A few weeks after an election win, the Trump transition team’s plan to kill the $7,500 consumer tax credit on EVs has already surfaced. Although this type of climate-focused subsidy cut was widely rumored, the news still sent Tesla and Rivian shares lower. It’s a critical inflection point for the climate tech sector, which must evolve quickly from being subsidy-dependent to delivering standalone business value.
Moving forward, solutions need to be better, cheaper, or lighter—not just greener. While some will view this change as a significant setback for climate initiatives, it may actually make the next wave of climate tech startups more resilient than zero-interest-rates-era peers or those from the cleantech boom that initially catalyzed the industry. After all, the first solar energy bubble exploded because it had always been on shaky territory, almost solely propped up by government subsidies.
The change of tone on who pays for the climate transition echoed globally at COP 29 in Baku. With a Trump administration likely to take the U.S. out of the Paris Climate Accords, developing nations are anxious about who will provide their climate aid. It’s increasingly likely that donor nations will decrease climate funds in the form of foreign aid and increase funding from the private sector.
For investors like me, this means looking at the market through a new lens. Climate solutions such as synthetic fuels, which are derived from non-petroleum sources, are certainly not in the picture as they are majorly reliant on tax subsidies. Meanwhile, software or platform-based climate tech startups providing services ranging from climate risk ratings to carbon accounting will now be evaluated solely as SaaS businesses, which have seen median revenue multiples drop from 19.4x in 2021 to around 6x today.
This doesn’t mean that investment in deep tech-related physics and chemistry innovations that can help address our climate crisis is dead. We still haven’t deployed 90% of the climate innovations needed to get to net zero. However, it does mean a return to looking at fundamentals. Startups must move quicker from research to commercialization, lean into lean manufacturing, and use the power of both AI and robotics in automation—all with an eye toward bringing cheaper solutions with real business ROI to market faster.
Searching for innovations that deliver EV affordability
One might wonder why the Trump administration, which has heavily leaned on Tesla’s Elon Musk as an ally, would make one of its first climate subsidy cuts aimed at EVs. However, Tesla seems to be in favor of repealing the subsidy, as the company believes it will have a much more negative impact on legacy automakers such as GM. These competitors are struggling to sell EVs at the volume that Tesla does and are more focused on targeting the traditional economy and mid-sized sedan markets that are more price-sensitive.
While Tesla certainly has some entry-level models like the Model 3, it also has customers looking at vehicles such as the Cybertruck, which carries a $82,235 price tag. The buyers of these types of cars probably won’t change their purchasing behavior without the subsidy, and many are probably making more than $150,000 and don’t qualify for the incentive anyway. However, competitors who are focused on selling lower-cost EVs and can no longer deduct $7,500 from the price tag will ratchet up the hunt for innovations that can make EVs more affordable. The average price for a new EV today is still $56,351, while a gas-powered vehicle is $48,397 on average.
Battery costs are the primary reason EVs’ sticker prices hover above their gas-powered counterparts. The cost of the minerals that go into batteries, such as lithium and nickel, which are increasingly in high demand, continues to drive up the price. Data from the Institute for Energy Research shows that EV batteries account for 30-40% of the cost of EVs today. Batteries have been undergoing significant innovations recently, with startups looking into solid-state lithium batteries and modular designs that could address some of the cost issues.
However, to really address costs, we might have to look outside the box at even more disruptive battery solutions. Chinese and Indian EV makers are making the long-held idea of battery-swapping technology a reality, and by decoupling the battery from the EV, they have reduced their retail prices. Furthermore, this approach reduces the operational costs of fleet operators by up to 20% while increasing uptime.
Another component of EVs where innovation could address affordability is the powertrain. An electric vehicle’s powertrain consists of the motor, transmission, driveshaft, AC/DC converter, and control unit. These control systems determine an EV’s performance, range, and efficiency and account for 10-25% of its total cost. Improving EV performance so these vehicles can use less energy, have smaller batteries, and travel farther on a single charge is a critical step in making them more accessible.
The EV industry's challenge mirrors the broader climate tech sector's imperative: finding technological breakthroughs that create compelling business advantages independent of policy support. Just as EV makers must innovate around batteries and powertrains to achieve price parity, other climate tech companies must identify similar technological leverage points in their domains.
Morphing from climate tech to deep tech
Climate tech is far more than battery technology or the renewables powering today’s EVs. It’s carbon capture technology, green hydrogen, fusion, and much more. Entrepreneurs in these spaces under the Trump administration will undoubtedly need to be wartime CEOs. Globally, climate tech funding and deals already hit a four-year low in Q3, according to CB Insights. Those who initially raised money during the zero-interest days are nearing the end of their runway as they’re dealing with capital-intensive businesses that have hardware, extensive facilities, and manufacturing costs.
While climate-focused investors will stick around, the more generalist investors will likely become tourists and move into areas like AI. However, some of these startups, which are using scientific and engineering innovations to solve complex problems, are close enough to commercialization that they will be able to position themselves at the intersection of deep tech, where there is growing rather than subsiding investor interest. Not just from climate tech investors naturally looking at hardware-based solutions outside of the climate space, but also investors that have shifted from a software and SaaS focus as valuations and returns have plummeted.
Today, deep tech claims a 20% share of venture capital funding, up from about 10% a decade ago, according to Boston Consulting Group. And while the AI space may be minting hectocorns and decacorns, the deep tech market is responsible for companies such as SpaceX, which has grown into a $175 billion company, and NVIDIA, which is now valued at more than $1.5 trillion. In fact, today, there are hundreds of deep-tech unicorns—and it no longer takes decades and hundreds of millions of dollars for these companies to get there. The median deep-tech unicorn took $115 million of capital and 5.2 years to get there.
The shift in U.S. and global climate policy under Trump 2.0 may ultimately strengthen climate tech by forcing a focus on fundamental business value. While this transition period will be challenging, it could catalyze the next generation of climate solutions that stand on their own merits. As demonstrated by the deep tech sector's growing success, breakthrough technologies combined with solid business fundamentals can attract substantial capital and achieve rapid scale. For climate tech entrepreneurs and investors, the mandate is clear under Trump 2.0: innovation must drive value creation, not policy support.
More must-read commentary published by Fortune:
- Shell’s Pyrrhic victory may well set the stage for more corporate climate accountability
- Demis Hassabis-James Manyika: AI will help us understand the very fabric of reality
- I worked with Steve Jobs. Here’s what he’d say about today’s leadership style
- The next wave of AI won’t be driven by LLMs. Here’s what investors should focus on instead
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
