Deep emissions reductions in the European power sector are already occurring, but emissions reductions in industrial sectors have been largely limited to incremental efficiency gains. In a new briefing, Sandbag looks at a funding model for industrial decarbonisation processes such as Carbon Capture & Storage (CCS), using Contracts For Difference (CFD) set against the carbon price. With the majority of European industry currently sheltered from the carbon price through free allocation on the Emissions Trading Scheme (ETS), little incentive has existed to innovate with entirely new low-carbon processes, or investment in CCS technology. Yet caps are set to tighten and industry has to adapt. Member State action through CFDs could be the answer.

Investing in these technologies to deliver deep decarbonisation for industry requires funding to support the high capital and operating costs. The EU Emissions Trading Scheme (ETS) carbon price (even after the Market Stability Reserve reform) will not be raised sufficiently or become bankable enough to make financing such investments likely in the EU. A combination of additional Member State and EU support will be needed, well beyond the proposed ETS Modernisation and NER 400 funds.

The supporting policy which Sandbag is suggesting would be based on Contracts For Difference (CFD), similar to the UK’s electricity CFDs, but pegged to the carbon price rather than the wholesale electricity price. For example, a CCS plant could agree with their Member State a guaranteed strike price of £100/€140 per tonne of CO2 stored. They would then be paid that figure for a fixed period, minus the carbon price. With the current carbon price of €7.50, the CCS plant would receive €132.50tCO2. As the carbon price rises, the size of the payment would decrease. This level of support compares favourably to current support prices being offered to renewable energy in other sectors.

A source of funding for the CFDs might be found in the ETS auction revenues, which analysts at PointCarbon estimate could total as much as €151 billion in total from 2015-2025. CFDs can incorporate elements of competition; by offering payments for any form of permanent CO2 storage, the most cost-effective technologies can be supported, which may include mineralisation of CO2 into aggregate and other novel forms of utilisation and storage, as well as deep geological storage.

The CFD model has been instrumental in helping to build the largest offshore wind industry in the world around the UK. Could the success be replicated for industrial decarbonisation?

Read the full briefing here.