Driving down emissions: Carbon contracts with industrial partners can accelerate the transformation process
How can the industrial sector achieve the climate protection goals while remaining competitive? Carbon contracts between the German federal government and companies have the potential to be a key policy instrument to support investments in climate-friendly processes and thus accelerate the transformation. That is the case presented by the position paper “Carbon contracts for an accelerated industrial transformation”, published by state-based initiative IN4climate.NRW. In their paper, the authors also put forward ideas for how the contracts should be designed.
The paper’s signatories include associations of the steel, glass and cement industries as well as numerous companies from energy-intensive sectors, among them Air Liquide, Currenta, HeidelbergCement, Lanxess, Shell and Thyssenkrupp, in addition to leading research institutions, such as the Wuppertal Institute, the German Economic Institute (IW) and RWTH Aachen University.
The future of industry must be made climate neutral without delay. This fact has notably been confirmed by the latest ruling of Germany’s Federal Constitutional Court. But many climate-friendly technologies are still far more expensive than conventional production methods – and therefore not internationally competitive. By flexibly compensating for this cost difference, climate protection contracts – project-specific carbon contracts between the government and a company – can change this situation. “More than half of all energy-intensive industrial facilities will need to be replaced or modernised by 2030. Low-emission substitute technologies already exist for many sectors,” explains Samir Khayat, Managing Director of the IN4climate.NRW initiative. “The facilities will have a long service life. It is therefore all the more important that policymakers create the appropriate frameworks as a matter of urgency. This can prevent lock-in effects from outdated technologies or production moving abroad, where conditions are usually much worse,” says Khayat.
The paper’s authors and IN4climate.NRW’s partner organisations believe that carbon contracts should include the following elements:
• Compensation for additional costs incurred in switching over to new, climate-friendly technologies compared with the former standard technology.
• Priority given to CO2 avoidance potential and the degree of technology development; provided that the selection criteria are met, carbon contracts should be offered to all sectors.
• Supporting instruments, e.g. those aimed at producing renewable electricity or green hydrogen at competitive prices or creating markets for materials and products manufactured in climate-friendly processes.
• Coordination of the funding instrument with the development of the regulations for free allocation in the EU emissions trading system.
“Effective instruments are urgently needed if we are to achieve the climate protection goals. Carbon contracts give companies planning certainty for climate-friendly business models that would not be economically viable under the current operating conditions. This can help low-emission technologies to break through,” says Dr Thilo Schaefer, Head of the Research Unit Environment, Energy, Infrastructure at the German Economic Institute and subject area leader at the scientific competence centre SCI4climate.NRW.
The paper was prepared by IN4climate.NRW’s working group on policy frameworks. It has been endorsed by the companies Air Liquide, Covestro, Currenta, HeidelbergCement, Lanxess, RHM, Shell, Spenner, thyssenkrupp Steel and Trimet as well as by the research institutions the German Economic Institute (IW), the Wuppertal Institute and RWTH Aachen University (Chair of Operations Management), the Federal Association of the German Glass Industry (BV Glas), the German Cement Manufacturers’ Association (VDZ) and the German Steel Federation (Wirtschaftsvereinigung Stahl).
https://www.in4climate.nrw/fileadmin/Nachrichten/2021/Pressemitteilung_F%C3%B6rderinstrument_f%C3%BCr_Klimaneutralit%C3%A4t/in4climatenrw-positionpaper-carbon-contracts-en-web-2021-05.pdf (position paper, English)
https://www.in4climate.nrw/fileadmin/Nachrichten/2021/Pressemitteilung_F%C3%B6rderinstrument_f%C3%BCr_Klimaneutralit%C3%A4t/in4climatenrw-positionspapier-klimaschutzvertr%C3%A4ge-de-web-2021-05.pdf (position paper, German)