Carbon Contracts for Difference (CCfDs) are long-term public-private agreements that guarantee a fixed price for avoiding or removing a tonne of CO₂. They bridge the gap between this fixed "strike price" and a fluctuating market carbon price, providing the revenue certainty needed to de-risk and unlock private investment in innovative green technologies.
A Carbon Contract for Difference (CCfD) is a sophisticated financial instrument designed to accelerate industrial decarbonization. Typically signed between a government body and a private company, its primary purpose is to provide the long-term price stability required to make large-scale, capital-intensive green projects financially viable. These projects, such as green hydrogen production or carbon capture facilities, are essential for climate goals but often too expensive to compete at current carbon prices, like those seen in the EU Emissions Trading System (EU ETS).
By guaranteeing a specific carbon price, CCfDs remove the primary investment risk: price volatility. This assurance allows companies to secure financing and commit to building the clean infrastructure of tomorrow.
How do Carbon Contracts for Difference work?
The mechanism operates around two key price points and a two-way payment flow:
- The Strike Price: This is a fixed price per tonne of CO₂ abated, agreed upon at the start of the contract. It is set at a level that makes the green project commercially viable.
- The Reference Price: This is the actual, fluctuating price of carbon in a compliance market, such as the price of a European Union Allowance (EUA).
- The Payment Flow:
- If the Reference Price is below the Strike Price, the government pays the company the difference. This ensures the project receives its guaranteed revenue stream.
- If the Reference Price rises above the Strike Price, the company pays the difference back to the government. This prevents the company from earning excessive "windfall" profits and makes the scheme cost-effective for taxpayers.
Concrete Examples
Use Case 1: Green Steel Production
A steel manufacturer wants to switch from a traditional coal-fired blast furnace to a new process using green hydrogen. This technology is very expensive. The company secures a CCfD with a strike price of €150 per tonne of CO₂ avoided. If the market price for carbon allowances (the reference price) is only €90, the government pays the company €60 for every tonne of emissions it reduces, making the project profitable and investable.
Use Case 2: Direct Air Capture (DAC)
A technology company develops a facility to capture CO₂ directly from the atmosphere. The cost is high, estimated at €400 per tonne. Through a competitive auction, it wins a CCfD with a strike price of €400. This guaranteed revenue allows the company to build and operate the plant, contributing to carbon removal goals long before market prices reach that level. This mechanism is a key pillar of the EU's industrial strategy, supported by instruments like the EU Innovation Fund.