Matthias Janssen’s Post

As first country worldwide, Germany launches a tender for Carbon Contracts for Differences (#CCfD #Klimaschutzverträge), to support a switch of energy-intense industry production from fossil to low-carbon such as #hydrogen or #CCS. This took a bit, though, I remember starting to advise clients on the first government CCfD design ideas back in 2020... Key facts (with many thanks to Josef Schumacher for his help!): 🔸 𝐆𝐞𝐧𝐞𝐫𝐚𝐥 𝐥𝐨𝐠𝐢𝐜: An industrial consumer with a CCfD receives payments to compensate extra cost of producing its goods with low CO2 emissions compared to the fossil reference with high CO2 emissions. Eligble consumers, e.g. in chemical, glas, paper, or steel industry, will compete for CCfD payments in tenders where bidders with lowest CO2 abatement cost (CCfD strike price) succeed and get a contract with the Federal Ministry for Economic Affairs and Climate Action. 🔸 𝐂𝐨𝐧𝐭𝐫𝐚𝐜𝐭 𝐝𝐞𝐬𝐢𝐠𝐧: Low-carbon production has to start within 4 years after the tender, CCfD contracts will then run for 15-years. CCfD payments are indexed to CO2 and fuel prices to make sure they are sufficient to cover extra costs of the low-carbon alternative, while - by the two-sided nature of the payments - ensuring that payments flow back to the government in case low-carbon production becomes cheaper than the fossil alternative. 🔸 𝐀𝐯𝐚𝐢𝐥𝐚𝐛𝐥𝐞 𝐟𝐮𝐧𝐝𝐬: €4 billion state budget to finance CCfD payments in a first tender that started on Tuesday, with a maximum of €1 bn per company. So this is targeted to medium-size facilities (max of €1 bn for 15y = ~€67 mn per year = 740k tons CO2 per year if exemplarily assuming CO2 abatement cost of €90/t). Total budget of €22 bn reserved to finance payments of additional tender rounds. These will also be open for very large-scale facilities such as cement plants with annual CO2 emissions > 1 million tons per year, probably including #CCS. 🔸 𝐂𝐎2-𝐫𝐞𝐝𝐮𝐜𝐭𝐢𝐨𝐧: The government's ambition is to reduce CO2 emissions by 350 million tons until 2045. That is up to 20 million tons per year, which is equivalent to 1/3 of Germany's CO2 reduction target for the industry sector in 2030. ⏰ 𝐁𝐢𝐝 𝐬𝐮𝐛𝐦𝐢𝐬𝐬𝐢𝐨𝐧: Industrial consumers who went through the prequalification process last year now have 4 months to submit their bid. Exciting task to transform the expected revenue gap into a successful (but not prone to winner's curse) bid! More info here (in German): https://lnkd.in/d5YrFDPf 𝐐𝐮𝐢𝐜𝐤 𝐞𝐜𝐨𝐧𝐨𝐦𝐢𝐜 𝐚𝐬𝐬𝐞𝐬𝐬𝐦𝐞𝐧𝐭: CCfDs can be an efficient instrument to establish early-stage technologies at large-scale. Competitive auctions facilitate selection of lowest-cost CO2 abatement options. In theory technology-agnostic, though challenging to put in practice as the definition of the fossil reference system has a massive impact on competitiveness of bids. More in our report for E.ON Hydrogen where we assessed five H2 support instruments, incl. CCfDs: https://lnkd.in/g9qaGjrs.