The limits of market-driven decarbonisation: why public sector leadership is key

“The European Union needs to invest an enormous amount of money in a relatively short time,” said Mario Draghi last September when presenting his report on competitiveness. With environmental and social crises intensifying, the question of where this investment will come from is one of the most pressing challenges for policymakers today.

One of the Commission’s early responses has been the Competitiveness Compass, a key initiative aimed at guiding EU policy. True to form, it reflects the prevailing stance of EU institutions: relying on green growth and technological innovation and assuming that, with the right incentives, private capital will lead the transition. This means doubling down on neoliberal policies by rolling back regulations in the name of “simplification” and funnelling public money into “de-risking” mechanisms to make green investments more attractive to private finance. 

But this is a losing game.

A race to the bottom

Decarbonisation cannot be left to the market, it is inherently political, reshaping economies by driving new sectors, coordinating supply chains, and redefining Europe’s place in the global system at the expense of the Global South. But what should it look like in practice? Is it merely about incentivising an energy transition or targeting high-emission industries? And where do biodiversity and the wider ecological crisis fit into this transformation?

Too often, the EU’s approach is reduced to a narrow energy transition narrative, neglecting the systemic changes needed and opening the door to greenwashing and false solutions. Market-driven decarbonisation is constrained by its fundamental logic: maximising profits. Private actors will only invest in green technologies if they are financially viable in the short term, leading to a race to the bottom where only the most profitable, low-risk projects receive funding. This prioritisation of quick returns means that essential but riskier solutions, such as large-scale public infrastructure or deep renovations of buildings, are systematically ignored.

According to Finance Watch, even with a fully functional Capital Markets Union, private finance would at best cover only a third of the climate investments needed.

A prime example is the EU’s push for a so-called ‘hydrogen economy’, heavily promoted by the European Investment Bank (EIB). Despite hydrogen being at the centre of the EU’s decarbonisation strategy, most production still relies on fossil fuels, making it a convenient greenwashing tool for the oil and gas industry. Even “green” hydrogen, produced using renewables, remains prohibitively expensive, inefficient, and resource-intensive—requiring vast amounts of water and land while delivering relatively little energy. Yet, the gas industry continues to push for  hydrogen as it prolongs the life of their fossil infrastructure and business models and attracts heavy subsidies, which should be used to fund genuinely transformative solutions.

Additionally, renewables finance is treated as just another asset class, interchangeable with fossil fuels, with no inherent obligation to cut emissions. In fact, private investment often clashes with the goal of abundant, affordable renewable energy. Companies thrive on scarcity, but as renewable costs plummet and daytime electricity becomes virtually limitless, their real challenge is preserving profit margins, not ensuring a just and effective energy transition. This highlights how private sector involvement in the energy transition remains insufficient, as they are unwilling to finance renewables on the scale and pace needed.. Fossil fuel giants like Shell have briefly dabbled in renewables, only to pull back when profits didn’t match expectations. Companies like ExxonMobil openly admit they will not invest in decarbonisation without a guaranteed profit margin under the claim that the public is unwilling to pay for a world with less carbon pollution, as its CEO, Darren Woods, claimed. 
The reality is clear, last year’s CERAWeek, one of the world’s most influential corporate leader gatherings in the energy sector, underscored a consistent message: the private sector will only support the transition if it remains profitable. When profitability is uncertain, they disengage.

The EIB’s role in market-driven climate finance

The EIB is an example of this flawed logic. Despite branding itself as the "EU climate bank", it prioritises technological innovation and green growth rather than systemic change, which would prioritise reducing resource use and phasing out economic activities for which there are no viable solutions, while providing alternatives in other sectors and affordable public services.  The Bank continues to support highly polluting companies and places great emphasis on de-risking private investment, including by using InvestEU guarantees to shield private capital from risk. This results in the vast majority of EIB energy lending supporting private investors. Overall, the EIB is effectively channelling public money into corporate profits, as our latest report shows. Public finance should be transformative: it should fund projects that serve the public interest, projects that would not happen without state-backed support. Yet, between 2020 and 2023, seven major corporations received over €11 billion from the EIB while making €100 billion in profits, more than half the EU’s annual investment needs for social infrastructure.

If corporations refuse to align public funding with social and environmental priorities, the EIB must impose stronger conditions on its loans. Given the urgency of the climate crisis and the scarcity of public funds, the Bank should prioritise direct public investments in non-profit, democratically controlled entities rather than de-risking corporate-led renewables, what TUED defines as “public pathway”.

According to this notion, energy transition must be reclaimed and restored, with public institutions taking back their role as the primary drivers of the transition, operating with transparency, accountability, and respect for workers’ rights. It must also be decommodified, shifting from profit-driven energy systems to those that prioritise social and ecological value; and must be demarketised, fostering publicly owned, non-commercial, and socially driven energy systems that serve communities rather than the industries.

A radical reimagining of our economic system

The climate crisis cannot be solved within the neoliberal framework that brought us to the brink of ecological collapse. Without a radical shift toward public leadership, we will continue to see half-measures and greenwashing instead of the large-scale, systemic transformation required. The logic of short-term profit will continue to undermine meaningful climate action unless we radically shift the focus to public sector leadership. Only through bold, transformative public investment can we build an equitable, sustainable future at the speed and scale the climate crisis demands.