This thesis aims to clarify how feasible Carbon Contracts for Difference (CCfDs) are and how they compare to other policy instruments. It further explores what design elements the policy instrument needs to contain to be effective. To answer these questions, the feasibility of CCfDs was analysed through industry and policy publications using evaluation criteria and subsequently the most important design elements were identified and examined.
The introduction of climate-friendly technologies in energy-intensive industries requires significant investments. These investments are often withheld due to competitive disadvantages and carbon price risks, thus preventing the progress of industry. As a remedy, CCfDs between the state and companies should reduce risks and thus create incentives for investment.
Table of Contents
1 Introduction
1.1 Introductory remarks
1.2 Research problem
1.3 Research objectives and research question
1.4 Significance and limitations
1.5 Structural outline
2 Background
2.1 Decarbonisation of the energy-intensive industry
2.2 Instruments for the transformation of industry
2.2.1 Carbon contracts for difference
2.2.2 Existing complementary policies and proposals
2.2.2.1 Carbon border adjustment mechanism
2.2.2.2 Climate contributions
2.2.2.3 Carbon clubs approach
3 Method
3.1 Research design
3.2 Data collection, data analyses and limitations
4 Ex-ante evaluation of instruments
4.1 Criteria for the policy evaluation
4.1.1 Political and diplomatic feasibility
4.1.2 Sustainability and policy longevity
4.1.3 Legal feasibility
4.1.4 Administrative feasibility
4.1.5 Technical feasibility
4.2 Evaluation
4.2.1 CCfDs
4.2.1.1 Political and diplomatic feasibility
4.2.1.2 Sustainability and policy longevity
4.2.1.3 Legal Feasibility
4.2.1.4 Administrative feasibility
4.2.1.5 Technical feasibility
4.2.2 CBAM
4.2.2.1 Political and diplomatic feasibility
4.2.2.2 Sustainability and policy longevity
4.2.2.3 Legal Feasibility
4.2.2.4 Administrative feasibility
4.2.2.5 Technical feasibility
4.2.3 Climate Contributions
4.2.3.1 Political and diplomatic feasibility
4.2.3.2 Sustainability and policy longevity
4.2.3.3 Legal Feasibility
4.2.3.4 Administrative feasibility
4.2.3.5 Technical feasibility
4.2.4 Carbon Clubs
4.2.4.1 Political and diplomatic feasibility
4.2.4.2 Sustainability and policy longevity
4.2.4.3 Legal Feasibility
4.2.4.4 Administrative feasibility
4.2.4.5 Technical feasibility
4.2.5 Overview of the evaluation
5 Instrument design
5.1 Possible variants of the instrument design
5.2 Evaluation
5.2.1 Geographical Scope
5.2.2 Price of the contract
5.2.3 Awarding the contracts
5.2.3.1 Allocation mechanism
5.2.3.2 Technological and sectoral scope
5.2.4 Duration
5.2.5 Legal practicability
5.2.6 Financing of the instrument
5.2.7 Hedging other input risks
5.2.8 Interaction with other kinds of instruments and support schemes
6 Discussion and conclusions
7 Bibliography
Objectives and Topics
This thesis examines the feasibility of Carbon Contracts for Difference (CCfDs) as a policy instrument to facilitate the transition to climate-friendly technologies in energy-intensive industries. It addresses the research question of how practically implementable CCfDs are compared to other policy instruments and how their design influences their effectiveness and feasibility.
- Comparison of CCfDs with CBAM, climate contributions, and climate clubs.
- Evaluation using criteria such as political/diplomatic, legal, administrative, and technical feasibility.
- Design considerations including geographical scope, contract pricing, and allocation mechanisms.
- Integration of CCfDs into broader policy packages.
- Assessment of risks such as carbon leakage and investment uncertainties.
Excerpt from the Book
2.2.1 Carbon contracts for difference
The idea of carbon contracts was first proposed by Helm and Hepburn (2005). The authors believed these contracts would address the regulatory risk and lack of long-term carbon markets resulting from government’s limited credibility in setting carbon reduction targets or carbon prices. Carbon prices have been too low to cover the additional costs of climate-friendly technologies compared to conventional ones. In addition, uncertainty about the development of the carbon price leads to higher financing costs (Sartor and Bataille 2019). Due to these issues, even well-proven technologies often could not be commercialised.
The concept of carbon contracts was revived and further refined by Richstein (2017), who argues that CCfDs are one way to minimise the price uncertainty which stems from the fluctuating carbon price. The contracts allow governments to guarantee investors in low carbon breakthrough technologies (LCBTs) a fixed price that recompenses reductions in carbon emissions above the current price in the European Union Emissions Trading System (EU-ETS). As a result, companies will be incentivised to make climate-friendly investments, thereby reducing their carbon emissions.
The CCfD is concluded between the government and a company (agent) for a specific project over a certain period. An agreement is reached on the contract price for avoided CO2, the so-called strike price (Bundesministerium für Wirtschaft und Klimaschutz 2020). Companies would receive the difference between the carbon price on the market and the contractually agreed strike price for each unit of avoided greenhouse gas emissions. If allowances continue to be freely allocated, a second revenue stream is created from selling these allowances. If the carbon market price is higher than the strike price, the companies would, in turn, pay the difference back to the state (see Figure 2).
Summary of Chapters
1 Introduction: This chapter establishes the context of the energy transition in energy-intensive industries and outlines the research objective, which is to evaluate the feasibility of CCfDs compared to other policy instruments.
2 Background: This chapter details the decarbonisation challenges in energy-intensive sectors and introduces the four main policy instruments: CCfDs, CBAM, climate contributions, and carbon clubs.
3 Method: This chapter describes the positivist, inductive qualitative research approach, focusing on document analysis rather than empirical interviews due to data scarcity.
4 Ex-ante evaluation of instruments: This chapter performs a comparative feasibility study of the four instruments based on five defined criteria: political/diplomatic, sustainability, legal, administrative, and technical.
5 Instrument design: This chapter analyzes how specific design features of CCfDs—such as geographical scope, pricing, and allocation—influence their overall impact and practicability.
6 Discussion and conclusions: This chapter synthesizes the research findings, confirming that CCfDs are the most feasible instrument, and suggests implementing them as part of a policy package.
Keywords
decarbonisation, energy-intensive industry, CCfD, Carbon Contracts for Difference, CBAM, Climate Contribution, Climate Clubs, energy transition, climate-friendly technologies, feasibility, policy evaluation, industrial transformation, GHG emissions, carbon pricing.
Frequently Asked Questions
What is the primary focus of this thesis?
The thesis focuses on the feasibility and practical implementation of Carbon Contracts for Difference (CCfDs) as a tool to support the industrial transition toward climate neutrality.
What are the central policy themes covered?
The research covers industry decarbonisation efforts, specifically examining CCfDs, Carbon Border Adjustment Mechanisms (CBAMs), climate contributions, and climate club approaches.
What is the core research question?
The research asks to what extent CCfDs are practically implementable compared to other policy instruments and how specific design elements (such as contract duration or allocation methods) affect their feasibility and effectiveness.
Which scientific methods are employed?
The study uses an inductive, qualitative approach, relying primarily on document research and comparative content analysis of policy publications and industrial literature to evaluate the proposed instruments.
What does the main body of the work address?
The main body evaluates individual instruments against five metrics—political/diplomatic, sustainability, legal, administrative, and technical feasibility—and then provides an in-depth analysis of how to optimize CCfD design elements.
Which keywords characterize this work?
Key terms include decarbonisation, energy-intensive industries, CCfDs, carbon pricing, policy feasibility, and industrial transformation.
How do CCfDs differ from other instruments?
Unlike CBAMs or climate clubs, which are broader regulatory mechanisms affecting international trade, CCfDs act primarily as a targeted, project-based support instrument that mitigates financial risk for companies investing in low-carbon technology.
Why are CCfDs considered highly feasible?
They are considered feasible because they build upon existing frameworks like those for renewable energy CfDs and integrate directly into the EU-ETS, reducing administrative complexity and potential diplomatic or trade resistance compared to unilateral measures like CBAM.
- Citar trabajo
- Anonym (Autor), 2022, Ex-Ante Evaluation of a New Policy Instrument. Carbon Contracts for Difference in Energy-Intensive Industries, Múnich, GRIN Verlag, https://www.grin.com/document/1337486
