Cleantech divide looms in Europe

Cleantech divide looms in Europe

Investment in the development of the cleantech sector in Europe is too slow and unevenly spread across EU member states, writes Ciarán Humphreys and despite its best intentions, it is not clear that the EU’s Net-Zero Industry Act (NZIA) will rectify this, he warns.

Ciarán Humphreys is a cleantech expert at the European Climate Neutrality Observatory (ECNO) and a Research Fellow at the Institute for Climate Economics (I4CE). 

Unveiling the Net-Zero Industry Act (NZIA) earlier this year, Ursula Von Der Leyen declared it would “create the best conditions for those sectors that are crucial for us to reach net-zero by 2050: technologies like wind turbines, heat pumps, solar panels, renewable hydrogen as well as CO2 storage.”

Progress in the development of the cleantech sector still needs to be faster, and investment across EU member states is unevenly spread. And despite the best intentions, it is unclear whether the Act, which MEPs vote on this week, will rectify this.

The Net Zero Industry Act sets ambitious targets for increasing Europe’s cleantech manufacturing capacity. However, tweaking the EU’s regulatory architecture will only get us so far. To truly grow Europe’s green industry, an ambitious, EU-level Cleantech Investment Plan should be the next priority.

The EU’s current investment offer is not up to this challenge.  The Strategic Technologies for Europe Platform (STEP), the proposed investment package supporting the Act, lacks muscle. If passed, it would see just €10 billion of public funds invested across cleantech, deep tech (such as AI) and biotech – hardly enough to spark an EU-wide wave of growth. For perspective, Germany offered the same to one microchip plant, and has spent billions more in subsidies to its economy.

This offer pales compared to the Biden administration’s ambitious spending programme, the Inflation Reduction Act (IRA). The IRA can potentially trigger $1.2 trillion in climate public investments, including generous tax credits for the cleantech sector.

The EU cleantech sector faces funding shortfalls at every stage of development, from lab research to factory floor. As detailed in a report I wrote for the European Climate Neutrality Observatory, this trend is already visible at the early research stage, with a widening gap between the amount of academic research into new technologies and the rate at which that research can be transformed into patents and successful start-ups.

Improving their access to finance is key to transforming research projects in Europe’s universities into the cleantech champions of the future. While overall private investment in EU cleantech is at record levels, start-ups and scale-ups still face funding gaps as they grow their business – with the risk that their growth stalls or their company collapse altogether.

Why? Many investors still see EU cleantech as too risky, and with the US and China spending big, it makes more sense for them to invest their money elsewhere. Europe should learn from these other large economies and think about how to support its own cleantech innovators better. A European Cleantech Investment Plan has a vital role in supercharging innovation and “crowding in” private investment.

To bring cleantech up to speed, the EU must seriously ramp up public funding and make it available to innovators in all member states. Simply relying on state aid is not enough to ensure the efficiency of public spending. EU-level solutions will provide the best projects, no matter where they are in the EU, receive the funding they need.

Recent data shows that since February of last year, Germany and France have accounted for 70% of state aid authorised in the EU since last February. These countries have also been able to introduce tax credits for cleantech innovation, with Germany’s climate tax credit of €7 billion and France’s announcement of a €2 billion green industrial tax credit.

Without European action, this will risk less wealthy or just smaller countries within the bloc being left behind. Without a truly European Cleantech Investment Plan, member states will have a growing cleantech divide.

The EU needs to develop a European solution quickly because EU cleantech is losing its global position fast. In the past two years, Europe has lost its position as lead wind exporter to China and second largest battery manufacturer to the US. The targets and reforms of the NZIA are not, on their own, going to reverse this trend. The question of financing is an increasingly urgent one.

What should this financing answer look like? Beyond STEP, the EU has the tools to plug the gap. In a recent paper, I looked at the central role of the EU Innovation Fund in scaling up European funding of the cleantech sector so that the EU as a bloc can remain internationally competitive, guarantee its energy security and meet its climate targets.

While I hope the EU does indeed deliver an ambitious Net Zero Industry Act, a beefed-up Cleantech Investment Plan needs to be what comes next.

The US and China have set the bar high – the EU needs to up its game or risk being left behind.

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