Cleantech solutions will be key to achieving climate neutrality in the EU by 2050, but the ECNO found that progress in clean technologies has been too slow, according to dedicated quantitative indicators.
The transformation of research into patents and innovative start-ups requires more action, including on financing. To bridge the financing gap for cleantech start-ups, EU financial instruments are vital. While private investment in cleantech is on the rise, it must further increase to realise the EU's ambitious manufacturing goals, with public finance playing a pivotal role in scaling up manufacturing and attracting private capital.
In analysing data associated with ECNO’s three enablers for cleantech, as well as supporting data points, this paper examines the current state of EU cleantech from lab to market.
However, more action is required to transform research into patents, and then into innovative start-ups.
While the EU has a healthy and growing venture capital ecosystem to provide the necessary seed funding, the private sector is not investing sufficiently to support the needs of the sector. EU financial instruments such as the Innovation Fund are necessary tools to bridge this financing gap.
This is a positive signal for the future growth of the EU manufacturing base. However, if the EU manufacturing is to reach the ambitious scale envisioned in the Commission’s Net Zero Industry Act, even more investment is required. Public finance should here play a significant role in scaling-up manufacturing and creating an attractive investment environment for private capital.
To successfully steward the transition to climate neutrality, policymakers and society more broadly need a clear view of where current progress stands. To help fulfil this role, the ECNO tracks progress on decarbonisation through scientifically rigorous analysis of thirteen critical building blocks. One of these building blocks is cleantech: the wide range of “clean” or “green” technologies which have an important role to play in decarbonising the economy. These technologies are not limited to the well-known spheres of energy (solar PV, heat pumps) or mobility (batteries for electric vehicles), but cut across all sectors of our economy, including food (alternative proteins) and construction (green steel and low-carbon cement).
Achieving the EU’s medium-term goal of 55% emissions reduction by 2030 will depend largely on deploying these technologies at scale, requiring an increase in Europe’s domestic manufacturing capacity. However, simply building up manufacturing for cleantech that is on the market today will not be sufficient to reach net zero by 2050 and mitigate some of the worst potential consequences of climate change. Doing so requires the development of innovative technologies that still require research and development, first of a kind demonstration, and commercial scale-up.
Recommendations to EU policymakers
Recommendations to EU policymakers
Recommendations to EU policymakers
Recommendations to EU policymakers
The foundation of the current global cleantech landscape is its lively research ecosystem. Europe is in a strong position to contribute to that ecosystem, with its world-class research institutions and 7% of the planet’s population contributing almost 30% of its knowledge generation. In the field of cleantech, this advantage should be utilised to the full if the EU is to contribute to its own and the world’s decarbonisation.
While the research on clean technologies in Europe remains active, with the number of related academic publications increasing, it is not resulting in an increase in patent activity.
This highlights a dynamic of a lowering capacity to transform research excellence into patent activity, the latter of which is the bedrock of cleantech progress further down the value chain. This slowdown is negative for the progress towards climate neutrality, as, according to the IEA, cleantech innovations will need to be brought to market faster than ever if the world, and therefore Europe, is to meet its decarbonisation goals.
To improve the connection between research and the cleantech market outside of the doors of Europe’s universities, the EU and Member States can develop a more targeted strategy to support the development of cleantech patents and increase the connection with the private sector through partnerships and financial support agreements.
Above all, bringing cleantech from the lab to market requires significant private and public funding. Private finance should ideally be able to take promising innovations through from prototype to commercial demonstration, early market adoption and wide market success - although, as it stands, there is not enough funding available, with venture capital and other private sources unwilling to accept the risk profile and high upfront capital costs associated with cleantech projects.
This is evidenced when examining recent trends in EU private energy and R&I spending, a key indicator in ECNO’s cleantech analysis. Progress on this indicator has been far too slow and is not sufficient to keep pace with the transformation required.
It’s essential that the EU ensures that sufficient public funding for cleantech is available across the EU.
Ciarán Humphreys, briefing author and cleantech expert at ECNO
This poses a problem for EU cleantech, as it means that projects face a “valley of death” as they leave the lab, due to a shortfall in private R&I and venture funding. At this stage, a start-up will seek to launch a pre-commercial demonstration (or pilot) project, to prove the viability and future market acceptance of the technology - but may be delayed or blocked from doing so due to the drop-off in finance. This is where public funding has a role to play, by financing commercial demonstration of projects which are promising but have not been adequately financed. Unfortunately, public funds for such R&D have only shown an average annual increase of 4.6% between 2015 and 2020 and are therefore not expanding at the pace required to make up the shortfall, further slowing the growth of European cleantech.
There are some signs that this trend may improve in future. Take, for example, the EU’s Innovation Fund, the EU’s largest climate fund made to support the commercial demonstration of green innovation projects. Unlike many EU funds, which are funded by the EU budget, the Innovation Fund is funded by an allocation of EU carbon allowances under the EU’s Emissions Trading System (ETS), which are then auctioned on Europe’s carbon market to raise capital for the Fund. This means that an increase in the ETS price in the future would result in a larger allocation to the Innovation Fund, as I4CE projected in a paper from 2023.
According to this projection, based on a Bloomberg forecast of a 2030 ETS price of €147, the size of the Innovation Fund in that year is expected to reach €27.1 billion, compared to the 2023 size of €3.6 billion. Such an increase in size would have a significant impact on future public support available to address the “valley of death” facing cleantech start-ups as they leave the lab and try to enter the market.
When considering how the EU is to meet its 2030 decarbonisation target, analysing the growth of Europe’s manufacturing and deployment of more mature cleantech is crucial. Here, the private finance picture looks positive, with investments into cleantech increasing on average 101% annually between 2017 and 2022 - demonstrating both increased investor interest in the sector and the rapidly expanding size of the market. 2021 saw an increase of €7.5bn invested over 2020, for a high point of €12.3bn overall, while 2022 saw a slight drop to €10.6bn.
This positive trend is no call for complacency - when examined in the global and political context of cleantech investment, there is still room for improvement. Firstly, this positive upward trend is a global, rather than a European, phenomenon, and when compared to other large global markets, the EU private capital stack is somewhat smaller. This disparity threatens European cleantech progress, as more vibrant private capital ecosystems in other jurisdictions will attract European innovators to relocate outside of the EU, slowing progress towards increased capacity of the European cleantech industrial base.
The EU’s own goals as far as cleantech manufacturing should be incorporated into this analysis – as they set the benchmark for the bloc’s cleantech ambition. A current focus of EU policymaking has been building up EU cleantech manufacturing, in the face of increasing competition from the US (through, most notably, the Inflation Reduction Act) and China, as well as other large economies. There is also a need to build up manufacturing to a level which can ensure the resilience of the EU cleantech industry, whose strong material dependency on China could pose a problem if current geopolitical and trade tensions spill over into a conflict.
To address these dual competitiveness and resilience challenges, the EU has proposed its Green Deal Industrial Plan, which includes a relaxation of state aid rules (Temporary Crisis and Transition Framework), the Net Zero Industry Act (a regulatory framework setting targets for EU manufacturing and accelerating permitting timelines, among other provisions) and the Strategic Technologies for Europe Platform (a funding mechanism for strategic technologies, including but not limited to cleantech).
Therefore, it is important to track cleantech investments against the investment needs to achieve those goals. Recent Agora Energiewende modelling projects the base case of current investment trends out to 2035, to show the size the industry is likely to reach if current trends continue. It then compares this base case to the investment needs of a European cleantech industry of a size that will ensure supply resilience or reach the goals as set out by the Net Zero Industry Act.
To achieve the NZIA scenario, investments would have to increase 83% against the base case. This means that private investment will have to increase if late-stage EU cleantech is to deliver the competitiveness and resilience which policymakers increasingly demand. Judging by historical trends, private investment cannot be expected to fill this gap alone, and therefore it is important that innovative public financing solutions are developed to make up for any shortfall and ensure the accelerated expansion of the industrial base.
EU cleantech is in a good position. With a world-class research infrastructure, dynamic start-up scene and growing industrial base, the signals that the industry will play a significant role in Europe’s decarbonisation are strong. However, the pace of growth could improve, with a lack of finance at different stages of the technology development process posing a stumbling block. Whether it is in bringing innovations from the lab to commercial demonstration or scaling more mature innovations to industrial scale and building up manufacturing capacities, a lot more will need to be invested to keep cleantech on track in its valuable role of delivering climate neutrality, economic competitiveness, and energy security.
This is where public finance has a role to play - both in bridging the “valleys of death” which cleantech innovators face through the technology development cycle, and in derisking investments to crowd-in more private capital which may be initially wary of the high upfront capital costs and risks associated with cleantech projects.
Some Member States are already stepping in to fill the gap. Take, for example, Germany’s climate tax credit of €7 billion, or France’s announcement of a €2 billion green industrial tax credit. However, many Member States, with greater fiscal constraints, are not able to match this support.
This is where European-level support is vital. The EU already has some powerful tools at its disposal, from the EU Innovation Fund to EIB mechanisms such as venture debt. The challenge for policymakers is how to better finance and target those existing financial instruments to support EU cleantech, and ensure the sector is on track to play its part in delivering EU decarbonisation from now until 2050, and beyond.
On 26 June 2023, ECNO was officially launched in Brussels, accompanied by a presentation of first flagship report on EU progress towards climate neutrality and panel discussion.
European Climate Neutrality Observatory launches to ensure European Green Deal delivers on climate neutrality