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Carbon Contracts-for-difference: How to De-risk Innovative Investments for a Low-carbon Industry?

Aufsätze referiert extern - Web of Science

Jörn C. Richstein, Karsten Neuhoff

In: iScience 25 (2022), 8, 104700, 20 S.


The shift to climate neutrality requires new process technologies for energy-intensive industries, such as steel, chemicals, or cement. A variety of technology options exist – but they face the challenges of (i) first-of-kind costs, (ii) higher operation and investment costs, and (iii) insufficient and uncertain carbon prices, which partly stem from political uncertainty. Existing innovation policy instruments and carbon policies such as price floors can only partly address these challenges. Project-based carbon contracts-for-difference (CCfDs) guarantee investors a fixed carbon price over the contract duration, thus de-risking such investments from political and market uncertainty, and allowing governments to set carbon prices above current levels. Here we show for a case study in the steel sector that carbon mitigation costs can be reduced by up to 27% and that owing to high incremental operation costs, price floors of 79% of the CCfD price would be needed for projects to achieve bankability.

Jörn C. Richstein

Senior Research Associate / Thematic Lead Electricity Markets in the Climate Policy Department

Karsten Neuhoff

Head of Department in the Climate Policy Department

Keywords: Energy flexibility, energy modelling, energy policy, energy resources

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