Corporate Climate Finance - An overview EU and US Approaches

This article provides a short summary of a recent webinar we organised together with ICF and NACD. The recording is available here: https://youtu.be/ok10q8c_FZc

In this decade of action, governments play a crucial role in supporting industrial decarbonisation to mitigate climate change, foster sustainable economic growth, and promote public health and social benefits. In this webinar we discussed the different approaches between the United States and the European Union and what companies can expect in terms of support and financing for their decarbonisation plans.

The Scope of the US Inflation Reduction Act

We started the webinar with an overview of the US Inflation Reduction Act, which includes $500 billion in spending and tax breaks. The US IRA is more focused on incentives rather than regulation, with a strong focus on environmental justice, and fostering collaboration between applicants.

The US IRA includes funding for energy, manufacturing, environment, transportation, electric vehicles, agriculture, and water, as well as tax credits for consumers on electric vehicles and heat pumps (among others). The IRA also focuses on investing in batteries, clean electricity, carbon reduction, carbon storage, nuclear, clean transit, hydrogen technologies, grid improvements, and recycling.

More information on the scope of the IRA available here: https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-inflation-reduction-act-heres-whats-in-it

There are various government agencies involved in Climate Funding through the IRA.

• US Department of Treasury is primarily engaged due to tax credits

• Department of Energy, EPA, Department of Agriculture, Department of Interior, and Department of Transportation also involved

Regulations and funding processes are still being implemented, causing some delays.

“National Green Banks” have $27 billion allocated through the EPA, with $7 billion going to states and cities and $20 billion to non-profits

Green Banks leverage public and private funding for climate solutions

Again, it was stressed that collaboration is key to accessing funding opportunities.

Scope of the Net Zero Industry Act:

The Net Zero Industry Act was proposed by the European Commission in the context of a broader regulatory framework for the green transition. It aims to promote manufacturing of clean technologies in Europe to contribute to decarbonization. The NZIA includes measures to simplify permitting procedures, facilitate access to markets, enhance skills, and promote innovation. It focuses on solar, wind, battery and storage technologies, heat pumps, geothermal technologies, electrolysers and fuel cells, biogas biomethane, carbon capture and storage, and grid technologies.

The NZIA also includes an EU target for carbon storage capacity and a hydrogen bank to fund the green premium for hydrogen production. A European sovereignty fund is envisaged to support cleantech sectors, subject to political discussions in the next months. It was noted that member states also have an obligation to include sustainability and resilience criteria in public procurement and auctioning procedures.

The NZIA complements a comprehensive portfolio of already existing EU climate legislation, the EU Green Deal with the fit for 55 climate policy package, the EU Emissions Trading Scheme (ETS) , the RePowerEU plan and a range of other legislative, finance and investment tools.

More information available here: https://ec.europa.eu/commission/presscorner/detail/en/IP_23_1665

Observations on the Inflation Reduction Act and CleanTech Manufacturing

It was discussed that the Inflation Reduction Act aims to increase the industrial base of the United States and reduce dependence on China for clean tech manufacturing. China is currently the largest investor in clean tech manufacturing, with investments four times larger than half a decade ago and eight to ten times more than North America and Europe combined.

The IRA focuses not only on renewable energy but also on hydrogen production, transmission distribution efficiency of distribution, carbon capture and storage, and nuclear power. The IRA was described as a classic industrial policy that puts public funding into long-term systemic things like production tax credits to attract private sector investment. It also encourages investments in rural areas, thus contributing to a more equal distribution of available funding.

For example, private capital investment in battery manufacturing plants has increased from $13 billion in October 2022 to $60 billion in March 2022, supplementing the production tax credit and other tax provisions in the IRA.

Europe’s regulatory framework for cleantech manufacturing & the Innovation Fund

Europe has a strong, and so far effective, regulatory framework in place including a carbon tax on emissions and a standard for Net Zero vehicles by 2035, which drives investments in low-carbon technologies and cleantech manufacturing.

The Net Zero Industry Act creates an enabling regulatory framework for cleantech manufacturing and aims to increase production inside Europe and reduce vulnerabilities in supply chains. The European Commission has revised state-aid rules to allow member states to give support to companies developing investments in clean tech manufacturing.

The Innovation Fund in Europe, funded by the ETS, focuses on accelerating innovation in areas where extra money is needed, such as clean technologies. The Innovation Fund focuses on decarbonizing energy-intensive industries, including hard to abate sectors, CCS, CCUS, and synthetic fuels. The fund also supports innovative renewables, energy storage, and clean tech manufacturing. The fund prioritises scale-up projects and transitioning from lab to commercial deployment. Funding can cover both capex and opex, which is new at the European level. So far, the EU has funded 70 projects, including the first hydrogen steel plant in Europe and Europe's largest PV manufacturing plant.

It was noted that the innovation fund prioritises energy intensive industries and hard to abate sectors such as CCS, CCUS, innovative renewable energy and energy storage, and cleantech manufacturing. . It also supports the recognition of professional qualifications and the creation of Net Zero industry academies to address skills gaps.

There is a clear demand - the third (and latest) large-scale call for projects has a budget of 3 billion, but the number of submitted projects totalled 18 billion.

Climate Finance and Policies for Small and Medium Companies

The Innovation Fund focuses on large-scale demonstration projects, but SMEs can also access it. The Climate Finance program aims to support companies with capital below 7.5 billion for their climate-related projects. The program has a specific window for mid-sized pilots, which allows startups and venture capitalist companies to test their innovations in a pilot scheme.

Advice for Board Members trying to understand and benefit from these policies

Overall, Board members should be asking how their company(ies) can leverage the IRA and EU opportunities to meet carbon reduction goals and improve business strategy. The landscape can be complex - companies should consider hiring consultants or partnering with trade associations or other partners / communities to navigate funding opportunities. It was noted that some opportunities may require 50% funding, which may require collaboration with investors or strategic partners to obtain. Board members should be aware that loans and grants have risks, but the opportunities generally far outweigh those risks.

What can the US and EU learn from each other?

It was mentioned that the US could learn from the EU’s effective use of regulations to move markets towards cutting emissions, while the EU can learn from the US’ incentive-based approach to industrial policy.

The EUs experience with carbon pricing and running an emissions trading system can be a valuable lesson for other countries. It was observed that the lack of a similar scheme in the US is likely due to politics, and that the concept is seen as a tax.

It was noted that we should avoid a subsidy race between industries investing in the US and the EU. The EU and the US are both acting forcefully to support clean tech, and that there are opportunities for both Europe and the US to be present in Green Tech value chains and have manufacturing activities on their territories.

In summary, these are two major regions in the world that are driving the acceleration of clean tech at a faster pace, with complementary approaches in some aspects. The European Union (EU) has envisioned a legislative framework combined with market solutions to anchor the business transition towards clean tech.

For businesses and their boards, it is critical to urgently assess these developments in light of their short-term challenges and future investments, and leverage public funding opportunities. Furthermore, in our interlinked world, climate finance presents promising elements to benefit the planet, as clean tech investments have the potential to deliver low-carbon solutions for all.

For information on the EU Decarbonisation opportunity - please see this report from ICF

https://www.icf.com/insights/climate/practical-insights-industry-decarbonization-europe

We thank our speakers for their expert insights:

Britt Ide

Britt Ide serves on the:

• Board of Directors of NorthWestern Energy (Nasdaq: NWE), a natural gas and electric utility

• Lead Independent Director of Atlis Motor Vehicles, a recently public (Nasdaq: AMV) battery and electric work truck innovator

• Board of PE-backed TechnoSylva, a US and Spain-based wildfire science and technology company helping utilities and fire agencies manage increasing wildfire risk

• Advisory Board of 3Degrees, a B Corp that helps companies (including Apple, eBay, and Lyft) meet their climate goals including with carbon credit trading

Britt has 30 years of experience as an engineer, lawyer and business leader (CEO, CSO, CLO). As President of Ide Energy & Strategy, Britt consults on energy, climate change and ESG. She holds a B.S. in Mechanical Engineering, an M.S. in Environmental Engineering, and a Juris Doctor. She is a NACD Board Leadership Fellow.

Antoine Colombani

Antoine Colombani is Member of Cabinet (private office) of Frans Timmermans, European Commission Executive Vice President for the European Green Deal. He joined the Commission in 2010 in the Directorate General for Competition and was the spokesperson for competition in 2012-2014, under Vice President Joaquín Almunia.

He then joined Mr. Timmermans’ team in his capacity as First Vice President in 2014-2019. Prior to joining the Commission, he worked for a short time as a judge in the Administrative Court of Paris (2009-10). He studied at Université Paris-I Panthéon Sorbonne, Sciences Po, the London School of Economics and Political Science, and the Ecole Nationale d’Administration (ENA).

Matt Futch

Matt is currently the strategic partnerships lead for the Tapestry project at X, the moonshot factory, a division of Alphabet.

Matt has worked in the global power industry in different positions for two decades focused on technology, regulation, and business partnership formation. He is an expert in clean energy technology, utility regulation, and new products and services for the power industry.

Previous to his role at Tapestry, Matt served as the strategy and business development leader at the National Renewable Energy Laboratory and propr to that he was VP of Regulatory Strategy for National Grid US where he led the development of long-term utility regulatory and business strategy for three jurisdictional companies across New York, Massachusetts, and Rhode Island.

Matt holds a M.A. in Global Finance and International Trade (energy emphasis) from the University of Denver and a Bachelor of Arts in Communications from Colorado State University. He lives with his family in Denver, Colorado and is a lifelong tennis fan / player.

Stefaan Vergote

Stefaan Vergote is Advisor for ‘Low carbon innovation ‘ in DG CLIMA.

Until end 2022, he was Head of unit CLIMA.C2 - Low Carbon Solutions (II): Research & Low Carbon Technologies. Previously he was Head of Unit for Economic analysis and Financial Instruments Unit in DG ENERGY. From 2010 to 2014, he was Head of Unit in DG CLIMA, responsible for development of strategic options for the EU’s international and domestic climate action. His team was in charge of the 2050 Low Carbon Roadmap, and the 2030 framework for climate and energy policies.

Previously, as Deputy Head of Unit on 'Energy and Environment' in DG Environment, he led a team coordinating the preparation and economic analysis of the 2020 Energy and Climate Package, which implemented the EU's independent commitment to reduce greenhouse gas emissions by 20% by 2020, including the review of the EU Emission Trading System, The Effort Sharing Decision and Directive on Renewable Energy.

Mr. Vergote has a diploma of civil electrotechnical-mechanical engineering at the Catholic University of Leuven (KULeuven) and holds a Postgraduate Degree in Environmental Management and Technology (KULeuven). Prior to joining the Commission, Stefaan Vergote held roles at the Catholic University of Leuven, the Flemish Institute for Science and Technology and VITO (Flemish Institute for Technological Research).