Climate technology and the investment gap – new Economist Impact report

Technologie klimatyczne

Fundamental changes in the structure of innovation financing are needed to meet the community’s goals for a carbon-free economy in 2050, according to a report prepared by Economist Impact on behalf of the investment firm IMPROVE. According to experts, the current system is not enough to adequately support needed climate technologies.

Coordinated action and hit investments

The report, “Climate Technologies: bridging the gap between innovation and impact,” comes in a year that has brought new temperature records. The authors stress that this is the last moment to launch coordinated cooperation and impact investing. Drawing on the literature, numerical data and interviews with industry experts, they attempt to formulate key recommendations for funding technologies that reduce emissions, develop climate resilience and our knowledge of climate change.

The addressees of the report are primarily entrepreneurs, investors and representatives of the public sector, on whom the implementation of the demands of the Net-Zero environmental program depends. The need for swift and effective action is indicated by clear signs of impending disaster, including extreme weather events, threats to food security and irreversible destruction of ecosystems.

Where is investment needed most?

The authors of the report emphasize that achieving the goals of the 2015 Paris Agreement. (limiting global warming to a maximum of 2°C above pre-industrial temperatures) will be impossible without technological advances. Although the number of start-ups focused on climate change challenges since 2010. increased fourfold, their potential still seems insufficient. Even if investments in climate technology promote job creation, support economic development and improve know-how.

The need to find new solutions affects almost all sectors of the economy, especially energy, transportation, industry, waste management and the agri-food industry. In each of them is observed the so-called “”thesis”. investment gap, or the discrepancy between what climate technologies offer today and what they could potentially offer, in the future. Filling this gap will require accelerated and targeted investment in developing and scaling new technologies.

According to the International Energy Agency(IEA), as much as 46 percent. emissions reductions needed to reach the Net-Zero target in 2050. will come from solutions that do not yet exist. However, the traditional way of financing innovation is not sufficient. Especially since the funds do not always go where they are needed most. The authors of the report cite the example of the agri-food industry, which generates nearly 20 percent of the total. emissions, but in 2022. It received only 10 percent. global investment in climate technology. Meanwhile, developing plant-based proteins to replace animal-based proteins would yield the largestCO2 savings per dollar invested.

Climate technologies and funding difficulties

The director of the Cleantech consulting organization in Europe, Jules Besnainou, stresses that the technologies needed to achieve the level of decarbonization planned for 2030 already exist. The biggest problem is increasing the scale of their utility and industrialization.

Too little is invested in high-risk and potentially high-impact spheres, while too much is invested in large companies engaged in incremental technological advances. The priority today should be carbon capture, which will require $160 billion in capital between 2020 and 2030 alone, 10 times more than in the previous decade.

The report emphasizes the need to combine public and private investment. The former are crucial at the initial stage of research and development, when risks are still very high. The next stage involves the development of a business plan and a functional prototype and relies mainly on government grants and “patient” corporate investors or so-called “patient” investors. “business angels.” It is only in the later stages of development and revenue establishment that venture capital (VC) funds begin to play a critical role. They support companies whose climate technologies are already too advanced to win government grants, but not yet commercially mature enough.

Philanthropic funds, which tolerate higher risks than profit-motivated investors, can and should play a non-negligible role in financing innovation. Only advanced technological solutions can count on equity financing or bank loans.

Government’s role in supporting climate technologies

Among the report’s key findings is the need for state governments to become more active, playing a key role in stimulating demand for new climate technologies. We are talking not only about grants, loans and tax breaks, but also regulations on public tenders and investments in human capital and infrastructure. As a positive example, the report points to Estonia, whose government is actively supporting climate innovation through public investment, reducing regulation or developing the infrastructure necessary for the adaptation of new technologies, such as electric vehicle charging stations.

Europe still lacks public and private investors to support the transformation from small scale to factory building and industrialization of new solutions. And this is where the government can help, by setting deadlines for phasing out legacy, polluting technologies.

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