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 Jacques Delors Institute, ger-lasting effects than the COVID-19 only with a major acceleration in clean Paris. 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 European Union 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, Euro- 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 Paris Agreement 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 European Parliament 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 European Institute 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).