Technical Standards, Political Effects: The EU Taxonomy’s Expanding Role in Industrial Policy
This publication builds on the paper “Sustainable Finance at an Inflection Point: The EU Taxonomy and its Impact” presented at the “EU Law and Policymaking” panel of the UACES Graduate Forum Research Conference, held at Panteion University of Social and Political Sciences, Athens, Greece (29–30 May 2025). The support of UACES in organising and facilitating my participation in the conference is gratefully acknowledged.
Abstract
What counts as “sustainable” in the EU? The answer is not just political, but increasingly codified through technocratic tools. This article examines the EU Taxonomy for Sustainable Activities as a key instrument of sustainability governance. Originally developed to steer green finance and prevent greenwashing, the taxonomy now plays a constitutive role by establishing the fundamental classification system that defines Europe’s green technological trajectory. Its scientific and technical logic, designed to create market clarity, provides a coordinative framework that aligns investment, industrial policy, and research priorities. Drawing on debates in innovation studies and institutional economics, this article argues that the EU Taxonomy functions as a de facto industrial policy instrument, creating a coordinated selection environment that shapes Europe’s green technological trajectory.
Introduction: Defining Sustainability, the EU Way
The global financial landscape is undergoing a profound transformation: concerns about climate change and environmental degradation are increasingly redirecting capital towards sustainable investment. This shift is particularly striking in Europe. The European Union (EU) aims to achieve net zero by 2050 under the European Green Deal, with member-states rallying behind this vision. The EU Taxonomy has emerged as “a cornerstone of the European Union’s sustainable finance framework and an important market transparency tool.” Enacted through Regulation (EU) 2020/852 in 2020, the green rulebook establishes a rigorous, science-based system to classify environmentally sustainable economic activities. Yet the sustainability classification system’s influence extends far beyond its original financial transparency mandate. What began as a tool to prevent greenwashing in capital markets has gradually evolved into an instrument that shapes innovation priorities, industrial policy, and research funding across Europe
This analytical puzzle raises a fundamental question: How does the EU Taxonomy shape technological innovation and industrial development in Europe? This article argues that the EU Taxonomy exerts its influence by structuring a “coordinated selection environment” (Nelson & Winter, 1982) – a framework of incentives and signals that guides the decisions of innovators, investors, and policymakers. It does so by establishing the foundational technical criteria that regulations like the Sustainable Finance Disclosure Regulation (SFDR), institutions like the European Investment Bank (EIB), and policies like the Net Zero Industry Act (NZIA) incorporate. In doing so, it creates a coordinated selection environment that powerfully structures economic and innovative activity around its classification of sustainability.
The discussion argues that by defining the boundaries of “sustainable” activity, the Taxonomy shapes “technological paradigms”: the shared cognitive frameworks that guide search activities within innovation communities (Dosi, 1982). This science-based classification system aligns the incentives of investors, firms, and policymakers, thereby structuring the development and selection of green technologies and fundamentally orienting Europe’s industrial trajectory.
What Is the EU Taxonomy, and Why Was It Created?
The concept of sustainable finance has long faced definitional challenges. In 2008, Sandberg et. al. identified fundamental heterogeneity in Socially Responsible Investment (SRI), describing it as “terminological, definitional, strategic and practical.” While acknowledging that SRI was the predominant term for investments integrating social, ethical, environmental, and corporate governance concerns, the scholars expressed scepticism about standardization unless implemented through top-down regulation. This definitional ambiguity persisted, with Strauß noting in 2021 that “the discussion about SF lacks consistency and a common understanding of SF.”
The European Commission (EC) acknowledged that achieving sustainable finance objectives required “a common language and a clear definition of what is ‘sustainable'” (EU, 2020). EUR-Lex (2021) offered a broad definition of sustainable finance as “the process of taking due account of environmental, social and governance (ESG) considerations when making investment decisions in the financial sector, leading to increased longer-term investments into sustainable economic activities and projects.” However, this definition, while highlighting the importance of environmental factors in investment decisions, lacked specific criteria for measuring sustainability.
The introduction of the EU Taxonomy marked a significant shift toward technical precision. As outlined in Regulation (EU) 2020/852, this classification system establishes concrete criteria for environmentally sustainable economic activities. The regulation targets six key environmental goals: mitigating climate change, adapting to its effects, ensuring the sustainable management of water and marine ecosystems, advancing a circular economy, preventing and controlling pollution, and protecting and restoring biodiversity and ecosystems. To qualify, an activity must meet four key criteria: it must make a substantial contribution to one of the environmental goals, avoid significant harm to the others, comply with safeguards, and meet technical screening criteria. This transformation represents a fundamental shift from principles-based to rules-based regulation, replacing interpretative flexibility with science-based technical specifications. The EU sustainability assessment framework functions as a comprehensive checklist that defines what counts as an “environmentally sustainable activity” for investment and policy purposes – a seemingly technical exercise with far-reaching consequences.
The shift in terminology from “sustainable finance” to “EU Taxonomy” represents a significant rhetorical evolution with important implications for governance approaches. The term “sustainable finance” evokes normative goals and principles, emphasizing the purpose of financial activities. In contrast, “taxonomy” carries scientific and technical connotations, suggesting objective classification based on empirical criteria. However, despite the technical framing, normative judgments remain embedded throughout the taxonomy. The selection of environmental objectives, the thresholds for “substantial contribution,” and the accommodation of transitional activities all reflect value judgments about environmental priorities and the appropriate pace of sustainability transitions.
From Finance to Innovation: When Classification Becomes Direction
The expansion of EU’s sustainability assessment tool from financial classification to broader policy influence is significant, because it demonstrates how technical standards can become powerful instruments of economic steering. Rather than remaining neutral tools, classification systems like the Taxonomy actively shape which technologies receive investment, which research priorities get funded, and which industrial strategies governments pursue.
Capital Coordination and Market Formation
The EU Taxonomy’s most direct impact lies in its capacity to align investment flows across public and private sectors. Originally designed to provide clarity for financial market participants under the SFDR, the green classification system has established mandatory disclosure requirements for large financial institutions. The European Banking Authority has noted substantial engagement with the green rulebook’s criteria across the EU banking sector, with institutions reporting significant exposure to both green rulebook-aligned and non-aligned activities in their climate risk assessments. EIB has integrated sustainability assessment tool’s criteria into its lending decisions, effectively making compliance a prerequisite for accessing Europe’s largest source of public investment capital. This alignment mechanism transforms the green rulebook from a mere classification tool into what a “market-shaping” instrument that actively constructs the boundaries of legitimate sustainable investment (Mazzucato, 2021).
The New Architecture of Industrial Policy
While the EU Taxonomy was originally designed as a classification system for environmentally sustainable economic activities, its influence extends beyond financial markets into broader policy and research frameworks. The Green Deal Industrial Plan, unveiled in February 2023, does not directly cite the EU sustainability assessment framework. Yet, its entire architecture is built upon the same strategic logic and targets the same sectors. The Plan identifies “net-zero technologies” – including batteries, windmills, heat pumps, solar, electrolysers, and carbon capture and storage – as its core priorities. This list is not arbitrary; it is a direct reflection of the economic activities designated for climate change mitigation within the EU green rulebook (Annex I to Regulation 2020/852). The Plan operates on this pre-defined policy environment, focusing on accelerating production and competitiveness in sectors already validated by the Taxonomy’s scientific screening criteria. This alignment demonstrates how the sustainability assessment framework has helped establish a common understanding of strategic green technologies, which indirectly informs the selection of sectors for industrial development.
NZIA (2023) and the Critical Raw Materials Act (CRMA) (2024) similarly focus on key technologies and raw materials that underpin decarbonization and green innovation. While these policies do not explicitly cite the Taxonomy, they operate within the same sustainability-oriented policy environment that the Taxonomy helps define. The Net Zero Industry Act (2023) establishes manufacturing targets for “net-zero technologies” that closely mirror the green rulebook’s-eligible activities. CRMA aims to ensure a secure and sustainable supply of raw materials critical for strategic technologies. The list of these technologies: permanent magnets, batteries, fuel cells, solar panels, wind turbines, and electrolysers, directly mirrors the technologies and economic activities deemed strategic and sustainable under the Taxonomy’s climate mitigation objectives (Annex I to Regulation 2020/852). In these cases, the sustainability assessment framework functions less as a legal mandate and more as a normative and technical reference point, shaping the boundaries of strategic industrial and technological activity in Europe.
Thus, critical raw materials strategies, renewable energy deployment targets, and clean technology manufacturing incentives are increasingly aligned with the same environmental objectives that the EU Taxonomy codifies, creating a powerful ‘landscape pressure’ – a broad macro-level impetus – that shapes industrial development pathways (Geels, 2014). While these policies do not formally reference the green rulebook, they operate within the broader sustainability framework that the sustainability assessment framework defines.
The Taxonomy contributes towards shaping norms and expectations around sustainable activity that anchor the EU’s industrial strategy. Policies may not reference it directly, because they are already operating within the framework of sustainable economic activity that the EU sustainability framework codified into law. This integration represents a significant departure from traditional industrial policy approaches, where governments typically selected strategic sectors based on economic competitiveness or national security considerations. Instead, the Taxonomy’s technical criteria now provide the scientific and regulatory foundation for industrial strategy.
Shaping Technological Paradigms and Innovation Pathways
Beyond capital and policy, the Taxonomy also influences research and innovation funding. Horizon Europe, the EU’s flagship research program, prioritizes projects that contribute to climate action, environmental sustainability, and the Green Deal objectives. Its strategic plan (2025–2027) earmarks significant shares of funding for climate-related activities and biodiversity projects, effectively incentivizing research aligned with EU environmental objectives. While the program does not explicitly require applicants to reference the green framework, its priorities reflect the broader sustainability and Green Deal framework.
In practice, this means that successful proposals increasingly need to demonstrate how their activities contribute to decarbonization, ecosystem preservation, or the circular economy, echoing the classification logic of the Taxonomy. In this sense, the green rulebook functions as a definitional framework that indirectly guides the direction of EU-funded research, shaping innovation priorities even at the earliest stages of project conception. This creates a powerful “selection environment” (Nelson & Winter, 1982) that steers R&D toward Taxonomy-eligible pathways. The alignment also illustrates a broader pattern: the EU is using technical standards not just to regulate markets but to actively steer research and innovation trajectories, creating positive feedback loops between policy, funding, and technological development.
Yet, this function is dual-edged. While it creates momentum for aligned technologies (e.g., stimulating R&D in green hydrogen, which meets the Technical Screening Criteria (TSC)), it also risks creating path dependency. The novel classification system is in not only “opening up,” but also “closing down” innovation pathways (Stirling, 2008). Despite rhetoric about technology neutrality, the Taxonomy’s specific criteria inevitably privilege certain technical solutions over others. Technologies that are not (yet) recognized by the EU sustainability framework, or that represent a more radical departure from the status quo, may find it harder to attract funding and attention. Furthermore, the contentious inclusion of nuclear power demonstrates that achieving green rulebook alignment is a key strategy for technologies to secure long-term viability, influencing not just current investment but future R&D portfolios.
Conclusion: Classifications That Shape Futures
The EU Taxonomy’s journey from a narrow financial tool to a broad-based governance instrument reveals a core mechanism of modern economic steering: the use of technical standards to orchestrate complex transitions. This analysis has argued that the sustainability classification system’s power derives not from direct mandate but from its role as a constitutive framework – one that actively creates new realities and categories – that creates a coordinated selection environment. By providing a coherent and sanctioned guidance on sustainable activity, it aligns the incentives of investors, public banks, and industrial policymakers. This environment, in turn, shapes technological paradigms (Dosi, 1982), steering R&D and industrial strategy toward Taxonomy-aligned pathways.
Ultimately, the EU Taxonomy demonstrates that today governance is increasingly exercised through the quiet power of classification. The ongoing evolution of its TSC will therefore remain a central, and intensely political, process in determining the structure of the European green economy
