EU Taxonomy’s Circular Economy Goal: Impact on Real Estate & Construction

30th April 2024

The European Union is on an ambitious and needed journey to redefine the interplay between economic growth and environmental sustainability. Striving to uncouple economic expansion from the consumption of non-renewable resources, the EU sets its sights on significantly reducing its material footprint. 

Starting from a 2015 benchmark of 14 tonnes per capita, the goal is a 50% reduction by 2030 and a 75% reduction by 2050. Furthermore, with the target of raising the circular material use rate to at least 25% by 2030.

At the heart of the transformation towards sustainability is the EU Taxonomy for Sustainable Activities, a framework designed to steer investments towards environmentally sustainable economic projects.

A major legislative move, that the Commission adopted on June 27, 2023, is the package of new measures to update and expand the application of the EU Taxonomy with four new environmental objectives, collectively known as ‘Taxo4’. Among these, the transition to a circular economy (objective #4), represents a key one, especially for the real estate and construction industries, and that is what we will focus on in this article.

These industries, which are known for their significant environmental footprints, are instrumental not only because of their considerable resource consumption and waste generation but also their impact on the economy, local employment, and quality of life.

The built environment, a major consumer of resources, accounts for approximately 50% of all materials extracted globally. Concurrently, the construction sector emerges as a primary source of waste, generating over 35% of the EU’s total waste. This scenario urgently calls for the adoption of sustainable construction and renovation practices to alleviate the environmental burdens these sectors impose.

Moreover, the construction sector’s greenhouse gas (GHG) emissions are noteworthy. Emissions from material extraction, manufacturing of construction products, and building processes contribute to 5-12% of total national GHG emissions across the EU. 

However, this challenge also unveils significant opportunities. By improving material efficiency, up to 80% of these emissions could be saved, spotlighting the indispensable role of the circular economy within the EU Taxonomy Regulation, which emphasizes the significance of expanding the durability, repairability, upgradability, reusability, and recyclability, while enhancing resource efficiency and minimizing waste – in the real estate and construction industries and beyond.

Assessing alignment for construction activities under the EU Taxonomy’s circular economy objective

To determine if the economic activities align with the EU Taxonomy, they must undergo a 3-step alignment process detailed in subsequent sections: substantial contribution, DNSH (Do No Significant Harm), and adherence to minimum safeguards. The same steps apply also to the EU’s objective of transitioning to a circular economy.

To align with the EU Taxonomy goal for “Transition to a Circular Economy”, economic activities related to building construction, renovation, and demolition must meet specific Technical Screening Criteria (TSC). These criteria are designed to ensure that the activity makes a substantial contribution to the transition to a circular economy by promoting sustainability, waste reduction, and greenhouse gas emissions reduction.

If the construction of new buildings and the renovation of existing ones, were already available within the climate adaptation and climate mitigation objectives, there are some new activities related to real estate and construction that fall under the new circular economy objective.

Here are the economic activities relevant to construction and real estate ruled in the EU Taxonomy for the objective of “Transition to a circular economy”:

  • Economic Activity 3.1. “Construction of new buildings” (NACE codes F41.1, F4.2, F43),
  • Economic Activity 3.2. “Renovation of existing buildings” (NACE codes F41, F43),
  • Economic Activity 3.3 “Demolition and wrecking of buildings and other structures” (NACE code F43.).

Substantial Contribution: Technical Screening Criteria for the Circular Economy for the construction and real estate industry

One of the key requirements for qualifying as substantially contributing to the circular economy objective is the assessment of the life-cycle Global Warming Potential (GWP) of the buildings involved in the economic activity. This involves calculating the greenhouse gas emissions associated with each stage of the building’s life cycle, from construction to demolition. By identifying and addressing the sources of greenhouse gas emissions, economic operators can take steps to reduce their environmental impact and promote sustainability.

Additionally, the TSC for economic activities related to construction, renovation, and demolition of buildings also require compliance with standards for waste treatment, retention of the original building where possible, and the use of secondary raw materials over primary raw materials.

These measures are aimed at minimizing waste production, conserving resources, and promoting the circular use of materials in order to achieve the goals of the circular economy.

What can be done to make the construction of new buildings more sustainable and compliant with the EU Taxonomy?

In the realm of the circular economy, the development of construction projects for both residential and non-residential buildings involves a comprehensive approach that merges financial, technical, and physical resources. 

In this context, the EU Taxonomy’s “substantial contribution” criteria for the circular economy regarding the construction of new buildings, set rigorous guidelines to enhance sustainability in the sector:

1. Waste Management: 

Compliance with EU waste legislation and the EU Construction and Demolition Waste Management Protocol is mandatory, aiming for at least 90% (by mass) reuse or recycling of non-hazardous construction and demolition waste, excluding naturally occurring materials

2. Global Warming Potential (GWP) Disclosure: 

The building’s life-cycle GWP must be calculated and disclosed to investors and clients upon request.

3. Circular Design and Construction: 

Incorporation of design for adaptability and deconstruction to support circularity.

4. Primary Raw Material Minimization: 

Usage of primary raw materials is minimized, enforcing maximum thresholds for different materials: concrete and stone (70%), brick and ceramic (70%), bio-based materials (80%), glass and mineral insulation (70%), non-bio-based plastic (50%), metals (30%), and gypsum (65%). 

5. Digital Documentation:

Characteristics of the building, including used materials and components, must be documented electronically for future maintenance and reuse, leveraging EN ISO 22057:2022 for Environmental Product Declarations (EPDs). This information should be accessible to investors and clients.

How to Automate the EU Taxonomy Compliance in Construction and Real Estate Industries with Dydon AI

For construction and real estate companies, aligning with the EU Taxonomy’s circular economy objectives presents complex challenges, especially in managing data, sustainability reporting, and ensuring compliance with other requirements. 

Dydon AI leverages advanced AI technologies—including Large Language Models (LLMs), Retrieval-Augmented Generation (RAG), and Natural Language Processing (NLP)—to address these challenges effectively, enhancing accuracy, efficiency, and compliance with EU regulations.

Enhanced Accuracy in Compliance Reporting

Through LLMs and RAG, Dydon AI delivers precise data analysis and extraction critical for meeting the EU Taxonomy’s requirements. This is particularly beneficial for handling the extensive documentation and sustainability metrics required, simplifying the reporting process.

Automated Data Extraction

Dydon AI technology excels in extracting essential information from technical documents. This feature is key to demonstrating compliance with circular economy objectives, significantly easing the manual burden and ensuring projects meet EU sustainability standards.

Support for Technical Screening Criteria (TSC)

The EU Taxonomy’s TSCs are essential for evaluating sustainability. Dydon AI assists organizations in filling data gaps with calculation tools that estimate important metrics, including CO₂ emissions and other screening criteria, aiding in compliance with circular economy standards.

Comprehensive Risk Assessments for Sustainable Development

By integrating data from Munich Re, Dydon AI offers detailed climatic and geological risk assessments. This functionality is crucial for developing resilient and sustainable properties, helping the industry to proactively address potential sustainability risks in line with climate adaptation and circular economy principles.

Explainable AI: Embracing AI with a Focus on Transparency

In industries as complex and regulated as construction and real estate, the transparency and trustworthiness of AI-driven processes are essential. Dydon AI’s commitment to explainable AI (XAI) ensures stakeholders have clarity and confidence in the insights generated by our algorithms. This level of transparency is vital for confidently navigating the EU Taxonomy’s circular economy objectives, enabling companies to make informed decisions and showcase their dedication to sustainable development practices.

By adopting Dydon AI’s cutting-edge solutions, construction, and real estate companies are better equipped to navigate the challenges of the EU Taxonomy’s circular economy criteria. Our technology not only streamlines the compliance process but also encourages the integration of sustainable practices, leading the way toward a greener future in the real estate and construction industries.

Read more about how to navigate the EU Taxonomy with AI

Navigating EU Taxonomy Reporting: Timeline, KPIs, and Best Practices

What is the role of AI in EU Taxonomy software? Interview with our CEO Dr. Hans-Peter Güllich

EU taxonomy made easy: German savings banks use TAXO TOOL for sustainable financing projects

German Landesbanken have opted for the AI software TAXO TOOL in combination with the RSU Taxo Master to automate the EU taxonomy reporting

EU Taxonomy Software (Taxo Tool) Testimonial: Sparkasse Bremen

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