EUROPEAN ENERGY POLICY EUROPE NEEDS TO INNOVATE POLICY BRIEF FEBRUARY 2021 TO BECOME A FRONT-RUNNER IN THE GLOBAL GREEN ECONOMY RACE

#CLIMATE RACE #GREENDEAL #ENERGY #INNOVATION

▪ THOMAS PELLERIN-CARLIN Of all the surprises that 2020 held for Two elements are however certain. First, Director, Energy Centre, humankind, there may be one with lon- reaching climate neutrality is achievable , ger-lasting effects than the COVID-19 only with a major acceleration in clean . pandemic: we now live in a world where 75% energy innovation, a message echoed by of the global economy aims to become cli- Bill Gates’ latest book. Second, as each mate neutral in the next decades. country changes its regulations, taxation The author would like to thank and investment priorities, global markets Marie Delair, Jules Besnainou, While the led the way in for climate-neutrality goods and services Camille Defard, Andreas Eisl, 2019 with its Green Deal’s climate neutrality continue to boom. Elvire Fabry, Jean-Baptiste Le by 2050 commitment, Chinese President Marois, Emilie Magdalinski, Xi suddenly announced last September at As the global race to seize the clean energy Eleonora Moro, Phuc-Vinh Nguyen, the United Nations that China will become opportunities has begun, this policy brief Nils Redeker, Eulalia Rubio, carbon neutral by 20601, while the new U.S. dives into the state of green innovation in Pierre Serkine for their valuable Administration under Joe Biden sets the Europe, with a specific look at the buildings, comments on this paper. climate neutrality by 2050 objective for the energy, industry and transport sectors. It pro- U.S.A.. Alongside them came a wide range poses five policy actions EU policy makers of countries, from the United Kingdom to can undertake in 2021 to accelerate clean Japan and Argentina. Each country is setting energy innovation, and thus strengthen the its own course to climate neutrality. The road competitiveness of the EU economy while will be bumpy. There will be many surprises increasing humanity’s chances to avoid a and likely a few setbacks. climate disaster.

PENSER L’EUROPE • THINKING EUROPE • EUROPA DENKEN 1 ▪ 7

1 ▪ The state of clean energy now move towards climate-neutrality, - peans have a lot to gain by consolidating this innovation in Europe technological leadership and turn it into a green competitive edge that will lead to the creation of millions of jobs. 1.1 ▪ European support to clean energy innovation promotes global climate 1.2 Public investments in clean energy action ▪ research and innovation have been The EU27 represents 5% of global population, decreasing in Europe. 10% of global greenhouse gas emissions, 15% of global GDP and 25% of the global Despite all their big talk on climate action, scientific publications.2 the 27 Member States of the European Union reduced public support for clean Getting the European economy to cli- energy research and innovation during the mate-neutrality is laudable, necessary, but last decade. While in 2010 those EU coun- insufficient by itself. The aim has been and tries were only aiming to cut greenhouse always will be to deliver global change. By gas emissions by 20% by 2020 and did using its diplomatic, economic and inno- not even had a legally binding objective for vative strengths, Europe goes way beyond 2050, they invested €3.7bn of public money decarbonising its own economy: it leads in clean energy research and innovation the way and inspires other countries to do (R&I). But while in 2018 those same coun- so. It thus helps to reduce emissions around tries had ratified the and the world. In this regard, green innovation is started to discuss the objective to become of critical importance as the rest of the world climate-neutral by 2050, they had reduced can import, or take inspiration from EU inno- public investment in clean energy R&I in the vations. meantime, making up €3.3bn in 2018.4

There is moreover an economic case to be In the meantime, US public authorities made. European research centres and com- increased their investment in clean energy panies are currently the world leaders in green R&I, to end up investing more under Donald technologies. As the European Investment Trump (€5Bn in 2018) than Barack Obama Bank recently recalled: “Europe registered (€4Bn in 2010). During the same period 50% more patents in green technologies China even tripled its level of investment than the United States, with Japan and China (from €2Bn to €5,5Bn). (see figure 1) further behind”.3 And as China and the USA

Figure 1 ▪ Public clean energy R&I (in €bn, current prices) Public R&I in Billion EURO 6

5

4

3

2

1

0 EU 27 US CN

2010 2018 Source : Jacques Delors Institute, based on JRC and the International Energy Agence’s Energy Technology RD&D Budgets, 2020 edition

PENSER L’EUROPE • THINKING EUROPE • EUROPA DENKEN 2 ▪ 7 This is a bad omen, both for the real Euro- ment in clean energy R&I is lacking, this pean contribution to global climate action section looks at global corporate research and for Europe’s competitiveness in the and development investments. future. Under-investing in clean energy R&I means that fewer green innovations will be Before the COVID-19 crisis, we saw a steady created. It makes the green transition harder and significant increase of global private to perform, especially in the so-called “hard research and development (R&D) invest- to abate” sectors where viable technical ment, especially in renewable energy solutions do not exist yet, such as aviation. technologies where private R&D doubled It makes the green transition more economi- between 2010 and 2019 -from $3bn to $6bn cally costly, as less innovation means that (see figure 2). the promises of cheaper renewables, batte- ries and building renovations will be slower Meanwhile, incumbent oil and gas compa- to materialise. It also increases the geopoli- nies did not sit on their hands and wait to tical risk that the green technology leaders of be overtaken by newcomers. They invested tomorrow will all be non-European compa- to reinforce the fossil fuel system, including nies, compelling future Europeans to rely on through private investment in ‘dirty’ energy US and/or Chinese green technologies the innovation, such as increasing the producti- way they currently rely on US and Chinese vity of shale oil extraction. As a result, we see digital technologies and suppliers. an increase in global corporate R&D spending in oil and gas (see figure 2). In 2019, corpo- In short, the last decade of national policy rate investment in R&D by globally listed oil decisions to cut clean energy research and and gas companies were estimated to be innovation spending constitute an eco- more than three times higher than invest- nomic and political risk for the European ments in renewables ($20bn for oil and gas, Union and the success of the European compared to $6bn for renewables see figure Green Deal. 2). This, combined with the fact that oil andgas companies invest less than 1% of their total capital expenditure in renewables, 1.3 ▪ Global private investments in points to a current policy failure: global oil fossil fuel R&I are still higher than and gas companies as a whole are not yet convinced that they should swiftly embrace investments in clean energy the energy transition. European and global efforts are critical to change this status quo, While European States failed to rise to the and the European Green Deal plays a key role occasion, what happened in the private in that endeavour. sector? As data on EU-level private invest- Global corporate R&D spending in energy- Figure 2 ▪ Globalrelated corporate sectors, R&D spending 2010 in energy-related-2019. In USD sectors, (2018) 2010-2019. In USD (2018) billion. billion. 25

20

15

10

5

0 Oil and gas Renewables

2010 2019

Source: Jacques Delors Institute, based on International Energy Agency, Energy Technology RD&D Budgets 2020, IEA, Paris, 2020.

PENSER L’EUROPE • THINKING EUROPE • EUROPA DENKEN 3 ▪ 7 1.4 ▪ The COVID economic crisis impacts 2.1 ▪ Maximise the impact of the EU clean energy innovation budget After the 2010s, came 2020 and its In December 2020, EU policy makers reached COVID-triggered economic recession. Its full a deal on the EU budget for the next seven impact on energy innovation remains to be years (2021-2027). After intense negotia- analysed. tions, the obtained a significant increase in Horizon Europe, the Some already available data point to a EU’s flagship programme for R&I. It now has risk of drastic decline in private R&I invest- €95.5bn for the 2021-2027 period, including ment with many companies entering in a at least €33.4bn specifically earmarked for ‘survival mode’ where short-term budge- climate R&I. Furthermore, Member States tary constraints outweigh medium-term will receive €338bn of EU grants to support economic imperatives, such as the need their national recovery programmes, and the to invest in R&I to survive in a competitive EU demands that 37% of this funding goes economy and a changing regulatory envi- to green investment.6 ronment. In a recent report, the European Investment Bank indeed points to a general To make good use of this money, the Euro- decrease of private investment, with 45% of pean Union relies both on well-established EU firms expecting to reduce investment in tools, from the European Research Council 2021. This is also the case of 43% of firms to the of Innovation and with climate-related investment, and is set Technology, and on newcomers like the to particularly impact smaller scale invest- European Innovation Council (EIC). This ments in renewable energy and energy brief recommends that: efficiency.5 1. The and Euro- Yet, other data points to a genuine resilience pean Investment Bank further engage of the clean energy innovation ecosystem. Member State, to improve the process According to an upcoming report by Clean- that matches EU funding with smart and tech Group, venture capital investment in green local projects. This will likely require EU27 actually increased in 2020, reaching $6 an increased presence of the European billion dollars over close to 470 deals. Commission and the European Invest- ment Bank in the European regions with the greatest needs for public support to 2 ▪ Five concrete ways for the the scale-up of early-stage companies, as well as in the cities that will be taking part European Union to support in the EU Research & Innovation Mission clean energy innovation in 2021 to make 100 EU cities climate-neutral by 2030. Against this backdrop, the European Union 2. The EIC establishes a regular annual can and should act in 2021 to accelerate Green Deal call to ensure that clean clean energy innovation in the 2020s and energy innovators can access EIC sup- 2030s. We now focus on five policy actions: port. Without such call, there is a risk that green innovation becomes the collateral • Maximise the impact of the EU budget, damage of a lack of consideration of the • Incentive Member States to invest more characteristics of clean energy start-ups in clean energy innovation, vis-à-vis digital start-ups. Such call • Drive private investment, thanks to a would build on the success of the 2020 strengthened EU regulatory framework, EIC Green Deal call. • Engage globally to support clean energy innovation, • Support specific industrial alliances.

PENSER L’EUROPE • THINKING EUROPE • EUROPA DENKEN 4 ▪ 7 2.2 ▪ Incentive Member States to invest 3. the European Commission proposes a more in clean energy innovation reform the European Stability and Growth Pact to make it fit for the European Despite its importance, the EU budget only Green Deal. Such reforms should enable accounts for less than 5% of the overall national governments to invest more in European research and development invest- climate-related research and innovation. ments, while national governments impact One option would be to exclude such 30% of those investments (i.e. 10% from investments from those fiscal rules, as direct national government investments, and those investments can be clearly defined 20% being investments by higher education using existing reporting methods, and organisations).7 represents very small amounts –e.g. cur- rent spending account for around 0,02% In most national energy policies, clean of the EU27 GDP (cf. section 1.2). energy innovation tends to be only an after- thought. Most EU countries have a siloed approach, with a ministry doing its R&I policy 2.3 ▪ Drive private investment, thanks to in relative isolation to the long-term and a strengthened EU regulatory framework short-term decisions taken by the economy, environment, energy, transport and industry While public money is vital for a vibrant ministries. As a result, when the Euro- innovation ecosystem, most innovation pean Commission looked at the national investments are done by the private sector. energy and climate plans (NECPs) of each In order to support private clean energy Member State, it could only conclude that innovation in the 2020s, EU policy makers such national plans “fail to pay sufficient have a once-in-a-decade chance from June attention to R&I needs for delivering on cli- 2021: when the European Commission will mate and energy objectives” and found “a propose to revamp the entire European buil- severe lack of national objectives and fun- ding, energy, transport and carbon pricing ding targets that show concrete and relevant frameworks, the so-called ‘fit for 55 pac- pathways to 2030 and 2050”8. In EU jargon, kage’. those sentences are a harsh criticism. Ambitious regulations can successfully The only genuine remedy will come from drive private sector innovation10 when they Member States themselves. Based on this create incentives to develop new solutions, assessment, we suggest that: and provide predictability to investors and innovators. We recommend the European 1. the European Commission uses the Commission to closely look at all its forthco- NECPs as a way to push Member States ming proposals through an innovation lens, to invest more in clean energy innovation. especially to: A specific minimum target (e.g. increase climate-related R&I public funding to a 1. Provide clear long-term and binding specific level) could be set in that context. objectives for the sectors which would 2. the European Commission, together with require massive research and innovation the International Energy Agency, fur- for 10-20 years before being able to come ther showcases best practice examples, up with a market-ready green solution. coming from EU and non-EU States that This is for instance the case for aviation. actually manage to come-up with realistic 2. Use public procurement, clean pro- and ambitious clean energy innovation duct standards and national targets to strategies. It is in particular critical to trigger the emergence of niche markets fix the lack of coherence of the German in areas where green options are ready, and French policies, 9 as those are the but still more expensive. Niche mar- two biggest economies inside the Union. kets are indeed vital to scale-up green innovation. Providing niche markets for

PENSER L’EUROPE • THINKING EUROPE • EUROPA DENKEN 5 ▪ 7 specific green products, such as green decisions.11 Politically, such declaration steel, would provide a secure market for could be spearheaded by the new Ita- innovators to compete fairly and scale up lian Prime Minister Mario Draghi, as Italy their solutions. This can be done through assumes the G20 Presidency in 2021. regulation, and through subsidies, inclu- 3. The European Commission and the ding carbon contracts for difference. further engage interna- 3. Fully use the power of EU regulation to tional partners after COP26, to promote oust inefficient technologies and pro- green innovation globally. With its vast ducts from the market. This is a critical diplomatic network, could play a signal that reduces the market risks taken key role in such an endeavour during its by private sector businesses and inves- Presidency of the Council of the Euro- tors. For instance, as the market share pean Union (January-June 2022). of electric vehicles is booming, it is now time for EU policy makers to organise the de facto phase-out of new oil-powered 2.5 ▪ Support specific EU industrial two-wheelers, vans and passenger cars. alliances: the new frontier of EU green Such a phase-out should occur in the 2030s if the European Union wants to be innovation policy consistent with its climate neutrality by 2050 objective. In the last decade, the European Union started to embrace an industrial policy approach to the energy transition, building 2.4 ▪ Engage globally to support clean on the concrete successes of the European energy innovation Battery Alliance. The March 2021 update of the EU Industrial Strategy is the right As climate change is a global phenomenon, moment for the European Commission to go it requires global action. 2021 constitutes a a step further in the creation of a European major window of opportunity for the EU to green industrial strategy. boost global cooperation on clean energy innovation. Indeed, the next major interna- The challenge is to gear all the EU policy tional climate conference (COP26) takes tools towards a single direction. The aim is place in November 2021 in Glasgow, and can to provide certainty and public resources already benefit from the climate leadership to help innovators test, pilot, demonstrate, of US President Joe Biden and the new scale up and industrialise green solutions in Chinese commitment to reach carbon-neu- Europe. Together with Member States, the trality by 2060. European Union should:

In that context, we suggest that: 1. identify core technology and innovation gaps. Such analysis should be delivered 1. The European Commission fleshes out by an independent, science-based centre its proposal for an EU-US “Green Tech of technical expertise, such as the Euro- Alliance”. We suggest that the Euro- pean Climate Change Council proposed pean Commission and the US Biden under the European climate law. Administration build such proposal in 2. based on the aforementioned analysis, a way that makes it inclusive so that the EU should boost public and private other major partners that are innovation investment in research and innovation powerhouses aiming to reach climate (see sections 2.1 and 2.2) in specific neutrality, such as Japan, can also parti- technologies relevant for specific indus- cipate in that Alliance. trial alliances. This will surely tackle 2. The European Council calls the G20 to areas where such alliances already exist deliver a “political declaration on green (batteries, green hydrogen) as well as innovation” that provides sufficient other alliances that can be launched in political cover for policy makers to acce- the future, such as next-generation solar lerate domestic fiscal and regulatory photovoltaic panels,

PENSER L’EUROPE • THINKING EUROPE • EUROPA DENKEN 6 ▪ 7 3. provide confidence about the existence CONCLUSION ▪ of domestic green markets (see sec- tion 2.3), Now that 75% of the global economy aims 4. provide the right level of flexibility of EU to become carbon neutral by 2050/2060, State Aid rules to ensure that investments the global race to seize the clean energy are well supported, for instance through opportunities enters a new phase. For Euro- the Important Projects of Common Euro- peans, this is a moment of truth. pean Interest, 5. adapt EU trade policy to ensure fair com- The worst case scenario would be for Euro- petition (cf. the debate on carbon border peans to repeat the mistakes they made adjustment mechanism12 and on clean twenty years ago on digital: doing too little product standards) and easier European too late. Because of those past mistakes, access to new green markets, especially today, not a single sizable digital technology in China and the USA. company is headquartered within our bor- 6. ensure sufficient high-level political - lea ders. The more policymakers increase green dership to provide political impetus, like public investment and adopt strong regu- the one given by Maroš Šefčovič, Peter lations in sectors like energy, transport and Altmaier and on batte- buildings, the more they can help EU innova- ries. tors so that the Apple, Google and Baidu of the green transition end up in Europe, not in Silicon Valley or Shanghai.

End notes ▪

1. There are still uncertainties whether China’s goal only 9. According to the European Commission, the R&I dimension concerns carbon dioxide emissions (carbon-neutral), or whether of Germany’s plan “lacks clear and measurable objectives” while it concerns all greenhouse gas emissions (climate-neutral). France’s plan “is impossible to evaluate” because of “a lack of 2. Those simplified numbers are based on the following sources quantified national objectives and quantified targets”. & calculation: 5,77% of the global population according to 10. For a review of the history of the demand pull model Eurostat for EU 27 population in 2020 & Countrymeters for global of innovation, cf. Godin, Benoit, and Joseph P. LANE. population in 2020, 9.47 % of global greenhouse gas emissions “Pushes and Pulls: Hi(S)Tory of the Demand Pull Model of Innovation.” Science, Technology, & Human Values, vol. 38, no. Managing Editor: Sébastien based on EEA estimates for EU27 GHGs in 2019 and JRC Edgar 5, 2013, pp. 621–654. JSTOR, www.jstor.org/stable/23474818. Maillard ▪ The document may be report 2020 estimates for global GHGs in 2019, 16.14% of global Accessed 19 Feb. 2021. reproduced in part or in full on the GDP according to World bank data for EU27 in 2018, and 23.37 11. Such declaration should also refer to the experience of dual condition that its meaning is of all world’s scientific articles, based on data from theNational Mission Innovation. It should also become the starting point for not distorted and that the source is Science Foundation for EU27 in 2018. a global endeavour to better map clean energy research and mentioned ▪ The views expressed 3. European Investment Bank, Investment Report 2020/2021, innovation investments in key global economies and companies, are those of the author(s) and do January 2021, p. 11. especially to use clean energy innovation investment as a proxy not necessarily reflect those of 4. This decrease is partially or entirely compensated by a rise to track the willingness of the global oil and gas companies to the publisher ▪ The Jacques Delors of EU-level investment during the same period. But comparable be part of the solution to climate change. Institute cannot be held respon- data is lacking, especially prior to 2014. 12. , Geneviève PONS, Pierre LETURCQ, A European sible for the use which any third 5. European Investment Bank, Investment Report 2020/2021, Border Carbon Adjustment Proposal, Europe Jacques Delors, June party may make of the document January 2021, p. 4-5. 2020. ▪ Original version ▪ © Jacques 6. All figures in this paragraph are in current prices. Delors Institute 7. Eurostat data for R&D expenditures. 8. European Commission, An EU-wide assessment of National Energy and Climate Plans, p. 21.

Institut Jacques Delors Penser l’Europe • Thinking Europe • Europa Denken 18 rue de Londres 75009 Paris, France • www.delorsinstitute.eu T +33 (0)1 44 58 97 97 • [email protected]