Overcoming structural barriers to the green transition

Prepared by Miles Parker and Susana Parraga Rodriguez

The impact of climate change is becoming increasingly evident in Europe, underlining the imperative to reach net zero carbon emissions. Global temperatures are continuing to rise, with 2024 being the first year in which global temperatures exceeded 1.5°C above pre-industrial levels (World Meteorological Organization, 2025). Since 1980, the four worst years for physical damage (in real terms) caused by extreme weather and climate events in Europe were 2021, 2022, 2023 and 2024 (European Environment Agency, 2025). These events have also had an impact on inflation, notably food prices. For example, following severe droughts in Spain and Italy, olive oil prices were 50% higher in January 2024 than a year before (Kotz et al., 2025).

While significant progress has been made, further efforts are needed to meet the EU’s commitment to reach net zero by 2050. Between 1990 and 2024, EU carbon emissions fell by 37% (Chart 1, panel a). According to the European Environment Agency, current policies would suggest a reduction of 47% relative to 1990 by 2030. The inclusion of additional policies and measures planned by Member States is likely to bring emissions down to close to the intermediate target of a 55% reduction. However, further action is required to meet the commitment to reach net zero by 2050 (Aguilar Garcia et al., 2025). Particular efforts will need to be made in the domestic transport and energy supply sectors, as these together account for more than half of total emissions (Chart 1, panel b).

Chart 1

Developments in EU carbon emissions

a) Net total carbon emissions

(MtCO2e)

b) Gross 2023 EU emissions by sector

This article examines the multiple barriers obstructing the processes of innovation, technological adoption and diffusion that are vital for the green transition in Europe. The transition involves replacing capital and economic processes that rely on carbon with carbon-free equivalents. This requires the development of new technologies and their widespread uptake, which in turn requires the reallocation of capital and workers within businesses, between businesses in the same sector and across sectors. Recent ECB analysis estimates that, to effectively achieve the green transition, Europe will need to mobilise substantial additional investments in the range of 2.7% to 3.7% of EU GDP each year until 2030 (Nerlich et al., 2025).

Several interrelated market failures and structural barriers are hampering the transition, calling for enhanced policy intervention. These include market failures such as negative environmental externalities, imperfect competition and knowledge spillovers, as well as complex, fragmented and uncertain regulation, insufficient infrastructure and know-how to adapt production processes, underinvestment in research and development (R&D), financing constraints, and underdeveloped capital risk markets. Carbon taxation is widely viewed as the best instrument to internalise environmental costs, but it cannot overcome all the barriers to the green transition on its own (Acemoglu et al., 2012; Aghion et al., 2019). Carbon pricing will need to be complemented by large-scale investment, targeted subsidies for green R&D and comprehensive structural policies (Andersson et al., 2025; Nerlich et al., 2025; Benatti et al., 2024).

Addressing these structural barriers is likely to bring broader economic benefits, since many of them also affect innovation and the diffusion of technologies unrelated to the green transition. As noted in the Draghi report (Draghi, 2024), these structural weaknesses weigh on the EU’s competitiveness and on its capacity to innovate in new technologies. Moreover, as ECB President Christine Lagarde recently noted, renewables are the clearest path to minimise the trade-offs of Europe’s energy policy goals of security, sustainability and affordability (Lagarde, 2025).

1 State of play for green technologies and innovation in the EU

Green innovation in the EU remains broadly comparable to other advanced economies, but the rapid catch-up by China has reshaped the global landscape. Between 2017 and 2021, the EU accounted for around one-fifth of global development of clean and sustainable technologies – similar to the United States and Japan – while China had overtaken other major regions by 2021 (see, for example, Nerlich et al., 2025). Based on European Patent Office data on international patent families, low-carbon energy technologies, including renewable generation and storage, remain the leading clean technology sectors. Innovation activity to reduce environmental impacts varies markedly by country (Chart 2).

Chart 2

Eco-innovation index

Technological advances, rising demand and supportive policies have improved the cost competitiveness of renewable energy worldwide. Between 2010 and 2024, the average global cost of electricity production declined by 62% for offshore wind, 70% for onshore wind and 90% for solar photovoltaic (PV) generation (International Renewable Energy Agency (IRENA), 2025). In 2024, 91% of newly commissioned renewable capacity was cheaper than the cheapest available fossil fuel alternative. Solar PV was, on average, 41% cheaper than the cheapest fossil fuel alternative and onshore wind 53% cheaper. While the cost of renewables has fallen by similar margins in major European markets, the overall cost still remains markedly higher than in China (Chart 3), which installed more new renewable energy capacity in 2024 than the rest of the world combined.

Chart 3

Plummeting costs of renewable sources of electricity

(2024 USD/kWh, levelised costs)

a) Onshore wind	b) Solar photovoltaic

Despite the reduced costs of renewables, green technologies remain more expensive in Europe than in other major economies, particularly China. For example, battery production costs are almost 50% higher, electrolysers 61% higher and heat pumps almost double the cost (Chart 4). These cross-regional cost differences are largely attributable to the scale of production, supply-chain integration and manufacturing efficiency rather than labour costs, which represent a small share of the total costs. Many of the climate-friendly technologies needed to achieve net zero emissions already exist at the firm level, but adoption rates are still short of the trajectory needed to achieve a successful green transition. Climate-friendly technology companies are still far from being able to compete with more traditional ones with lower prices but higher emissions (McKinsey, 2023) and are unable to scale up sufficiently to prove the technological readiness and realise the commercialisation potential of promising climate-friendly technologies that remain in the early stages of innovation (McKinsey, 2024).

Chart 4

Production costs of clean energy technologies in the EU and the United States (relative to China)

(index: costs in China = 100)

2 Structural barriers to the green transition in the EU

Despite a solid innovation base, the EU faces a range of structural barriers that constrain green investment and the diffusion of low-carbon technologies. These barriers include market failures, financial frictions, and costs that disincentivise innovation and switching to new technologies.

First and foremost, any new green technology faces the barrier of the implicit subsidy for fossil fuels arising from unpriced environmental impacts. Burning fossil fuels creates long-term global damage in terms of climate change, as well as localised air pollution. The European Environment Agency estimates that in 2022 alone, 239,000 deaths in the EU were attributable to particulate emissions that were above the World Health Organization’s guidelines. The International Monetary Fund estimates this implicit subsidy for fossil fuels to have been USD 267 billion in 2022 (1.8% of euro area GDP), with a further USD 95 billion (0.6% of GDP) in explicit subsidies (Black et al., 2023).^[1] These implicit and explicit subsidies are a substantial disincentive to green technology innovation, as any new technology would need to be far more productive than existing carbon-based technologies to be competitive.

The next market failure stems from knowledge spillovers that provide wider societal benefits than just those obtained by the company undertaking the research. These spillovers include broader benefits to other users, as well as to competitors within the same sector. For example, advances in battery technology not only reduce the price of electric vehicles but also boost the profitability of renewable sources of electricity by reducing curtailment in times of excess supply. These spillovers create a disconnect between private returns on R&D spending and social returns (Acemoglu et al., 2012). As a consequence, left to themselves, individual companies will underinvest in green innovation relative to the social optimum.

Financial frictions affect green innovation more than other innovation, stunting its progress through the stages of technological development. For example, the lack of technical expertise in venture capital firms regarding clean technologies relative to other areas, such as software, may limit their willingness to engage with early prototypes. Similarly, the size of initial commercial-scale projects may exceed the normal size of venture capital grants, while still being seen as too risky for bank-based finance (Dugoua and Moscona, 2025). Deeper equity markets help carbon-intensive industries to innovate in green technology and to decarbonise faster (De Haas and Popov, 2023). Clean technology projects are generally also capital intensive, making future profitability sensitive to small changes in revenue and costs. Indeed, companies involved in innovation in renewable energy are more sensitive to cash flow shocks, reducing patenting activity relative to firms innovating in fossil fuels (Noailly and Smeets, 2021). This sensitivity to future profitability also means that a predictable path for environmental regulation is vital, as regulatory uncertainty weighs on green innovation.

These financing constraints are especially salient in the EU, since non-bank funding sources that are better suited to financing risky long-term investments are underdeveloped. There is a substantial need to progress the capital markets union to channel capital towards innovative and competitive firms by increasing opportunities for equity and venture capital financing (Arampatzi et al., 2025). Financing constraints, limited access to risk capital and underdeveloped capital markets are often cited as factors limiting the green transition. Recent evidence from the euro area bank lending survey (ECB, 2025) suggests that banks are increasingly differentiating firms according to their transition risks. While credit standards are gradually easing for firms with better climate performance, uncertainty surrounding future climate regulation is reported to be dampening loan demand, underlining the interplay between financial and regulatory barriers.

Additional costs inhibit firms from adopting new technology and switching from carbon-intensive to clean technology. Regulatory costs and uncertainty can make companies reluctant to invest in potentially risky new technology. New technology also requires a raft of complementary factors, including workforce skills, supply-chain security (such as for critical raw materials) and complementary technology. Competitive utility-scale storage, for example, helps counter the day-to-day (and intraday) intermittency of solar and wind power. Finally, there are a range of network and coordination impacts that currently favour fossil fuels and hence generate inertia in highly-emitting technologies.

Complex and fragmented regulatory frameworks across Member States create uncertainty and are often cited by companies as barriers to innovation and investment. The complexity of government regulation has lessened in most EU countries in recent years, but the EU is still falling behind other more business-friendly economies (Chart 5). Cumbersome administrative and compliance procedures add costs for firms seeking to enter or expand in new markets and potentially limit access to certain technologies or data (Nerlich et al., 2025). These procedures often generate long approval timelines, increased costs and additional resource needs. These challenges are particularly acute in the renewable energy sector, where permitting and grid connection queues remain significant bottlenecks. Industrial and energy projects can face permitting processes that can take several years, with some examples taking over ten years.^[2] Such delays raise project costs substantially, estimated at 10-35% of the total investment value (Piotrowski and Gislén, 2024). The complexity of the permitting process partly reflects the EU’s unique multi-layered legal environment, with processing timelines that can vary significantly between and within Member States. In Italy and Poland, for example, permitting delays have contributed to several undersubscribed auctions for new wind energy capacity. Beyond the costs of some regulation, perceived uncertainty about the direction and pace of future climate regulation also weighs substantially on business decisions to innovate and to invest in green technology (Basaglia et al., 2025; Köhler-Ulbrich et al., 2025; Marotta et al., 2025).

Chart 5

Ease of complying with government regulation and administrative requirements

Skills shortages, mismatches in labour markets and slow reallocation of workers hinder the adoption of new technologies. While the shift towards a cleaner economy is policy driven and technology enabled, it is people who ultimately make it work, making reskilling and upskilling crucial (OECD, 2024). Defining “green skills” is not straightforward: these are not a distinct set of abilities, but rather existing skills, knowledge and competencies applied to activities that reduce environmental harm. The majority of emissions-intensive occupations share similar skill profiles with at least one neutral or green-driven occupation, implying that transitions are feasible with well-targeted reskilling policies. For example, petroleum engineers, a clear high-emissions occupation, share very similar skills requirements with a number of green-driven occupations, including environmental engineers and climate change policy analysts.

New green-driven occupations tend to demand higher proficiency levels across nearly all skills. As new occupations emerge, the green transition is gradually raising the demand for all skills in the labour market. The challenge is particularly acute for low-skilled workers, whose knowledge areas diverge more significantly from those required in green-driven occupations, while high-skilled workers often already possess transferable knowledge in mathematics, engineering and technology. Without government intervention, this could potentially drive an increase in inequality (Albanese et al., 2025). The EU’s relative shortage of STEM graduates is compounding this issue (Filip et al., 2025). Moreover, theoretical skill-matching exercises overlook key factors that influence actual mobility, such as wage differences and available vacancies. Today there are not enough skilled workers to meet the rapid growth in green and sustainability jobs. According to LinkedIn data, the share of green hires globally grew 8% between 2024 and 2025, compared with just 4% growth in the share of workers with green skills over the same time period. This is the second year in a row where the demand for green skills grew twice as fast as supply (LinkedIn, 2025).

Lack of necessary infrastructure and network effects can reduce demand for and slow the diffusion of new technology. Coordination by a range of actors on one solution can reduce costs for all users of the network. For example, owners of internal combustion engine vehicles currently benefit from a vast network of petrol stations. Despite falling battery electric vehicle prices, thanks to substantial reductions in battery prices resulting from technological improvements and increased scale, uptake by consumers has been varied. Concerns over the ability to charge on longer journeys (“range anxiety”) remains an obstacle to adoption. Battery electric and plug-in hybrid vehicles accounted for just under one-third of new EU car registrations in November 2025 (Chart 6), which is broadly the share achieved by such vehicles in Norway a decade ago. In November 2025, battery electric vehicles accounted for 95% of new car registrations in Norway, demonstrating that a rapid transition to lower carbon passenger vehicles is possible with the right infrastructure in place.

Chart 6

New car registrations by power source

(percentage shares, 12-month moving averages)

a) EU	b) Norway

Collectively, these barriers slow innovation and the diffusion of green technologies through the economy. Delaying the green transition has direct adverse implications for potential output and competitiveness as well as indirect implications for inflation volatility. Survey evidence indicates that clean technology firms view the limited availability of finance, complex and fragmented regulations, uncertainty, skilled labour shortages, limited demand for new green products and complex partnerships as obstacles to their business activities.^[3] Box 1 complements this survey-based evidence with new textual analysis of corporate earnings calls conducted by publicly traded firms. In particular, it provides an up-to-date ranking of the structural barriers to the green transition most frequently cited by large firms.^[4]

Box 1
Barriers to green investment according to businesses

Prepared by Clémence Descubes

Recent evidence from the survey on the access to finance of enterprises (SAFE) highlights that firms face multiple obstacles to green investment. More than half of the firms participating in the SAFE in the second quarter of 2023 identified high interest rates or elevated financing costs, together with insufficient public subsidies, as major obstacles to their planned investment in the green transition over the next five years (Nerlich et al., 2025). This box complements these survey-based insights with evidence from the textual analysis of earnings calls conducted by large companies.

Earnings calls point to a gradual strengthening of firms’ green investment. While this type of investment still accounts for only a modest share of total investment (3.1% in 2025), mentions in earnings calls increased steadily between 2019 and 2023 and have since consistently remained above their 2019 level. By contrast, mentions of investment in general remained broadly stable over the same period (Chart A).

Chart A

Mentions of investment and green investment in earnings calls

(average number of sentences in earnings calls that mention at least one keyword; index: 1 January 2015 = 100)

In line with the barriers to business activity identified in SAFE survey questions on the impact of climate change (Nerlich et al., 2025), we identify and classify firms’ references to the following barriers: (i) access to finance, (ii) skills and labour shortages, (iii) demand-side constraints, (iv) regulatory complexity and uncertainty, (v) energy and input cost, (vi) general economic uncertainty, and (vii) partnerships, diffusion and intellectual property (IP) barriers. For each barrier, a list of keywords was drawn up using the same terms reported by firms in the surveys when describing obstacles to clean and sustainable technology activities in the EU.

The access to finance barrier refers to the financing frictions that firms report encountering when seeking to undertake investment, including limited or costly access to capital, constraints in bank lending and market-based financing, high interest rates, insufficient public support or subsidies, and a general low willingness among investors to provide risk capital. The regulatory complexity and uncertainty barrier has two distinct dimensions: (i) regulatory uncertainty, as reflected in firms’ references to legal or administrative unpredictability, complexity and fragmentation at national or EU level; and (ii) regulatory constraints in practice, as captured by mentions of environmental reporting costs, compliance costs, licensing or permitting delays, reporting requirements and tax-related complexity. The general economic uncertainty barrier reflects firms’ concerns about future economic conditions, political developments, market dynamics and climate-related risks.

The barriers firms face are not uniform across all types of investment, with regulatory complexity and uncertainty and general economic uncertainty playing a prominent role in dampening green investment (Chart B). The two main barriers faced by firms in their planned green investment are difficulties in access to finance (on average, 57% of all mentions of barriers between 2015 and 2025) and the regulatory barrier (23% over the same period). The latter category is dominated by mentions of regulatory uncertainty. The third most important barrier to green investment is general economic uncertainty, followed by energy and input costs, skills and labour shortages, demand-side constraints, and barriers related to partnerships, innovation and IP.

By contrast, when considering the same set of obstacles for all types of investment, financing constraints become considerably more important, accounting, on average, for 86% of all mentions of barriers reported by large firms between 2015 and 2025. Mentions of regulatory barriers play a more limited role, representing, on average, only 6% of the obstacles reported.

Chart B

Barriers to green investment and all investment perceived by firms

(percentage contributions to total mentions of barriers to investment)

a) Green investment	b) All investment

Earnings call data also point to cross-country heterogeneity. Using a composite indicator that aggregates the seven identified barriers to green investment, we find that in 2025 firms in Sweden and Luxembourg perceived barriers to green investment below the euro area aggregate, indicating more favourable conditions for green investment in those countries (Chart C). By contrast, firms in Austria and Italy were far more likely to perceive barriers to green investment than the euro area aggregate.

Chart C

Heterogeneity in perceived barriers to green investment by country

(average number of sentences in earnings calls that mention at least one keyword; index: euro area average = 100)

3 How structural policies can accelerate the green transition

The combined existing barriers to the green transition are insurmountable without policy intervention. Policies enacted by governments have been successful in delivering lower emissions in Europe. However, no one policy is by itself enough to deliver a timely and effective transition to net zero. Just as the various barriers to the transition interact and reinforce each other, so too can policies put in place to address individual barriers.

Broad-based carbon pricing is necessary to ensure companies and households internalise the environmental damage caused by their use of carbon-intensive technologies. Within the EU, this carbon pricing is principally carried out through the Emissions Trading System. By 2023, emissions in the sectors covered by this system were reduced by almost half compared with 2005. Coverage will be extended to further sectors in the coming years.

Policies providing support for green R&D can have a positive economic impact in generating competitive new technologies. ECB research shows that high-polluting firms exposed to environmental policies that support green innovation increase their filing of green patents (Benatti et al., 2025). Moreover, there is no impact on filing of other types of patent, so support for green innovation does not crowd out other types of innovation. Indeed, Dechezleprêtre et al. (2013) find that clean technology patents receive, on average, 43% more patent citations than “dirty” patents, which shows wider technological applications and therefore economic benefits from subsidising green technologies.

Accelerating the economy-wide adoption of green technologies will require action to address the costs faced by companies and households of switching to new technologies, particularly where these costs are caused by regulation. Accelerating growth will require comprehensive reforms to simplify and speed up permitting procedures, including streamlining environmental assessments and digitalising application processes, as recommended in the EU’s Affordable Energy Action Plan. For instance, Germany’s recent permitting reforms increased the permits issued for onshore wind from 8 gigawatts in 2023 to almost 15 gigawatts in 2024. Investment to unblock the current backlog of grid connections would further speed up deployment of renewable capacity.

Substantial investment in dense charging networks would contribute to overcoming coordination barriers and encourage consumers to switch to electric vehicles. There are substantial network effects from customer usage of the same technology, resulting in lower costs for each user. Without sufficient usage, dense networks of charging points are unlikely to be profitable, reducing incentives for private investment. At the same time, the lack of available charging points limits the uptake of electric vehicles. Government support for the construction of a charging network was an important part of the transition to electric vehicles in Norway. Across Europe, there is a strong correlation between the density of public charging networks and the share of new electric cars (Chart 7). Government subsidies for purchase can likewise help build critical mass and provide sufficient demand to support car manufacturers in transforming their production processes. Research highlights peer effects, where exposure to early adopters boosts uptake (e.g. Bollinger et al., 2022). An individual’s range anxiety may be lessened by knowing an existing battery electric vehicle owner who frequently travels longer distances without difficulties.

Chart 7

Public charging network density in 2024 versus new electric car registrations in November 2025 by country

(x-axis: density, number per thousand inhabitants; y-axis: share of new vehicle registrations, percentages)

To illustrate how structural policies can shape the speed and cost of the green transition, this section draws on a simplified version of a directed technical change model. The model forms part of preliminary ongoing work at the ECB (Kim Taveras et al., 2026) to understand the impact of structural policies and the green transition. Inspired by Acemoglu et al. (2012), the model allows companies to choose between “dirty” and “clean” technologies, with the choice of sector in which to innovate responding endogenously to expected profitability. However, firms face technology-switching fixed costs that limit technology adoption, thereby generating inertia and causing companies to be locked into their current technology. These switching costs provide a simplified way to represent the structural barriers documented in the previous section. Each of the frictions described raises the cost, delays the pay-off, or increases the uncertainty associated with shifting towards greener innovation and production.

The model also features sluggish reallocation of research efforts, capturing skills mismatches and bottlenecks in the initial innovation stages of clean technologies. Together, these frictions create path dependence: once an economy is specialised in dirty technologies, high switching fixed costs, insufficient R&D resources, and weak market incentives slow innovation and the diffusion of clean technologies. Climate damage increases with continued production of dirty output, which raises temperatures until environmental disaster becomes unavoidable and output collapses. Thus, we define this environmental disaster as the point where the quality of the environment falls below a critical threshold, resulting in climate tipping points and the complete loss of economic activity. We set this threshold at 6°C of warming, in line with Acemoglu et al. (2012). The model represents the global economy, and we abstract here from the pertinent, but difficult, questions surrounding global policy coordination.

Building on this framework, we simulate four scenarios that sequentially introduce policy measures to correct misaligned private incentives and address structural barriers to the green transition. Chart 8 shows, for each scenario, developments in the simulated economy over 100 years, focusing on the advantage of “clean” over “dirty” technology (panel a), the share of “dirty” output in total output (panel b), the rise in temperature (panel c), and total output net of climate damage (panel d). The first scenario simulates a laissez-faire benchmark without policy intervention. The subsequent scenarios progressively add layers of policy intervention, introduced at year 20 for clear visualisation. The second scenario introduces carbon taxes to correct for unpriced environmental externalities. We calibrate this scenario to match the “current policies scenario” from the International Energy Agency’s (IEA) World Energy Outlook 2025, in which global temperatures are projected to reach just under 3°C above pre-industrial levels by 2100. The third scenario additionally incorporates subsidies for R&D and clean production to further realign incentives towards clean innovation. We calibrate the policy interventions here to match the IEA’s “stated policies scenario”, which incorporates much greater support for green innovation than the “current policies scenario” and reflects a greater degree of policy ambition. Under this scenario, global temperatures reach +2.5°C by the end of this century. The fourth scenario also introduces structural policies that reduce the technology-switching frictions.

Chart 8

Simulation results of sequentially introducing policy measures to accelerate the green transition

a) Advantage of "clean" over "dirty" technology	b) Share of “dirty” production in total output
(percentages)	(percentages)
c) Temperature rise	d) Total output net of climate damage
(degrees Celsius)	(index: year 0 =100)

We first examine a laissez-faire economy to illustrate how path dependency and private incentives eventually result in an environmental disaster. In an economy without policy intervention, high technology-switching fixed costs and weak incentives to innovate in clean technologies trap firms in “dirty” production. Firms do not internalise the environmental costs and researchers do not account for the social benefits of clean innovation. The result is continued dependence on high-emission technologies and dirty production together with rising temperatures, which ultimately leads the economy towards an environmental disaster and the collapse of output.

Introducing a carbon tax slows the pace of environmental degradation by increasing the relative cost of dirty production. However, the carbon tax alone is insufficient to address the structural barriers that impede switching or the underlying coordination failures in clean innovation. High technology-switching fixed costs capturing barriers such as complex regulation, skills mismatches and lack of finance continue to hold back the reallocation of resources towards clean technologies. In line with Acemoglu et al. (2012), the economy still converges towards an environmental disaster, albeit much more slowly than in the laissez-faire scenario.

Additional R&D and clean production subsidies help redirect innovation, reduce relative costs and encourage innovation in clean technologies. Examples of such subsidies include R&D grants and rebates for new electric vehicles. Nevertheless, the green transition remains incomplete: technology switching remains sluggish due to the high switching fixed costs capturing persistent structural rigidities, and aggregate clean innovation and production is insufficient to meaningfully change the emissions trajectory and associated rise in temperatures.

In the final scenario, a comprehensive policy package that complements carbon taxes and subsidies with structural policies that address the barriers to switching technology can successfully achieve the green transition. Lower switching costs enable firms to adopt clean technologies at scale. As shown in Chart 8, once implemented, this comprehensive policy package accelerates the green transition and sharply limits dirty production. Initially, short-term costs of implementation somewhat reduce total output, but the long-term gains are large: structural policies curb temperature increases and put the economy on a trajectory that eventually delivers net zero.

Overall, the simulations highlight that structural policies are essential to enable the green transition at the necessary scale and speed. While broad-based carbon pricing remains a central pillar, it is not sufficient to counteract the multiple frictions holding back clean innovation and investment. Indeed, by increasing the costs faced by dirty firms, it reduces the funds they have available for clean innovation and transformation. At the same time, the results should be interpreted with caution. For tractability purposes, policies are simulated as permanent shifts, whereas in practice the timing and sequencing of their implementation might vary.

The jump in clean innovation and production once switching fixed costs fall illustrates that targeted initial support can help overcome early barriers, unlock scale effects and accelerate learning. This support does not need to be permanent. As technologies mature and private incentives become aligned with the green transition, green technological development can gain its own momentum. Once this occurs, support measures should be phased out to avoid distortions. This pattern is consistent with real-world evidence; for instance, a large share of global solar PV and onshore wind electricity production initially required subsidies but has since reached cost competitiveness with fossil fuel alternatives (Chart 9).

Chart 9

Worldwide additions of utility-scale renewable electricity

(gigawatts)

a) Onshore wind	b) Solar photovoltaic

4 Conclusion

The green transition demands a comprehensive policy mix that combines effective carbon pricing with enhanced structural policies. The EU’s strong research base and innovation capacity provide a solid foundation, but persistent financing, regulatory, skills and infrastructure barriers impede sufficiently fast progress towards the green transition. Failure to address these barriers will jeopardise the realisation of the EU’s commitment to reach net zero carbon by 2050.

Broad-based carbon pricing through the Emissions Trading System remains the central policy pillar to internalise the environmental externalities of carbon usage, but further policies are needed to address other barriers. Structural policies that improve the business environment, facilitate the reallocation of resources, and stimulate competition and entrepreneurship while settling some of the existing regulatory uncertainty can accelerate the emergence and diffusion of clean technologies. Regulatory constraints are more frequently cited as a barrier to green investment than to other types of investment. Simplifying regulations, notably to substantially speed up the permitting process, can help companies carry out the necessary investment to decarbonise their production processes.

Such measures are also likely to yield broader economic gains, as many of the structural bottlenecks hindering the green transition also weigh on Europe’s long-run productivity, competitiveness and capacity to innovate. Thus many of these reforms will also boost innovation and the uptake of other technologies, such as digitalisation. By raising long-term growth potential and productivity, such policies can also create fiscal space to support public green investment or cushion the social costs of transition.

Nonetheless, while simplification of some regulations to reduce costs is needed, reversing or delaying environmental policies that are already in place to deliver on the EU’s climate goals can be harmful. Both academic research and statements made by firms in earnings calls demonstrate that uncertainty about climate regulation represents a substantial barrier to green innovation and investment.

Looking ahead, the policy effort to foster the green transition should be viewed not only as an environmental necessity but also as an economic strategy. Strengthening the EU’s innovation ecosystem, scaling up clean technologies and reducing regulatory fragmentation would help secure Europe’s energy resilience, reinforce industrial competitiveness and limit the exposure of European households and firms to volatile fossil fuel markets. By tackling these structural barriers now, the EU can place itself on a firmer path towards a sustainable and more dynamic economic model.

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