Estimating Green Premiums Using Internal Carbon Prices

Abstract

Empirical evidence on price premiums for green intermediate products is scarce, especially for energy-intensive basic materials. Evidence on such green premiums is relevant, as they may affect companies incentives to invest in green production technologies. Moreover, green premiums are important for the design of green support programmes, as support levels could be adjusted for companies’ green revenues. This paper proposes a new approach for estimating green premiums for basic materials. Basic material buyers’ additional willingness to pay for green inputs is estimated based on their reported internal carbon prices. This green willingness to pay is used to construct a demand curve for green basic materials. Short-to medium-term green supply is derived from low-carbon basic material production facilities that have been announced or are under construction. The proposed methodology is then applied to estimate and predict green premiums in the steel sector. The results indicate that green steel premiums will be too low and too transient to generate significant incentives to invest in green primary steel production facilities. Other policies such as effective carbon prices and carbon contracts for difference are and will be central in driving the green steel transition. Green steel premiums may only play a complementary role in the first years of the transition