In a Nutshell
The Innovation Fund (IF) is one of the world’s largest funding programmes for the commercial demonstration of innovative low-carbon technologies. It is also the EU’s key funding instrument for financing the green transition and promoting European industrial leadership in clean technologies.
The Fund’s goal is to create financial incentives for investment in first-of-a-kind clean technologies by sharing the risk with project promoters. This should help attract additional public and private resources.
The revenues for the IF are raised via the EU ETS and the auctioning of its 450 million allowances. As such, it depends on the carbon price – at EUR 75 /tCO2, it is set to provide around EUR 38 billion from 2020 to 2030. As part of the latest revision of the ETS, the free allowances which were allocated to certain energy-intensive sectors to avoid carbon leakage will be phased out due to the introduction of the Carbon Border Adjustment Mechanism. These allowances will instead be added to the IF, increasing the financial support available.
The IF uses a competitive selection process to choose the best projects to invest in. There are regular calls for proposals targeting four areas:
- innovative low-carbon technologies and processes in energy-intensive industries
- carbon capture and storage (CCS)
- innovative renewable energy generation
- energy storage technologies
While carbon dioxide removal (CDR) is not explicitly listed as a targeted area, the Fund does finance certain carbon removal projects. However, these projects are evaluated in the CCS category and based on methodologies developed for those technologies because there is no separate CDR category. This severely limits the type of CDR methods that can apply for IF funding and increases the complexity of their application processes.
The IF aims to finance varied projects across all Member States, Norway and Iceland. There are no Technology Readiness Level (TRL) requirements for applications, but projects need to be sufficiently mature for first commercial examples and large-scale demonstrations. Projects are selected based on criteria specified in calls for proposals, covering degree of innovation, effectiveness of greenhouse gas emissions avoidance, maturity, scalability, and cost efficiency.
What's on the Horizon?
In December 2022, a political agreement was reached on the revision of the EU ETS Directive, which established the Innovation Fund, introducing two key changes to the Fund:
- increase in the budget by bringing additional sectors (maritime, aviation, buildings and road transport) in the scope of the Fund;
- new financing mechanisms whereby projects are selected based on an auction and are supported through fixed premium contracts, contracts for difference or carbon contracts for difference (CCfDs).
This will allow the IF to take the form of a production subsidy to cover 100% of the funding gap for scaling up clean tech. The Commission is now in the process of implementing these changes by revising its Delegated Regulation, which sets out the rules on the operation of the Fund.
First auctions are expected in autumn 2023 and will be on green hydrogen production. Winners will receive a fixed premium for each kg of renewable hydrogen produced over a period of 10 years. CCfDs, which could deliver a direct deployment incentive to different types of carbon management projects, including CDR, should follow shortly thereafter.
While the Innovation Fund has benefitted CCS and Carbon Capture and Use (CCU), it has failed to recognise the specificities of CDR and the fact that it is, alongside emission reductions, a vital tool for reaching Europe’s climate goals.
Certain carbon removal projects can benefit from IF funding but CDR is not explicitly listed as a targeted area. This omission severely limits the type of CDR methods that can apply for funding, primarily to projects such as direct air capture and storage (DACCS) and bioenergy with carbon capture and storage (BECCS). These projects are also evaluated in the CCS category, obliging them to adapt to CCS methodologies and increasing their administrative burdens.
Consequently, support for projects related to carbon removal within the IF has been significantly lower than for CCU and CCS. When CDR projects receive IF grants, they are labelled as CCS, making it difficult to keep track of CDR funding. Out of 37 projects in 2021, seven were categorised as CCUS, while within these, only two related to CDR, accounting for around 6% of IF’s total grants. Stockholm Exergi’s BECCS Stockholm project was awarded an IF grant of EUR 180 million and Carbfix’s Silverstone project was awarded EUR 3.8 million. In 2022, out of 16 projects, nine were CCUS-related and only one related to CDR (Coda Terminal by Carbfix was awarded a EUR 115 million grant, or 3.79% of IF’s grants).
Ringfencing CDR support
As with any nascent technology with elevated investment costs, CDR needs innovation funding and support for commercial deployment. To remedy the current funding gap, there needs to be increased internal understanding of the differences between CCS and CDR within the Innovation Fund as well as internal tracking of support for these different technologies.
The upcoming Delegated Act in which the Commission revisits the operation of the Fund provides an opportunity for the Fund to explicitly feature carbon removal as a key enabler of net zero and provide the corresponding targeted support. As a second necessary step, the Fund should also consider the specifics of CDR in future calls for proposals and associated methodologies. This would lead to dedicated higher and direct funding to carbon removal projects and contribute to strengthening the CDR ecosystem in Europe.
Beyond BECCS and DACCS
Due to the current structure of the Fund, most of the CDR projects funded so far have been related to DACCS and BECCS. Explicitly featuring carbon removal in the scope of the IF would also open a door to supporting a wider range of carbon removal solutions, beyond DACCS and BECCS, to include, e.g., various carbon farming and ocean-based approaches, enhanced weathering, or mineralisation.
Commission Delegated Regulation 2019/856 providing the overall framework for the Fund’s operation
First call for large-scale projects
Second call for large-scale projects
Third call for large-scale projects was launched.
Deadline to submit feedback to the draft terms and conditions for the pilot auction – a new tool for funding innovative low-carbon technologies under the Innovation Fund
The results of the third call for large-scale projects were published.
Draft Commission Delegated Regulation implementing the changes to the Innovation Fund agreed in the ETS revision, notably the use of competitive bidding, is open for feedback until 7 August 2023.
Publication by the European Commissions of the Terms and Conditions of its first auction dedicated to the production of renewable hydrogen production in Europe
Deadline to submit projects to the third call for small-scale projects
Second Innovation Fund progress report expected
Commission Delegated Regulation (EU) 2019/856 of 26 February 2019 supplementing Directive 2003/87/EC of the European Parliament and of the Council with regard to the operation of the Innovation Fund (Text with EEA relevance.)