Policy Update: The EU Green Deal’s Legacy

As the European Union approaches the start of a new political mandate, we take this opportunity to reflect on the policy files and initiatives that have had the most significant impact on the cleantech sector from 2019-2024. Undoubtedly, the European Green Deal has catapulted Europe into a new era of cleantech growth, serving as a market signal to invest in sustainable industries and technologies, thus incentivizing innovation and creating new economic opportunities while ensuring long-term competitiveness. However, the progress made so far in implementing the European Green Deal is just a prelude, setting the stage for industrializing and commercializing the manufacture of clean technologies across Europe.

The European Green Deal was ushered in five years ago as Europe's dual commitment to become the first carbon-neutral continent while creating growth and prosperity. This political agenda was, to a large extent, brought about by the widespread protests demanding more climate action that swept across the world in 2019, and their subsequent impact on European elections. The EU Green Deal was heralded as Europe's new growth strategy and included elements of competitiveness and a just transition from the start. Five years on the Green Deal has delivered a regulatory framework setting the stage for increased deployment and manufacturing of clean technologies in Europe.

Below, we dive into some of the most impactful initiatives from the European Green Deal:

• The Carbon Border Adjustment Mechanism (CBAM): The EU had been considering including imports under its carbon price ever since 2008, but it was only in 2023 that this decision was enshrined into European legislation, a global first, with a focus on primary goods such as steel and cement. This is an extremely positive signal forward, generating global convergence on GHG accounting in key sectors but also leveling the playing field between more carbon-intensive production processes outside the EU and those inside the EU, while we pursue the goals of the EU Green Deal. Currently in a pilot phase, the Mechanism will enter into effect by 2026.
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• The EU Emissions Trading System (ETS) was a key pillar of the EU Green Deal and under the 'Fit for 55’ policy package. Emissions covered by carbon pricing went from 43% to 75% of the European economy. The EU ETS also reached the historical 100 Euro / tonne milestone milestone in February 2023, for the first time ever. There has been a slump in the price lately, but the EU carbon market showed its true potential as a policy which can make emitting technologies less economical and more expensive than non-emitting ones, all while generating potentially more than 50 billion Euros between 2024-2030 EU- wide. Additionally, thanks to the entrance into force of the CBAM, the ETS will see a phasing out of free allocation to installations covered by the CBAM, to be finalised by 2034 at the very latest (details of Phase IV of the EU ETS still to me decided in the next European Parliament). A positive turn in the use of free allocations has been the granting of access to them to certain cleantech scale-ups as well.
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• The Net Zero Industry Act (NZIA): Introduced in March 2023, six months after the US launched its Inflation Reduction Act providing a financially attractive package to US cleantech manufacturers. The EU instead chose to take a strategic list approach, offering fast-tracked permitting, additional benefits for projects in cleantech manufacturing in the technologies on the list, as well as the commitment to reach 40% of annual deployment needs to reach the EU's 2030 climate and energy targets through the manufacturing of those technologies on the strategic reserve list at European level. While overall a positive step in the right direction, the NZIA was not accompanied by any new funding mechanisms, and has fallen prey to an excessive widening of the strategic list of technologies, two aspects which reduce the intended effectiveness of this act.
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• The EU Innovation Fund: Operational since 2020, the EU Innovation Fund has become one of the world's largest funding programs for scaling up innovative cleantech from the pilot stage to commercial-scale demonstrations. Financed by revenues from the auctioning of emission allowances under the EU ETS, the fund supports a wide range of projects across various sectors. Since its entry into operation, the fund has held 3 sets of calls, with the latest call launched in November 2023, and having a total budget of €4 billion. The fund is a crucial component of Europe's decarbonization toolkit. However, our latest research shows that 82.5% of funding for large-scale projects goes to large industrials. It has thus far focused on project-based grants but has recently started developing market-based funding mechanisms. These mechanisms include competitive bidding, trialed through its so-called “European Hydrogen Bank” pilot auction (whereby €720 million was awarded to seven projects), a model which is to be replicated across other technology pools.
• European Climate Law: The world's first legislation enshrining carbon-neutrality across multiple countries marked a critical milestone in the global efforts to implement the Paris Agreement. The 2030 target has been agreed at net 55% with 52.8% reductions and 2.2% removals; and future 2040 targets will be established through the processes established within the European Climate Law. An independent European Scientific Advisory Board on Climate Change was also created and issued its first report recommending science-aligned actions and targets in early 2024.
• Road Transport & Buildings: In 2023, the EU agreed to establish a carbon market covering the emissions associated with road transport and buildings dubbed ETS2, that is complementary to the existing EU ETS. This policy tool is additional to the sector-specific policies setting targets and standards in each sector. Some highlights include an 11.7% reduction in energy consumption by 2030 under the Energy Efficiency Directive (EED), a binding target to decrease the average energy performance of the national residential building stock by 16% by 2030 under the Energy Performance of Buildings Directive (EPBD), obligatory targets for the rollout of charging infrastructure, a 2035 internal combustion engine ban for new cars, and stringent CO2 standards for new heavy-duty vehicles.
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• REPowerEU: In March 2022, in response to Russia’s invasion of Ukraine, the EU put forward the ‘REPowerEU’ plan setting out measures to wean Europe off Russian fossil fuel imports. The plan is based on three pillars to increase the resilience of the EU’s energy system, notably energy savings, energy supply diversification, and accelerating the rollout of renewable energy. To achieve this, REPowerEU amended some of the articles of the Renewable Energy Directive (REDIII), the Energy Efficiency Directive (EED) and the Energy Performance of Buildings Directive (EPBD) files which were ongoing at the time. The plan also seeks to mobilize up to €300 billion in grants and loans, mainly by repurposing money from the Recovery and Resilience Facility (RRF), Europe’s pandemic recovery fund.
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• Carbon management: Europe put forward the world's first voluntary framework for carbon removals based on a thorough and transparent methodology for carbon accounting. The framework covers three areas of carbon removals: industrial carbon removals; carbon farming; carbon storage in long-lasting products. The framework mandates that a carbon removal operator will have to: quantify its carbon removals; demonstrate that the removal would not occur in the absence of the activity; prove that the removal is long-term; and ensure the connection between the carbon removal and sustainability. To ensure credibility and transparency, the framework imposes that certification schemes may only use accredited third-party certification bodies to verify project developers’ and users’ carbon removal assessments.
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• Sustainable Finance: Europe has been at the forefront of global efforts to integrate environmental and social considerations into financial decision-making. Some notable aspects include the following:

    a. Taxonomy Regulation: Adopted in December 2019, the Taxonomy’s goal is to establish clear criteria for what constitutes a sustainable activity, ensuring consistency, transparency, and comparability in the classification of these activities. These clear criteria, commonly called technical screening criteria for each environmental objective were adopted at later stages. For instance, the Taxonomy Climate Delegated Act which specifies the activities, and related technical screening criteria, which contribute to climate change adaptation and climate change mitigation was adopted in April 2021. While innovation is crucial for sustainability, the Taxonomy's structure emphasizes environmental objectives, harm prevention, and compliance with social and governance standards rather than directly addressing cleantech innovation financing. Cleantech innovation financing might be considered implicitly within the framework if innovative activities contribute to the environmental objectives outlined in the Taxonomy. However, it is not a standalone criterion and the list of covered activities under the Taxonomy still misses a lot of breakthrough clean technologies.

    b. Sustainable Finance Disclosure Regulation (SFDR): Adopted in November 2019, SFDR mandates that financial market participants disclose the sustainability impacts of their investments to prevent greenwashing and improve transparency. In April 2022, the European Commission adopted draft regulatory technical standards which further specify the content, methodologies and presentation of information to be provided pursuant to various provisions of the SFDR. Although not intended as a product labeling regime, market participants use Article 8 (light green) and Article 9 (dark green) labels this way. Amendments are expected in 2025.

    c. Corporate Sustainability Reporting Directive (CSRD): The CSRD requires large companies, all listed entities (except for smaller listed entities) and some non-EU entities with principal activities in the EU to disclose detailed information on how sustainability issues affect their business and their environmental impact. Key points include: mandatory use of European sustainability reporting standards; reporting on various topics, including climate change, biodiversity, and pollution.; assurance of reported information by an external auditor or certifier.

A new chapter opens: Implementation, Competitiveness, and Investment

The European cleantech industry is at a crossroads. After a mandate of setting the overarching policy and sectoral frameworks, the focus is now turning toward implementation and investment, in line with the goals of that framework.

The future of European cleantech must be ‘made in Europe.’ In a bid to create prosperity, jobs and resilience, the EU is moving from ambition to deploy cleantech towards an ambition to leadership in cleantech manufacturing. However, EU cleantech manufacturers are not on a level-playing field with global competition.

While Europe is great at developing early stages of new generations of clean technologies, there’s a clear risk that the manufacturing of these technologies will scale up elsewhere, as notably was the case for Europe’s once-promising solar industry. Furthermore, regaining lost market share is costly and lost manufacturing ownership translates to lost economic dynamism, jobs, and resilience.

The European cleantech sector is at a tipping point in its development, and the emphasis is rightly shifting from creating a framework to investing and implementing it in accordance with its objectives.

Hence, in the next mandate, we expect the European Commission to focus on:

Investment

While some European cleantech scale-up success stories have started to emerge such as H2 Green Steel in Sweden and battery gigafactory developer Verkor in France, these companies are the exception in Europe’s cleantech landscape due to a significant investment gap. This investment gap is currently at EUR 50 billion only for six clean technologies (solar PV, wind, batteries, heat pumps, electrolysers, CCS). How do we explain this gap?

On the private funding side, European cleantech companies face a more challenging venture capital environment compared to their counterparts in the US and China. This is due to less risk-taking appetite among European investors and a traditionally more conservative investment culture. On the public funding side, European and Member States’ funding instruments and subsidies cater predominantly to early stage cleantech innovation and not to the scale up stage. With global peers having in place targeted investment plans which enable the fast and at scale deployment of capital into cleantech, Europe is at a crossroads: if it does not adequately support its cleantech industry, it risks losing its competitiveness. For Europe to revive its competitiveness, it must urgently put forward a simple cleantech investment plan that focuses on public guarantees, leverages institutional investors, and unleashes the full potential of Europe’s Emissions Trading System (ETS) revenues.

Competitiveness

Europe is waking up to the reality that – despite being the most climate-friendly geography in the world – the market leadership it painstakingly built in a range of clean technologies is now at risk from subsidised international competition.

The challenges facing the EU’s cleantech industry have not gone unnoticed by policymakers. Indeed, both the European Commission’s official stocktaking of the Clean Transition Dialogues, held with innovators and other key stakeholders in the green transition, as well as the recent report on the future of the Single Market by former Italian Prime Minister Enrico Letta make clear that strengthening the business case for scaling cleantech manufacturing capacity is essential to ensure the EU’s long-term economic competitiveness.

A key tool that leaders should leverage in the next mandate to address Europe’s competitiveness challenge is sustainability and resilience criteria in public procurement and public auctions, to create demand for EU-made equipment and components. By prioritising price criteria in procurement, Europe currently facilitates the scale-up of cleantech manufacturing in 3rd countries.

Additionally, EU cleantech competitiveness depends on access to abundant, clean and affordable raw materials and electricity; investment in the skills needed to build up cleantech manufacturing; access to financial instruements; and sustainability requirements as a pre-condition to access the EU market.

Implementation

The European Green Deal is the key lever to make the business case for scaling up clean technologies. However, the Green Deal’s success hinges on coordinated efforts, substantial investments, clear policy signals, and proper implementation. Without proper implementing legislation, the European Green Deal risks remaining an empty shell.

In order for the Green Deal to boost  Europe’s competitiveness, we need to get implementation right in many fronts including on:  reducing red tape via the Net-Zero Europe Platform , established under the Net Zero Industry Act, which will help coordinate and remove hurdles for strategic net zero projects;  faster permitting for strategic cleantech projects;   improving energy efficiency of buildings to reduce energy consumption and strengthening eco-design and energy labelling requirements for consumer products; (4) having in place a fully-fledged carbon border adjustment mechanism (CBAM) ensuring that imported goods from countries with less stringent carbon regulations do not undercut European cleantech products that comply with the EU’s strict environmental standards.

Take the carbon market, for example. The revision of the EU Emissions Trading System (ETS) mandates the phase-out of free carbon permits (allocations) for sectors covered by CBAM, including iron, steel, cement, aluminum, hydrogen and electricity.  The implementation of the overhauled EU ETS will help level playing field for green steel and renewable hydrogen producers by giving them access to free allocations that were not eligible to receive before, which can help them lower the green premium.

A Cleantech Competitiveness Deal

In order to foster Europe’s green industrial competitiveness by 2030, we cannot afford to lose more ground in scaling up its domestic cleantech manufacturing sector. While some of the groundwork has been laid with the Green Deal and the Green Deal Industrial Plan, now is the time for Europe to enact a targeted and fiscally efficient Cleantech Competitiveness Deal - see our recent open letter signed by 24 cleantech organisations. The open letter underlines the necessity of establishing the business case for industrialising clean  technologies at scale. We have identified three priority areas that will usher in a new era of green industrial growth in Europe:

I. A Cleantech Investment Plan for European competitiveness, including:

• Mobilising institutional investors: European pension funds and insurance companies hold trillions of euros of investments. Yet, they do not invest in cleantech funds at the scale needed due to regulatory barriers. These barriers can be overcome via: a reform of the Capital Markets Union; targeted amendments to the Solvency II Delegated Regulation to improve the treatment of equities; as well as de-risking instruments and fund of fund structures such as those proposed by the European Investment Fund.
• Boosting and broadening the EIB's counter-guarantee facility. Public guarantees are one of the keys to the commercial scaling of emerging technologies quickly. The €5 billion facility that the EIB announced is a great start, but only covers the wind sector. If we want Europe to become the home of cleantech manufacturing, EIB guarantees should be expanded via a top-up of InvestEU to other clean technologies such as battery gigafactories, electrolysers and long-duration energy storage systems.
• Leverage EU Trading System (ETS) revenues to invest in Net-Zero Industrial Transformation. The EU should consider borrowing against future ETS revenues, to make the investments needed in cleantech now. The ETS price will reach over €120 by 2030. Waiting until then may be too late for our cleantech competitiveness - frontloading ETS revenues through the Innovation Fund or towards fresh guarantees would galvanise private investment as soon as possible. In addition, Member States should invest at least 25% of EU ETS revenues in scaling cleantech solutions and manufacturing.

II. Concrete Action Plans for Cleantech Manufacturing in Europe, including:

• Sustainability requirements: as a pre-condition to access the EU market, for strategic cleantech equipment and supply chains, raising the bar on the sustainability of the equipment enabling the clean transition.
• Sustainability and resilience criteria to support domestic manufacturing: Resilience requirements in public procurement and public auctions will help create demand for EU-made equipment and components used in the clean transition.
• Access to abundant, clean and affordable electricity: Action plans must focus on ensuring that regulatory reform and public investment in infrastructure, clean energy especially, is sufficient to address this growing need.
• Investment in the skills needed to build up cleantech manufacturing: The EU and Member States should take the establishment of Net Zero Academies in the NZIA as a starting point, and develop clear national incentives for the retraining of Europe’s industrial labour force.

III. A vision for the next generation of cleantech breakthroughs.

To guarantee that Europe remains the world’s cleantech champion in 2040 and beyond, we should:

• Develop strategic plans to attract and advance innovative, growing sectors crucial to our long-term competitive sustainability. For technologies that are still in development such as innovative renewables, new storage technologies, and carbon removals, we should develop tailored industrial strategies outlining their role in achieving the 2040 and 2050 climate targets.
• Defend research and growth funding to nurture the next generation of cleantech leaders. Maintaining the size of research funds like Horizon Europe, ensuring that cleantech is at the heart of the successor FP10 proposal, and mobilising EU support to start-ups such as the European Innovation Council is crucial.

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