Editing IPCC:AR6/WGIII/Chapter-11 (section)

==== 11.6.4.5 Financial Incentives ====

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Fossil-free basic materials production will often lead to higher costs of production, for example, 20–40% more for steel, 70–115% more for cement, and potentially 15–60% for chemicals ( [[#Material%20Economics--2019|Material Economics 2019]] ). There is a nascent literature on what are effectively material ‘feed-in-tariffs’ to bridge the commercialisation ‘valley of death’ ( [[#Wilson--2011|Wilson and Grubler 2011]] ) of early development of low-GHG materials ( [[#Bataille--2018a|Bataille et al. 2018a]] ; [[#Neuhoff--2018|Neuhoff et al. 2018]] ; [[#Sartor--2019|Sartor and Bataille 2019]] ; [[#Wyns--2019|Wyns et al. 2019]] ). Renewable electricity support schemes have typically been price-based (e.g., production subsidies and feed-in-tariffs) or volume-based (e.g., quota obligations and certificate schemes) and both principles can be applied when thinking about low-GHG materials. Auction schemes are typically used for larger-scale projects, for example, offshore wind parks.

Based on how feed-in-tariffs worked, a contract for difference (CfD) could guarantee a minimum and higher-than-market price for a given volume of early low-GHG materials. CfDs could be based on a minimum effective GHG price reflecting parity with the costs of current higher-emitting technologies, or directly on the higher base capital and operating costs for a lower-GHG material ( [[#Richstein--2017|Richstein 2017]] ; [[#Chiappinelli--2019|Chiappinelli et al. 2019]] ; [[#Sartor--2019|Sartor and Bataille 2019]] ; [[#Vogl--2021a|Vogl et al. 2021a]] ). CfDs can also be offered through low-GHG material procurement where an agreed price offsets the incremental cost of buying low-GHG content product or material. Private firms, by themselves or collectively, can also guarantee a higher than market price for low-GHG materials from their supplier for marketing purposes ( [[#Bataille--2018a|Bataille et al. 2018a]] ; [[#Bataille--2020a|Bataille 2020a]] ). Reverse auctions (by which the lowest bidder gets the production subsidy) for low-GHG materials is also an option but it remains to be analysed and explored. While these financial incentive schemes have been implemented for renewable energy, their application to incentivise and support low-GHG material production have yet to be developed and implemented. The German government is currently developing a draft law which will allow companies that commit to cut GHG emissions by more than half using innovative technologies to bid for 10-year CfDs with a guaranteed price for low-carbon steel, chemical and cement products (Agora Energiewende and Wuppertal Institut 2019; [[#BMU--2021|BMU 2021]] ).

New and innovative financial market contracts for basic materials that represent low-carbon varieties of conventional materials are emerging. This is the case of aluminium for which quantity of low-GHG production already exist in countries where hydroelectric power is a common power source. Market developments will allow for low-GHG aluminium to trade at a premium rate as demand develops. For example, Harbor Aluminium has launched a green aluminium spot premium at the end of October 2019 and the London Metal Exchange has introduced a ‘green aluminium’ spot exchange contract. ( [[#LME--2020|LME 2020]] ; [[#Das--2021|Das 2021]] ).

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