Carbon Contracts for Differences: their role in European industrial decarbonization

The document argues that CCfDs can mitigate regulatory and price uncertainty in carbon markets while providing innovation incentives for low-carbon industrial technologies. It positions CCfDs as one element of a broader five-part policy package including climate contributions, renewable CfDs, green public procurement, and product carbon requirements. The brief examines the economic costs and social values of CCfDs, suggests national-level implementation to be practical despite state aid complexities, and discusses their potential integration with COVID-19 Recovery Funds to ensure long-term business cases for green industrial investments.

• Carbon Contracts for Differences (CCfDs) function as a two-sided option where the government pays the agent the difference if the market carbon price is below a strike price, and the agent returns additional revenue if the market price exceeds that strike price.
• CCfDs address two primary market failures: they reduce financing costs by stabilizing revenue streams against regulatory uncertainty and provide a vehicle for additional technology support to help innovative industrial technologies overcome the 'valley of death'.
• CCfDs can significantly lower the carbon price required to make an investment competitive by approximately 35% by allowing for a higher debt ratio in low-carbon projects.
• While CCfDs are technically state aid and must comply with EU rules, the document suggests that national-level awarding is more practical than a European-level approach, provided there is harmonization through common strike prices or EU directives.
• The public cost of CCfDs may be low initially for first-movers but could increase as more plants convert to clean technologies, unless the EU ETS price rises to meet the strike prices. For France, estimated costs are between 100 and 500 million€/yr for differences of 5 to 25 €/tCO2.
• CCfDs can be integrated with COVID-19 Recovery Funds to create long-term business cases for novel technologies, although they are better suited for innovative projects than 'shovel-ready' ones.

APA

Gerres, T., & Linares, P. (2020). Carbon Contracts for Differences: their role in European industrial decarbonization. Climate Strategies. https://climatestrategies.org/wp-content/uploads/2021/03/Carbon-Contracts_CFMP-Policy-Brief-2020.pdf

Chicago

Gerres, Timo, and Pedro Linares. Carbon Contracts for Differences: their role in European industrial decarbonization. Climate Strategies, 2020. https://climatestrategies.org/wp-content/uploads/2021/03/Carbon-Contracts_CFMP-Policy-Brief-2020.pdf.

Wikipedia

{{cite report |last1=Gerres |first1=Timo |last2=Linares |first2=Pedro |title=Carbon Contracts for Differences: their role in European industrial decarbonization |publisher=Climate Strategies |date=September 2020 |url=https://climatestrategies.org/wp-content/uploads/2021/03/Carbon-Contracts_CFMP-Policy-Brief-2020.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{gerres2020carbon, author = {Gerres, Timo and Linares, Pedro}, title = {{Carbon Contracts for Differences: their role in European industrial decarbonization}}, institution = {Climate Strategies}, year = {2020}, month = sep, url = {https://climatestrategies.org/wp-content/uploads/2021/03/Carbon-Contracts_CFMP-Policy-Brief-2020.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }