Conference Agenda

Facing uncertain market and political conditions, industrial firms continue to postpone investments in innovative low-carbon technologies. To address this problem, Carbon Contracts for Difference (CCfDs) have rapidly emerged as a central policy instrument to support industrial decarbonisation. Yet, while the investment incentives of such instruments have been extensively discussed, their welfare and fiscal implications have been heavily understudied. Building on a newly-introduced measure of the cost of public risk, the Cost of Earmarked Funds, this paper investigates on how alternative CCfD implementations allocate risk between firms and the public sector. By framing the industrial firm’s abatement decision as a continuous-time investment problem with multiple sources of risk, I analytically show how these different policy designs reshape the distribution of payoffs for the producers. From a policy perspective, I highlight the trade-offs of each CCfD design, and compare their fiscal and welfare implications. I show that, when considering multiple risk sources, some design architectures can increase public budget exposure while barely having any effect on incentives. Finally, I perform Monte-Carlo simulations to quantitatively analyse current CCfD implementations - and compare the fiscal and welfare impacts of the French and German schemes to those of the standard CCfD design. The results show that, across all scenarios considered, the standard CCfD is never welfare-dominant, highlighting the structural limitations of this widely discussed instrument in the context of industrial decarbonisation. I then conclude on how national design choices reflect different policy priorities, and the outcomes that can be expected from each of these schemes.