Carbon Contracts for Difference (CCfD)

Carbon Contracts for Difference (CCfD) are an innovative instrument for promoting decarbonization. They support the transition to low-emission technologies by covering the differential costs between new and conventional technologies and guaranteeing a CO2 base price. If the CO2 market price is lower than this base price CCfDs compensate for the difference; if it is higher repayments may be due. This reduces the financial risk for companies and facilitates the transition.This paper provides a comprehensive overview of CCfDs analyzes how they work sheds light on the financial background identifies limitations and examines their application in European countries. In addition the incentive effect on companies is illustrated through a model implementation. The results show that CCfDs are an important complement to existing instruments such as the EU Emissions Trading System (EU ETS) and can promote investment in new technologies.