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| 7 minutes read

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. 

In more detail: eligible projects
  • General requirements
    • Funding is only available for products processes that have equivalent or superior functionality compared to the reference products. 
  • CCU/S: Projects that reduce emissions through Carbon Capture and Storage or Utilisation (CCU/S) can be funded if 
    • long-term storage or product capture can be certified;
    • the measure can be approved under the EU ETS as GHG reduction; and
    • the connection to necessary transport and storage infrastructure is secured. 
    • As these requirements can currently not be met, CCU/S projects are excluded from the first tender call.
  • Hydrogen: The production of hydrogen derivatives is eligible for funding but cannot be used for energy production or the production of materials for energy production.  If hydrogen or a hydrogen derivative is used, it must be ‘green’ or ‘low-carbon’ whereas
    • green hydrogen must fulfil the requirements of the EU Renewable Energy Directive (RED);  
    • low-carbon hydrogen must fulfil the requirements of the EU Taxonomy Regulation and - depending on its origin - the requirements of the RED for biogas or fuels (for hydrogen from biomass, biogas, landfill or sewage gas) or of the new EU Gas Directive (for hydrogen from non-renewable sources). 
    • Due to the still lacking certification options under RED and the Gas Directive, in the first tender call the BMWK only reserves the right to demand recognised certificates for the hydrogen used. 
  • Biomass: The substance-based utilisation of biomass is permitted. However, the use of biomass for energy production is only permitted if the applicant can demonstrate that neither direct electrification nor the use of hydrogen or its derivatives other than biomass and similar gases is technically or economically feasible. In addition, the use of biomass must be sustainable and scalable in view of limited biomass potential. 
  • Natural gas: Natural gas use is only allowed if it is technically unavoidable. However, applicants must demonstrate a plan to reduce it. 
  • Other fossil fuels: The use of the most fossil fuels is only allowed for the first ten years if it is technically necessary. 
In more detail: projects not eligible for funding
  • Projects commissioned before the application for the funding.
  • Projects that are exclusively dedicated to the production of secondary energy carriers (i.e., energy that was transformed from a primary energy source, such as refined fuel oil) or hydrogen.
  • Projects for which the total funding volume is less than EUR 15 million.
  • Projects that are exclusively dedicated to the transport of greenhouse gases.
  • Projects that are exclusively dedicated to the geological storage of greenhouse gases.
  • Projects that are not directly dedicated to the manufacturing of industrial products.
  • Production in facilities not operated in Germany.
  • Projects  not covered by the EU ETS.
  • Projects that are not commercially viable after the end of the funding period without state support.
  • Projects which the applicant is obliged to implement due to statutory duties.
  • Projects which do not use the best available techniques as defined in the Industrial Emissions Directive (Directive 2010/75/EU).
  • Projects for which other EU, federal or state funds have already been applied for or which have been approved if this is specified in the funding call.

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). 

Documentation required for applications 
  • Description of the project
  • Planned GHG emissions
  • Technical, commercial, and operational feasibility
  • Implementation milestones
  • Financing plan
  • Financial standing
  • Security covering an amount of 0.1% of the total funding amount (to secure potential penalties)
  • Other subsidies for the project

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

Detailed calculation
Basic Agreement Price
PlusDynamisation component (i.e., adjustment in case of price increases in relevant energy carriers)
MinusEffective carbon price for the transformative production process as compared with the conventional reference system (such price being calculated based on the EU ETS and related EU regulations)
Multiplied byThe realised GHG emission reduction (based on EU reference regulations) and the realised production quantity
EqualsPreliminary amount to be paid by grantee or grantor (the latter if the amount is negative)
MinusAny other subsidies received for the project
Minus Up to 60% of any green surplus revenue (i.e., revenue which would not have been generated absent the transformation)
EqualsFinal amount

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.

Reasons for penalties (selection) 
  • Project not operational within 3 years after grant decision
  • Breach of information and reporting obligations, including failure to report annual data comprehensively and on time, or other subsidies
  • Missing GHG targets by more than 10% in a given year
Reasons for rescission (selection) 
  • Fraudulent application, including provision of false information
  • Project not operational within 4 years after grant decision
  • Failure to reduce GHG emissions by 90% by the last subsidy year (the reclaim amount depends on by how far the grantee missed the target)

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.


hydrogen, decarbonisation, state aid, climate change & environment, energy & infrastructure, net zero, renewables, germany, blog posts