Designing carbon contract for difference incentives to drive the deployment of carbon capture and storage in Europe

Abstract

Carbon contracts for difference (CCfDs) have become a leading policy option in Europe for funding the deployment of carbon capture and storage (CCS) and other industrial decarbonisation projects. This mechanism aims to cover the gap between project costs and the prevailing carbon price over a given project duration. This paper assesses existing CCfD schemes in five European states, highlighting the design choices available to policy makers and their impact on CCS deployment. Design choices include parameters such as project eligibility and selection criteria, payment symmetry, price indexing, and performance criteria. Variation between these schemes is a result of different national contexts and policy visions for CCS development. Countries with weaker political support for CCS or a focus on industrial decarbonisation have tended to prefer CCfD programmes open to multiple decarbonisation technologies. Countries with a strategic vision to deploy CCS technology for multiple purposes have developed technology-targeted schemes. A fundamental challenge for CCS projects is a reliance on shared CO₂ infrastructure, which creates co-dependencies with other projects and can increase cost uncertainty. Design features to address this challenge have included regional prioritisation, cross-chain risk mitigation, consortium bids, and flexibility to changing costs. Project selection and performance criteria can be tailored to promote goals such as near-term abatement, net-zero compatibility, and wider economic impact. As more countries develop CCfDs to meet their decarbonisation goals, this paper offers a structured comparison of the motivating factors and outcomes of key design choices for CCS, so as to inform the design of future schemes.