The United States and China have provided generous subsidies and tax incentives to develop their green industries. While the European Union lacks the fiscal firepower of these countries, the bloc’s policymakers can and should use public guarantees to support private investment in cleantech companies.
MUNICH – Over the past two years, the European Union has made scaling up its cleantech sector a high priority. As European Commission President Ursula von der Leyen has emphasized, the sector is essential to the bloc’s economic competitiveness, energy security, and industrial leadership.
The EU has an innovation edge in several clean technologies, from green hydrogen to long-duration energy storage. But it is difficult to achieve commercial scale for these technologies on the continent. An investment gap of around €50 billion ($52 billion) must be filled to manufacture, by 2030, at least 40% of the solar and wind devices, batteries, heat pumps, hydrogen electrolyzers, and carbon capture and storage technology the EU must deploy.
When he presented his recent landmark report on European competitiveness, former Italian prime minister Mario Draghi succinctly summed up the problem: “There are too many barriers to commercializing innovations and scaling them up in the European Union.” In particular, the EU needs to develop new production methods and new methods of financing the construction of “first of a kind” plants, which require long lead times, access to large amounts of capital, and highly skilled labor.
The United States and China, recognizing that green industries can generate jobs and prosperity, have channeled billions of dollars into these sectors. US President Joe Biden’s Inflation Reduction Act, which offers tax credits for domestic cleantech production, is expected to unlock upwards of $3 trillion in private investment over the next decade, according to analysis by Goldman Sachs. China, for its part, has heavily subsidized its solar industry, among others.
The EU lacks the fiscal firepower of China and the US. So, instead of building these industries through generous subsidies and tax incentives, European policymakers must use government funds in a way that will crowd in private capital. That is where public guarantees come in.
Customers often expect companies selling technology that is unproven at commercial scale to issue extensive warranties in case the product does not perform as advertised. These warranties are backed by bank guarantees, for which firms are required to hold full collateral. But cleantech companies need comparatively high levels of investment to develop and expand their businesses, and holding large amounts of cash as collateral locks up capital that could be better spent building additional facilities, hiring and training workers, and fulfilling customer orders.
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To ease this burden, the public sector could provide counter-guarantees, promising to reimburse part of any payout that a bank makes to a customer. Industry experts have advocated this instrument as a way to decarbonize energy-intensive industries and derisk investments in clean technologies. It also featured prominently in Draghi’s report, which calls on the EU to increase substantially “the use of guarantees … in support of strategic sectors of the economy.”
Public guarantees have already proven effective in scaling up cleantech innovation in Europe. In 2022, Bpifrance, the French public investment bank, guaranteed €51 million of financing for Verkor, a French battery manufacturer. The guarantee helped Verkor secure private investment and a commitment from Renault to source electric-vehicle batteries from the firm, enabling it to break ground on its first gigafactory, in Dunkirk.
These guarantees are highly efficient, with each euro of public money unlocking up to thousands of euros of working capital for innovators. For example, a €5 billion guarantee facility created by the European Investment Bank for companies in the wind sector will support up to €80 billion of new investment in this important renewable energy source.
Moreover, taxpayer money is spent only if a claim ends up being made, and the available evidence suggests that this is a rare occurrence. The International Chamber of Commerce estimates that the average loss rate for guarantees is between 0.2% and 1.7%. While the risk is higher for innovative technologies, it is a risk worth taking in order to support climate solutions that could reduce greenhouse-gas emissions and create green jobs and future tax revenues.
One positive development is that the EIB has proposed a €500 million counter-guarantee instrument for cleantech companies, pending approval by its board of directors in early 2025. If the EIB turns this pledge into a reality, some of the EU’s most promising cleantech companies will likely achieve financial viability, which would benefit the bloc’s economic competitiveness and be a boon for the planet.
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MUNICH – Over the past two years, the European Union has made scaling up its cleantech sector a high priority. As European Commission President Ursula von der Leyen has emphasized, the sector is essential to the bloc’s economic competitiveness, energy security, and industrial leadership.
The EU has an innovation edge in several clean technologies, from green hydrogen to long-duration energy storage. But it is difficult to achieve commercial scale for these technologies on the continent. An investment gap of around €50 billion ($52 billion) must be filled to manufacture, by 2030, at least 40% of the solar and wind devices, batteries, heat pumps, hydrogen electrolyzers, and carbon capture and storage technology the EU must deploy.
When he presented his recent landmark report on European competitiveness, former Italian prime minister Mario Draghi succinctly summed up the problem: “There are too many barriers to commercializing innovations and scaling them up in the European Union.” In particular, the EU needs to develop new production methods and new methods of financing the construction of “first of a kind” plants, which require long lead times, access to large amounts of capital, and highly skilled labor.
The United States and China, recognizing that green industries can generate jobs and prosperity, have channeled billions of dollars into these sectors. US President Joe Biden’s Inflation Reduction Act, which offers tax credits for domestic cleantech production, is expected to unlock upwards of $3 trillion in private investment over the next decade, according to analysis by Goldman Sachs. China, for its part, has heavily subsidized its solar industry, among others.
The EU lacks the fiscal firepower of China and the US. So, instead of building these industries through generous subsidies and tax incentives, European policymakers must use government funds in a way that will crowd in private capital. That is where public guarantees come in.
Customers often expect companies selling technology that is unproven at commercial scale to issue extensive warranties in case the product does not perform as advertised. These warranties are backed by bank guarantees, for which firms are required to hold full collateral. But cleantech companies need comparatively high levels of investment to develop and expand their businesses, and holding large amounts of cash as collateral locks up capital that could be better spent building additional facilities, hiring and training workers, and fulfilling customer orders.
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At a time when democracy is under threat, there is an urgent need for incisive, informed analysis of the issues and questions driving the news – just what PS has always provided. Subscribe now and save $50 on a new subscription.
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To ease this burden, the public sector could provide counter-guarantees, promising to reimburse part of any payout that a bank makes to a customer. Industry experts have advocated this instrument as a way to decarbonize energy-intensive industries and derisk investments in clean technologies. It also featured prominently in Draghi’s report, which calls on the EU to increase substantially “the use of guarantees … in support of strategic sectors of the economy.”
Public guarantees have already proven effective in scaling up cleantech innovation in Europe. In 2022, Bpifrance, the French public investment bank, guaranteed €51 million of financing for Verkor, a French battery manufacturer. The guarantee helped Verkor secure private investment and a commitment from Renault to source electric-vehicle batteries from the firm, enabling it to break ground on its first gigafactory, in Dunkirk.
These guarantees are highly efficient, with each euro of public money unlocking up to thousands of euros of working capital for innovators. For example, a €5 billion guarantee facility created by the European Investment Bank for companies in the wind sector will support up to €80 billion of new investment in this important renewable energy source.
Moreover, taxpayer money is spent only if a claim ends up being made, and the available evidence suggests that this is a rare occurrence. The International Chamber of Commerce estimates that the average loss rate for guarantees is between 0.2% and 1.7%. While the risk is higher for innovative technologies, it is a risk worth taking in order to support climate solutions that could reduce greenhouse-gas emissions and create green jobs and future tax revenues.
One positive development is that the EIB has proposed a €500 million counter-guarantee instrument for cleantech companies, pending approval by its board of directors in early 2025. If the EIB turns this pledge into a reality, some of the EU’s most promising cleantech companies will likely achieve financial viability, which would benefit the bloc’s economic competitiveness and be a boon for the planet.