The Innovation Fund will promote advanced low-carbon technologies to reduce greenhouse gas emissions and promote decarbonisation.

By Paul A. Davies and Michael D. Green

By the end of 2018, the European Commission will set up an Innovation Fund (the Fund) to aid decarbonisation. To achieve this, the European Commission will amend the EU Emissions Trading System (EU ETS) Directive via a delegated act. The EU ETS was created to reduce carbon emissions and incentivise companies to reduce their output, and covers around 45% of the EU’s greenhouse gas (GHG) emissions. Entities with access to the Fund from 2021 to 2030 (phase 4 of EU ETS) will include power and energy-intensive industrial sectors.

The Fund will build on support from the NER300 initiative — a large funding programme for innovative low-carbon projects. This support led to €2.1 billion being awarded to 38 innovative renewable energy projects and a carbon capture and geological storage (CCS) project. Money from the Fund will be used to help finance low-carbon technologies such as CCS, and will extend to both small and large-scale projects.

The compulsory allocation of revenue from the sale of 450 million emission allowances (EUAs) will provide financing for the Fund. According to Petra Sarapatkova, policy officer for the European Commission’s climate directorate, this could amount to “between €5.8bn to €11bn dependent on the carbon price”.

Last year, the European Commission requested a report from experts in energy-intensive industries, which found that:

  • A significant amount of low-carbon, innovative technology and a large number of business models are available for investment
  • The Fund should keep up with the fast-paced nature of technological change, and adapt its criteria for eligible technologies accordingly — cross-sectorial cooperation will prove beneficial, particularly in relation to CCS
  • Financial support should be linked with a project’s level of risk and the Fund should be flexible in this regard
  • Money given to projects should be staggered and delivered at certain project milestones, so that funds can be diverted from underperforming projects to more successful projects

The Commission is due to launch a public consultation paper regarding the Fund to discuss criteria for selecting projects and how operational prospects will be measured.

Simon Pettinger Kearney, policy advisor at the European Banking Federation, highlighted the need to encourage investment from banks as well as public funds, saying, “We are working with the Commission to set a regulatory framework in place that enables bank financing”.

Latham will continue to monitor the progress of the Fund.

This post was prepared with the assistance of Olivia Featherstone in the London office of Latham & Watkins.