The conundrum facing ETS decarbonisation investment plans
How EU carbon market revenues now fund industrial decarbonisation
The European Union has built one of the world's largest clean technology funding programmes by channelling carbon market revenues into industrial emissions projects. However, a central question remains unanswered: how do policymakers and project sponsors prove that billions of euros in public support deliver genuine, measurable emissions cuts rather than subsidising investments that would have happened anyway?
The EU Emissions Trading System generates substantial auction revenue each year. That money now flows into the Innovation Fund, which the European Commission describes as a flagship mechanism to help heavy industry, hydrogen producers, and manufacturing firms deploy low-carbon technology at commercial scale. By July 2025, the fund's portfolio included 194 projects across 27 countries, backed by approximately €11.3 billion in support.
For UK businesses trading with EU partners or watching European industrial policy, this funding architecture matters. It shapes competitive dynamics in sectors such as steel, cement, chemicals, and clean energy manufacturing. It also raises practical questions about how emissions reductions are measured, verified, and credited over time.
Carbon pricing revenue becomes project finance
The EU Emissions Trading System requires industrial operators to purchase allowances for each tonne of carbon dioxide they emit. Auction revenues from those allowances fund the Innovation Fund, which then allocates grants to projects that promise significant emissions reductions. The Commission estimates the fund will reach around €40 billion between 2020 and 2030, depending on carbon prices.
In March 2026, the Commission announced that 54 clean industry projects had signed grant agreements worth €2.7 billion under the 2024 call. Individual awards ranged from €1.8 million to €216 million. The Commission described these agreements as marking the start of a new wave of decarbonisation implementation across Europe.
Meanwhile, the 2025 Net-Zero Technologies call made €2.9 billion available across five categories, including large-scale decarbonisation, cleantech manufacturing, and pilot projects. The structure reflects a shift from demonstration funding towards commercial deployment, particularly for technologies that can operate at industrial scale.
The fund's reach has grown rapidly. In 2024, the Commission said 85 projects would receive €4.8 billion in grants, with projected savings of approximately 476 million tonnes of CO2 equivalent over their first 10 years of operation. By mid-2025, the cumulative portfolio was expected to avoid around 860 million tonnes of CO2 equivalent in the same timeframe.
What sectors and technologies receive support
Innovation Fund grants target industries that are difficult to decarbonise using existing technology. Consequently, supported projects span heavy industry, renewable hydrogen, energy storage, carbon capture, and manufacturing processes for batteries, heat pumps, and wind turbines.
The 2025 call included distinct tracks for general decarbonisation, cleantech manufacturing, and smaller pilot schemes. This structure acknowledges that different technologies sit at different stages of commercial readiness. Some need capital to scale proven processes, while others require support to move from pilot to full operation.
Steel and cement producers, for example, can apply for funding to install electric arc furnaces or alternative binders that cut process emissions. Hydrogen projects may receive support for electrolysers powered by renewable electricity. Battery manufacturers can access grants to build production lines that reduce reliance on imports from Asia.
For UK firms, this creates both opportunities and competitive pressure. European manufacturers receiving Innovation Fund grants may gain cost advantages in low-carbon products, particularly in sectors where procurement increasingly favours suppliers with lower embedded emissions. Similarly, UK companies exploring joint ventures or supply agreements with EU partners need to understand how this funding affects project economics and timelines.
The measurement and verification challenge
The core policy tension lies in proving that funded projects deliver real, additional emissions cuts. The term "additionality" means the project would not have proceeded without public support, and the emissions reductions would not have occurred otherwise. Establishing this requires clear baselines, transparent reporting, and credible monitoring after grants are awarded.
The Commission requires applicants to demonstrate significant emissions savings compared to conventional technology. Projects must also show financial need, meaning the grant is necessary to make the investment viable. Yet defining what counts as significant, over what time period, and against which baseline remains a source of debate.
Large headline figures can mask important details. A project claiming 10 million tonnes of CO2 savings over a decade sounds substantial, but the claim depends on assumptions about the counterfactual scenario, operational performance, and how long the technology remains in use. If the grant supports a project that would have happened three years later anyway, the real climate benefit is much smaller than the headline number suggests.
This matters for UK businesses because similar measurement questions arise in domestic carbon reporting, PPN 06/21 compliance, and supply chain due diligence. Companies answering tender questions about Scope 3 emissions or setting science-based targets need robust data on the carbon intensity of materials and components. If EU suppliers claim emissions savings based on Innovation Fund projects, buyers need to understand how those savings were calculated and whether they can be reliably attributed to specific products.
Industrial policy meets climate accountability
The Innovation Fund represents a deliberate attempt to link climate policy with industrial strategy. European policymakers argue that public support for clean technology manufacturing strengthens the EU's position in global markets while accelerating decarbonisation. The approach treats emissions reduction and economic competitiveness as complementary goals rather than trade-offs.
This logic explains why the fund includes dedicated tracks for manufacturing technologies such as batteries, electrolysers, and heat pumps. The Commission wants to ensure that Europe produces the equipment needed for its own energy transition, rather than importing it. For UK firms, this has direct implications. It affects the cost and availability of low-carbon components, the location of new production capacity, and the competitive landscape for exports to EU markets.
However, the dual objective creates complexity. A project that strengthens industrial capacity may not deliver the largest emissions reduction per euro spent. Conversely, a project with excellent climate credentials may offer limited economic spillovers. Balancing these considerations requires clear criteria, transparent decision-making, and ongoing performance monitoring.
The Commission publishes lists of funded projects, grant amounts, and projected emissions savings. Yet the detail available varies. Some projects provide comprehensive technical descriptions and emissions baselines, while others offer limited public information. This inconsistency makes it harder for businesses, investors, and civil society to assess whether the fund is meeting its climate goals.
Emissions savings and funding commitments by the numbers
The following figures provide a snapshot of the Innovation Fund's scale and stated ambitions. They come from official European Commission sources published between 2024 and early 2026.
- The Innovation Fund is financed by auction revenues from the EU Emissions Trading System, with an estimated total value of around €40 billion from 2020 to 2030.
- In March 2026, 54 clean industry projects signed grant agreements worth €2.7 billion, with individual awards ranging from €1.8 million to €216 million.
- The 2025 Net-Zero Technologies call made €2.9 billion available across five categories, including large-scale decarbonisation and cleantech manufacturing.
- By July 2025, the fund's portfolio included 194 ongoing projects in 27 EU and EEA countries, supported by approximately €11.3 billion.
- Those projects were expected to deliver around 860 million tonnes of CO2 equivalent savings over their first 10 years of operation.
- A 2024 announcement said 85 projects would receive €4.8 billion in grants and could avoid roughly 476 million tonnes of CO2 equivalent in their first decade.
What UK businesses should consider
Even though the Innovation Fund operates within the EU, its effects extend beyond European borders. UK companies that supply EU markets, source materials from European producers, or compete with EU firms for international contracts need to understand how this funding shapes costs, capabilities, and carbon footprints.
First, procurement expectations are shifting. Public and private buyers increasingly ask suppliers to report embedded emissions and demonstrate progress towards net zero. If European competitors receive grants to install low-carbon production technology, they may offer products with lower carbon intensity. UK firms need comparable data and, where necessary, comparable technology investments to remain competitive.
Second, supply chain transparency matters more than ever. If a UK manufacturer sources steel, chemicals, or components from EU suppliers, the carbon intensity of those inputs affects the manufacturer's own Scope 3 emissions. Understanding whether suppliers have received Innovation Fund grants, and what emissions improvements resulted, helps businesses report accurately and identify decarbonisation opportunities.
Third, the fund's focus on manufacturing capacity has strategic implications. If the EU builds substantial domestic production of batteries, electrolysers, or heat pumps, UK businesses may face longer lead times or higher costs when sourcing from non-EU suppliers. Conversely, stronger European supply chains could improve availability and drive down prices over time.
For businesses already working on carbon reporting and PPN 06/21 compliance, the lessons from EU funding design are directly relevant. Clear baselines, transparent methodologies, and credible verification matter just as much in UK carbon reduction plans as they do in European grant applications. The principle remains the same: ambitious targets mean little without robust measurement.
Policy design and practical delivery
The Innovation Fund's structure reflects lessons from earlier EU climate funding. It operates through open calls with published eligibility criteria, independent evaluation panels, and standardised application formats. This approach aims to ensure fairness, reduce political interference, and direct money towards projects with the strongest technical and financial cases.
Nevertheless, challenges remain. Application processes are complex and resource-intensive, which may disadvantage smaller firms or those without dedicated grant-writing expertise. Evaluation criteria must balance technical rigour with practical flexibility, particularly for technologies that are still maturing. Post-award monitoring needs to be thorough enough to catch underperformance without creating excessive administrative burdens.
The Commission has tried to address some of these issues by offering technical assistance and capacity-building support for applicants. It has also introduced smaller grant tracks for pilot projects, recognising that not every innovation is ready for large-scale deployment. Whether these measures prove sufficient will become clearer as more projects reach operational phase and begin reporting verified emissions data.
For UK policymakers, the Innovation Fund offers a case study in how carbon pricing revenue can be recycled into industrial decarbonisation. The UK has its own emissions trading scheme and its own net zero funding mechanisms. Observing which aspects of the EU model succeed, and which encounter friction, provides useful evidence for domestic policy design.
Where to find further detail
Businesses seeking authoritative information on the Innovation Fund, project selection criteria, and emissions methodologies should consult official European Commission sources directly. These provide the most reliable and up-to-date guidance.
The European Commission's climate action pages explain how the fund operates, including eligibility requirements and application timelines. The European Climate, Infrastructure and Environment Executive Agency manages the fund's day-to-day administration and publishes detailed information on funded projects. For the legislative framework, EUR-Lex hosts the official texts of relevant directives and regulations.
UK businesses exploring sustainable procurement or supply chain decarbonisation may also find value in reviewing the fund's technical guidance documents. These set out how emissions baselines are established, how savings are calculated, and what reporting obligations apply. The principles can inform similar exercises in UK contexts, even where the specific rules differ.