The German energy ministry has launched its carbon contracts for difference (CCfDs) scheme, aimed at supporting the decarbonisation of production from energy-intensive industries, and expects the first round to take place this year.

Robert Habeck, Germany’s federal minister for economic affairs and climate action, has been keen to pitch CCfDs as a response to the US Inflation Reduction Act (IRA). He has also played up the potential to boost the nascent hydrogen industry, while remaining notably silent on the topic of carbon capture. The government is shortly expected to publish a separate carbon management strategy that is likely to include its thinking on the deployment of CCS.

“Programme will transform Germany as an industrial location” Habeck, German economic affairs minister

Details on the budget for the CCfD programme will need to be finalised with the finance ministry, and the scheme will also require state aid approval. But the energy ministry expects the funding to be in the “mid-double-digit billions”. The vast majority of this funding will be a hedge against unexpected price variations, it says.

The scheme will kick off with a two-month preparatory stage, where companies will share details of their ‘transformative’ emission reduction projects with the ministry. This information will be used to design the bidding rounds, and participation in this stage is mandatory for anyone hoping to take part in the first round of auctions.

The ministry is proposing 15-year CCfDs. Companies will bid in with a price per ton of CO₂ avoided, and the lowest bids will be selected. The amount actually paid out will fluctuate based on the cost of carbon allowances on the EU emissions trading system (ETS) and of energy sources, the ministry says. If the cost of green production falls below that of conventional production, companies will pay back the difference.

The auctions will be open to all energy-intensive industries, but the ministry specifically cites the steel, cement, paper and glass industries as likely participants.

Habeck is confident of EU approval. “We have a standing line with Brussels. We would not be here if there was not a basic agreement about the programme, but there are concrete details to clarify.”

The ministry is expecting to achieve enormous reductions with this budget: the instrument could cut emissions by a cumulative 350mn t, or one-third of the total industrial emissions Germany needs to cut to reach net zero by 2045, Habeck says.

IRA response

CCfDs are as much an industrial support programme as a climate change one, and are especially needed in light of the massive subsidies for US industry in the IRA, Habeck argues. The ultimate goal is to make new technologies competitive without subsidy, to develop the skills and expertise to make them in Germany, and ultimately to export them.  The programme will “transform Germany as an industrial location”, Habeck says. “We are pioneers, up to now only the Netherlands have introduced [CCfDs].”

The ministry’s guidelines acknowledge that Germany is already subsidising renewable electricity and clean hydrogen production, and taxing emissions on a European level through the ETS and the proposed carbon border adjustment mechanism (Cbam). But it says CCfDs are still needed to give businesses the price certainty required for long-term investments.

Merely relying on high carbon prices would lead to Europe decarbonising through deindustrialisation, Habeck argues. Allowing industries such as chemicals, steel, glass and cement to simply leave Europe “would be absolutely the wrong answer" he says. 

The minister also emphasises how CCfDs will not just be targeted at large industry, but also at Germany’s cherished ‘Mittelstand’ of small and medium-size enterprises. Minimum bids will be for reductions of just 10,000t/yr, and smaller projects could bid as a consortium to reach this threshold.

Hydrogen

The ministry has not limited the technologies that can be used for CCfDs. However, its guidelines talk of the potential of the scheme to give a strong impetus to the buildout of hydrogen infrastructure, while saying nothing about carbon capture.

Habeck stresses any electricity used must by bidders must be 100pc renewable, and any hydrogen used must meet EU definitions for clean hydrogen. Again, he was notably silent on carbon capture.

Even blue hydrogen that meets EU definitions could be at a disadvantage—the guidelines say companies will receive higher payments for using green hydrogen over blue.

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Author: Killian Staines