of 2035. For nuclear energy the focus is above all on safety, the disposal of radioactive waste and deadlines for permits.

Austria brought an action against this act, supported by Luxembourg. The General Court of the EU dismissed the action on 10 September 2025 (Case T-625/22). According to the judgment, the Commission was entitled to assume that certain nuclear and natural gas activities can, under conditions, contribute substantially to climate change mitigation. The Court endorsed a step-by-step approach that reduces emissions gradually while taking security of supply into account. According to the judgment, the Commission did not have to include upstream and downstream steps such as uranium mining and fuel transport. Austria lodged an appeal with the Court of Justice on 18 November 2025 (Case C-739/25 P). The legal dispute has therefore not yet been finally decided. Until a decision to the contrary, the act remains applicable.

The classification remains politically contested, because the Taxonomy has to bring together scientific thresholds, industrial policy and comparability on the financial market. For the power system, what matters less is which technology receives a label. What is decisive is which investments become easier to justify and finance as a result. A gas-fired power plant can be discussed as a means of safeguarding security of supply with a high share of fluctuating feed-in. That does not automatically make it climate-compatible. Conversely, looking only at annual emissions easily overlooks the role played by flexible power plants, storage, grids and demand shifting. The Taxonomy does not resolve this trade-off. But it makes it verifiable in the language of finance.

What the Taxonomy can and cannot do

The Taxonomy creates comparability. Investors, banks, insurers and supervisory authorities get a common frame of reference, and vague sustainability claims become harder to make. Companies have to disclose more precisely which parts of their business already meet the criteria. It does not completely prevent greenwashing, but it raises the burden of justification. The materiality threshold of 2026 reduces the effort. But it also means that smaller business areas become less precisely visible.

Its limits arise from the nature of the instrument. The Taxonomy does not replace energy system planning. It does not decide how much grid reserve is needed, which power plant capacities are missing in a region, how electricity market design and grid charges work or which permitting procedures slow down investment. An aligned plant in the wrong place or without a grid connection may contribute little to the system. Conversely, a non-aligned plant may be needed in the short term for supply without thereby being sustainable in the long term. The Taxonomy also says nothing about the profitability of a project. It can improve financing conditions, but replaces neither a business model nor offtake agreements or support instruments. This applies in particular to green hydrogen and long-duration storage.

The concept of sustainability is also defined more narrowly than is usual in the political debate. At its core it concerns ecological criteria of the EU, supplemented by minimum social safeguards. Issues such as energy poverty, local acceptance, industrial value creation or strategic sovereignty are not comprehensively reflected by the Taxonomy.

Distinction from climate targets, ESG and support policy

  • Climate targets: They set how much emissions are to fall by a given point in time. The Taxonomy, by contrast, classifies activities according to whether they contribute to environmental objectives. It is an instrument for allocation and transparency, not a quantity pathway for emissions.

  • ESG: The abbreviation stands for environmental, social and governance and is used more broadly. ESG ratings are mostly based on the providers' own methodologies. The Taxonomy is based on EU law and above all makes the environmental part concrete. A good rating does not imply a high Taxonomy share, and vice versa.

  • Support policy: An aligned activity does not automatically receive state support as a result. Support programmes and other financial market rules may be guided by the Taxonomy, but need not be in every detail.

In short: the EU Taxonomy governs which activities may be deemed environmentally sustainable in European financial and corporate reporting. In the power system it shows that sustainable investment concerns not only generation but also grids, storage, flexibility and conversion technologies. Its strength is verifiable classification. Its limit lies where system planning, market rules and political weighing of interests require decisions of their own.

Sources

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Edited by eCMS on 11.11.2026 19:47

© 2026 Erik Schmidt. All rights reserved. Quotations with a link to the source are welcome.