The carbon contract for differences, a suitable tool for the decarbonation of hydrogen?

The EU-ETS carbon market is not sufficient to rapidly decarbonize sectors where low-carbon technologies are too expensive compared to existing technologies. To address this, our study characterizes a carbon contract for differences (CCfD). This is an instrument that guarantees producers using low-carbon technology a sufficient carbon price to ensure the competitivity of their technology compared to emitting ones. We propose a methodology for policymakers to design CCfD according to their region and sectoral application. We focus on a CCfD for the development of hydrogen by electrolysis as an alternative to steam methane reforming. Due to the dual impact of carbon pricing, we argue that this CCfD is a complex contract and should be defined for areas with a homogeneous electricity mix.