An opportunity for startups: Will the EU’s new climate package turn the tide on emissions?

Editor's note: this a guest post from Tatu Liimatainen, director of EU Public Affairs at Fourtold, an independent consultancy providing strategic communications and reputation counsel to global organisations in the health, science, and technology industries.

Startups are already set to drive the green tech boom as the global economy shifts towards smart solutions to the climate crisis. But they will receive an extra boost thanks to European Union plans to redirect trade and industry towards greener business choices. This political push from Brussels will have huge economic implications not only in Europe but around the world.

As we approach the UN Climate Change Conference (COP26) in Glasgow this October, there are more and more signs that the world needs to act urgently. In recent weeks, there have been deadly floods in western Europe and China, wildfires in California and Siberia, and record heats in Finland, Ireland, and Canada. All this extreme weather points to the climate crisis playing out right now across the northern hemisphere this summer.

At the same time, solutions are emerging and countries are responding. Major economies like the United States, Japan, South Korea say they aim to become carbon neutral by 2050, with China setting 2060 as its target. Can the EU maintain its traditional position as the world leader when it comes to climate pledges?

The EU already agreed earlier this year to become carbon neutral by 2050 and slash its greenhouse gas emissions by at least 55% by 2030. The obvious next question is: how can we do this?

The answer came on July 14 when the European Commission published its massive climate and energy legislation package, awkwardly named Fit for 55. The aim is to recalibrate the relevant climate and energy legislation to meet the 55% target.

The package’s 12 legislative initiatives tighten the existing EU climate framework across the board, introducing more stringent targets to cornerstone policies like the Emissions Trading Scheme (ETS), the Effort Sharing Regulation (ESR) and the land-use sector (LULUCF).

The Commission also sets tougher targets for renewable energy in transport, industry, and buildings. Other measures include tighter emission standards for cars and vans, tweaks to the tax system to promote the transition from fossil fuels, and a carbon border adjustment mechanism (CBAM) that levies imports of carbon-intensive products like steel, cement, aluminium and fertilizers. It adds up to a serious attempt by the Commission to put a heftier price on emissions by strengthening the ETS and moving the climate framework towards a more market-based direction.

The long list of actions may sound like a regulatory exercise, but this bureaucracy has a clear political ambition: to raise the cost of emissions so much that it drives technological change on the ground. Targets can concentrate minds and transform the economic landscape.

But it raises another question: can the EU seize the business opportunities in the green transition?

The Commission estimates if the EU is to cut greenhouse gas emissions by 55% by 2030, it would need to invest an additional €336 billion annually in its energy systems compared to the previous decade. Even after its recent budgetary boost, the EU´s pockets are nowhere near deep enough to fund this kind of transition.

That means the European economy must innovate and finance the European climate makeover, rather than just being a global buyer. Europe must do more to lead the green tech boom, and not leave it to the likes of China which, despite being the world’s biggest carbon emitter, is also the global leader in wind and solar energy generation.

Startups should be at the heart of Europe’s green tech boom. SMEs represent 99% of EU businesses, and they can address the challenges with a fresh mindset. Although Europe’s industrial giants, like its carmakers, are changing tack by developing electric engines, the most innovative green tech ideas have emerged from startups and SMEs.

But they may also face big additional or up-front costs with, for example, the extension of the ETS. The changing regulatory environment around renewables might make companies think twice about their next investments. Furthermore, the CBAM will likely cause trade frictions with the EU´s global trading partners, which could hit European business.

As for investment, there will be more EU money, notably innovation funding under the Horizon Europe research programme, and a hefty 25% of the 2021-27 budget devoted to climate action. Public funding should also generate more global funding for cleantech.

The EU needs to use digitalization to power the transition across the field. The Fit for 55 package goes in the right direction, although much remains to be done. Digitalization will be crucial for making the energy systems smarter, further automating industry, improving energy efficiency in homes and offices, and distributing energy sources. It will also be essential for e-mobility and for greening agriculture. And European solutions are important not just for innovation and investment, but because of cybersecurity: the EU cannot compromise the safety and reliability of its energy networks.

Fit for 55 will now be scrutinized by the European Parliament and the EU’s national governments, a legislative process that will generate heated political debates and likely take years to complete. But it also could nudge the EU´s economy and society to become both greener and smarter.