What’s next for Carbon Contracts for Difference and can they really boost innovation in Europe?

Europe’s dependency on fossil fuel imports not only means high energy prices for European households but also has important consequences on industries across Europe. One key takeaway from a recent high-level round table organised and hosted by Henrike Hahn, Member of the European Parliament, was that Carbon Contracts for Difference could be the key to boosting green innovation in Europe.

What are Carbon Contracts for Difference?

A CCfD is a contract between a public administration and a company. Carbon Contracts for Difference set a fixed carbon price over a given period, which reduces the investment risk for companies and shares the CO2 costs between public and private entities. They are particularly relevant for those considering an investment in a low-carbon technology because they improve the medium to long-term competitiveness of low-carbon solutions, according to Prof. Pedro Linares, Professor of Industrial Engineering at the University of Comillas Pontifical and co-author of the study “Carbon Contracts for Difference (CCfDs): A European Perspective”.

Representing the European chemical industry, Cefic’s General Director, Marco Mensink, expressed the chemical industry’s support for CCfDs, while also stressing the need for sufficient funds to reinforce green transition. He called for deployment of effective instruments to accelerate the transition for those hit hard by the energy crisis. He also added:

“We urgently need solutions, like funds and mechanisms, for European SMEs which represent the large mass of European industry, since the green transition is becoming increasingly unaffordable for them.”
Marco Mensink, Cefic Director General

Rolling out CCfDs: where do we stand?

Germany is taking a leading role in the implementation of CCfDs. Michael Kellner, Parliamentary State Secretary for Economic Affairs and Climate Action at the German federal government, noted that the German government is finalising the funding program for energy-intensive industries like steel, chemicals, glass, and cement by February 2023. So we can expect to hear more about CCfDs in the coming years.

Alexandre Paquot, Director of Road Transport at DG CLIMA shared the European Commission’s interest in introducing competitive bidding throughout Europe:

“It will take a little time, but we want to do it right. It is the first time we will launch such an initiative, an instrument; hence we need to look at other’s experience and work closely with experts and academics.”
Alexandre Paquot, Director of Road Transport, DG CLIMA, European Commission.

The first application of CCfDs will aim to strengthen green hydrogen, as a key pillar of the transformation, according to Alexandre Paquot. Marco Mensink added if CCfDs can help reduce green hydrogen prices, it already can be seen as an achievement.

Other instruments are needed to support the transition

While CCfDs may incentivise investments in breakthrough low-carbon technologies, there is no silver bullet. The European Commission is offering various instruments to support industry’s transition, including the Innovation Fund which recently launched a €3bn call for large-scale projects and re-injects about 40 billion Euros revenues harnessed from the EU Emissions Trading System (ETS) back into the industry for innovation.

“We want to support industry to decarbonise, but we also want to trigger innovation in Europe through grants for large-scale, first-of-a-kind demonstration projects.”
Alexandre Paquot, Director of Road Transport, DG CLIMA, European Commission.