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SUMMARY:The "Dirty Self-Hedge": A Speedbump on the Way to Decarbonizing Industry?
DESCRIPTION:13:00 - 14:00 //   This paper identifies a risk-hedging mechanism we coin the "dirty self-hedge" and analyzes how it affects financing costs of green industrial investments. The dirty self-hedge occurs in basic materials production when exclusively conventional, emission-intensive producers can pass on input price shocks to final product prices. They thus have a natural hedge for their profit margins against input price risk. Clean producers of the same goods lack this self-hedge due to different input structures and face higher volatility of profit margins. Using historical commodity price data, we first show evidence of the dirty self-hedge in the production of both steel and ammonia. Second, using a Monte Carlo simulation model of investment under uncertainty, calibrated to the European steel sector, we show how this increases risks and thus financing costs for clean producers. A potential policy solution to lower risks for green investments is carbon contracts for differences. We show that when they cover differential price developments between conventional and clean inputs, input price risk for the green firm is reduced and risk symmetry restored. Our results thus inform the design of industrial decarbonization policies.  
DTSTART;VALUE=DATE:20260416
DTEND;VALUE=DATE:20260416
DTSTAMP:20260316T230000Z
URL:https://www.diw.de/en/diw_01.c.1005350.en/events/the__dirty_self-hedge___a_speedbump_on_the_way_to_decarbonizing_industry.html
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