This Study explores the idea of awarding carbon contracts for difference (CCfDs) to help commercialise the first ultra-low carbon basic industrial materials (steel, cement, concrete, aluminium, certain chemical feed-stocks) projects. It argues that this approach would be economically efficient, is compatible with EU state aid and WTO law, and is highly complementary to other policy instruments.
- A project-based “Carbon Contract for Difference” (CCfD) for ultra-low carbon materials could be used to ensure that projects for ultra-low carbon materials face a) a sufficiently reliable, “investible” carbon price and b) that the price is effectively high enough so deep decarbonisation technologies become commercially viable immediately, and can be commissioned during the coming 5-10 years.
- This system would be somewhat similar to (although much less expensive than) “feed-in premium/ tariff” (FIP/FIT) policies for renewable energy projects to be “investible”. However, it would work by guaranteeing producers of ultra-low carbon materials a fixed carbon price, rather than a fixed power, gas or heat price. It also only covers the difference between the current carbon price and the contracted price; if the carbon price were higher than the guaranteed price, there would be no payment.
- This system would thus help to ensure that the CO2 price faced by investors in first-of-a-kind commercial scale projects better reflects the true social cost of carbon in the economy. It would complement the EU carbon market by providing a substantially higher and more predictable (bankable) carbon price based on which large-scale long run investment decisions could be taken. A CCfD would be complementary with other key policies, including national or European innovation funds by providing a viable pathway to market for successful demonstration pilots. They could potentially be funded by a small downstream carbon charge on CO2 intensive basic materials.