Fiscal and regulatory instruments for clean technology development in the European Union


Headline issue

The cost of existing environment-friendly technologies, such as wind turbines and SO2 scrubbers, needs to be brought down so that they can be deployed on a large scale, while fundamental research needs to advance on the frontiers of technologies such as smart grids or energy storage.

Yet, despite these pressing challenges, European companies in the electricity production sector – the largest greenhouse gas emissions emitter in Europe, with 33% of European emissions in 2012 – spend less than 1% of their turnover on innovation, against 10-15% in IT or pharmaceuticals, suggesting that the incentives to conduct Research, Development and Demonstration (RD&D) of new or enhanced low carbon technologies and their associated systems and processes might not be in place.

The objective of this policy note is to investigate whether the current level of public support to environment-friendly technologies is sufficient to allow European countries to respond to the multiple challenges posed by climate change and other environmental concerns and to discuss the policy interventions that might be needed in order to drive forward clean energy technology investments in Europe.

Key findings

• European countries currently emphasize technology deployment over direct Research and Development (R&D) support. Current efforts on deployment should be augmented with additional R&D support.
• Given that there is no evidence that we have hit diminishing returns to energy R&D funding, we recommend an increase of public R&D funding for low carbon technologies. The IEA estimates that public R&D spending needs to at least double to achieve significant carbon emissions reductions.
• Increased funding should be gradual and consistent to avoid adjustment costs. A doubling of public R&D expenditures over 10 years corresponds to what was observed between 2001 and 2011 and thus seems achievable.
• To signal long-term commitments to energy R&D funding, we recommend directing 10% of the planned EU-ETS auctioned allowances revenues until 2025 to R&D funding. This would lead to the doubling of EU public R&D expenditures in 10 years suggested above.
• Public R&D efforts should focus on technologies central to any decarbonisation pathway and have a strong public good component, such as CCS, energy storage, smart grids, energy efficiency and infrastructure for electric vehicles.
• Because emissions standards and permits markets favour innovation in technologies that are closest to the market, public R&D efforts should in contrast support the development of technologies further from market that nonetheless have long term potential.