Full Title: Contracts for Difference to Spur Clean and Competitive Industry: Options for Federal Policymakers
Author(s): Wesley Look, Seton Stiebert, Yuqi Zhu, William Shobe, Benjamin Longstreth, Alan Krupnick, Aaron Bergman, Chris Bataille, and Pavitra Srinivasan
Publisher(s): ACEEE
Publication Date: September 23, 2025
Full Text: Download Resource
Description (excerpt):
A government-issued contract for difference (CfD) to support industrial decarbonization is an agreement between two parties in which one party (the government) promotes innovative, low-carbon industrial production, and the other (the producer manufacturing the product) seeks price certainty for the clean product. This report is intended to provide U.S. federal policymakers with background on CfD policy and to outline the core details for policymakers to consider when designing a CfD policy to facilitate clean industrial production.
The core feature of a clean industrial CfD is the “strike price”: the per-unit price—usually determined through auction—that a producer requires to manufacture the clean product (e.g., a ton of clean steel). If the market price for this product drops below the strike price, the government pays the difference between the market and strike prices. In a two-sided CfD, if the market price rises above the strike price, the producer pays the government the difference. In either case, there is no exchange of the underlying asset.
An industrial CfD policy has three key functions: (1) to support low-carbon production in cases where the technology is not yet proven or economically competitive; (2) to help producers manage market risks; and (3) to drive innovation and demonstrations of first-of-a-kind (FOAK) and nth-of-a-kind (NOAK) technologies.
CfDs offer three main advantages: (1) They reduce investment risk, thereby attracting (and lowering the cost of) private capital for the deployment of innovative technology. (2) They facilitate price discovery when suppliers bid for support in auctions. (3) They conserve public funds compared to other financial supports.
CfDs also have challenges: (1) Because they guarantee a price floor, they may weaken market incentives in some cases, especially for industrial commodities that can be stockpiled. (2) They focus on auction bid prices and therefore may overlook other policy concerns, such as social and local environmental benefits. (3) There is a risk of overcompensating producers for payments based on average prices. (4) Because CfDs are long-term contracts, they could reduce adaptability to market changes. (5) They may not be well suited for projects focusing on material efficiency and material substitution.