Contracts for difference (CfDs) are increasingly used as policy tools to reduce price risk and accelerate investment in renewables and low carbon industrial processes. This Fin.Connect.Basics brief explains how CfDs work and distinguishes power sector CfDs, where revenues are stabilized through two sided settlements around a strike price, from Carbon Contracts for Difference (CCfDs), which hedge uncertainty in CO₂ prices under emissions trading. The paper discusses how CCfDs can improve planning security, lower financing barriers for capital intensive decarbonization projects, and strengthen the credibility of climate policy by committing the state over long time horizons. It also highlights key risks, including the potential support of inefficient technologies, limited scalability due to fiscal costs and market interactions, and barriers for SMEs. Finally, the brief outlines the current German scheme of CO₂ contracts for difference, its tender based design, and what this means for companies seeking support for transformation investments.
