Funding climate innovation appears to have lost its shine for European policymakers. Unless this changes soon, the European Union risks losing its status as a pioneer in climate-related technologies.
Early this year, the EU’s Strategic Technologies for Europe Platform (STEP) fund, which promised to support emerging cleantech solutions, was slashed from €10 billion ($11 billion) to just €1.5 billion. Moreover, a significant portion of the remaining funds was earmarked for defense projects, rather than for green technologies and climate-related infrastructure investments.
Since the European Parliament elections in June, EU policymakers have been sending mixed signals regarding the likelihood of new public funding for commercializing and scaling clean technologies. The “European Competitiveness Fund” that European Commission President Ursula Von Der Leyen has pledged to advance as part of her second mandate would finance investments in cleantech, but also in artificial intelligence, space, and other “strategic technologies.” How the funding would be allocated remains unknown.
Greater clarity is needed. Europe is in a global race for leadership in green innovation, and the other competitors, especially the United States and China, have shown a clear commitment to winning. The US Inflation Reduction Act, for example, has injected $240 billion into the green-tech sector, with every $1 of government investment having been matched with $5.50 in private spending.
When fast-growing startups lack access to government-backed pools of capital at home, they leave. Already, firms are relocating from Europe to the US, taking private capital, talent, and future world-leading technologies with them. To reverse this trend, the EU must unlock large volumes of capital to support research and development in the green technologies of the future.
But with the world teetering on the brink of recession, and EU member states under huge financial pressure, this capital needs to be obtained without tapping current revenue or funding streams. Fortunately, a single creative policy change could unlock a substantial chunk of capital, without increasing fiscal spending. The key is to be found in the EU’s Emissions Trading System.
Launched in 2005, the EU’s ETS functions as a cap-and-trade system that divides the total target volume of greenhouse-gas (GHG) emissions into allowances, which are then allocated to firms within the ETS territory. A company that exceeds its allocated emissions allowances must purchase additional ones, either from a company with allowances to spare or in public auctions.
In 2022, the EU ETS generated €38.8 billion in auction revenues. Most revenues are returned to member states, which are supposed to spend the money mostly on climate- and energy-related priorities. But even when auction revenues are channeled toward much-needed cleantech and green-infrastructure projects (which is not always the case), they remain inadequate to fund the level of investment needed today.
This will change: ETS revenues are set to increase significantly over the next decade, as the carbon price rises. But financing cleantech cannot wait. That is why some investors and policymakers, including European Parliament member Thomas Pellerin-Carlin, have called for the EU to borrow against future ETS revenues, thereby generating more capital for green investment today.
A similar approach is already being deployed elsewhere. Japan announced last February that it plans to issue ¥20 trillion ($137 billion) in climate-transition bonds over the coming decade to support green investment, using future revenue from its own ETS and its fossil-fuel levy to service the debt. The announcement was welcomed by markets, industry, and climate innovators alike.
To be sure, implementing such a scheme in Europe would be more complicated, as it would require the EU to assume collective debt on behalf of member states. But this would not be nearly as daunting a political hurdle as one might think, because the ETS is already an EU-level scheme. It should thus be feasible to get European leaders to approve collective borrowing against future ETS revenues, especially given the obvious and far-reaching benefits of giving cleantech startups greater access to capital.
Borrowing against future ETS revenues would enable the EU to reduce emissions in the medium term and invest in the vital infrastructure and transformative technologies that are needed to meet its climate goals. European policymakers owe it to cleantech innovators – and to European citizens – to give this policy a chance.
By Craig Douglas, a founding partner at the climate-tech VC World Fund and an adviser to the European Commission on energy.
© Project Syndicate 1995–2024
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