CARBON CONTRACTS FOR DIFFERENCE (CCFDS)

A carbon contract for difference guarantees a selected project a price per verified tonne. The supplier sells removal units to private or regulated buyers and reports the market price received. When that price falls below the strike price, government pays the difference. Under a two-way contract, the supplier repays the excess when it rises above. Government therefore supports the sale without normally buying the unit. If it takes ownership or retires the unit, the arrangement becomes public procurement. Unlike an advance market commitment, which promises future purchases, a carbon contract for difference protects selected projects against insufficient market revenue.

Governments can negotiate with projects or select them competitively. For example, developers could bid the guaranteed price they need, and the lowest credible bids win within the budget. The reference price is the market price deducted from that guarantee when calculating the government’s top-up. Choosing it is hardest design choice because CDR has no single transparent price, varying across methods, durability and contract terms. It could be the price a supplier receives from independent buyers or a published benchmark for comparable removals. Prices require checks against artificial discounts and related-party deals. Contracts would also need to define volumes, delivery dates, inflation, verification, reversals, unit ownership, repayments and non-delivery.

Predictable per-tonne revenue can help capital-intensive CDR projects attract equity and debt. Competitive rounds allow governments to compare the support projects require, while later rounds reveal whether costs are falling. Payments following verified sales and delivery limit support for failed projects, and two-way contracts recover public money when market revenue exceeds the guaranteed price. Support can decline as corporate buyers in voluntary markets or regulated companies in compliance markets begin paying enough to make projects viable without government top-ups.

CCfDs are complex to set up. They require rigorous legal contracts and clear rules on measuring and verifying delivered removals. A reference price above sales revenue leaves projects under-supported, while one below it increases public payments. Broad carbon prices may misprice removal methods; project sales prices can reward discounted or related-party transactions. A strike price set too low may deter bidders or leave projects unfinanceable, while one set too high overpays them. Depending on whether private or compliance buyers normally retain the units, public money can subsidise their purchases without giving government the associated credit or claim.

Programme managers should compare verified tonnes delivered, prices paid by buyers, government top-ups, delays, defaults and private investment secured. This shows whether contracts are getting projects operating without overpaying or subsidising sales that would have happened anyway. Results should shape future budgets, guaranteed prices, reference-price rules, eligibility, contract terms and penalties. Persistent non-delivery or windfall payments should trigger tighter rules.

The finance ministry approves the budget and long-term spending. The department responsible for CDR defines eligible methods and selects projects. An agency or publicly owned company signs contracts and makes payments. Developers and buyers explain costs, sales and delivery constraints. Certification bodies test verification rules, banks assess whether contracts support lending, and government lawyers check procurement, competition and subsidy law

Supranational institutions can fund and award contracts, as the EU Innovation Fund’s competitive bidding powers demonstrate. National governments can authorise long-term budgets and designate a public contract counterparty. Regional/State governments can run programmes within their fiscal powers, as the Australian Capital Territory’s reverse auctions show. Cities can sign smaller price-support contracts where local financial rules permit, as Manchester’s virtual power-purchase agreement demonstrates. These levels can act independently, although higher-level funding and common verification rules can support subnational programmes.