A cir­cu­lar eco­nomy tax­onomy

How does the EU Taxonomy work?

When reporting on the EU Taxonomy, companies must assess and disclose to what extent they carry out economic activities that are covered by the EU Taxonomy (eligibility) and following that, to what extent these activities comply with the set of robust technical criteria that defines when an economic activity can be deemed sustainable – hence contributing to one, or more, of the six environmental objectives. Specifically, for an economic activity to be aligned with the EU Taxonomy, it is required to:

• Substantially contribute to at least one of the six environmental objectives, as defined in the technical screening criteria.
• Do no significant harm to any of the other five environmental objectives, as defined in the technical screening criteria.
• Comply with minimum safeguards, namely ensuring compliance with principles on responsible business conduct as outlined in the OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.

Taxonomy alignment is presented in the form of three EU Taxonomy KPIs, namely Capex, Opex and Turnover, meaning that it is expressed as a percentage of the Capex, Opex and Turnover of aligned economic activities.

Why is it we need to speak the same circular language?

Speaking the same circular language is essential for fostering a cohesive and effective transition to a circular economy. A standardised circular taxonomy serves as a common framework that enables clear communication and understanding among diverse stakeholders, including businesses, investors, policymakers, and consumers.

This shared language ensures that everyone involved in the circular economy ecosystem interprets terms, goals, and strategies consistently. It eliminates ambiguity and misinterpretation, facilitating more accurate assessments of circul^ar practices and promoting collaboration. Without a standardised language, the potential for confusion and misunderstandings will continue to hinder the development of cohesive strategies and impede progress towards a circular economy.

A taxonomy in relation to the transition to a circular economy is necessary for several key reasons:

• Standardisation and clarity: providing a standardised framework and clear definitions for what constitutes a circular economy activity to help eliminate ambiguity and ensure a common understanding for all stakeholders.
• Guidance for decision-making: helping businesses and investors identify economic activities that align with circular economy principles.
• Promoting sustainable finance: offering a systematic way to categorise and assess investments based on their contribution to the circular economy.
• Preventing greenwashing: establishing clear criteria that all activities must meet to be considered circular to ensure that claims of sustainability are substantiated and that businesses genuinely contribute to the circular economy transition.
• Policy alignment: aligning with and reinforcing broader policy objectives related to the circular economy, e.g. EU Circular Economy Action Plan.

It is important to note that these advantages depend upon how particular sectors actually buy into the Taxonomy – how relevant it is deemed to be and how achievable it is. This is further elaborated upon later, as part of the “Key challenges facing the circular economy taxonomy” section.

Explaining the EU Circular Economy Taxonomy

The EU has provided previous guidance about where the emphasis needs to be placed with respect to accelerating the transition to a circular economy, in particular to the EU’s Circular Economy Action Plan published in 2020. This pattern continues with respect to a taxonomy for the transition to a circular economy. How a particular economic activity may substantially contribute to the transition to a circular economy is based upon four key principles as outlined below.

The EU Circular Economy Taxonomy focuses upon five sectors and 21 economic activities. However, when looking into the details, many more than the five sectors and 21 economic activities are actually included. Some economic activities encompass a much broader array of sectors and activities in themselves, especially within the “Services” section as outlined below.

The sectors and associated economic activities have been targeted as they either generate large amounts of waste or stand the potential to accelerate the transition to circular business models – essentially focusing upon the problem and those that can help solve tit. This, however, means that huge swathes of the economy are not included. In time, it is assumed that the circular economy taxonomy will be expanded upon.

The sectors and economic activities are summarised below, with some general observations for information.

1. Manufacturing

Economic activities - i) Manufacture of plastic packaging goods ii) Manufacture of electrical and electronic equipment

Focusing on manufacturing, this section is probably where the circular economy taxonomy lacks the most in that it focuses upon only two economic activities. But this will be expanded upon by the EU over time.

To show substantial contribution to the circular economy for the manufacture of plastic packaging goods, one criterion relates to the use of circular feedstock, i.e. until 2028, at least 35% of the packaging product by weight needs to consist of recycled post-consumer material for non-contact sensitive packaging and from 2028 this should be at least 65%.

In line with the emphasis being placed upon the manufacture of electrical and electronic equipment by the EU, the list of criteria is lengthy. Focusing primarily on design, the criteria includes designing for long lifetime, for repair and guarantee, for reuse and manufacturing, for dismantling and for recyclability.

2. Water Supply, Sewerage, Waste management, and Remediation activities

Economic activities - i) Phosphorus recovery from waste-water ii) Production of alternative water resources for purposes other than human consumption iii) Collection and transport of non-hazardous and hazardous waste iv) Treatment of hazardous waste v) Recovery of bio-waste by anaerobic digestion or composting vi) Depollution and dismantling of end-of-life products.

Both water and wastewater are included, primarily from a treatment perspective. These economic activities are familiar and widely practiced. To date, water intensive industry is missing from the Taxonomy which is an oversight.

There is a focus upon the more “traditional” components of the circular economy, such as resource management and recycling, as these sectors are critical to a successful transition to a circular economy. The Taxonomy provides clear definitions, enabling such economic activities to classify themselves as sustainable, as well as setting clear boundaries for other activities within these sectors.

3. Construction & Real Estate

Economic activities – i) Construction of new buildings ii) Renovation of existing buildings iii) Demolition and wrecking of buildings and other structures iv) Maintenance of roads and motorways v) Use of concrete in civil engineering

The criteria for buildings is both specific and ambitious. Emphasis is very much placed upon construction and demolition waste, global warming potential of the entire lifecycle, circular design techniques, the use of raw materials and the use of electronic tools.

But it is the use of raw materials that really stands out and raises the “circular bar” very high indeed. For example, the use of primary raw material in the three heaviest material categories needs to comply with very specific maximum total amounts used, e.g. for the combined total of brick, tile, ceramic, a maximum of 70% of the material comes from primary raw material. It is the emphasis of integrating secondary raw material that will pose the greatest challenge for the construction and real estate sector.

The use of concrete in construction and in the maintenance of infrastructure such as tunnels and bridges is also addressed specifically, with focus on minimising the use of primary raw materials through using of secondary ones. For concrete, a maximum of 70 % can come from primary raw materials or a minimum of 30% needs to come from secondary raw material. This poses a significant challenge to the construction sector.

4. Information & Communication

Economic activities - i) Provision of IT/OT data-driven solutions

This activity places emphasis upon digital enablers that are crucial to the transition to a circular economy. Companies that design and develop such software and solutions are now provided with the opportunity to illustrate their relevance both to the circular economy transition but also to sustainability as a whole.

This activity is defined as one that manufactures, develops, installs, deploys, maintains, repairs or provides professional services, including technical consulting for design or monitoring of a) software & IT or similar built for the purpose of remote monitoring and predictive maintenance b) tracking and tracing software c) lifecycle assessment software d) design and engineering software e) supplier management software f) lifecycle performance management software g) lifecycle performance management software.

5. Services

Economic activities - i) Repair, refurbishment and remanufacturing ii) Sale of spare parts iii) Preparation for re-use of end-of-life products and product components iv) Sale of second-hand goods v) Product-as-a-service and other circular use- and result-oriented service models vi) Marketplace for the trade of second-hand goods for reuse

It is important to note that a much broader array of economic activities is brought into focus here. For example, within “repair, refurbishment and remanufacturing”, over 20 NACE codes are listed, ranging from textiles to furniture and also including refurbishment and remanufacturing of machinery for a broad range of economic activities.

”Preparation of reuse” is defined as an activity that prepares for re-use of products or components of products that have become waste, so that they can be re-used without any other pre-processing. This could incorporate numerous sectors and industries.

Under Services, product-as-a-service is also included. It is defined as providing customers with access to products through service models, which are either a) use-oriented services, where the product is still central but its ownership remains with the provider and the product is leased, shared, rented or pooled or b) result-oriented, where the payment is pre-defined and the agreed result, i.e. pay per service unit is delivered.