The green transition is a strategic transition

Russia’s invasion of Ukraine and increasing hostility towards the West have shattered Europe’s long-held assumption that trade would uphold lasting peace with its giant neighbour. Much of the European Union’s economy is built on the foundation of oil and gas, largely supplied by Russia. Europe now finds itself in the untenable position of being heavily dependent on a hostile and unreliable power for much of its energy. Moreover, the conflict and resulting sanctions have disrupted exports from the region for many commodities, including metals and food, as well as oil and gas, stoking inflation to levels not seen in decades.

According to a recent European Investment Bank (EIB) study, entitled ‘How bad is the Ukraine war for the European recovery?’, real economic growth in the EU is now expected to fall well below 3% in 2022, down from the 4% estimated by the European Commission before the war. Further trade disruptions or increased economic sanctions could plunge the European economy into recession.

European governments are busy securing gas supplies to avoid catastrophic economic and social consequences before next winter. However, the medium and longer-term solutions lie elsewhere, away from fossil fuels. Looking ahead, Europe needs to secure its energy supply and protect itself from future shocks; the necessary steps to achieve this are the same as those needed to tackle the climate crisis. Reducing our consumption of carbon-emitting fossil fuels and accelerating the decarbonisation of our economies by investing in innovative, green and digital technologies will strengthen Europe’s energy security and strategic autonomy. It will also help us achieve our climate goals and provide the basis for sustainable economic growth. Rather than rethink our strategic direction, the new geopolitical situation encourages us to double down on our policies and accelerate their implementation.

Investment gaps are immense, and Europe simply cannot rely solely on public money to develop – and bring to scale – all the new technology we need to create a strong, carbon-neutral and competitive economy. The European Commission estimates that Europe needs about €350bn of extra annual investment to achieve its 2030 emissions target. A specific focus needs to be put on hard-to-abate sectors, such as the chemical and steel industries, but also long-distance transport. For these sectors, investment and innovation needs are particularly large given the absence of economically competitive abatement technologies. Huge amounts of investment are also needed in areas such as semiconductors and artificial intelligence (AI). While the EU just recently stepped up support for the production of semiconductors, with a plan to mobilise up to €48bn by 2030, China is planning to invest €150bn over the same period, while the Unites States has allocated €55bn over the next three years. To become a leader in AI, Europe would need to quadruple its level of investment.

The European Green Deal, the Union’s plan to transform itself into a modern, resource-efficient and competitive economy, will absorb as much as a third of the €2tn NextGenerationEU recovery plan and long-term budget.

Used cleverly, EU support can act as a lever and attract even more investment. Blended financing structures, combined with public grants, are a powerful tool to attract private capital, as the success of the European Fund for Strategic Investments (EFSI) showed. EFSI, which ran between 2015 and 2020, exceeded its target of mobilising €500bn in quality investment. The fund also enabled the EIB to expand its activity to riskier, but more innovative, projects by as much as 30%. EFSI’s successor, InvestEU, will work in much the same way, with a €26.2bn guarantee from the EU budget.

Europe’s ability to innovate and accelerate the deployment of new technologies is central to its energy security objectives, climate goals and future prosperity. Unfortunately, too many innovative European companies struggle to secure the funding needed to bring their innovations to the point of market deployment and adoption. These firms end up leaving the EU for the US or Asia, where risk-capital markets are deeper. Still, the public sector can put together efficient instruments to fill this financing gap. The EIB, for example, has helped to build up entire sectors in Europe, which originally were perceived as too risky, such as offshore wind. Recently, the Bank also financed the first European gigafactories. Public support for innovation is vital because we simply do not yet have all the technologies we need to achieve our climate goals. We need new, breakthrough technologies, particularly for hard-to-abate sectors.

The European Green Deal is a tremendous move in the right direction, but we need to invest more, and faster, if we are to avoid catastrophic climate change consequences and build a stronger, more autonomous and more competitive economy. Russia’s war in Ukraine makes this need only greater and more urgent.

No individual or country can ever stop the wind from blowing or the sun from shining. As such, an energy system based on mass-scale renewables would guarantee Europe’s energy security and strategic autonomy.

As the EU’s climate bank, the European Investment Bank (EIB) is already committed to supporting €1tn of investment in climate action and environmental sustainability by 2030 and directing half of all its lending to projects that combat climate change. The EIB is also one of the biggest supporters of the digital economy, with a loan portfolio of €15bn just in this sector.