Innovation and modernisation fund

The two European funds for the promotion of low-emission innovative technologies in energy and industry (Innovation Fund) and for the modernisation of the energy sector (Modernisation Fund) will be provided with financial resources through the auctioning of emission allowances (EUA).

As part of the Fit for 55 reforms, the Innovation Fund was extended to cover the buildings, road transport, maritime transport and aviation sectors, and the amount of emission allowances allocated to the fund was increased. This increase also includes emission allowances that will no longer be allocated for free due to the planned introduction of a carbon border adjustment mechanism (CBAM). On its website, the European Commission cites 530 million allowances, which, at an assumed EUA price of 75 euros, could generate around 40 euros billion for the fund between 2020 and 2030.

The Innovation Fund uses these funds to award grants for innovative projects as part of regular calls for proposals. These can relate to emission reductions in EU ETS 1 industrial sectors as well as the use or storage of CO2 (CCU/S) in the industrial or the energy sector, renewable energies and energy storage, and the above-mentioned transport sectors and buildings. In addition to cost efficiency, the key criteria are the achievable emission reductions, the degree of innovation and maturity of the technologies, and the contribution to decarbonisation within the EU. To accelerate the market uptake of specific mature technologies, tenders have also been held since 2023 in which only the bid price of the tenderers is relevant, for example for suppliers of green hydrogen.

The Modernisation Fund, which specifically supports lower-income Member States in decarbonising their energy systems, was also increased by the EU ETS 1 reform as part of the Fit for 55 package: instead of two percent of the cap, an additional 2.5 percent of the cap will be allocated to the Modernisation Fund in future. In addition, the group of eligible Member States for part of the funds has been expanded to include three southern European countries (Greece, Portugal and Slovenia).

Climate Social Fund

A new EU-managed Social Climate Fund was created to counter the additional burdens of the new emissions trading system (EU ETS 2) for financially acutely vulnerable households, micro-enterprises and transport users. One year before the full introduction of EU ETS 2 in 2028, revenues from the auctioning of 100 million allowances from EU ETS 1 already flow into the newly created fund. Proceeds from EU ETS 2 will follow from 2027 onwards. 65 billion euros are to be generated in total from the auctioning for the Social Climate Fund.

The fund is intended to encourage the implementation of national Social Climate Plans. Country-specific limits determine the maximum amount of funding that Member States can obtain. On the one hand, temporary, direct income support is eligible for funding. On the other hand, the fund is intended to support measures and investments that provide financial assistance to vulnerable groups as they transition from fossil to climate-friendly technologies. An additional 25 percent from national funds is to be allocated to implement the Social Climate Plans, bringing the total available funding to 86.7 billion euros.

In addition, the Member States are to use their remaining proceeds from EU ETS 1 and EU ETS 2 in full to actively support the transformation to climate neutrality in terms of economic and social policy. In Germany, these funds are channelled into the Climate and Transformation Fund, which finances a wide range of measures.