Clean Air Task Force Paper Explores Carbon Contracts For Difference In The EU Policy Landscape

Clean Air Task Force Paper Explores Carbon Contracts For Difference In The EU Policy Landscape - Carbon Herald

The Clean Air Task Force – a non-profit advocacy group and think tank on climate and energy, has released a new policy brief, exploring the design of carbon contracts for difference (CCfD) and comparing carbon capture and storage policies in Europe.

The report authored by Toby Lockwood is called “Designing Carbon Contracts for Difference” and brings attention to CCfDs as an efficient instrument to reduce the costs and risks related to zero-emission investments. 

As hard-to-abate sectors often require the application of technologies like carbon capture and storage (CCS) or replacing fossil fuels with hydrogen, funding and risk management are two of the main barriers despite expectations that CCS will become cheaper. The cost of emitting CO2 under the European Union Emissions Trading System (EU ETS), even at the record levels reached in 2023 is still lower than the cost of decarbonization. 

Relevant: EU Carbon Price Goes Under €56 T/CO2, Lowest Levels In Two Years

Though the ETS is expected to eventually rise high enough to spur deployment of emissions-free alternatives in the industry, many governments are now choosing to implement policies that can cover the cost gap between emitting CO2 and the cost of decarbonization. The emerging policy of choice for this task is the ‘carbon contract for difference’.

The measure includes projects being awarded with a contract that guarantees to pay the difference between the CO2 abatement cost and a reference price for CO2 emissions, usually the EU ETS. 

Key characteristics of the three incentive schemes. Source: Clean Air Task Force report “Designing Carbon Contracts for Difference”

Such CCfDs system was first implemented by the Netherlands, where an existing mechanism for subsidizing renewable energy generation was expanded to the SDE++ in 2020, to include other decarbonization technologies like electrolytic hydrogen and CCUS.

A similar measure has been implemented in the UK as well, aimed only at CCS projects – the Industrial Carbon Capture contract. Through it private law contracts will be signed between the capture projects and a state-owned entity established by the Department of Energy Security and Net Zero, with contracts beginning in 2024.

Relevant: EU Publishes Proposals For 2040 Emission Reduction Targets And Industrial Carbon Management

Denmark is the third country’s policy looked into in the report. The Nordic country introduced a CCUS Fund in 2022 that has awarded a similar type of contract for full-chain carbon capture and storage projects. It plans further rounds under a slightly altered format. 

These three pioneering policies are compared side by side in the Clean Air Task Force’s policy brief – available here – with the goal of informing policy design choices in new countries tackling industrial decarbonization and CCS deployment.

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