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2022
Conference Paper
Title
Carbon contracts for difference as essential instrument to decarbonize basic materials industries
Abstract
Contracts for difference are an instrument to provide security in case of volatile or unsure price evolvement. They have been successfully used in the context of market opening for renewable energies. The contract guarantees the agreed contract price and thereby basically funds a price gap between market prices for a good and its actual costs for the project developer.
Project-based Carbon Contracts for Difference (CCfD) are now being discussed as a means to advance the adaptation of breakthrough technologies, i.e., to incentivise emission intensive basic industries to shift to low-emission production processes. In Germany, the federal government committed itself to deploy a project-based pilot funding program for such CCfDs, for the steel, ammonia, cement, and lime sectors. The basic idea is simple: to cover incremental costs between a novel climate-friendly technology and its conventional baseline, while considering existing and evolving CO2 prices and other relevant risks. The implementation as a CCfD might also encompass paybacks in case CO2 market prices (in the EU ETS) exceed the contract price, depending on the design of the instrument. The detailed design of this policy instrument, contrariwise to the basic idea, can be rather complex. Important questions are: how to set a suitable reference for the project to be contracted in terms of costs and emissions, which kinds of costs and revenues to consider, how to allocate funding and determine which projects are awarded, and how to consider the interaction with the ETS - and many more.
The paper presents preliminary findings from a research grant from the German Federal Ministry for Economic Affairs and Climate Action (BMWK), considering the aforementioned questions of policy design in the context of the expected German pilot program, and discusses their respective trade-offs. It outlines explicitly how a CCfD payment can be derived considering the difference costs between a climate friendly and a respective reference production as well as the effective CO2 price based on market price and free allocation. In a broader perspective, it addresses how CCfDs are embedded in the existing and anticipated policy framework for carbon intensive industries in Germany and in the EU such as, e.g., CBAM.
Project-based Carbon Contracts for Difference (CCfD) are now being discussed as a means to advance the adaptation of breakthrough technologies, i.e., to incentivise emission intensive basic industries to shift to low-emission production processes. In Germany, the federal government committed itself to deploy a project-based pilot funding program for such CCfDs, for the steel, ammonia, cement, and lime sectors. The basic idea is simple: to cover incremental costs between a novel climate-friendly technology and its conventional baseline, while considering existing and evolving CO2 prices and other relevant risks. The implementation as a CCfD might also encompass paybacks in case CO2 market prices (in the EU ETS) exceed the contract price, depending on the design of the instrument. The detailed design of this policy instrument, contrariwise to the basic idea, can be rather complex. Important questions are: how to set a suitable reference for the project to be contracted in terms of costs and emissions, which kinds of costs and revenues to consider, how to allocate funding and determine which projects are awarded, and how to consider the interaction with the ETS - and many more.
The paper presents preliminary findings from a research grant from the German Federal Ministry for Economic Affairs and Climate Action (BMWK), considering the aforementioned questions of policy design in the context of the expected German pilot program, and discusses their respective trade-offs. It outlines explicitly how a CCfD payment can be derived considering the difference costs between a climate friendly and a respective reference production as well as the effective CO2 price based on market price and free allocation. In a broader perspective, it addresses how CCfDs are embedded in the existing and anticipated policy framework for carbon intensive industries in Germany and in the EU such as, e.g., CBAM.
Author(s)
Rights
Under Copyright
Language
English