1. Introduction

A green taxonomy is a legally or administratively defined classification system that identifies which economic activities can be regarded as environmentally sustainable. In energy markets, taxonomy rules are increasingly important because investors, banks, governments and energy companies need a common method for determining whether investments in renewable generation, electricity networks, storage, hydrogen, energy efficiency, nuclear power or other technologies genuinely contribute to environmental objectives.

The most developed example is the EU Taxonomy Regulation, Regulation (EU) 2020/852, which establishes a classification system for environmentally sustainable economic activities. The system is intended to improve transparency, reduce greenwashing and help direct capital toward activities that contribute to environmental objectives. (EUR-Lex)

India is also developing a national green and sustainable finance taxonomy. The Reserve Bank of India has described a national taxonomy as an important building block for aligning government, regulators, financial institutions and investors, while also identifying greenwashing and verification as important concerns. (Reserve Bank of India)

2. Meaning of Green Taxonomy in Energy Investment

Green taxonomy should not be understood simply as a list of "green" technologies.

Instead, it establishes legal and technical criteria by which an economic activity is assessed.

For an energy investment, the taxonomy may ask:

Does the activity make a substantial contribution to an environmental objective?

Does it do no significant harm (DNSH) to other environmental objectives?

Does it satisfy specified technical screening criteria?

Does the investment comply with applicable minimum safeguards?

Can the environmental performance be measured and verified?

Under the EU framework, an economic activity is taxonomy-aligned only when it satisfies the requirements of Article 3 of Regulation 2020/852. The EU disclosure rules distinguish this from taxonomy eligibility, which merely means that an activity is covered by the relevant delegated acts. (EUR-Lex)

Thus:

Taxonomy eligibility ≠ taxonomy alignment.

This distinction is extremely important for energy investors.

3. Environmental Objectives Relevant to Energy

The EU Taxonomy identifies six environmental objectives:

climate-change mitigation;

climate-change adaptation;

sustainable use and protection of water and marine resources;

transition to a circular economy;

pollution prevention and control; and

protection and restoration of biodiversity and ecosystems.

The technical criteria progressively establish how activities can contribute to these objectives. (EUR-Lex)

For energy investments, climate-change mitigation is particularly significant.

Examples include:

solar photovoltaic generation;

wind generation;

electricity transmission and distribution;

battery storage;

renewable hydrogen;

energy-efficiency projects;

certain manufacturing activities supporting clean-energy infrastructure.

The taxonomy therefore changes the investment question from:

"Is this a renewable-energy project?"

to:

"Does this particular economic activity satisfy the legally specified environmental performance requirements?"

4. Application to Electricity Investments

A. Renewable Energy Projects

Solar and wind projects are natural candidates for taxonomy treatment.

However, an investor should examine more than the project's carbon emissions. Environmental impacts may include:

biodiversity;

land use;

water consumption;

pollution;

construction impacts;

supply-chain impacts; and

climate-related physical risks.

Consequently, a renewable-energy project may be technically eligible but still fail alignment requirements if the applicable technical or DNSH requirements are not satisfied.

This approach prevents the simplistic assumption that renewable energy automatically equals taxonomy-aligned investment.

B. Electricity Grids

Green taxonomy has important implications for electricity transmission and distribution.

A grid investment may indirectly facilitate decarbonisation by:

connecting renewable generation;

increasing system flexibility;

reducing congestion;

integrating distributed generation;

enabling electrification; and

facilitating storage and demand response.

Therefore, taxonomy criteria can recognise the infrastructure necessary for the energy transition rather than focusing exclusively on generation assets.

This is particularly important because large-scale decarbonisation requires substantial investment in networks, storage and system flexibility, not merely renewable generation.

C. Energy Storage

Battery storage and other storage technologies can be relevant to taxonomy because they facilitate the integration of variable renewable electricity.

For investors, the legal assessment may involve:

the nature of the storage facility;

its relationship with the electricity system;

environmental performance;

resource efficiency;

lifecycle impacts;

waste management; and

applicable DNSH requirements.

This demonstrates a central feature of taxonomy law: environmental classification increasingly operates at the level of economic activity and technical performance rather than broad technological labels.

5. Green Hydrogen Investments

Green hydrogen creates particularly complex taxonomy questions.

An investment may involve:

renewable electricity generation;

electrolysers;

hydrogen storage;

pipelines;

transportation;

hydrogen refuelling infrastructure; and

industrial hydrogen consumption.

A taxonomy framework can therefore determine whether each activity contributes sufficiently to climate objectives and whether environmental safeguards are satisfied.

For example, an electrolyser powered by qualifying renewable electricity may have a substantially different environmental profile from hydrogen produced using electricity with a high carbon intensity.

The legal significance is that the source and methodology of production matter, rather than merely calling the final product "hydrogen."

6. Nuclear and Natural Gas: A Major Legal Issue

One of the most important legal controversies concerning energy taxonomy concerns the treatment of nuclear energy and natural gas.

The EU adopted Delegated Regulation 2022/1214, which included certain activities involving nuclear energy and natural gas within the taxonomy subject to specified conditions and disclosure requirements. (EUR-Lex)

This generated litigation because the inclusion of these activities raised questions concerning:

climate mitigation;

the precautionary principle;

radioactive waste;

nuclear accident risks;

greenhouse-gas emissions;

the transition toward climate neutrality; and

the Commission's delegated regulatory powers.

Austria v Commission, Case T-625/22

The most significant recent case is Austria v Commission, Case T-625/22, decided by the General Court on 10 September 2025.

Austria challenged the inclusion of certain nuclear and fossil-gas activities in the EU sustainable-investment framework.

The General Court dismissed the action, upholding the Commission's delegated regulation. The Court held that the Commission was entitled, under the applicable framework and evidence before it, to conclude that certain nuclear and fossil-gas activities could, under specified conditions, contribute substantially to climate-change mitigation or adaptation. (EUR-Lex)

The case is particularly important because it demonstrates that taxonomy classification is a legal and scientific regulatory exercise, not simply a political or commercial designation.

It also illustrates the importance of:

scientific evidence;

technical screening criteria;

the Commission's delegated powers;

the "do no significant harm" concept;

the precautionary principle; and

judicial review of technical regulatory decisions.

7. Greenwashing and Investor Protection

A major purpose of taxonomy is to combat greenwashing.

Without a common classification system, an energy company could describe an investment as:

sustainable;

climate-friendly;

green;

low-carbon; or

environmentally responsible

without necessarily satisfying a uniform legal standard.

Taxonomy creates a more objective framework.

This has consequences for:

Fund managers

They may need to establish what proportion of investments qualifies as taxonomy-aligned.

Banks

Taxonomy information can assist in assessing sustainable lending and environmental risks.

Energy companies

Companies may need systems for collecting technical and environmental data.

Investors

Investors can compare investments using standardised environmental information.

Regulators

Regulators can use disclosure and verification mechanisms to reduce misleading sustainability claims.

The EU has consequently developed detailed disclosure requirements concerning taxonomy eligibility and alignment. (EUR-Lex)

8. Application in India

India does not yet have an EU-equivalent fully operational national taxonomy covering the entire green-finance ecosystem in the same manner.

The development of a national taxonomy has nevertheless become an important part of India's sustainable-finance policy discussion.

The RBI has expressly identified a national green/climate finance taxonomy as an important mechanism for:

defining green activities;

improving tracking of green financial flows;

helping financial institutions assess climate risk;

scaling sustainable finance; and

reducing greenwashing. (Reserve Bank of India)

The RBI's green-deposit framework also provides an illustration of how taxonomy concepts can influence financial regulation. Pending finalisation of an official Indian green taxonomy, eligible green activities included renewable-energy projects involving solar, wind, biomass and hydropower, including projects integrating generation and storage. (RBI System Health)

Therefore, taxonomy application in India can potentially affect:

renewable-energy finance;

green bonds;

green deposits;

sustainable lending;

infrastructure investment;

climate-risk management;

ESG disclosures; and

institutional investment decisions.

9. Indian Case Law Relevant to Green Taxonomy

There is currently no major Indian Supreme Court decision directly interpreting a national "green taxonomy" for energy investments comparable to the EU's Austria v Commission litigation.

However, Indian environmental jurisprudence supplies important legal principles that can inform taxonomy design and judicial review.

A. Vellore Citizens' Welfare Forum v Union of India (1996)

The Supreme Court recognised sustainable development, precautionary principle and polluter-pays principle as important components of Indian environmental law. (Indian Kanoon)

The Court also emphasised that environmental protection cannot be separated from the long-term use and conservation of natural resources.

Relevance to taxonomy

A taxonomy cannot simply classify an activity as green because it reduces carbon emissions.

It should also consider whether the activity creates significant environmental harm elsewhere.

This corresponds closely with the logic of the Do No Significant Harm principle.

B. A.P. Pollution Control Board v M.V. Nayudu (1999)

This case is important for environmental decision-making involving scientific uncertainty and technical evidence.

Indian courts recognised the difficulty of judicially evaluating highly technical environmental questions and emphasised the importance of expert knowledge. Later decisions have continued to rely upon this reasoning. (Indian Kanoon)

Relevance to green taxonomy

Taxonomy criteria frequently depend upon technical questions such as:

lifecycle emissions;

carbon intensity;

water impacts;

biodiversity impacts;

pollution thresholds;

climate-risk assessment.

Consequently, taxonomy regulators require credible scientific and technical expertise.

C. M.C. Mehta v Kamal Nath (1996)

The Supreme Court reinforced environmental principles including sustainable development and the polluter-pays approach. (Indian Kanoon)

Relevance

An investment classification system should account for environmental externalities rather than treating environmental damage as an irrelevant cost.

10. Taxonomy and the "Do No Significant Harm" Principle

The DNSH principle is arguably one of the most important legal innovations in green-investment regulation.

Suppose an investment produces very low carbon emissions but causes serious:

water pollution;

biodiversity destruction;

hazardous waste;

soil contamination; or

ecosystem degradation.

A sophisticated taxonomy should not automatically classify that activity as environmentally sustainable.

This creates a multi-dimensional environmental test:

Substantial contribution + DNSH + safeguards + technical criteria = taxonomy alignment

This is more rigorous than a simple carbon-intensity test.

11. Taxonomy, Due Diligence and Investment Documentation

Energy investors increasingly need documentary evidence demonstrating environmental performance.

A taxonomy-oriented investment due-diligence process may examine:

This transforms taxonomy from a disclosure exercise into an important element of investment due diligence.

12. Legal Challenges

Several legal problems arise in applying green taxonomy to energy investments.

1. Scientific uncertainty

Energy technologies develop rapidly. A criterion appropriate today may become outdated as technology changes.

2. Technology neutrality

Regulators must decide whether to classify activities according to technology or environmental performance.

3. Nuclear and gas controversy

The Austria v Commission litigation demonstrates the difficulty of determining whether transitional or low-carbon technologies should qualify under sustainability frameworks. (curia)

4. Greenwashing

Broad sustainability claims can create misleading investment signals unless backed by measurable criteria.

5. Data quality

Investors may lack reliable information concerning lifecycle emissions, biodiversity, supply chains and climate risks.

6. Regulatory fragmentation

Different jurisdictions may classify the same energy activity differently.

7. Dynamic regulation

Taxonomy criteria can change as science, technology and government policy develop. The EU has continued updating its taxonomy framework and disclosure rules, including changes adopted in 2025 and subsequent interpretive guidance. (EUR-Lex)

13. Importance for Energy Law

Green taxonomy represents a movement from traditional energy regulation toward investment-oriented environmental regulation.

Traditional energy law primarily asks:

Can this company generate, transmit, distribute or sell electricity legally?

Taxonomy introduces an additional question:

Can the economic activity be legally characterised as environmentally sustainable for investment and disclosure purposes?

This distinction is significant because taxonomy can influence the cost, availability and direction of capital.

A taxonomy-aligned project may become more attractive to investors seeking sustainable assets, whereas an activity failing the criteria may face greater difficulty accessing certain sustainability-linked sources of capital.

Taxonomy therefore operates indirectly through financial markets while pursuing environmental policy objectives.

14. Conclusion

Green taxonomy is becoming an important legal bridge between environmental law, energy law and financial regulation.

For energy investments, its principal functions are to:

establish common sustainability definitions;

identify environmentally relevant economic activities;

impose measurable technical criteria;

prevent significant environmental harm;

improve sustainability disclosures;

reduce greenwashing;

support informed investment decisions; and

redirect capital toward environmental objectives.

The EU experience demonstrates the legal complexity of this approach, particularly through Austria v Commission (T-625/22), where the General Court examined the legality of classifying certain nuclear and fossil-gas activities under the EU taxonomy. (EUR-Lex)

For India, the developing taxonomy framework can build upon established principles of sustainable development, precaution, environmental protection and polluter pays recognised by the Supreme Court in cases such as Vellore Citizens' Welfare Forum and A.P. Pollution Control Board v M.V. Nayudu. (Indian Kanoon)

Ultimately, the significance of green taxonomy lies in converting the broad concept of "green investment" into legally and technically testable criteria. In the energy sector, this can influence not only disclosure but also project structuring, financing, due diligence, risk allocation and the long-term direction of investment capital.