Less than half of Israeli climate-tech companies are focused on decarbonization
Investments in climate are increasing worldwide, but according to a new report less than half of Israeli climate-tech startups address decarbonization - the biggest problem with the most in-demand solutions and flow of investment
Over recent years, several countries have made a significant commitment: by 2050, they will achieve the goal of net-zero carbon emissions as part of the fight against climate change. This means that these countries will greatly reduce their emissions and will also integrate technologies to offset emissions that they cannot actively cut. However, there are numerous challenges involved and most of the technological advancements required to pave the way to achieving these objectives simply do not yet exist. This is precisely where the opportunity lies for many entrepreneurs in Israel and around the world.
How significant is this opportunity? The world is generously increasing investments in clean energy, hoping to bridge the gaps and successfully achieve the commitments made by many countries to become carbon neutral by the mid-century. Global investments in clean energy increased by 17% last year, reaching $1.8 trillion, according to BloombergNEF's report. This is a record level of annual investment, which could indicate the resilience of the transition to clean energy even in a year of geopolitical turmoil, high tensions, and spikes in inflation. These massive investments have additional implications: opportunities for companies worldwide to provide the new technologies that will reduce emissions.
About 93 countries, responsible for about 79% of greenhouse gas emissions, have committed to reaching the goal of net-zero emissions by 2050. The task is extremely complex and requires significant investments. But it's not only governments committed to this - around 40% of Fortune 500 companies are committed to emissions reduction as well. Government programs to transition to clean energy, along with substantial funding, such as the U.S. government's law to reduce inflation, allocating $500 billion directly to fund clean energy, and the European Union's Green Deal, providing incentives amounting to $270 billion, are joining the effort.
In Israel, successive governments in recent years have repeatedly used the term "climate-tech," promising that while Israel fails to achieve reductions in emissions in line with its international commitments, it will become a global leader in climate research and innovation. However, is there actually an emerging ecosystem of climate-tech companies that could make Israel a significant and relevant player in the global carbon reduction technology market? A new report answers this question and recommends that decision-makers develop a climate strategy to direct local investment towards this field.
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Mile Advisory, a consulting company specializing in climate and energy, examined several Israeli climate-tech companies and assessed whether they directly offer technologies for carbon reduction (decarbonization) as defined by the International Energy Agency as essential for the transition to clean energy worldwide.
The agency has identified over 500 clean energy technologies as in-demand for significant emissions reduction in the energy sector - the sector responsible for about 75% of global emissions. This is of great importance, presenting significant opportunities for companies, as the organization emphasizes that nearly half of the required emissions reduction will rely on technologies currently in development. These include technologies for energy and heat capture and storage, synthetic and biological fuel production, transportation, industrial process solutions, carbon management (including carbon capture), and solutions for the construction sector (heating and cooling, lighting solutions, cooking, building renovations, and more).
The analysis reveals that of Israel's 700 climate-tech startups, only 152 of them directly address decarbonization needs as defined by the International Energy Agency, mainly in energy, transportation, and construction. Another 268 companies were identified as indirectly contributing to decarbonization, such as digital software solutions that could serve companies post-decarbonization.
These companies are crucial as they harness knowledge and skills rooted in Israel's leadership in software and cybersecurity for climate purposes. In total, these 420 companies (about 46% of climate-tech startups) address only 75 out of approximately 500 technologies defined by the agency as critical (about 15%), indicating a gap between Israel's supply and global demand. Gaps also exist in areas where Israel has relatively strong technological offerings, such as in the energy transformation sector.
Regarding government investment, even before the significant planned cuts in the Ministry of Energy, Israel's level of investment in research and development in the energy sector is about five times lower as a percentage of GDP compared to other OECD countries. The average government investment in R&D per GDP in the energy sector in OECD countries is around 0.02%, while in Israel, it is only 0.004%.
Yet, there is enormous potential, significant entrepreneurial appetite and a technological arena ripe for breakthrough ventures in Israel. For instance, Israel is ranked among the top five G20 countries in solar energy expertise. The opportunities ahead could also serve as an engine for Israeli economic growth. For example, reducing carbon emissions in the construction sector represents an annual market expected to reach $1.5 trillion by 2030.
In recent years, Israel has developed expertise in areas such as cultured meat, precision agriculture, and protein substitutes. However, these are not the central areas required for the most significant reduction in carbon emissions today. According to the report, funding for Israeli climate-tech companies primarily comes from local investors, a pattern that deviates from the Israeli high tech scene which remains dominated by foreign investors. "This gap indicates that Israel's carbon technologies are not the primary focus for global investors, as the local scene lacks the momentum for global demand and supply," according to the report. Furthermore, public investments in research and development in Israel are low compared to European countries.
Morielle Lotan, Founder and CEO of Mile Advisory, says that the government and investors should formulate and adopt an investment strategy in climate areas, especially now, when available funding sources are shrinking. "The current period requires examining where Israel's unique value proposition intersects with global market demands," she says. "The global effort to reduce carbon requires a coordinated international approach, where each country leverages its unique strengths to contribute to a comprehensive solution for significant challenges. Israel can play a central role in the global race towards zero emissions.
"Israel can capitalize on its traditional strengths in areas such as software, cybersecurity, and artificial intelligence to accelerate market solutions, adapting its skills to address climate change."
