DESALINATION AND REUSE WITHIN THE FRAMEWORK OF THE EU TAXONOMY FOR SUSTAINABLE FINANCE

By Mr. Eduardo Orteu and Mr. Carlos Vázquez, Sustainability Group at Goméz Aceco&Pombo

Sustainable Finance in the European Union Regulation (EU) 2020/8521 of the European Parliament and of the Council, of 18 June 2020, on the establishment of a framework to facilitate sustainable investment (hereinafter, the “Taxonomy Regulation”) has established a classification system for economic activities in the EU in order to identify those that can be qualified as environmentally sustainable by contributing to the achievement of EU environmental objectives2 – both related to climate and non-climate issues - so that investments aimed at developing such activities can be qualified, in turn, as environmentally sustainable.

To do so, the Taxonomy Regulation requires that such activity contributes significantly to the achievement of the aforementioned objectives and does not cause significant harm to any of them (the so-called Do No Significant Harm -DNSH- principle). The Regulation has been developed through delegated acts that define, for each of the environmental objectives, the technical criteria to be taken into consideration to define when an economic activity contributes significantly to the achievement of those

1) https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32020R0852 climate objectives, as well as to determine when such activities may cause significant harm to another environmental objective (DNSH principle). In other words, these are the technical criteria which allow a given economic activity to be classified as environmentally sustainable.

Until now, the delegated acts adopted to implement the Taxonomy Regulation did not consider seawater desalination or wastewater reuse as environmentally sustainable activities. This situation has changed following the adoption on June 27 by the European Commission of two new delegated acts3 implementing the above-mentioned Regulation.

Criteria for considering wastewater reuse as an environmentally sustainable activity.

Article 12 of the Taxonomy Regulation establishes that an economic activity is considered to contribute substantially to the sustainable use and protection of water and marine resources when it substantially contributes to achieving the good status of bodies of water or to preventing the

2)

3) https://finance.ec.europa.eu/system/files/2023-06/taxonomy-regulation-delegated-act-2022-environmental_en_0.pdf and https://finance.ec.europa.eu/system/files/2023-06/taxonomy-regulation-delegated-act-2022-climate_en_1.pdf and protection and restoration of biodiversity and ecosystems. deterioration thereof when they are already considered to be in good status by a series of means and resources, among which water reuse is expressly identified (in paragraph 1c). This generic provision is now being developed by the delegated act approved by the European Commission on June 27th and pending publication, which establishes the technical criteria to be taken into consideration to define that an economic activity contributes significantly to the achievement of the non-climate environmental objectives identified in the aforementioned regulation, as well as to determine when such activities may cause significant damage to another environmental objective. Annex II2 of the aforementioned delegated act deals with the environmental objective "transition to a circular economy" and paragraph 2 thereof, referring to activities related to water supply, wastewater management and environmental restoration activities, addresses the criteria for defining when wastewater reuse can be considered an activity aligned with the EU taxonomy.

From the outset, it should be noted that the European Commission does not link wastewater reuse with the environmental objective referring to the sustainable use and protection of water resources, as the Taxonomy Regulation itself does in article 12.1c above, but rather with the environmental objective referring to the circular economy. Moreover, it does so within a group of activities comprising "the production of alternative water resources" where, together with reuse, it also includes activities aimed at water harvesting and the collection and treatment of that known as grey water.

Accordingly, the delegated act requires that the following requirements be met in order to comply with the Taxonomy Regulation: ʞ 1) First and foremost, and with regard to the description of the scope of the activity itself, reused water must be used to replace resources taken directly from bodies of water or drinking water supply systems and it must be intended for recharging aquifers, irrigation, industrial reuse, leisure and any other municipal use. It is important to bear in mind that the economic activity only includes the facilities and the process that make the water suitable for reuse, thus any prior treatments (such as those required for wastewater treatment) necessary to meet the quality requirements that the treated effluent must meet to be returned to the public water domain are excluded. Nor does it cover infrastructure that may be needed a posteriori to serve reused water, such as distribution canals in irrigation systems. In any case, the proposal expressly excludes desalination from this scope, as well as reuse activities intended to supply drinking water. ʞ 2) Second, for the activity to make a substantial contribution to the objective of transitioning to a circular economy, the following requirements must be met: ʞ a) Any reclaimed water must be suitable for reuse and when it comes to agricultural use it must comply with the requirements laid down in Regulation (EU) 2020/741 of ʞ ʞ the European Parliament and of the Council concerning minimum requirements for water reuse, and, for all other uses, with the provisions of national legislation. b) The project must have been authorized within the framework of an integrated water resources management plan in which the measures implemented have been evaluated from the point of view of demand to improve efficiency in the use of available resources. In other words, the activity must be set out in a river basin management plan or a drought plan. Additionally, and for agricultural uses, an environmental risk assessment is required, including the effect thereof on the quantitative status of water bodies, in accordance with the provisions of the risk management plan for reclaimed water regulated by Regulation (EU) 2020/741.

3) Finally, in order to comply with the DNSH principle, the following requirements must be fulfilled: ʞ a) In terms of climate change adaptation and mitigation, an assessment of the direct greenhouse gas emissions released by the reclamation plant is required, but no maximum emission limit values are set; as such, it can be understood that requirements are met for the wastewater treatment plants if they abide by the emission parameters set therefor. Likewise, a description must be provided setting out how the activity helps in tackling the physical risks of climate change; in this case, this is deemed to be fulfilled to the extent that reuse bolsters supply guarantees with regard to structural or temporary shortages (drought episodes). ʞ b) From the perspective of sustainable use and protection of water and other water resources, it must ensure that the activity does not hamper the achievement of the environmental objectives laid down in the Water Framework Directive and the Marine Strategy Framework Directive; this entails that both projects for the development of activities and the river basin management plans in which they are ensconced must have an environmental impact assessment and any strategic environmental assessments, respectively. ʞ c) In terms of integrated pollution prevention and control (IPPC), it must comply with the requirements of the aforementioned Regulation (EU) 2020/741 or with any stricter requirements, if mandated by national regulations. In addition, and for the specific case of aquifer recharges or infiltration by run-off, it must comply with the quality parameters established in the Directive on the protection of groundwater against pollution and deterioration, or with national regulations if these are more stringent. ʞ d) Finally, in order to prevent any possible harmful effects on biodiversity, the environmental impact assessment required of projects for the development of these activities must evaluate the impact on habitats and species, with special attention to protected areas included in the Natura 2000 Network and other sites protected by EU regulations. These assessments must identify any corresponding mitigation measures, which must be duly implemented.

While the proposal as a whole deserves a positive assessment, there are some issues which stand out, notably because they could be improved in order to fulfil this regulation: ʞ First, and as stated previously, it would have been more appropriate to systematically place the reuse of reclaimed water as an activity that contributes not so much to the achievement of the circular economy objective as to the sustainable use and protection of water resources, as stated in Article 12.1c of the Taxonomy Regulation. In Spain (which is one of the EU countries with the highest reclaim rates), the use of reclaimed water is expressly linked to river basin management planning and is conceived as a substitute resource for surface and groundwater resources aimed precisely at reducing pressure on these bodies of water and helping to achieve their environmental objectives. This approach is not only more sound from a regulatory point of view, but also more consistent with the purpose of the Water Framework Directive and with the philosophy of the Taxonomy Regulation itself. It is an entirely different matter whether the elimination and recovery of substances present in treated water, such as nitrates, could be considered as an activity which contribute to the environmental objective of the transition to a circular economy, as provided for in paragraph 2.1 of the delegated act.

Second, the reference to the exclusion of desalination from the scope covered by reuse activities is incongruous. Beyond the fact that desalination and reuse are materially different activities, this exclusion expresses the European Commission's negative stance towards this activity which, like reuse, contributes to strengthening the resilience of people and ecosystems to the negative impacts of climate change. Similarly, the exclusion of reuse when water is intended for human consumption is unfounded. It is one thing for a State to prohibit the use of reclaimed water for human consumption, but quite another for this activity to be considered in alignment- or not - with the taxonomy. In the current drought scenario, the use of reclaimed water from wastewater has become a real option for guaranteeing supply in urban areas subject to occasional water stress. This is happening in Spain in certain river basin districts where reclaimed water is being added to the mix of resources available to ensure supply to the population. ʞ Finally, excluding reuse of pre-treatment activities or activities to make water available for irrigation, which may follow the industrial process of reclamation, limits the scope of the measure. Pre-treatment activities, which are those specific to wastewater treatment to achieve the water quality objectives imposed by EU legislation in order to meet the environmental objectives identified in the river basin plans, are in fact activities aligned with the taxonomy according to the delegated act implementing the taxonomy regulation itself. Therefore, the exclusion is, in and of itself, a contradiction. On the other hand, activities for the supply of reclaimed water are essential to make real use of the reclaimed water and, in the specific case of agriculture, they are also subject to the risk control measures required by Regulation (EU) 2020/741 in the risk management plan for reclaimed water.

Technical criteria for considering seawater desalination as an environmentally sustainable activity.

As stated previously, the European Commission has also revised the delegated acts of the Taxonomy regulation already approved on climate objectives and it is precisely the act that regulates the objective on adaptation to climate change, in Annex II5 therein, which includes seawater desalination as an activity that makes a substantial contribution towards achieving adaptation to climate change, for the purposes of the provisions of Article 11 of the Taxonomy Regulation.

Indeed, the European Commission considers that an increase in more frequent, severe and prolonged episodes of drought, together with an increase in evapotranspiration, could exacerbate the problem of scarcity, thereby jeopardising water supply capacity and leading to the overexploitation of existing resources. In addition, climate change will also increase the risk of contamination of freshwater sources due to decreasing flows, rising temperatures, flooding and loss of forest cover. In view of the above, it is concluded that seawater desalination - in areas where water resources are experiencing (or will experience in the future) negative impacts associated with climate change - can contribute significantly to climate change adaptation by helping countries increase their water resources and thus their resilience by providing additional water resources that, although more expensive, are more reliable (as they are not dependent on climatic fluctuations), while avoiding overexploitation of existing sources.

In order for seawater desalination to be an activity that makes a significant contribution to climate change adaptation, the new regulation lays down the following requirements to be met in order to fulfil the Taxonomy Regulation: and operation of desalination plants to produce water for distribution through water supply systems. The activity includes the abstraction of seawater or brackish water, the pre-treatment, treatment and posttreatment thereof, as well as storage. It also includes the activity of managing waste rejection generated in the process. It does not include distribution to the end user. ʞ 1) First, the description of the scope of the activity itself includes the construction ʞ 2) Second, in order to demonstrate that the contribution is significant, it is necessary to evidence that the technical eligibility criteria for making a substantial contribution to climate change adaptation foreseen for water supply activities in paragraph 5 of Annex II of the first Delegated Act on Climate Change mentioned above are met; this requires a "robust" analysis of the risks and vulnerability that climate change places on water resources and the availability thereof and how desalination alleviate this vulnerability and strengthen adaptive capacity over the lifetime of the activity. This requires an assessment of risks and impacts both in the short term (10-year scenario according to climate projections) and in the long term (10 to 30 year scenario). Additionally, as an adaptation solution, it is necessary to verify that desalination does not adversely affect other adaptation solutions that can be implemented to address the same risks, that it favours, insofar as possible, other nature-based or green infrastructure-based solutions, that it is consistent with existing local, regional or state adaptation plans and that it is verified against existing climate change adaptation indicators.

3) Finally, in order to comply with the DNSH principle, the following requirements must be met: ʞ a) In terms of climate change mitigation, the energy intensity of the desalination process as a whole must not exceed 4 kWh per cubic metre of water produced and meet a maximum greenhouse gas emissions threshold of 270 gCo2e/kWh. ʞ These parameters have been established taking as a reference the energy consumption of reverse osmosis technologies (as the most developed and most efficient technology from a consumption perspective) and based on the consumption data calculated for this technology by the WB (3/7 Kwh/m3) in its 2019 reports and by the European Commission itself (3-5 Kwh/m3) in 2021. The threshold established for production activities in the EU Delegated Regulation 2011/2139 is also taken into consideration. The threshold includes only the desalination process itself (including the discharge of rejects) but not the subsequent distribution of desalinated water insofar as it is understood to be included in a different activity, such as water supply. to verify that there are no negative effects that would hinder the achievement of the objectives established in the European directives on water and the protection of the marine environment. In particular, the river basin management plan must take into consideration the risk of deterioration of the environmental status of the water bodies (good status or good ecological potential of the affected water bodies) and the impact on the marine environment (ensuring that the good environmental status of marine water bodies associated with the use of desalination is not damaged). ʞ b) With regard to the objective aimed at the protection and sustainable use of water and the marine environment, desalination activity must be included and authorised in the corresponding river basin management plan, which, in turn, must have been subject to a strategic environmental assessment ʞ To prevent damage associated with the discharge of desalination plant waste rejects, specifically, the desalination plant operator must monitor the maximum temperature of the seawater body receiving the effluent (following discharge) and the maximum variation between the temperature prior to and after receiving the effluent so as not to exceed the maximum thresholds that may be established for this purpose in applicable national legislation. The water plan itself must demonstrate that the use of desalination is envisaged as a suitable alternative after considering all possible alternative measures, including those relating to the most efficient use of existing resources and all measures based on the management of demand. ʞ c) With regard to the objective of pollution control and prevention, desalination projects must have the corresponding ʞ environmental impact assessment (EIA), although with a broader scope to analyse the specific impacts associated with the discharge of waste at the point in the marine environment where they take place. The EIA itself must establish the measures for the appropriate discharge of waste, preventing or minimising any negative impacts on the receiving environment and associated species and ecosystems. The scope of the EIA and the measures therein will depend on the peculiarities of each project and the baseline state of the receiving natural environment. d) With regard to the objective of protecting and restoring biodiversity and ecosystems, the Commission mandates that the EIA include an analysis (even if only partially) of any possible impacts - individual or cumulative - on biodiversity, and that a specific assessment should be made in the case of sites subject to special protection (Natura 200 network, marine protected areas, etc.).

As in the case of wastewater reuse, the inclusion of seawater desalination in the European taxonomy deserves a positive assessment, although it must be said that the regulation could have been much more ambitious in promoting the development of this activity and overcoming difficulties for the implementation of desalination projects outside the EU. Nonetheless, some considerations can be made in this respect: difficulties in the case of those installations that do not have self-supply from renewable energies, as access to the grid does not always guarantee, in all countries, that the energy used is from a renewable source, which is precisely why some flexibility would be desirable in terms of compliance with this requirement, particularly when the desalination activity is performed outside the EU. ʞ Thus, on the one hand, meeting the 270 gCo2e/Kwh emissions threshold may pose ʞ On the other hand, from a systematic point of view, desalination should also be considered as an activity that contributes substantially to the fulfilment of environmental objectives in terms of protection and sustainable use of water, directly or indirectly, insofar as it meets the characteristics to be classified as a facilitating activity for the purposes of the provisions of Article 16 of the Taxonomy Regulation. This is to the extent that, on the one hand, they not only contribute to, but also facilitate adaptation to climate change in the terms set out in Article 11 thereof and, on the other hand, they directly enable other activities to make a substantial contribution to the sustainable use and protection of water resources, in the terms set out in Article 12 of the Regulation. Specifically, and on this last point, the additional contribution of water resources made possible by seawater desalination helps to reduce pressure on bodies of water by allowing the available water resources to be used in order to guarantee the environmental demands of other associated bodies of water, replacing the use of surface and groundwater resources by other resources from desalinated seawater to meet usage demands.

Apart from the above, the delegated act to establish the technical criteria to be taken into consideration to define that an economic activity contributes significantly to the achievement of the non-climate environmental objectives identified in the Taxonomy Regulation contains a complementary reference to desalination