Smart, Green and Clean:This is the Innovation that the EU Economy Needs

In the last few years, the European Union (EU) has been battling multiple crises, which have deeply transformed not just the EU itself but also the economic and geopolitical dynamics of the international arena. Climate change, inflation and the energy crisis, as well as increasing competition on a global market often dominated by the US and Chinese digital giants, have been threatening the endurance of fundamental liberal economic paradigms, with many countries attempting to adopt a protectionist approach. Yet, the EU is still a committed defender of open markets and, despite global negative shifts in 2022, its GDP grew by 3.6 %, its employment rate showed positive trends and, as reported by the Global Innovation Index, many European Member States were still among the most innovative economies in the world.

However, to succeed in strengthening its industrial competitiveness and the resilience of its energy system, the EU needs to change its economic paradigms by optimizing its scarce resources, boosting product and process innovation, and managing the clean energy transition. In other words, technological innovation is at the heart of the transformation process that is needed to fully recover and revitalize the EU economy and create long-term sustainable prosperity. This is particularly urgent in light of the European Green Deal, which aims to turn the EU into the first climate-neutral continent by 2050 and to reduce net greenhouse gas emissions by at least 55% by 2030, compared to 1990.

Going green – the European way

Enter the Net Zero Industry Act, Europe’s response both to China’s multi-billion dollar subsidization of its national economy and to the US Inflation Reduction Act (IRA), which allows Washington to finance green and technological innovation by way of massive state aid in the form of tax breaks and subsidies for manufacturers based in North America. As part of the Green Deal Industrial Plan, the Net Zero Industry Act aims to ensure that 40% of the necessary production capacities of strategic clean technologies will be located in the EU, that strategic dependencies are overcome and that green manufacturing capacity is increased to underpin the clean-energy transition. While the Net Zero Industry Act is not a direct answer to the 369 billion USD to be made available under the US IRA, it still has the potential to support those clean technologies that are commercially available and suitable for a rapid scale up. Indeed, it intends to attract investment in the cleantech sector by streamlining existing funding channels, facilitating access to markets, supporting research and development, enhancing skills, and reducing administrative bottlenecks.

The EU is currently a net importer of most types of green technology and has a global market that is expected to triple to a value of EUR 600 billion by 2030, with related manufacturing jobs set to more than double. However, in order to build an effective system of cleantech innovation networks in Europe, instead of starting from the top it may be better to focus more on the smaller scale, such as by supporting start-ups operating in the sector. Unlike the classic top-down, centralized industrial policy, benefitting established players, such a decentralized approach would also boost Europe’s future resilience by diversifying supply chains. This is not an easy goal to reach, however, as it will require strong coordination between Member States and a more active and targeted support program, as outlined below.

What role do European start-ups play in the green transformation?

In Europe, the number of cleantech start-ups is certainly increasing but, according to a study developed by the Centres for European Policy (cep) Network, the distribution of these companies is not homogeneous. If one looks at the main European economies in terms of GDP, i.e. Germany, Italy, and France, Germany comes out on top, with Italy recording one-third fewer cleantech start-ups than Germany. In fact, only 14% of Italian start-ups operate in the cleantech sector. Moreover, even within these countries, start-ups are highly concentrated in a small number of cities  and a long way from achieving a more decentralized tech landscape.

Beyond the numbers, however, what remains problematic is the fact that, at national level, there is no clear definition of what a cleantech is. In France, for example, cleantech includes a wide range of companies that deal with both technological innovation tout court, ‚the deep techs‘, and those that deal with low-impact production, such as the green techs. Therefore, for the current European agendas to work, it is of utmost importance to agree on concrete concepts and definitions of cleantech that can be easily made operational in the different Member States.

In addition, while more subsidies for this type of company would be welcomed in all three countries, not all countries can afford the same amount of aid, and there is even a risk of disrupting fair competition at the EU single market level. In the case of Italy, start-ups receive less funding than their German and French competitors. In fact, the real problem facing Italian cleantech start-ups is precisely the difficulty of accessing funding, not only in the first phase of project development and incubation but especially in the second phase, when they need to scale up their business models to become small or medium-sized enterprises.

Italy, Germany, France – hurdles for cleantechs everywhere

Italian venture capital does not seem to believe in cleantech start-ups. According to the Milan Polytechnic’s Observatory, from 2015 to 2020, only 13 startups in this sector obtained funding for a total of €36.8 million out of €2.458 billion earmarked for innovation. Yet, not only in Italy but also in France and Germany, startup accelerators – which are supposed to help companies take a leap to the next level – are unable to provide sufficient resources and banks often demand guarantees that are too high. While the problem of access to adequate funding could be applied to all start-ups, in the case of cleantechs it is more acute because the products created by the latter need more time for development and marketing and therefore often do not fit with the investors’ logic of immediate profit.

In the case of Germany, the Future Fund, launched by the government in 2020, has helped to strengthen investments, including private ones, in the cleantech sector. Nevertheless, as in Italy, there are significant obstacles related to low market liquidity in the venture capital segment in general, and to a lack of focus on innovation activities for clean solutions in particular. Furthermore, excessive bureaucracy is identified by German start-ups as a significant obstacle to their growth. According to the Startup Monitor, 90 per cent of start-ups consider bureaucratic simplification to be their first goal.

In the case of France, administrative red tape and overlaps in the various lines of funding are undermining the French authorities’ attempts to efficiently boost business innovation in the country. There is also a particular French tendency to take into account, which is that projects developed in Paris seem to be better supported compared to those in other cities. As mentioned earlier, the concentration of cleantech start-ups in specific geographical locations and cities is also common in Germany and Italy. However, while in the case of the latter two, this is mainly due to the presence of greater public or private funding, as well as innovation, technology or human capital, in the case of France, it seems more of a cultural issue, with Paris being preferred to the rest of the country.

The way forward

In conclusion, despite the fact that the European Net Zero Industry Act aims to facilitate the development of green and cleantech activities by decreasing bureaucratic constraints, the risk is that a large-scale European plan will not be able to consistently address the existing and persistent barriers in the startup markets of the Member States. Hence, it is necessary for national authorities to do their part by changing the cultural approach to start-ups, cutting red tape and facilitating private investment through ad hoc guarantees. These are all essential actions that will enable clean techs to acquire the necessary resources in an integrated and effective system that would not only generate new forms of prosperity but also allow the European project to move from a state of constant exposure to external crises to one of long-term social and economic progress.

This contribution is an abridged and revised version of cepInput 5/2023