European investment in the energy transition is stalling

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This is a crunch moment for green strategy in Europe. As our sister newsletter Europe Express reported this week, liberal European parliament members are accusing businesses of exploiting concerns about economic dynamism to attack the EU’s environmental policy agenda. In the UK, similar worries prompted chancellor Rachel Reeves to say last week that economic growth would take priority over the Labour government’s ambitious net zero goals.

But, as we report in today’s edition, new data suggests that European governments need to pay more attention to green investment — unless they’re willing to fall behind the pack in this multitrillion-dollar global race.

GREEN INVESTMENT

New numbers show a worrying trend for Europe

European politicians have spent much of the past year debating whether the region’s focus on climate action has sapped its economic vigour. But new data suggests grounds for a different sort of competitiveness worry: that Europe is losing momentum in the contest for the low-carbon industries of the future.

Yesterday, the research business BloombergNEF published its annual report on investment in the energy transition. At an aggregate global level, the picture looks fairly robust. Worldwide investment in the low-carbon transition — including spending on clean energy and related grid improvements, electric transport, and decarbonisation of industry and buildings — reached over $2tn, up 10.7 per cent from the previous year’s figure.

The report’s authors note that the annual growth rate was a deceleration from the rates above 20 per cent seen in the previous three years. But last year’s investment in the transition was well over double the $929bn seen in 2020. While many business leaders seem to have grown quieter on green issues over the past five years, the amount of hard cash actually invested has increased in a serious way.

These strong global numbers are, to a very large degree, thanks to China. Chinese green investment grew 20 per cent last year, accounting for $134bn of the $202bn global increase. Other Asian developing economies, notably India, also had big gains.

In the US, investment was roughly flat year on year, as the galvanising effect of Joe Biden’s Inflation Reduction Act began to fade, and investors started to worry about the impact of a second Trump administration.

The most striking slowdown was seen in Europe: green investment slid by 6.5 per cent in the EU, and 12 per cent in the UK.

A major part of the problem was renewable energy investment, which fell by 10 per cent in the EU and an ugly 68 per cent in the UK, according to BloombergNEF.

Among the constraints for renewable power growth in the region has been weaknesses in grid infrastructure — one area where there was at least a modest increase in European investment last year. Policy uncertainty is a more serious concern. For all the bold green pledges made by Sir Keir Starmer’s new(ish) UK government, investors are still waiting for details of game-changing policies that will make those aspirations real — notably in reforming a slow, overloaded permitting system. In the EU, the green zeal of commission president Ursula von der Leyen’s first five-year administration has become conspicuously more muted in her second, which began last month.

And while the political heat around net zero strategies is rising across much of Europe, the scaling back of green subsidies has already had a real impact. This was a key reason behind a stagnation in European electric vehicle demand, and a fall of nearly a third in heat pump sales — the latter contrasting with a strong rise in the US and Asia.

There was a particularly stark decline in investment around decarbonising industry, which fell by 25 per cent in Europe last year. Again, policy uncertainty was a major factor: steel giant ArcelorMittal was among the companies that cited this as a reason for deferring low-carbon investment.

Europe is far from out of this race. Last year’s weaker green investment came after strong rises in previous years, and still amounted to 2 per cent of GDP in the EU — far behind China’s 4.5 per cent, but well ahead of the 1.2 per cent figure in the US.

The key question for policymakers now is what areas of green investment to prioritise. The BloombergNEF report identified an interesting disparity between “mature” green sectors like renewable energy and electric cars, and “emerging ones” like carbon capture, green hydrogen and technologies linked to decarbonising industry.

In the mature areas, investment grew by 15 per cent last year; in the emerging ones, it fell by 23 per cent. And while Chinese companies have secured a dominant role in many of the more established green sectors, in the smaller, newer ones there is still all to play for in terms of global market share. That is worth consideration from European policymakers as they consider how to breathe new life into the continent’s stuttering green investment drive.

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