Innovative Carbon Contracts for Industry Decarbonisation in Spain
The electrification of industry is recognised as a critical factor in achieving decarbonisation goals, strengthening economic resilience and reducing dependence on imported raw materials.
Despite Spain's leadership in renewable energy capacity, its industrial electricity consumption remains below levels from two decades ago, with less than 30 per cent of final energy use being electrified. Particularly in energy-intensive sectors such as cement, steel, and chemicals, electrification faces technological and economic barriers, necessitating innovative financing mechanisms to accelerate transition.
The European Union Emissions Trading System (EU ETS) provides a foundational incentive, with carbon prices reaching record highs of around 100 euros per tonne in 2023. However, volatility and long investment horizons mean that current price signals are insufficiently stable for large-scale industry investments requiring 15 to 25 years of certainty.
Additional costs associated with transitioning to clean technologies, which can comprise up to 80 per cent of initial investment and operational expenses depending on sector and technology, further hinder progress. Limited ability to pass these costs onto customers in a competitive international landscape delays investments, risking non-compliance with decarbonisation commitments.
Since 2020, Spain has increased public funding for sustainable industrial projects, including initiatives like the PERTE de descarbonisation industrial and European Innovation Fund auctions, which have facilitated early investments. Nevertheless, reliance on direct grants alone may prove insufficient in mobilising the necessary private capital for comprehensive industrial transformation.
In this context, Carbon Contracts for Difference (CCfD) present a promising solution. These bilateral agreements between the public sector and industry establish a fixed strike price for carbon, providing long-term revenue stability. If the market price falls below this level, the government compensates the company; if it exceeds, the company refunds the excess (in bidirectional models).
CCfD facilitate crucial funding for operational costs, addressing the real hurdle to green industry, and provide financial predictability by covering 15 to 20-year spans, thus de-risking investments amid volatile carbon markets. They also promote transparent, efficient utilisation of public funds through targeted tenders, revealing true decarbonisation costs for specific sectors.
Several European countries have already adopted CCfD models, allocating tens of billions of euros to support low-emission industry projects. Germany and the Netherlands are prominent examples, with national schemes now central to their industrial policy. Spain is now progressing towards this approach, with the recent establishment of the Fondo para el Impulso de la Descarbonisation Industrial, aiming to leverage CCfD structures for sectoral decarbonisation.
Implementing a tailored regulatory framework for CCfD in Spain would unlock substantial private capital, transform industrial investment prospects, and foster a competitive, green industrial landscape, supported by proven international models and national commitments to electrification and decarbonisation.