Germany initiates first tenders for Carbon Contracts for Difference

On March 12, 2024, the German government launched the first funding call of €4 bn to aid the decarbonization of high-carbon industries like steel, cement, and paper. Through the establishment of "climate protection agreements" (Klimaschutzverträge) which take the form of carbon contracts for difference (CCfDs), support shall be distributed to areas where it can achieve the greatest greenhouse gas (GHG) reduction at the lowest cost. Climate protection agreements are concluded under a state-aid approved funding scheme (Förderrichtlinie Klimaschutzverträge - the "Scheme") and the respective funding call (which may further specify the requirements).  

What are CCfDs? 

CCfDs are a special type of contracts intended to minimise the risk of excessive public subsidies through a two-way payment system: The subsidy grantor pays out amounts to the beneficiary, but only up to a certain limit, beyond which the grantee pays the grantor. They aim to mitigate the burden of high-cost low-carbon investments by compensating for cost differences compared to cheaper high-carbon technology.  

Which projects can apply for funding?

The Scheme is targeted at industries obliged under the EU emission trading system (EU ETS) with high GHG emissions of at least 10 kt CO₂ per year and a high potential for emission reduction, such as the production of steel, cement, paper, or glass. The projects are expected to achieve a GHG reduction in comparison to the reference system of at least

• 60% in the first three years;
• 90% by the last year of the term. 

It is mostly up to the companies to decide how they want to achieve the GHG reductions (e.g. by using hydrogen, CCU/S or biomass) - the Scheme aims to be technology-neutral but holds special requirements for different decarbonisation methods (see “in more detail" below). 

Applicants may form a bidder consortium, allowing smaller companies to participate in the tenders. To participate in the first tender procedure, an applicant needs to have participated in the preparatory proceeding, which was open for project proposals between June and August 2023. 

How are the tenders awarded?

The tender is initiated by the BMWK in a funding call, followed by a bidding process. Funding calls include information on subsidy conditions, volume, criteria, deadlines, and maximum bid amounts per project (in the first tender, the maximum amount is EUR 1 bn.). Funding calls can be general in nature or limited to specific sectors or technologies.

Applicants for the tender must use a template application provided by BMWK and provide security in the amount of 0.1% of the total applied funding.

The BMWK will award the tender after a bidding process based on a scoring system which uses the following criteria: 

• amount of aid requested per quantity of product - the so-called subsidy cost efficiency - (the lower, the better);
• amount of GHG saved compared to the reference system – the so-called relative GHG emission reduction – (the higher, the better); 

These criteria are supposed to ensure that only the most efficient applicants with the lowest cost for GHG emission reductions win the auction. The award is made according to the pay-as-bid principle (i.e., successful applicants receive funding based on their submitted basic agreement price, described below). 

How is funding calculated?

Under the Scheme, funding is governed by a ‘climate protection agreement’ between the BMWK and the grantee, with a term of 15 years. The amount of the funding is calculated based on the additional cost which the applicant incurs in comparison to continuing to operate its conventional system (“Basic Agreement Price”). Additional costs include both construction (CAPEX) and operation (OPEX) expenditure.  The amount can be adjusted, among others, for energy price increases and can include a mechanism to disgorge ‘green surplus revenue’. The amount is updated annually. Upon the grantee's request, the BMWK may provide quarterly advance payments if the grantee offers collateral. 

What happens if targets are missed?

Payments will be stopped if the grantee misses its targets for reducing GHG emission targets. Additionally, if the grantee intends to shut down the facility permanently before the end of the climate protection contract, it must seek BMWK approval and pay back the grant. 

If the funding amount turns negative and the grantee becomes obliged to pay, the grantee may terminate the agreement with 3 years notice. 

If the grantee operates other, non-subsidised facilities, it must reduce the output of such facilities by 90% of the production capacity of the subsidised facilities. 

The grantee owes penalty payments to the BMWK in case of certain violations of the subsidy conditions. In more severe cases, BMWK is in principle obliged and/or entitled to rescind the grant.

Information rights and obligations

The BMWK monitors the success of the projects. To this end, the grantee has extensive information obligations vis-à-vis the BMWK, the EU Commission, and the German Federal Audit Court, including site visits. 

Certain data about the project is published in the EU Commission’s state aid transparency database. Further, the grantee must provide certain information regarding the production processes to the public and to sector representatives, to support commercial scaling of subsidised technologies. This does not apply to trade secrets and confidential information. 

What's next?

Under the current first funding call companies who took part in the preparatory procedure now have 4 months to submit a bid for the first auction.  

The BMWK plans to hold around 5 auctions. The second auction is scheduled for autumn 2024. This will likely be preceded by another preparatory procedure in summer 2024. The third auction is planned for 2025. 

The BMWK maintains a central website  (unfortunately mostly in German language) with updates and information on climate protection agreements and funding calls, including application documentation.