Carbon Contracts for Difference

The goal is clear: Europe needs to be climate-neutral by 2050. The European Union (EU) has committed to fulfilling climate and energy policy emission reduction targets as part of the Green Deal. One tool that is being used to achieve these goals are carbon contracts for difference (CCfDs) which support climate-neutral investments by emission- and energy-intensive industries.

Carbon Contracts for Difference - what’s behind them

Carbon Contracts for Difference (“CCfDs”) are climate protection agreements between the Federal Ministry for Economic Affairs and Climate Protection (BMWK) and companies in emission-intensive sectors. Their purpose is to make climate-friendly manufacturing processes economically viable. The CCfDs compensate for the additional costs of transformative, low-emission manufacturing processes compared to conventional technologies (so-called reference technologies). This creates a positive investment environment and financial incentives for the use of innovative, climate-neutral technologies, allowing companies to switch to more climate-friendly production practices.

Objective of funding

The CCfDs focus on emission-intensive industrial sectors that have to reinvest in plants, such as the steel, cement, paper and ammonia industries. These will be subsidised for a period of 15 years to ensure that the road to climate neutrality is rapid and cost-efficient. The aim of the programme is to directly save around 350 megatonnes of CO₂ equivalent by 2045 and prevent greenhouse gas emissions from being shifted abroad. The CO₂ contracts for difference also provide an incentive for the necessary technologies and infrastructures to be developed and implemented in Germany right now in order to promote national innovations for the decarbonisation of industry worldwide.

How CCfDs work in practice

CCfDs are concluded between the state and the investing company. The European Emissions Trading Scheme (EU ETS) serves as the reference market. As such, the contract guarantees the difference between the agreed CO2 contract price and the price of a CO2 certificate for emission reductions compared to the value of a conventional reference technology. If the contract price is above the current CO2 price level, the state subsidises the

project in the first few years. However, if the CO2 certificate price rises above the contract price, the company is obliged to pay the difference back to the state. The free allocation of certificates to the project which the company can sell at the fixed CO2 certificate price guarantees a fixed CO2 price for emission reductions that reliably incentivises the company to reduce its emissions.

Grafik CCfD ENG

Latest developments

Calls for funding (bidding procedure) were initially published for the implementation of the CCfD. The first preparatory procedure then took place in the period from 6 June 2023 to 7 August 2023. Participants were required to take part in this preparatory procedure in order to participate in the subsequent bidding process. The evaluation criteria were 80% cost efficiency and 20% relative greenhouse gas reduction.

The next step - the entry into force of the funding guideline - is currently still pending. The first bidding process and the contract award process will take place in winter 2023. Operations begin no later than 36 to 48 months after the contract is awarded. This bidding process will be held twice a year from 2024 onwards.

What requirements do projects have to meet?

Minimum requirements

Reference system: at least 10 kt CO2 equivalents per year
Relative greenhouse gas reduction: 90% technically possible and 60% from the beginning of the 3rd year after the start of operations

Exclusion criteria (selection)

Production of secondary energy sources and hydrogen
Projects that do not directly serve the manufacture of industrial products

Input energy

Electricity used must have been generated from renewable energies
► Use of green or blue hydrogen and derivatives
Use of biomass and CCS/CCU subordinate

Start of operations

no later than 36 or 48 months after receipt of the funding decision