CFM TRACTION Carbon Contracts for Difference

The report evaluates Carbon Contracts for Difference (CCfDs) as a financial instrument to reduce carbon-price risk for industrial companies in Germany, specifically within the steel, cement, and ammonia sectors. It finds that CCfDs can trigger investments in clean technologies at lower expected carbon prices than minimum carbon price schemes and can significantly reduce the net present value of government funding. The analysis suggests that combining CCfDs with other risk-reducing instruments, such as contracts for difference for renewable electricity, further lowers the necessary strike price. The report also discusses award mechanisms, arguing that negotiations may be superior to auctions for complex innovative projects to avoid 'low-balling' strategies and overcompensation.

• CCfDs enable investment in clean technologies at lower expected carbon prices compared to minimum carbon price schemes. For example, in a low-cost scenario for steel, investment is profitable at expected CO2 prices of 77 EUR with a CCfD, versus 139 EUR under a minimum CO2 price of 30 EUR.
• The net present value (NPV) of government funding for decarbonizing up to 30% of cement, ammonia, and steel production by 2035 is estimated between -17 billion and 13.5 billion Euro, depending on the carbon price path. In a medium carbon price scenario, the NPV of government payments is estimated at 8 billion Euro, which is significantly lower than the 33 billion Euro required if no carbon price existed.
• CCfDs can act as a hedging instrument rather than a pure subsidy; high carbon prices in later years can lead to positive cash flows for the government as companies pay back the difference when the market price exceeds the strike price.
• Covering additional risks beyond carbon pricing reduces the necessary CCfD strike price. Including electricity price risk reduces the required price by 19%, and combining CCfDs with a contract for difference (CfD) for renewables can reduce the strike price by 28 Euro/tCO2 by lowering average electricity costs by 15 Euro/MWh.
• For the award of CCfDs, the report suggests that negotiations or 'Competitive Dialogue' may be preferable to pure auctions. This is because the non-standard nature of low-carbon technologies and asymmetric information can lead to 'low-balling' strategies, where bidders submit artificially low bids and then seek costly ex-post renegotiations.
• To avoid technological lock-in and ensure sectoral diversity, the report recommends that award mechanisms should not rely solely on the lowest cost of abatement but should use scoring rules to account for emission reduction performance over time and ensure at least two different technologies are awarded contracts per sector.

APA

RICHSTEIN, J. C., KRÖGER, M., NEUHOFF, K., CHIAPPINELLI, O., & LETTOW, F. (n.d.). CFM TRACTION Carbon Contracts for Difference. Climate Strategies. https://climatestrategies.org/wp-content/uploads/2021/04/CFM-Traction-Germany_FINAL.pdf

Chicago

RICHSTEIN, JÖRN C., MATS KRÖGER, KARSTEN NEUHOFF, OLGA CHIAPPINELLI, and FREDERIK LETTOW. CFM TRACTION Carbon Contracts for Difference. Climate Strategies, n.d. https://climatestrategies.org/wp-content/uploads/2021/04/CFM-Traction-Germany_FINAL.pdf.

Wikipedia

{{cite report |last1=RICHSTEIN |first1=JÖRN C. |last2=KRÖGER |first2=MATS |last3=NEUHOFF |first3=KARSTEN |last4=CHIAPPINELLI |first4=OLGA |last5=LETTOW |first5=FREDERIK |title=CFM TRACTION Carbon Contracts for Difference |publisher=Climate Strategies |url=https://climatestrategies.org/wp-content/uploads/2021/04/CFM-Traction-Germany_FINAL.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{richsteinndcfm, author = {RICHSTEIN, JÖRN C. and KRÖGER, MATS and NEUHOFF, KARSTEN and CHIAPPINELLI, OLGA and LETTOW, FREDERIK}, title = {{CFM TRACTION Carbon Contracts for Difference}}, institution = {Climate Strategies}, url = {https://climatestrategies.org/wp-content/uploads/2021/04/CFM-Traction-Germany_FINAL.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }