Ex-Ante Evaluation of a New Policy Instrument. Carbon Contracts for Difference in Energy-Intensive Industries

Tesis de Máster , 2022 , 66 Páginas , Calificación: 1,5

Política - Política del medio ambiente y climática

This thesis aims to clarify how feasible Carbon Contracts for Difference (CCfDs) are and how they compare to other policy instruments. It further explores what design elements the policy instrument needs to contain to be effective. To answer these questions, the feasibility of CCfDs was analysed through industry and policy publications using evaluation criteria and subsequently the most important design elements were identified and examined.

The introduction of climate-friendly technologies in energy-intensive industries requires significant investments. These investments are often withheld due to competitive disadvantages and carbon price risks, thus preventing the progress of industry. As a remedy, CCfDs between the state and companies should reduce risks and thus create incentives for investment.

Table of Contents

Abstract

Kurzzusammenfassung

Table of Contents

List of Abbreviations

List of Tables

List of Figures

1 Introduction
1.1 Introductory remarks
1.2 Research problem
1.3 Research objectives and research question
1.4 Significance and limitations
1.5 Structural outline

2 Background
2.1 Decarbonisation of the energy-intensive industry
2.2 Instruments for the transformation of industry
2.2.1 Carbon contracts for difference
2.2.2 Existing complementary policies and proposals
2.2.2.1 Carbon border adjustment mechanism
2.2.2.2 Climate contributions
2.2.2.3 Carbon clubs approach

3 Method
3.1 Research design
3.2 Data collection, data analyses and limitations

4 Ex-ante evaluation of instruments
4.1 Criteria for the policy evaluation
4.1.1 Political and diplomatic feasibility
4.1.2 Sustainability and policy longevity
4.1.3 Legal feasibility
4.1.4 Administrative feasibility
4.1.5 Technical feasibility
4.2 Evaluation
4.2.1 CCfDs
4.2.1.1 Political and diplomatic feasibility
4.2.1.2 Sustainability and policy longevity
4.2.1.3 Legal Feasibility
4.2.1.4 Administrative feasibility
4.2.1.5 Technica l feasibility
4.2.2 CBAM
4.2.2.1 Political and diplomatic feasibility
4.2.2.2 Sustainability and policy longevity
4.2.2.3 Legal Feasibility
4.2.2.4 Administrative feasibility
4.2.2.5 Technical feasibility
4.2.3 Climate Contributions
4.2.3.1 Political and diplomatic feasibility
4.2.3.2 Sustainability and policy longevity
4.2.3.3 Legal Feasibility
4.2.3.4 Administrative feasibility
4.2.3.5 Technical feasibility
4.2.4 Carbon Clubs
4.2.4.1 Political and diplomatic feasibility
4.2.4.2 Sustainability and policy longevity
4.2.4.3 Legal Feasibility
4.2.4.4 Administrative feasibility
4.2.4.5 Technical feasibility
4.2.5 Overview of the eva lua tion

5 Instrument design
5.1 Possible variants of the instrument design
5.2 Evaluation
5.2.1 Geographical Scope
5.2.2 Price of the contract
5.2.3 Awarding the contracts
5.2.3.1 Allocation mechanism
5.2.3.2 Technological and sectoral scope
5.2.4 Dura tion
5.2.5 Legal pra ctica bility
5.2.6 Financing of the instrument
5.2.7 Hedging other input risks
5.2.8 Interaction with other kinds of instruments and support schemes

6 Discussion and conclusions

7 Bibliography

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

List of Tables

TABLE 1: CHALLENGES FOR TRANSFORMATION OF INDUSTRY AND POLICY INSTRUMENTS TO ADDRESS THEM

TABLE 2: CLIMATE CLUB IDEAL TYPES AND THEIR CHARACTERISTICS (FALKNER ET AL. 2022)

TABLE 3: COLOUR SCALE

TABLE 4: OVERVIEW OF THE ASSESSMENT OF CCFDS

TABLE 5: OVERVIEW OF THE ASSESSMENT OF A CBAM

TABLE 6: OVERVIEW OF THE ASSESSMENT OF CLIMATE CONTRIBUTIONS

TABLE 7: OVERVIEW OF THE ASSESSMENT OF CLIMATE CLUBS

TABLE 8: OVERVIEW OF THE ASSESSMENTS OF THE POLICY INSTRUMENTS

TABLE 9: COLLECTION OF POSSIBLE ELIGIBILITY AND AWARD CRITERIA

List of Figures

FIGURE 1: KEY CHALLENGES OF THE TRANSFORMATION OF THE ENERGY-INTENSIVE INDUSTRY (AGORA ENERGIEWENDE 2019)

FIGURE 2: SIMPLE ILLUSTRATION OF THE PAYMENT STREAMS OF CCFDS ((GERRES AND LINARES 2020)

FIGURE 3: CBAM PHASE-IN PROPOSAL OF EUROPEAN COMMISSION (CLEAN ENERGY WIRE 2021)

FIGURE 4: OUTLINE OF A CLIMATE CONTRIBUTION MECHANISM (BRZEZINSKI AND SNIEGOCKI 2020)

FIGURE 5: EVALUATION OF A POLICY AT DIFFERENT POINTS IN TIME (SAMSET AND CHRISTENSEN 2017)

FIGURE 6: EVALUATION CRITERIA FOR THE ANALYSIS

FIGURE 7: RADAR DIAGRAMS ILLUSTRATING THE ASSESSMENT OF CCFDS, CBAM, CLIMATE CONTRIBUTIONS AND CLIMATE CLUBS

FIGURE 8: THREE DIFFERENT VARIANTS OF GEOGRAPHICAL SCOPE OF CCFDS

FIGURE 9: THE PRICE-SETTING PROCESS FOR CCFDS (AGORA ENERGIEWENDE 2021)

FIGURE 10: POSSIBLE TWO-STAGE TENDER PROCEDURE FOR CCFDS

FIGURE 11:THE CLUSTER OPTIONS FOR THE CCFD TENDER

FIGURE 12: TRADE- OFF BETWEEN HIGHER COSTS AND HIGHER RISK OF LOCK-IN

FIGURE 13:POSSIBLE COMBINATIONS OF CCFDS WITH OTHER POLICIES AND THE RESULTING EFFECTS

1 Introduction

1.1 Introductory remarks

The world is facing a historic task regarding the energy transition. For decades, attempts have been made to draw attention to the issue of climate change and the urgent need for action, but the self­interest of (powerful) states has frequently been an obstacle to international agreements, and thus any global endeavour to achieve a transboundary commitment has been hampered.

The Paris Agreement on climate protection is the first binding document under international law. It requires countries to design their national climate protection programs in a manner that limits global warming to a maximum of 2 degrees (UNFCCC 2021). Numerous strategies and laws have been enacted at the national and European levels to achieve this target, including the objective of being climate-neutral by 2050 (Bundesregierung 2019; Deutscher Bundestag 2020; European Commission 2019).

European countries agree that the industry must be transformed immensely for the energy transition as it is responsible for 25% of greenhouse gas (GHG) emissions worldwide. Developments since Putin's war of aggression in Ukraine also demonstrate that decarbonisation of the economy and industry is incredibly important for reducing dependency on fossil fuel imports and to not making oneself vulnerable to political blackmail or jeopardising the security of supply.

The energy transition in energy-intensive industries¹ has been impeded by a number of factors. Aggravating reasons, among others, include the enormous costs of establishing climate-friendly technologies, the absence of market maturity of these new technologies, and the lack of necessary policies that drive innovation and investment.

Another reason why little investment is made in energy-friendly technologies is because the industry repeatedly finds itself in situations determined by significant levels of risk: Fluctuating carbon prices and carbon prices that are too low make forecasting and investment certainly challenging. To ensure that this price uncertainty does not hold back innovation and the establishment of new climate-friendly technologies, instruments are needed that can minimise these risks.

Carbon Contracts for Differences (CCfDs) are said to be an instrument able to compensate for this price uncertainty. Through a contract between the government and the enterprise, the carbon price is fixed for a certain period of time. It thus can overcome price fluctuations and contribute to providing a stable source of revenue for decarbonised technologies and consequently incentivise investment.

This research aims to identify how feasible CCfDs as a policy instrument are, and which design elements can have benefits for its impact.

This chapter has introduced the context and will continue with the research problem, followed by the research objective and questions, the significance and limitations, and will conclude with the structural outline of the study.

1.2 Research problem

If one follows the discussion about policies to support decarbonising industry, it is evident that CCfDs play an essential role in the considerations of policymakers. At the German national level, for example, they are explicitly mentioned as desirable in the coalition agreement of the new government and are also part of the national hydrogen strategy from 2020 (Bundesregierung 2020; SPD, Bündnis 90/ Die Grünen, FDP 2021).

Since the instrument was proposed by Richstein in 2017 and introduced into the discussion, many other researchers have also taken up the instrument and investigated how it can function, and above all, what economic basis leads to the widely praised risk reduction.

It is noticeable that the instrument is often traded as universally applicable and the best possible solution, without ever having been tested beforehand and without certainty that it fulfils the promised effect.

Many national and European institutions are urging the introduction of CCfDs, but they are not basing their decisions on experience. For example, a pilot programme for CCfDs announced in 2021 has not yet started in Germany. The question is also whether it is right that CCfDs in particular keep falling under political discussion. Other policy instruments are also considered capable of supporting the climate-friendly transformation of industry, such as a Carbon Border Adjustment Mechanism (CBAM), climate clubs and climate contributions. To what extent do CCfDs have advantages over other policy instruments for industry transformation? Without practical experience, studies on the feasibility and practical applicability and knowledge on how exactly CCfDs need to be designed, a comprehensive introduction of the contracts is unthinkable and the possible positive effects for the transformation of the energy-intensive industry cannot be unfolded. It is therefore appropriate and necessary to examine how applicable CCfDs currently are and what problems and risks they may face. It is also essential to explore what the design of the contracts could look like to overcome these problems and dangers.

1.3 Research objectives and research question

Given the lack of research on the feasibility and suitability of CCfDs and the necessary design and content of the contracts, this study will aim to identify how sophisticated the policy instrument is and whether and in what form it is applicable and promising for the European Economic Area (EEA).

For this research aim, it is necessary to establish how CCfDs and other currently discussed policy instruments function. In addition, the feasibility of these instruments must be evaluated and possible strengths and weaknesses highlighted. This will provide a basis for a subsequent comparison of practical implementability. Another objective of this study is to determine the influence of the policy instrument's design on the contracts' feasibility and effectiveness.

Considering the research aim and objectives presented, the following research question is addressed:

To what extent are CCfDs practically implementable compared to other policy instruments and what impact does the design of the contracts have on their feasibility and effectiveness?

The scope of the study is relevant as each European national economy is different. Therefore, this study will focus on the European Union but will also draw comparisons to the national economies of the member states (MS) occasionally. Decisions to introduce climate measures in a single MS may have an impact on the whole region, thus requiring a consideration of national and European levels.

1.4 Significance and limitations

This study will contribute to understanding which currently discussed policy instruments for industry transformation are easiest to implement. This will generate knowledge on which aspects to consider and enable governments and decision-makers to be more proactive in taking the next steps towards the implementation of the instruments. Regarding design elements that promote the feasibility and effectiveness of the contracts, the study will provide answers that will help to supplement and fill the current shortage of research in this particular area. The industry side can also use the research results to better prioritise the design of CCfDs and increase the planning capacity for successful production transformation.

The limitations of this study are first and foremost the scarcity of data. Since the policy instrument is a very new approach, there are unfortunately very few studies and literature on CCfDs. The fact that this study is an ex-ante² policy evaluation also limits the sources available, as most policy evaluations are conducted ex-post³ (cf. chapter four). This gap could not be filled by conducting interviews, as the necessary contacts to the few experts on CCfDs are not existent and some of them were simply not available for a Master's thesis.

This allows for only partial generalisability of the results, as there are limits to predicting the future effects of a policy instrument.

1.5 Structural outline

In chapter one, the context of the study and the research problem have been briefly discussed. The research objectives and questions, the value of the research findings of this study for further use, and the limitations the study has to contend with have been identified.

In the second chapter, the background regarding the decarbonisation of energy-intensive industry is presented. CCfDs and other selected policy instruments for the transformation of industry are introduced here afterwards. The third chapter is dedicated to the method used for data collection and subsequent analysis.

The fourth chapter analyses the four policy instruments. The chapter begins with the selection and explanation of the evaluation criteria, which are then used to analyse each individual instrument.

Chapter five explores the most relevant design elements and possible contents of CCfDs before they are examined in more detail in terms of the feasibility and effectiveness of the contracts. The subsequent discussion in chapter six is dedicated to answering the research question, interpreting the analysis results, and working out and providing possible policy implications and suggestions for future research.

2 Background

This chapter provides background information. First, the topic of decarbonisation in industry is highlighted. Then, the functioning of CCfDs and three other policy instruments is described to prepare for the intended comparison in chapter four.

2.1 Decarbonisation of the energy-intensive industry

The energy-intensive industry is of particular significance in the energy transition. These industries account for the largest share of industrial emissions, which must be reduced by a quarter by 2030 to almost zero by 2050 (European Commission 2019). Most basic materials require a tremendous amount of energy in their production, often from fossil sources such as coal, coke or oil. However, these industries also have a great potential for energy savings and a special role in the decarbonisation of other economic sectors, because if basic materials such as steel, chemicals or cement are able to be produced in a climate-neutral way, this also helps the downstream sectors to cut carbon emissions (Weijnen, Lukszo, and Farahani 2021).

Leap innovations are required in the production of basic materials. Some of these technologies needed for the climate-neutral industry are already available or are close to market maturity. These include, for example, green hydrogen, which plays a central role in steel and chemical production. In cement production, new binding agents and carbon capture and storage (CCS) are particularly considered climate-neutral production methods (Agora Energiewende 2019). Industrial-scale demonstration projects, for example, the use of green hydrogen in industrial production processes as a substitute for fossil fuels, are needed by 2030 to achieve climate neutrality. However, intensive innovation and research is required to promptly make these ready for use on an industrial scale (Weijnen et al. 2021).

The three methods for producing steel, chemicals (especially ammonia) and cement that have already been touched on deserve a brief elaboration. Steel can be made using hydrogen in direct iron reduction. This route is a two-stage production process in which hydrogen is used instead of coke to reduce the iron ore in direct reduction plants. This means that there are no process-related CO? emissions. This produces sponge iron (Direct Reduced Iron, DRI), which is then melted into crude steel in an electric arc furnace (together with scrap if required) (bdew 2020). If the hydrogen is supplied with 100 percent renewable energies, this route is almost COi-neutral.

Green hydrogen, i.e. hydrogen produced by electrolysis using renewable electricity, also offers considerable emission-saving potential in the chemical sector. It can be used especially to produce ammonia, which is the world's second most common basic chemical and is used, for example, in fertilisers or as a future marine fuel. The production of green ammonia is based on two steps: First, electricity from wind, solar or hydropower is used to electrolyse water. The resulting green hydrogen is then catalytically converted with atmospheric nitrogen to ammonia (Chemietechnik 2021).

In cement production, the CCS process, in particular, offers savings in carbon emissions. Through COi capture with the CCS process, a large part of the process- and fuel-related COi emissions can be captured in cement clinker production. Using oxygen for combustion simplifies the separation and increases the carbon capture rate to around 90 percent. The carbon dioxide would then have to be transported away via a carbon dioxide infrastructure and finally compressed at suitable storage sites (Heidelberg Cement 2022).

Overall, the transformation of the energy-intensive basic materials industry faces a series of challenges (see Figure 1). One noticeable aspect is that the prerequisites for introducing and operating the three methods explained above are the availability of renewable energies and the necessary infrastructure. Another problem is that Western European countries are also at a relative disadvantage for the low-cost production of renewables and green hydrogen. Certain other regions have advantages because of stronger wind and solar radiation. These disadvantages will have to be compensated for in the coming years.

The majority of production plants in the basic materials industry are characterised by very long investment cycles and have technical lifetimes of more than 50 years (Agora Energiewende 2019).

The introduction of new technologies would turn conventional plants into stranded assets. Earlier decommissioning is associated with several costs and may be challenging to enforce politically.

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Figure 1: Key challenges of the transformation of the energy-intensive industry (Agora Energiewende 2019)

Furthermore, many key technologies, such as those mentioned above, are not fully technically mature or have not been tested on a large scale and must therefore first be tested in demonstration and pilot plants. The additional costs of transforming energy-intensive industries can also lead to competitive disadvantages, as the higher production costs may be reflected in product prices. It is therefore essential that these disadvantages and possible consequences (i. e. carbon leakage) are compensated by (financial) support.

It is evident that the challenges of transforming the energy-intensive basic materials industry are diverse. To address these challenges and achieve the associated goals, policymakers can use specific instruments. CCfDs, the main focus of this paper, and three other instruments that will be examined are presented in the following section.

2.2 Instruments for the transformation of industry

As described above, there are very diverse challenges in the context of decarbonising industry. As diverse as these challenges are, so must be the policy instruments that address them. There is no one policy that can address all the issues, which requires the development of individually designed instruments for each problem. Table 1 shows a collection of challenges in the energy-intensive industry and their specifically designed response instrument.

Abbildung in dieser Leseprobe nicht enthalten

Table 1: Challenges for transformation of industry and policy instruments to address them

2.2.1 Carbon contracts for difference

The idea of carbon contracts was first proposed by Helm and Hepburn (2005). The authors believed these contracts would address the regulatory risk and lack of long-term carbon markets resulting from government ’s limited credibility in setting carbon reduction targets or carbon prices. Carbon prices have been too low to cover the additional costs of climate-friendly technologies compared to conventional ones. In addition, uncertainty about the development of the carbon price leads to higher financing costs (Sartor and Bataille 2019). Due to these issues, even well-proven technologies often could not be commercialised.

The concept of carbon contracts was revived and further refined by Richstein (2017), who argues that CCfDs are one way to minimise the price uncertainty which stems from the fluctuating carbon price. The contracts allow governments to guarantee investors in low carbon breakthrough technologies (LCBTs) a fixed price that recompenses reductions in carbon emissions above the current price in the European Union Emissions Trading System (EU-ETS). As a result, companies will be incentivised to make climate-friendly investments, thereby reducing their carbon emissions. The CCfD is concluded between the government and a company (agent) for a specific project over a certain period. An agreement is reached on the contract price for avoided CO2, the so-called strike price (Bundesministerium für Wirtschaft und Klimaschutz 2020). Companies would receive the difference between the carbon price on the market and the contractually agreed strike price for each unit of avoided greenhouse gas emissions. If allowances continue to be freely allocated, a second revenue stream is created from selling these allowances. If the carbon market price is higher than the strike price, the companies would, in turn, pay the difference back to the state (see Figure 2).

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Figure 2: Simple illustration of the payment streams of CCfDs ((Gerres and Linares 2020)

The instrument offers investment security for companies and creates incentives to change over to climate-friendly production methods. Furthermore, CCfDs fill a gap in the funding landscape, as many technologies fail in the phase between research funding and large-scale commercial application, a phenomenon called the "Valley of Death" (Agora Energiewende 2019; Richstein and Neuhoff 2019). This has to do with many funding programmes only covering investment costs (CAPEX) but often excluding operational costs (OPEX). However, CCfDsare said to provide long­term support beyond the investment costs.

Furthermore, Chiappinelli and Neuhoff (2020) show that the contracts serve as a commitment instrument for the governments. Governments would try to keep the carbon price high to keep the necessary CCfD payments low. Moreover, the social value of CCfDs should also not be underestimated. For example, one positive effect is “the improvement in the learning curve (and related spillovers) associated with the support of low-carbon technologies included in the CCfD”(Gerres and Linares 2020).

CCfDs can consequently cover additional operational costs due to the introduction of LCBTs, but on the other hand, also minimise both market price and regulatory risks. Hence, CCfDs are not only a risk mitigation instrument but also a funding instrument (Lösch et al. 2021).

2.2.2 Existing complementary policies and proposals

2.2.2.1 Carbon border adjustment mechanism

Since the introduction of the EU-ETS in 2005, a carbon price has been in place in Europe. This increases the cost of causing emissions for companies. Many companies do not want to bear the higher costs of the carbon price. Therefore, they are incentivised to relocate their economic activities to countries where emissions are cheaper or do not have to be paid at all. Consequently, emissions would not ultimately decrease but merely shift to other regions, a phenomenon known as “Carbon Leakage” (Görlach et al. 2018), which makes a unilateral climate policy ineffective regarding climate targets. The EU's current carbon leakage measures, such as free allocation of emissions allowances and financial compensation for indirect emission costs included in electricity prices, are often not considered adequate and future-proof.

Consequently, the European Commission proposed the introduction of a CBAM as part of its "Fit for 55 package" in July 2021 (European Commission 2021a). Under the proposal, the greenhouse gas emissions associated with certain imported goods would be subject to the same carbon price as under the EU-ETS (European Commission 2021b). EU importers would thereby buy allowances when importing certain product groups⁴, corresponding to the CO2 price that would have been paid if the goods had been produced following EU rules on the pricing of carbon emissions. If a non­EU producer can prove that he has already paid the price for the CO2 produced in making the imported goods in the third country, the related costs would be accounted for.

As a result, importers face similar costs as EU producers, which minimises incentives for carbon leakage and thus strengthens the competitiveness of the European industry (Leipprand et al. 2020). The EU also anticipates that the introduction of the CBAM will strengthen the EU-ETS and encourage non-EU industry and its international partners to reduce their emissions (European Commission 2021a).

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Figure 3: CBAM phase-in proposal of European Commission (Clean Energy Wire 2021)

The proposed CBAM is intended to proceed in parallel with the gradual abolition of the free allocation of allowances (Umwelt Bundesamt 2021). The CBAM is to start with a transition period without financial obligations between 2023 and 2026. From 2026 onwards, the free allocation of allowances is to decrease by 10% each year and be replaced entirely by 2036 (see Figure 3). From this year on, all allowances need to be purchased by firms.

Contrary to what is demanded by Leipprand et al. (2020) and Bellora and Fontagné (2020), the EU does not explicitly plan to introduce export rebates for EU exports “with which they would be relieved from the cost of EU-ETS allowances and put on an equal footing in world markets with products from third countries”(Menner, Reichert, and Voßwinkel 2021). Reasons for this may be legal, as export subsidies can be much more difficult to defend at the WTO.

2.2.2.2 Climate contributions

An alternative to border adjustment mechanisms such as CBAM is levying climate taxes on end products in conjunction with a continuation of free allocation of allowances. Ismer et al. (2020) describe that a climate contribution could address the lack of reflected carbon costs in products. When consumed within the EU, this levy would price materials and could initially be imposed on selected energy-intensive product materials. The contribution is levied when products are sold to European final customers in the same way as a value added tax (VAT). The carbon costs are thus 11 passed along the value chain and apply to materials produced in the EU and imports (see Figure 4 for illustration) (Neuhoff et al. 2021). Moreover, Brzezinski and Sniegocki (2020) depict that “if at any stage the material is exported outside of the EU, the liability is acquitted”. The charge is based on the weight of the respective raw material in the product. It can be linked to the carbon price and the existing EU benchmarks, thus simplifying the administration and the recording of the carbon intensity (Menner et al. 2021).

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Figure 4: Outline of a Climate Contribution mechanism (Brzezinski and Sniegocki 2020)

The climate contribution offers a valuable opportunity to internalise carbon pricing down to the consumption level throughout the value chain. Products made of energy-intensive materials become more expensive, which creates a clear carbon price signal at the consumer stage and stimulates producers for efficient material use and choice. In the same way, consumers are incentivised to choose less carbon-intensive goods. The revenues from the climate contribution can, for example, finance other climate protection measures (Neuhoff et al. 2021).

A climate contribution reflects a shift from a production-based climate protection strategy to a consumption-based system. In this way, not only the industry, but above all, society as a whole is brought on board to support the energy transition through the conscious consumption of energy­friendly products (Borgnäs, Harrendorf, and Nieber 2020).

The climate contribution is combined with the continuation of the free allocation. This should prevent a double burden. It is also said to protect against carbon leakage (Sartor, Cosbey, and Shawkat 2022).

2.2.2.3 Carbon clubs approach

The discussion about so-called climate clubs has gained momentum since Joe Biden's election in the USA in 2020. Now that the USA is in a cooperative frame of mind again, voices are being raised to establish international climate alliances between the largest emitters⁵ to jointly reduce emissions and introduce a carbon tax at the international level (Tagliapietra and Wolff 2021). Germany also developed a climate club approach and presented it to the Federal Cabinet in August 2021(Federal Ministry of Finance 2021). The Ministry of Finance explicitly demands that this proposal be discussed intensively in the G7 and the G20.

In principle, countries join a climate club to take joint climate action. Falkner et al. (2022) distinguish three climate club types (see Table 2). Firstly, normative clubs “bring together countries that share a normative commitment to achieve certain objectives ” (Falkner et al. 2022). In a normative club, commitment to the joint climate policy goals is essential for affiliation. In the second type, bargaining clubs, more efficient agreements occur. Common goals, objectives and policies are negotiated between powerful and significant actors. Lastly, transformational clubs are characterised by “legally binding membership rules, tangible club benefits and sanctioning mechanisms that seek to change the incentive structure of a select group of members” (Falkner et al. 2022).

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Table 2: Climate club ideal types and their characteristics (Falkner et al. 2022)

The transformational clubs match the proposal of Nobel Prize laureate William Nordhaus (2015).

He was the first to suggest the notion of climate clubs to address the omnipresent problem in the fight against climate change in the international context: free-riding. The so-called “tragedy of the commons” in global climate politics is the situation where “countries have an incentive to rely on the GHG emissions of others without implementing comparable abatement measures themselves” (Menner et al. 2021) due to the non-excludable common good character of the global carbon budget compatible with the Paris climate goals.

According to Nordhaus (2015), clubs can be used as a mechanism to change the free-riding situation. He describes that states could come together in clubs where they can mutually benefit from sharing the costs of creating a resource with public good characteristics. For the record, a public good is typically non-excludable and non-rival (Morrell 2009). In a club, however, a public good is excludable and becomes a “club good”. Only the club members can benefit from the cooperative arrangement. They pay dues and follow the club rules to enjoy the full benefits of membership. The club members agree to harmonise their emission targets and, in the best case, set an (international) carbon price that applies to the club members’ territory. One of the most important features is that non-members are penalised, for example, through duties that must be paid. Countries driven by rational self-interest would then consider joining the club and thus save emissions themselves, to avoid being excluded and having to pay the duties.

Nordhaus (2015) distinguishes between two types of sanctions in his proposal. The first is carbon duties. These are tariffs levied on the import of goods in relation to the carbon content of the product. In other words, it is a carbon border adjustment (CBA) with the primary aim of reducing carbon leakage and less to increase participation in the club.

The author, however, favours the second type of sanctions, uniform percentage tariffs, which are levied uniformly on all imports from non-members, for example, 2%. He believes this would give non-members an enhanced incentive to join the climate club.

The G7 agreed at their meeting at Schloss Elmau in Germany in June 2022 to establish a cooperative and open climate club by the end of the year. To this end, the G7 commits to a strongly decarbonised road transport sector by 2030 and a fully or predominantly decarbonised power sector by 2035, and to prioritise concrete and timely steps to phase out domestic, unabated coal-fired power generation (G7 2022).

3 Method

This study aims to provide answers on how practical CCfDs are compared to other policy instruments and how the design implementation of the contracts influences feasibility and effectiveness. The methods used to answer these questions are outlined in this chapter.

3.1 Research design

The present study follows a positivist research philosophy. Positive approaches try to describe a phenomenon as it is or, as in our case, will be. “Positive questions focus on “describing, understanding, explaining, or predicting reality as it is” (Toshkov 2016). Since we are dealing with an ex-ante policy evaluation and trying to clarify questions of the future, a positive descriptive research philosophy is more appropriate than a normative approach, which tends to answer how something ought to be and thus to examine the moral order of the world.

The approach of the study is inductive, i.e. general statements are to be made through data collection. Through this type of research, general conclusions are derived through data collection and analysis. A qualitative approach is more appropriate, as no quantitative data is available to achieve the research objectives. Therefore, the qualitative approach remains, which is mainly dedicated to document research and subsequent analysis. For this task, the question of the practical applicability of CCfDs and possible design elements was explicitly focused on.

3.2 Data collection, data analyses and limitations

The data was mainly collected through document research. Expert interviews could not be conducted, as there are very few experts for CCfDs and unfortunately there was often no possibility to contact them. These are very high-ranking scientists at renowned research institutes and politicians in senior positions in political institutions. It was possible to contact two experts through the network of an employee of the Siemens Energy Government Affairs department, but they were ultimately not available for interviews for a Master's thesis due to time constraints. The same applies to contacting the industry. Here, enquiries were mostly left unanswered. Therefore, the data collection was limited to a review of the available literature, which was mainly found on websites of research institutes, ministries and other political institutions, but also on websites of companies in the energy-intensive industry.

Two different analyses were selected to answer the research question, each of which is intended to answer one of the two sub-questions in the research question.

Concerning the first sub-question, how practically applicable CCfDs are in comparison to other policy instruments, a content analysis was chosen. First, the evaluation criteria against which the four policies were to be analysed were determined. These five criteria also served as a tool for categorising the collected data: The data for each instrument was assigned to the five categories 'political and diplomatic feasibility', 'sustainability and policy longevity', 'legal feasibility', 'administrative feasibility' and 'technical feasibility', which simplified the ensuing analysis by providing a better overview. Subsequently, the collected data was used to conduct the analysis in the same form and order, logically building the arguments on each other to answer the first sub­question. Coloured summary tables and graphs were additionally created and illustrate in each chapter the performance of the respective policy instrument against the evaluation criteria.

The second sub-question of the research question, what impact the design of the contracts has on feasibility and effectiveness, is answered by a second content analysis. For this purpose, the key design elements of the contracts were first extracted, which were used for the subsequent categorisation of the collected data. These categories were later used as chapter subdivisions for the analysis and the evaluation criteria feasibility and effectiveness were applied to analyse the impact of the respective design element.

The limitations of the method are the scarcity of available literature and the problem of insufficient industry expertise in the analysis. The analysis is mainly based on other research or policy studies. Unfortunately, there was little industry data available, which could have been useful for a fuller picture. Also, the fact that this is an ex-ante analysis, i.e. a policy evaluation before the introduction of the policy instruments discussed here, makes it impossible to use quantitative data such as statistics and similar, which could have allowed cross checking of the results by approaching the research problem with another method. Nevertheless, the available data has generated sufficient knowledge to produce a tangible and value-added analysis. The method was able to answer the research question, which can be built upon in the future.

4 Ex-ante evaluation of instruments

This chapter is dedicated to evaluating the four policy instruments: CCfDs, CBAM, climate contributions and climate clubs. First, it is explained what an ex-ante evaluation of a policy is.

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¹ such as steel or chemicals industry

² “Ex-ante“ in this regard means the evaluation prior to take decision on policy intervention

³ “Ex-post“ in this regard means the evaluation after policy intervention has taken place

⁴ For example, energy-intensive products such as aluminium, fertilisers, iron and steel, electricity, cement, etc.

⁵ Including the USA, China, and the EU

• Universidad: University of Potsdam
• Calificación: 1,5
• Año de publicación: 2022
• Páginas: 66
• No. de catálogo: V1337486
• ISBN (PDF): 9783346840080
• ISBN (Libro): 9783346840097
• Idioma: Inglés
• Etiqueta: Public policy, CBAM, CCfD, decarbonization, decarbonisation, energy-intensive industry, carbon contracts for difference, klimaschutzverträge, climate contribution, climate clubs, klimaclubs, energy transition, feasibility, machbarkeit