Germany awards first companies with pioneering ‘climate contract’ scheme to slash industry emissions

The German economy ministry has awarded the first group of companies with support guarantees under the country’s novel Climate Contracts for Difference (CCfD) scheme. Fifteen companies will receive compensation for the extra costs of slashing emissions with the so-called "climate contracts", minister Robert Habeck said at a press conference.

He stressed that this kind of CCfD scheme would be a first for the EU and would allow companies to have planning security regarding key transformation projects for 15 years. “Companies know that it will benefit them,” Habeck argued, adding that, while the programme was primarily meant to ensure decarbonisation, it would also “foster economic development and technological innovation” in the country.

Chemicals company BASF, among the winners of the first round of auctions, welcomed the scheme. "The climate protection agreements are a great instrument for incentivising the green markets we need," said Uwe Liebelt, president European Verbund Sites at the company.

Europe’s largest economy launched the “pioneering” subsidy programme last year to prepare Germany’s industry sector for decarbonisation and allow the country to achieve climate neutrality by the target year 2045. Profound CO2 reductions in basic industries such as steel, cement, paper, glass and chemicals require entirely new production processes often costing billions of euros to introduce. To make these investments competitive, the contracts compensate companies for the price difference to fossil-based production procedures and switching to climate-neutral production.

“Energy-intensive companies will produce climate neutral in the future,” Habeck said, adding that the government would remain “completely technology open” regarding the ways that participating producers find to meet their targets. The procedures awarded in the first round of CCfDs often used novel technologies that made it hard for companies to gauge financial risks.

However, as rising prices for emissions allowances under the European Emissions Trading System (ETS) are the main instrument for achieving industry decarbonisation across Europe, instruments to slash companies’ CO2 footprints would be needed to reduce costs. Green politician Habeck stressed that the programme would close a gap for small- and medium-sized enterprises which had so far received no targeted support.

The scheme would also back technology ‘Made in Germany’. At a time of economic stagnation for the German economy that is to a large degree caused by difficulties in its industrial production sector, the minister said the new programme could provide a crucial impetus for manufacturers to keep investing in the country. Habeck added that other EU countries had already shown great interest in the scheme.

At the start of the subsidy programme, Habeck said climate contracts overall could save a total of 350 million tonnes of CO2 by 2045, equivalent to a third of the total industry emissions cuts needed to reach the country’s climate targets. The government hopes the contracts, which are also a reaction to green tech subsidies in the US sparked by the Inflation Reduction Act (IRA), will also boost the development of clean industry technologies. “Germany’s role is to show that it is possible,” Habeck said.

The earmarked sum for the first round of 2.8 billion euros is unlikely to be used in full, the economy ministry (BMWK) said. Exactly how much of it will be used will depend on the price development of different energy sources and for carbon emissions allowances in the ETS. “At a time of tight budgets, the climate contracts help to ensure that the state pays support in a flexible way over several years to meet the actual demand of companies to implement decarbonisation in an economical fashion,” Habeck argued.

To apply for the scheme, companies had to bid how much government support they need to avoid one tonne of CO2 with their transformative technology. Companies that convert their production at the lowest cost were awarded in the scheme’s first round.

They will receive the agreed sums only once the annual emissions reduction targets have been fulfilled. The ministry expects to save about 17 million tonnes of CO2 over a period of 15 years with this round. In 2023 alone, Germany’s total emissions stood at 674 million tonnes of CO2 equivalents, ten percent less than in 2022.