The uncertain costs of decarbonization policies: a risk analysis for the European steel industry

The goal of decarbonizing European industries requires a balancing act between climate neutrality and competitiveness, involving considerable cost uncertainty. This has prompted calls for public investment support. Two innovative instruments are at the centre of the debate: Carbon Contracts for Difference and quota-based green lead markets. This article examines their economic interplay and quantifies the magnitude of the expected costs and risks based on the example of the European steel industry. It shows that, in order to be effective, the instruments require a significant transfer of risk from investors in green steel capacity to steel buyers or taxpayers. However, a combination of the two can be used to achieve a more balanced distribution of risk, thereby increasing public acceptance.