Catching up with climate investment in the European Union
The Members of the European Parliament (MEPs) will audition the European Commissioner-designates in early November. The hearings are a crucial moment to seek commitment from the EU’s next executive team on the priorities for the coming five years and how they will delivered – including on the urgent issue of investment in the climate transition.
What’s at stake for the climate?
Commission President, Ursula von der Leyen, has pledged to stay on course to deliver on the goals set by the European Green Deal with a focus on “implementation and investment to make it happen on the ground”. She has announced a Clean Industrial Deal within the first 100 days of the new mandate to tackle the dual goal of boosting the EU’s competitiveness and decarbonising the industry sector.
The need to unlock investment to deliver this goal features prominently in several mission letters sent to the Commissioner-designates, including to Teresa Ribera and Stéphane Séjourné, who, among other things, will be responsible for the Clean Industrial Deal. The challenge will be on the new Commissioners to develop and deliver this new flagship initiative – and the clock is ticking.
Each year, any unmade investment will contribute to an increase in the climate investment needs of the following year. As highlighted in Mario Draghi’s report on European competitiveness, the EU faces an unprecedented need to increase climate investment, both in terms of scale and speed, to meet its objectives. I4CE estimated that 406 billion euros(1) of additional investment are needed annually between 2024 and 2030 to reach EU’s 2030 climate objectives.
1: All data are in constant 2022 euros.
The need for a long-term EU investment plan to match ambitious objectives
The MEPs will challenge the Commissioner-designates on how they intend to implement the missions for which they are responsible. Understanding investments needs and closing gaps through public funding and private finance should be a central part of that.
Addressing the climate investment deficit requires a comprehensive approach that involves existing and future policies and regulations, carbon pricing systems, and both public and private finance schemes.
A focus on a long-term EU climate investment plan could be one of the central measures for the new mandate. To nurture this debate, I4CE’s research provides granular and transparent evidence on the current state of play of the EU’s Climate Investment Deficit.
The EU Climate Investment Deficit – what is it about?
I4CE published the first edition of the EU Climate Investment Deficit report in February 2024. This report tracks the EU27 public and private investments made in 22 sectors (including wind power, building renovation, electric cars, etc.) that are critical to the transformation of the energy, building and transport systems. We then compared the figures to the investment needed in the same sectors to reach EU’s 2030 targets.
Our research showed that the EU27 climate investments reached 407 billion euros in 2022 (or 2.6% of EU GDP), a 9% growth compared to 2021. Still, this is not sufficient to reach the EU’s 2030 targets. The European economy needs to double its level of climate investments to deliver the economic, geopolitical and climate benefits EU policy makers committed to. In other words, at least 813 billion euros would be needed every year until 2030, leaving a European climate investment deficit of 406 billion euros in 2022.
Good and bad news about climate investments in 2023
- Solar is going strong, wind and grids are starting to catch up
After a slowdown in 2022, investment in wind power more than doubled in Europe in 2023. According to WindEurope, this resurgence in wind power investments can be attributed to the relative stabilisation of raw material costs, including steel and other commodities, after several years of inflation. In addition, the simplification of permitting conditions in the EU, and growing recognition by national governments of the necessity to index auction tariffs and prices have contributed to the restoration of investor confidence. Germany and Spain permitted 70% more onshore wind than in 2022. France, Greece and Belgium also saw higher permitting volumes.
The EU also saw record solar installations in 2023. According to SolarPower Europe, 59 GW was installed in 2023, twice as much as in 2021 to reach a total installed capacity of 263 GW in 2023. Germany accounts for the lion’s share of these installations, having installed 14GW in 2023, twice as much as in 2022. The EU has the objective to reach a total solar power capacity of 592 GW in 2030, including 320 GW by 2025. This corresponds to an average installation of 47GW per year between 2024 and 2030. In other words, we’re well on our way.
If we translate this into euros, this represents an investment of around 52.1 billion euros, an increase of 26% compared to 2022. This significant increase in investment puts the EU on track to meet its 2030 target for the sector as the solar sector now present a climate investment surplus of 18 billion euros. There is still lots to be done, but the EU is currently progressing at a pace that is promising in terms of achieving its 2030 targets for the solar sector.
The good news from the wind and solar sectors are of little use if the electricity grid infrastructure does not follow suit. According to International Energy Agency (IEA), investment in power grids rose by more than 20% in 2023, reaching 60 billion euros. This is a very positive development driven by the need to develop grid interconnection between EU Member States, especially to facilitate power flows to central European markets. Despite this rise, investments in power grids are still below what is needed to achieve the objectives, with a gap of 30 billion euros. By comparison, the deficit in 2022 was 42 billion euros, indicating a reduction in the deficit over time.
- Crisis in the heat pump market
Following substantial increases in investment over recent years, EU investment in heat pumps has declined by 7.2% in 2023 in comparison to the previous year. EU heat pumps sales even fell by 47% in first half 2024 compared to first half of 2023 (EHPA, 2024).
According to the European Heat Pump Association (EHPA), the primary cause of this decline can be attributed to fluctuations in energy prices. In the wake of the Russian invasion of Ukraine in 2022, gas prices experienced a notable surge, making the utilisation of a heat pump a more financially advantageous alternative to an oil or gas boiler. However, since 2023, gas prices have exhibited a downward trend. This recent decline has resulted in a situation where they are once again below electricity prices, rendering the purchase of heat pumps a less compelling proposition for households and industries.
Furthermore, as indicated by EHPA, the evolution of the heat pumps market in the EU is closely related to the political landscape. A number of negative signals have been transmitted to the market in recent times, contributing to an overall atmosphere of uncertainty for investors and the market players. The European Commission’s Heat Pump Action Plan, initially scheduled for late 2023, has been postponed to a later. Similar shifts have also been observed at national level. For instance, the removal of government support for heat pumps in Italy largely explains the 44% decline in Italian heat pumps investment in 2023.
Our initial estimates for 2023 assesses the sector’s climate investment deficit at around 29 billion euros. The recent contraction in the heat pump market is hindering the EU’s ability to achieve its targets for the sector. Without the implementation of supplementary public policy measures, the EU will not be on track to achieve its 2030 objectives for this specific sector.
Better assess and better address the EU climate investment deficit
The EU has set itself clear targets to transform its energy, buildings and transport systems in a way that delivers economic and social benefits while getting on track towards climate neutrality by 2050. Even if there have been positive developments in climate investments recently, such as in the solar power sector, other sectors, such as heat pumps, are struggling.
To understand if the EU is on track to deliver, it is necessary to continuously better assess and address its EU climate investment deficit. Better assessment means that EU institutions should deliver their own, needs-driven and accurate, granular and comprehensive assessment of the climate investment deficit. Better address means that they should implement a policy and investment mix, including an EU long-term investment plan to tackle it.
The hearings of the Commissioners-designate in the European Parliament is an ideal opportunity for MEPs to hold the new executive team in the Commission accountable to creating the conditions necessary to better assess and address this climate investment deficit.
