Europe to Consider Innovative Carbon Contracts to Underpin Huge Climate-Related Investment

By Mathew Carr

May 5, 2021 — LONDON: To ensure the European Union’s policies achieve the region’s required emission cuts, investors will probably need the comfort of clever carbon contracts that protect clean investors.

The region’s policies needs to reflect industry’s needs during the transition to climate neutrality, the European Commission said today in an updated plan (see link below).

“De-risking of initial investments through tools like Contracts for Difference need to be explored,” it said.

CCfD would pay out the difference between the price of EU emissions allowances and the contract price, thus effectively ensuring a guaranteed carbon price would be protecting the hydrogen project from competition fueled by coal, crude oil or natural gas.

The allowances have surged to a record this week.

Whichever green-hydrogen project, for instance, offers to produce the fuel at the lowest carbon price, would win the CCfD incentive. This competitive tension will drive down costs, as electricity contracts for difference did for offshore wind.

In exchange for the insurance, investors would pay money to the government should carbon prices be higher than the CCfD strike price, reducing financial risks for the taxpayers providing the incentive.

Companies would therefore have an incentive to make climate-friendly, innovative investments and reduce their CO2 emissions, knowing they were protected from market shifts or a counter attack from fossil fuels.

Carbon prices are likely to help determine hydrogen prices, as hydrogen competes with old energy.

Governments will become incentivised to keep carbon prices high and the carbon market tight.

This is for three important reasons:

First, they’ll want to get more money when they sell carbon allowances in auctions. These funds can help poor people navigate the energy transition and create jobs.

Second, they’ll try to keep the carbon price above the CCfD strike levels because, otherwise, they’ll have to tap indebted taxpayers to pay the difference to the makers of the hydrogen.

Third, high carbon prices (tight constraints on emissions using various policies) are the only way they’ll meet their emission-reduction targets.

The CCFD would help spur industrial scale demonstrators of green
technologies and the launch of markets for green and circular products, the commission said today (Wednesday).

Other derisking measures could include insurance programs and
special purpose vehicles for off balance sheet financing “to support the uptake of new low carbon technologies at industrial scale.”

The Green Tech Investment Initiative would increase the access to equity finance for innovative small-medium enterprises and start-ups that develop and adopt green-tech solutions.

Agora (see link below and https://carrzee.org/2020/11/15/green-hydrogen-is-already-in-the-money-in-britain-portugal-this-is-why-boris-can-drop-petrol-cars-early/

NOTES:

EU REPORT:
https://ec.europa.eu/info/sites/default/files/annual-single-market-report-2021.pdf

CarrZee wrote about the benefits of CCfDs several times in November:
https://carrzee.org/2020/11/20/exclusive-germany-confirms-its-considering-funky-carbon-contracts-to-support-climate-transition/

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