Carbon Contracts for Difference
Carbon Contracts for Difference - what’s behind them?
Through climate protection contracts between the Federal Ministry for Economic Affairs and Energy (BMWE) and operators of emission-intensive industrial facilities, low greenhouse gas emission production processes are to be made economically viable. To achieve this, the contracts compensate for the additional costs of lower-emission production methods compared with conventional processes. This is intended to provide investment certainty and create financial incentives for the deployment of innovative, low-carbon (CO₂) technologies. In this way, climate protection contracts can make an important contribution to the decarbonization and long-term transformation of industry.
Objective of funding
The CCfDs focus on emission-intensive industrial sectors, such as the the paper, chemical, metal or glass industry. With a term of 15 years, these contracts are intended to create reliable framework conditions for investments in greenhouse gas-neutral production processes. The aim of the funding program is to achieve significant immediate reductions in CO₂ emissions and to prevent the offsetting of greenhouse gas emissions abroad. In addition, the climate protection agreements provide an incentive to develop and implement the necessary technologies and infrastructure in Germany now, in order to advance national innovations aimed at decarbonizing industry worldwide.
How CCfDs work in practice
CCfDs are concluded between the government 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 contractual CO₂ price is higher than the current market price of CO₂ allowances, the government subsidizes the project during the initial years. However, if the price of CO₂ allowances rises above the contractual price, the company is required to repay the difference to the government.
Through the free allocation of emissions allowances to the project, which the company can sell at the predetermined CO₂ allowance price, a fixed CO₂ price for emission reductions is effectively guaranteed. This provides a reliable incentive for reducing emissions and supports investment in low-carbon technologies.
Latest developments
The implementation of the Climate Protection Contracts funding program began in summer 2023 with a first bidding round in which companies from various sectors of the energy-intensive industry from all over Germany took part. Of the 17 companies that submitted a bid, 15 were awarded a contract. The signed climate protection contracts reach a maximum funding volume of around 2.8 billion euros.
With the second bidding round, which ran from May to September 2026, the funding framework for CCfDs was expanded. In addition to traditional electrification and hydrogen projects, initiatives involving carbon capture, utilization and storage (CCU/CCS) were eligible for the first time, provided they target process-related or otherwise hard-to-abate emissions. The German federal government is providing a total of up to 5 billion euros in funding for the bidding process.
Further information
The latest news and background information on the CCfDs can be found on the BMWE website.
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