The transition to a greener and more inclusive economy is a huge opportunity for Europe. The deep transformation needed means a tectonic shift in sectors, business models and activities, and will require a massive investment. According to BNEF, the region invested around €200 billion in the low-carbon energy transition in 2022. To stay on track, average annual investments into clean energy in Europe need to run at more than three times this level for the rest of this decade, and more than four times in the 2030s.
The paramount capital reallocation needed happens only when it has economic sense.
And we need to channel investment not only in green activities and projects but also in those areas more difficult to abate. If we want to succeed in our climate goals we have to help the whole economy to transition. In this journey, the financial sector plays a key role which we have defined as bringing the age of these opportunities to everyone. This is why it is so important to have the holistic approach recently adopted by the European Commission setting not only green finance, but transition finance at the core of its strategy.
The paramount capital reallocation needed happens only when it has economic sense. Companies, investors, banks, citizens… They are not going to change their financial decisions and behaviors massively and at scale unless we dramatically reduce the green cost premium thanks to technology and the right enabling policy framework. In this sense, the green transition is reshaping the global competitiveness landscape, with the different regions in the world competing to win the race to net zero. Europe is already making relevant steps with relevant proposals such as the Net Zero Industry Act but we need to do more.
How to create the best enabling policy framework to support the green transition? I propose to frame this question using technology maturity which, at the end, define the basic elements of any financial decision: the traditional risk and return, and the increasingly relevant impact.
At a first level we have those technologies without a green cost premium and that are ready to be massively deployed such as renewable energy, energy efficiency, or electric mobility. In this area, the improvements in the policy framework should be focused on facilitating a faster permitting and simplifying industrial projects for climate- neutrality. The latest estimates show that build time for utility-scale solar and wind projects ranges from four to ten or more years, depending on the geography. According to the IEA Renewables report 2022, Europe’s renewable capacity expansion during 2022-2027 could be 30% higher if accelerated-case conditions were met.
The second level includes those technologies that are in the early stages and need to move to an economically viable phase to reach a point where the conditions to scale up are met. Here we have those sectors difficult to abate where we still have relevant green cost premiums: how to produce green steel or cement, how to produce sustainable aviation fuels, how to solve heavy transportation or shipping, how to make carbon capture and many more. All those technologies may suffer a “valley of death”, and consequently public resources are critical to incentivize additional private investment.
In this sense, we welcome the Net-Zero Industry Act proposed by the Commission where they are qualified as strategic net-zero technologies such as battery/storage, electrolysers and fuel cells, sustainable biogas/biomethane or carbon capture and storage (CCS). A good reference is the innovative mechanism such as the carbon credit for difference (CCfD).
Having the right policy framework and working in partnership is critical to promote the financial flows required.
And finally, we have the third level of technologies that are still in the research phase but need to be accelerated such as nuclear fusion, electric or H2 planes or truly smart grids. Here we need long-term investment, with public-private partnerships and industry alliances to share the high risks but also to build on the different capabilities of the different stakeholders (governments, companies, universities and other civil organizations). The right policy framework for the EU also means to invest in human capital development such as education or talent attraction through immigration and retention.
To conclude, investment in technology will be a game changer in the race to zero. Having the right policy framework and working in partnership is critical to promote the financial flows required. In all of this, we as the financial industry have to play our role: contribute to achieving more sustainable and inclusive societies without leaving no one behind. A better Europe for all.
Time is running out, but the solution is on us. Therefore, I am optimistic. We have to respond to the demands of the new generations. Let’s put our children and grandchildren ahead of everything and make it happen.
