Start of the carbon contracts for difference funding programme

The Federal Minister for Economic Affairs and Climate Action is kicking off the preparatory procedure for its carbon contracts for difference funding programme. This preparatory procedure will serve to collect the necessary information for designing the ensuing auction procedure in an effective and needs-based manner. Companies interested in placing a bid in the first round of auctions are required to take part in the preparatory procedure. The announcement will be published in the Federal Gazette tomorrow (6 June 2023). The preparatory procedure has a duration of 2 months.

Robert Habeck, Vice-Chancellor and Federal Minister for Economic Affairs and Climate Action, said: “By launching the carbon contracts for difference programme, we are pushing ahead with the transformation of Germany’s industrial base. This modern funding instrument will raise the bar for global decarbonisation efforts and ensure that financial resources will be used where they are most needed and most effective for stimulating the transformation of the industrial sector. It is a programme that will provide funding for both climate action and for strengthening Germany as an industrial and innovation hub. I would like to invite all interested parties to take part in the preparatory procedure and submit forward-looking projects!”

The Federal Ministry for Economic Affairs and Climate Action has earmarked tens of billions of funding for the conclusion of carbon contracts for difference. The main part of this funding is to be used towards protecting companies against unexpected price volatility. Companies interested in receiving funding will enter into a competitive bidding procedure for the carbon contracts for difference. The best and in particular the lowest bid will win. Based on the information collected as part of the preparatory procedure, a first round of auctions is to be conducted and the first carbon contracts for difference awarded before the end of this year.

Carbon contracts for difference are to encourage the establishment of climate-friendly production processes in energy-intensive industries such as steel, cement, paper and glass. In sectors where climate-friendly production procedures are currently not yet competitive, carbon contracts for difference offset the added cost involved compared with conventional procedures.

Carbon contracts for difference mirror the principle of private-sector hedging contracts. They provide companies with financial predictability regarding the development of prices (e.g. for energy sources like hydrogen) and protect them against risks that currently keep them from investing in climate-friendly production methods. Once the transformative production method becomes more cost effective than the conventional one, the payment flow under the carbon contract for difference is reversed and companies have to pay back the difference to the state. This ensures that the government funding scheme remains adapted to demand.

Carbon contracts for difference are making a key contribution to bringing climate-friendly technologies to market, ultimately helping them become profitable without government funding. The plants receiving funding will produce climate friendly goods, which will help drive the creation of green lead markets. In addition, the projects receiving funding will generate expertise on the financing, construction and operation of innovative production plants, which has the potential to strengthen Germany as a business hub and boost global climate action. They will also provide powerful impetus for the deployment of hydrogen infrastructure in Germany and Europe. The transformational projects are also considerably reducing their greenhouse gas emissions, thus making an important contribution to Germany’s 2045 net zero target.

The funding guideline is still subject to approval under EU state aid and national funding rules and to budget negotiations.

A document containing detailed information on the carbon contracts for difference funding instrument can be found here.