Carbon contracts for difference (CCfDs)

Industry plays a key role in the transformation towards climate neutrality but needs to overcome technological and financial challenges on the way. Numerous heavy industry production plants need reinvestment this decade, which presents an opportunity to invest into climate-neutral technologies. While many jurisdictions have carbon pricing policies in place, CO₂ prices are often not high enough yet to justify such investments. In a competitive international trading environment and without a stable existing demand it is also difficult to pass on incremental costs to consumers. Framework conditions which address these additional costs are thus needed to spur the transformation.

In the context of this investment dilemma, Carbon contracts for difference (CCfDs) come into play. A CCfD is a financial hedging instrument that reduces the incremental costs that arise when a company shifts from conventional to climate-neutral production. As such, Ccfds are one of the central policies to accelerate the industrial transformation. They also complement other needed policy measures such as carbon pricing and carbon leakage protection. The contracts can be designed to react flexibly to changing framework conditions such as shifts in carbon pricing or prices for energy carriers.

The main goal of CCfDs is to kick-start the industrial transformation and quickly drive down CO₂ emissions in the sector. But CCfDs can do even more by working along the whole industrial value chain: they not only help secure climate-neutral industrial production financially, but also incentivise the establishment of the necessary infrastructure and provide the supply of climate-neutral goods needed to build green lead markets. The necessary funding for CCfDs can be minimised through an intelligent policy mix, including effective carbon pricing and carbon-leakage protection, and measures on the demand side such as labelling and green public procurement.

Agora Industry’s work on CCfDs focuses on German industry, with strong links to the EU level. We have, for example, analysed in detail different design options for CCfDs as well as interactions between CCfDs and green lead markets and the EU Emissions Trading System. In addition to producing policy analyses, Agora Industry actively participates in and furthers broad stakeholder exchanges both at EU level and in various EU member states.