Why Europe is closing the gap with the United States

Europe is pulling closer to the US as the best place to invest in climate technology.

Europe’s advantage — consistent, long-term policy support for net sustainability — is not yet enough to outcompete the enormous strength of the US: lots of capital funding a native spirit of risk-taking and innovation.

But we’ve never seen the gap narrow quite so much. It would not be impossible to see Europe pull ahead and become the global centre of climate tech by 2030, especially if the EU reforms its capital markets.

The trends we’re seeing today put a lot of focus on policy and its power to determine where climate tech ultimately succeeds. The EU is doubling down on the energy transition through what it does best: market regulation. Meanwhile the US is actively reversing its policy support for net zero. Worse, it’s exploding policy certainty. Uncertainty is the biggest threat to its climate tech leadership.

Why the US may lose its lead

The US tax bill that’s being finalised in Congress is not all bad for climate tech. Ending tax breaks for US wind and solar, for example, is generally sensible. Prices are competitive and market adoption is advanced. These industries have emerged from adolescence and do not need constant parental support.

The bill still has problems on many levels. Billions of dollars of cuts to provisions in the Inflation Reduction Act (IRA) are not sensible . This will likely slow the buildout of carbon capture, hydrogen, industrial decarbonisation, and other technologies that the US was in a position to lead.

A deeper problem, however, is that no one knows what will happen over the next few years. Perhaps Republican lawmakers decide that a solar farm or carbon capture facility in their district is not really a waste of money. Maybe federal support zigzags for the next 18 months, then control of Congress changes and green investment incentives return.

Either way, certainty over US energy transition policy appears to be dead.

Policy certainty is crucial for climate tech investing. Why? Because startups in this space tend to take time and money to prove themselves. Not only that, they also need lots of government engagement along the way through permits, tax breaks, and other things. Laws will change, and so will the economic picture. But it’s critical that policy is generally favourable if you’re planning to fund a $10 million round to prove a technology that needs 100x greater production five years later.

Rollbacks in the US send the wrong market signals at a time when the country should be accelerating its low-carbon deployment. That’s not just because the greener option is the right thing to do. Unit economics have never been more competitive. After decades of investment and innovation, technologies from geothermal to batteries are becoming some of the cheapest on the market. Many of these technologies will benefit from some type of market support to reach their potential faster — as solar’s success has shown.

They need investment now to reach their potential by 2030. But who will write the cheque when policy remains so hard to predict?

We know what we’ll do if the Big Beautiful Bill is implemented in its current form. We’ll be more selective with US investments. We’ll focus on supportive states like California and New York and sectors like corporate-backed offtake markets that show momentum without federal support.

More broadly, we’ll probably redirect capital toward Europe and other areas where the regulatory environment is more predictable.

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What Europe is doing right

EU energy transition policy is not just consistent. It’s smart, because it focuses on demand rather than supply. The Biden legislation’s fixation on supply-side incentives (like tax credits for renewables) only gets you so far. These incentives can even be counterproductive by making technologies without a credible cost-reduction path look economically viable.

EU member states offer their own tax breaks to encourage supply. But Brussels is focused overall on long-term demand creation. Policies are tightening emissions standards, enforcing carbon pricing, and creating market pull through Fit for 55.

Fit for 55 is a legislative package meant to reduce the bloc’s emissions by 55% in 2030 versus 1990. Covering everything from fuel to land use, it’s a good example of how sprawling, long-term policies can have specific outcomes right now. In our portfolio it helps companies like Ineratec, which makes modular chemical plants for producing sustainable aviation fuel (SAF). Fit for 55 mandates a certain level of SAF in jet fuel over the next decade. This underpins demand for Interatec’s (and many other companies’) products.

We’re starting to see the EU and the UK as the most stable areas for climate tech investment over the long term. While the US flipflops, Europe has quietly built an industrial policy environment where the demand side pulls the best clean technologies forward.

Europe needs to go further if it wants to actually surpass the US. It should reform its markets to mobilise more institutional capital for “risk” investments in climate tech. There are a few routes to explore. Basel III’s capital allocation requirements (enforced through the EU’s Capital Requirements Regulation) could be relaxed to free up more investment capital. Denmark has pioneered a model of guaranteeing private-sector investments against first losses — and this could be rolled out across member states.

More than anything Europe needs to integrate its fragmented capital markets. If such steps were taken the bloc — with its mix of public- and private-sector support for the transition — could lead the West in climate tech.

The lesson of China’s leadership

To be clear, neither the US nor Europe leads the world in the energy transition. China does. Its relentless pace of electrification and clean technology deployment makes it almost impossible for Europe and the US to catch up.

China’s systems-level change is the result of a long-term industrial strategy. Its dominance in solar, batteries, and EVs didn’t happen overnight. It was policy-determined decades ago to meet the country’s goal of sovereignty in all areas including energy independence. This required it to patiently invest in control of many critical materials supply chains that the energy transition depends on.

Sustainability did not drive its decisions. A long-term strategy for resilience did.

The lesson for Europe and the US is not to become politically like China. It’s to create a market architecture that encourages energy technologies of the future to gain mass adoption. Solar and wind should be built because they make energy cheaper and more secure for everyone — not just because they are more sustainable. Electric vehicles should receive policy support because they’re ultimately the less expensive, better way to transport people and goods.

China is showing how long-term policy support can transform an economy and make it more resilient than other economies in the world of 2100. The EU understands the need for consistent policy support and is acting on it. The US is decelerating its own transition. It still leads in many areas of innovation, but this won’t last long without better policies.

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