Fossil fuels focus hinders EU cleantech investment and climate transition

The EU is making progress towards its climate neutrality goals, but the pace of the transition remains too slow, with ‘misaligned incentives’ still promoting fossil fuels use more than cleantech.

This is according to the 2025 report of the European Climate Neutrality Observatory (ECNO), a watchdog for the EU’s climate policies and transition – which found that finance for the transition remains “a major stumbling block”.

Six-year trends show that fossil fuel subsidies and investments in fossil fuel supply have increased, while financial support for renewables has declined. At the same time, cleantech businesses are facing additional challenges in slow permitting times, missing or inadequate infrastructure, and limited access to skilled workers.

In 2023, ECNO identified a climate investment gap of €344 billion, manifesting particularly in the slow pace of building renovations, a decline in heat pump uptake, a slump in EV sales, and an insufficient expansion of wind power. 

This investment gap has resulted in the slow development of electrification across all energy demand sectors, putting the continued build-up of cleantech manufacturing, which is already plateauing, at risk.

ECNO recommendations to fill €344bn cleantech investment gap

To fill this gap, the organisation recommends first adjusting national incentives, particularly phasing out fossil fuels subsidies in favour of electrification, renewable expansion, infrastructure and cleantech uptake.

Governments should also create a supportive investment framework for clean goods, technologies, and decarbonisation efforts by aligning public budgets, taxation, and pricing mechanisms to support the climate transition.

Beyond that, the EU should remove bottlenecks to the transition by speeding up permitting, aligning planning and investment into grid development with climate targets, and advancing green skills. Finally, public procurement should focus on sustainable EU products to create lead markets for clean technologies. 

Bright spots in ECNO report

Despite the lingering financing gap for the climate transition, the report also highlights significant progress areas.

Notably, ECNO finds that the EU’s cleantech industrial base and innovation ecosystem are on track to deliver net zero by 2050, with value added on the rise in the cleantech sector, and manufacturing capacities increasing for wind, solar photovoltaics, heat pumps, electrolysers, and batteries. 

Battery manufacturing is also on track to exceed the EU target of 550 GWh annually by 2030, while solar power expansion is exceeding expectations: in mid-2025, solar became the single largest source of electricity in the EU for the first time in history.

The industrial sector also saw improvements across all indicators compared to last year, particularly around energy efficiency, resource productivity and circularity, and the use of renewables.