Report | Spend Smarter:
A bit of advice on climate innovation financing
Currently, most EU-managed climate innovation subsidies go to innovation (through the Innovation Fund). The EU’s Innovation Fund, launched in 2020, is one of the world’s largest programmes funding innovative low-carbon technologies, however the Innovation Fund’s current approach is too costly and inefficient. The scale of the climate change challenge requires careful funding allocation to free up the funds needed to support activities with high abatement potential currently left out of the grant system.
The Innovation Fund has recently announced the third large-scale call which will have €3 billion to award in grants. We need to make sure this money is well spent!
Extending the scope of the Fund to “the scaling up of techniques, processes and technologies that may no longer be considered innovative, but nevertheless possess a significant greenhouse gas emissions abatement potential”, as proposed by the European Parliament in June 2022, is a promising step in the right direction.
However, a general policy to better prioritise the allocation of funds is badly needed.
Main findings
- Subsidies to innovation should not be paid upfront when technology risk is low. Instead, they should be based on performance. The Innovation Fund’s current approach is too costly and inefficient.
- Carbon contracts for difference (CCfDs) are only useful when they match the number of spare free emission allowances held by their beneficiaries.
- CCfDs with high strike prices (higher than the carbon market price) increase the competitive distortion in favour of the installations which receive free emission permits.
- To reduce competitive distortions while free permits are given to polluting plants, carbon contracts for substitution should be set up to cover activities receiving few or no free allowances that reduce the demand for carbon-intensive products (see figure below).
- The scale of the climate change challenge requires careful funding allocation: more parsimonious innovation financing would free up the funds needed to support activities with high abatement potential currently left out of the grant system.
Our recommendations
All three EU decision bodies (Commission, Parliament and Council) have proposed to increase the size of the Innovation Fund as part of the ‘Fit-for-55’ package. Although this could provide an opportunity to improve decarbonisation incentives by putting the carbon market’s trillion euro value to better use, it also increases the amount of funds at risk of being misspent.
It is crucial to tap the decarbonization potential of those activities that have thus far been left out of the ETS incentives.
Extending the scope of the Fund to “the scaling up of techniques, processes and technologies that may no longer be considered innovative, but nevertheless possess a significant greenhouse gas emissions abatement potential”, as proposed by the European Parliament in June 2022, is a promising step in the right direction.
However, a general policy to better prioritise the allocation of funds is badly needed.
Sandbag seen in the media
- Carbon pulse: UPDATE – EU clean energy subsidies should go to sectors where the carbon price ‘doesn’t work’ -report
- Carbon pulse: EU institutions on ‘same side’ in defending Innovation Fund from REPowerEU funding raid, says lawmaker
- Bruegel (2024) Accelerating strategic investment in the European Union beyond 2026
Photo by Jannis Lucas on Unsplash