ETS: Innovation Fund & Modernisation Fund

by Sebastian Baciu

The EU’s ambitious climate objectives are supported by two key pillars: the ETS Innovation and Modernisation Fund. The main aim is to use the revenue gained from the EU Emission Trading System (ETS) in order to support decarbonisation initiatives in Europe and bolster the transition to net-zero while ensuring continued economic growth.

The Innovation Fund (IF)

Depending on the carbon price, the EU ETS, the world’s largest carbon pricing scheme, is providing the capital for the Innovation Fund through the auctioning of 450 million allowances from 2020 to 2030 [1]. Therefore the Innovation Fund is able to provide businesses with around EUR 25 billion over 2020-2030. A considerable share of the IF revenues will also be provided by the new EU ETS that will come in force in 2026 in parallel with the current ETS. The new scheme will cover buildings and transport, which will increase the funds available for decarbonisation schemes at the EU level [2]. The ETS 2 will contribute to the IF by auctioning 150 million allowances [2].

Consequently, the Innovation Fund will be used to drive the development and implementation of innovative low-carbon technologies, which will also be incentivised by the ETS. This can help strengthen the EU’s position as a leader in technological innovation on a global scale. The Innovation Fund will support private large and small-scale projects that have the potential to bring major emissions reductions in energy-intensive industries through highly innovative technologies in Europe. The projects need to demonstrate a sufficiently robust planning and business model as well as a solid financial and legal structure. The funds will be channelled towards projects focusing primarily on cross-crutting projects in energy-intensive industries, carbon capture and utilisation (CCU), carbon capture and storage (CCS), renewable energy generation and energy storage [3]. The Fund will thus help improve the sharing of the risks with the project developers that need support for the implementation of revolutionary projects.

The Innovation Fund is crucial to delivering the EU’s targets under the Paris Agreement and its objective to be a zero-carbon economy by 2050, as laid out in the European Green Deal Investment Plan. 

The Modernisation Fund (MF)

The second important instrument developed by the EU is the Modernisation Fund, which is a dedicated funding scheme to support EU member states with a GDP 60% lower than the EU average. The eligible countries are Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia. The Modernisation Fund will be supported by revenues from the auctioning of 2% of the total allowances for 2021-30 under the current EU ETS as well as additional allowances transferred to the Modernisation Fund by some of the recipient Member States [4]. Thus, depending on the carbon price, the Modernisation Fund may reach about €14 billion between 2021 and 2030. 

With the ETS revision in 2026, member states with a GDP that is 65% below the EU average, namely Greece and Portugal, will also be supported through the auctioning of an additional 2.5% of the total amount of allowances between 2026 and 2030 [5]. The Modernisation Fund is thus placed at the heart of the European Green Deal Investment Plan; it has a total amount of around EUR 25 billion [6]. It is considered one of the key funding mechanisms which will contribute to the objectives of the EU Green Deal by helping the beneficiary Member States meet the 2030 climate and energy targets and contribute to the EU-wide transition to a low-carbon economy [6]. The European Investment Bank will play a key role in this respect by assessing investment plans proposed by the beneficiary Member States, managing revenues and transferring resources [7].

The main investments will be directed towards renewable energy, the support of households living in energy poverty and a fair transition in carbon-dependent regions of the beneficiary countries. The Fund will also help member states increase their energy security by supporting the modernisation and interconnection of their energy networks, while at the same time promoting a shift away from fossil fuels. [8]

The Modernisation Fund will work in synergy with other national and European instruments, such as the Just Transition Fund or Invest EU programme. Taken together, these instruments can help ensure a fair and effective transition to carbon neutrality in Europe. While meeting the ambitious targets of the Paris Agreement will largely depend on the success of technology developments over the next decade, the EU stands as an example of how to mobilise green investments for a sustainable future.

References:

[1] European Commission, URL: https://ec.europa.eu/clima/eu-action/funding-climate-action/innovation-fund/policy-development_en, accessed on 28.01.2022
[2] Financing the Fit for 2030 package, Bellona Europe, 2021 , URL: https://bellona.org/news/climate-change/2021-09-financing-the-fit-for-2030-package-modernisation-innovation-and-social-funds-spell-the-eus-recipe-for-the-future, accessed on 29.01.2022
[3] EU Innovation Fund, URL: https://www.euinnovationfund.eu/, accessed on 29.01.2022
[4] How the EU Modernisation Fund can be a driver for the fossil-free energy transformation, CAN Europe, URL:https://caneurope.org/eu-modernisation-fund-a-driver-for-the-fossil-free-energy-transformation/, accessed on 29.01.2022
[5] Financing the Fit for 2030 package, Bellona Europe, 2021 , URL: https://bellona.org/news/climate-change/2021-09-financing-the-fit-for-2030-package-modernisation-innovation-and-social-funds-spell-the-eus-recipe-for-the-future, accessed on 29.01.2022
[6] Modernisation Fund, European Commission, URL: https://ec.europa.eu/clima/eu-action/funding-climate-action/modernisation-fund_en, accessed on 28.01.2022
[7] Modernisation Fund, European Investment Bank, URL: https://www.eib.org/en/products/mandates-partnerships/modernisation-fund/index.htm, accessed on 29.01.2022
[8] Modernisation Fund, URL: https://modernisationfund.eu/, accessed on 29.01.2022