Achieving climate neutrality and energy independence requires an acceleration in the diffusion of low-carbon technologies. However, this process is hampered by the high costs of many emerging green technologies, and further innovation is needed to lower their cost. For example, producing green hydrogen currently costs approximately three times as much as grey hydrogen derived from natural gas. Major cost reductions in this technology are contingent on massive reductions in the cost of electrolysers, which can be triggered by research and development (R&D) investments.

A central goal of climate policy must therefore be to lower the costs of carbon-free technologies to a point where they are competitively viable against high-carbon alternatives. By doing so, these sustainable options could become the preferred choice for businesses and consumers and facilitate a transition to a low-carbon economy.

The climate neutrality objective requires a radical shift in the mix of technologies used for production and consumption across all sectors of the economy. The key pillars of climate neutrality include renewable energy deployment, increased energy efficiency in buildings and industry, electrification of the transportation and manufacturing sectors, large-scale energy storage, carbon capture, utilisation and storage (CCUS), hydrogen and hydrogen‐based fuels, and bioenergy use.

However, numerous barriers impede low-carbon innovation. These range from issues like lack of demand, first-mover disadvantage, high risks and uncertain returns, to financial constraints, barriers to competition, and technology “lock-in”. These obstacles underscore the need to reinforce low-carbon innovation policies.

Innovation policies – with a focus on both the development and deployment of low-carbon technologies – should therefore constitute a cornerstone of strategies to reach carbon neutrality.

Governments should recalibrate their STI policies to place greater emphasis on the research, development and demonstration (RD&D) stages as opposed to the adoption and diffusion stages. Public expenditures on research, development and demonstration for low-carbon technologies have stagnated (as a percentage of GDP) over the last 30 years and might be insufficient to meet current needs. Technologies that are still far from market readiness, but essential for achieving carbon neutrality by 2050, require additional support.

Achieving climate neutrality requires innovation in radically new technologies, which cannot be effectively encouraged through “horizontal” R&D support such as broad tax credits or deployment subsidies. These instruments often overlook technologies still in the early stages of development.

Moreover, technology neutrality – even between various low-carbon technologies – tends to favour technologies that are closest to market and with the shortest payback time and is therefore not neutral in practice. Thus, targeted and specific policy support is essential for advancing key technologies vital for a carbon-neutral future. These include carbon capture, utilisation and storage (CCUS), green hydrogen, sustainable bioenergy, advanced high‐energy density batteries and direct air capture (DAC).

Although innovation policies should play a greater role in carbon neutrality strategies, they are insufficient on their own and need to be part of broader packages of climate policies. These packages should include the phasing out of fossil fuel subsidies and introduction of carbon pricing, regulations and standards.

Framework conditions that incentivize innovation and technological change are also important. For example, competition and entrepreneurship policies play a critical role in encouraging business dynamism, the creation of new innovative firms and the reallocation of resources toward the most resource-efficient firms. Education, skills and science policy in turn are necessary to make sure that the transformation can rely on the right set of skills and research.