The Innovation Fund

The EU’s Innovation Fund, launched in 2018, is the EU’s programme for funding cutting-edge low-carbon technologies. To be eligible, projects must be, according to the European Commission, highly innovative, cost-efficient, mature, scalable, and have a significant emission reduction potential. 

The Innovation Fund is financed using revenues from the Emissions Trading Scheme (ETS), under which certain sectors must buy emission permits (allowances) to be allowed to pollute. We estimate that it will receive the proceeds from the sale of nearly 800 million emission permits over the period of 2021-2030. Subsidies come in the form of grants (paid mostly upfront) but may also include performance-based amounts in the future. In practice, the funding goes to sectors already receiving emission permits under the EU ETS.  

We estimate that the fund will be worth €75 billion. How the money will be spent is therefore more critical than ever. 

As Sandbag’s research showed, the Fund’s current granting approach is too costly and inefficient. Upfront subsidies are used in the wrong way and do not address competitive distortions, leading to high decarbonisation costs instead of incentives to low carbon activities. 

The Innovation Fund is currently being overhauled to reflect recent changes to the ETS. You can find Sandbag’s propositions submitted to the European Commission’s Innovation Fund Expert Group here.    

At the same time, we study the interactions between EU policies and climate policies outside the EU. Policies such as the Carbon Border Adjustment Mechanism can incentivise global climate action and spark international debate, but if these policies are not well presented and understood nationally, there is a risk of opposition and retaliation. Established EU policies such as the EU ETS can provide a basis for the development of climate policies elsewhere, but in order to lead by example, the EU can’t afford to fail.