In the Wake of the Inflation Reduction Act, Europe Remains an Excellent Region for Climate Tech Innovation 

Europe has strong economic, societal, and regulatory drivers of decarbonization

There are strong fundamentals supporting climate tech innovation in Europe, including economic, social, and regulatory drivers of decarbonization. These factors indicate that the recent decline in climate tech investment in the region will be transitory. 

There are several economic drivers of decarbonization that distinguish Europe from other regions Powerhouse and Powerhouse Ventures are active in. First, fuel prices are generally higher, and 9 of the top 10 countries with the highest gasoline prices at the pump in July were in Europe. Furthermore, 9 of the top 10 countries with the most expensive natural gas are in Europe. With electricity prices set by natural gas, the high gas prices translate into higher electricity prices, and Europe leads the world in electricity prices—the top 10 countries with the highest electricity prices are in Europe. The relatively high cost of conventional fuels like gasoline and natural gas increases Europe’s appetite for pursuing lower-carbon alternatives, even before considering the geopolitical risk with respect to oil and gas imports from Russia and other authoritarian regimes. 

Additionally, public opinion in Europe is generally more favorable towards decarbonization compared to the US. For example, more European respondents are willing to make substantial changes to their lifestyles in order to reduce the effects of climate change, are concerned that climate change will personally harm them during their lifetimes, and are more confident of their own societies’ responses to climate change. This context promises to continue driving increased demand for products that contribute to decarbonization. 

Public opinion in favor of addressing climate change has been paralleled by a regulatory environment that is very beneficial for climate tech startups. The NextGenerationEU pandemic recovery facility runs through 2026 and has allocated 800BN EUR to investments in areas including climate. More specifically, the EU has mandated that all new vehicles must have zero emissions starting in 2035, which is expected to encourage continued robust deployment of EVs throughout the region and create demand for solutions like Powerhouse Ventures portfolio company Zeti’s fleet finance solution. Another example is the European Renewable Energy Directive, which requires all renewable hydrogen producers to use hourly matching by 2030 and is expected to spur demand for innovations in hourly energy matching, including solutions like Powerhouse Ventures portfolio company Granular Energy’s 24/7 Carbon Free Energy Platform. There are numerous other regulations covering areas including emissions reporting and the decarbonization of the built environment, which are similarly supportive of decarbonization.  

Regulatory tailwinds will continue to make Europe an attractive market for climate tech 

Regulators can take two approaches in response to the negative externalities that result from carbon emissions: price the emissions, or subsidize lower carbon alternatives. Generally economists view a carbon tax as more efficient, but it’s politically difficult to implement in many regions, which often leaves subsidies as the most feasible tool. This was the case at the national level in the United States with the IRA. However, Europe is pulling on both levers, and it is currently expanding its carbon pricing mechanism as well as several subsidy initiatives. 

The EU Emissions Trading System (ETS) is a cap-and-trade program intended to price emissions in sectors including electricity generation, and ultimately spur emissions reductions in those sections. In April 2023, the EU parliament adopted several modifications to the ETS program, including increasing the 2030 reduction target from 43% to 62% (relative to 2005 emissions), phasing in a carbon border adjustment mechanism for several heavy-emitting industries like steel and fertilizers, and expanding the ETS to cover maritime shipping. This expansion creates greater pressure for heavy industries like steel and shipping to track and reduce their emissions. 

The EU is also pursuing multiple initiatives focused on funding decarbonization technologies. Importantly, the European Commission has released the actions that it intends to take through the Green Deal Industrial Plan for the Net-Zero Age. The plan focuses on four pillars, including increasing funding (subsidies), opening trade, enhancing skills, and simplifying regulation. With respect to increasing funding, the EU is taking a two-prong approach aimed at expanding EU-level funding through a proposed European Sovereignty Fund, as well as creating rules to promote member-state funding of renewable energy and industrial decarbonization projects. The EU parliament will need to approve the Commission’s proposed changes, and the final bill is expected to be approved by the end of 2023.

While the IRA has captured the world’s attention and is providing huge benefits to climate tech innovators, Europe is continuing to use both subsidies and carbon prices to incentivize decarbonization. Europe’s robust climate innovation hubs, broad approach to regulating carbon, and economic and societal pressures to decarbonize will continue to foster a strong ecosystem for climate tech innovators and investors in the coming years. 

Special thanks to Gabriel VanLoozen, Huiling Zhou, Shaandiin Cedar, and Sam Wohlforth.

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