After EU Commission's first decision on Carbon Contracts for Difference, Germany initiates bidding of EUR 4bn

The European Commission approved the first Carbon Contracts for Difference (CCfD) scheme under the new Guidelines on State aid for climate, environmental protection and energy 2022 (CEEAG).

Following the Commission's decision, on 12 March 2024 the German Federal Ministry for Economic Affairs and Climate Protection (BMWK) initiated the first bidding process with a total volume of EUR 4bn. With this funding scheme, Germany is taking a pioneering role in Europe and internationally in the field of state aid for climate protection. 

Concept of contracts for difference

A contract for difference entitles the beneficiary to a payment equal to the difference between a fixed “strike” price and a reference price. The German scheme is designed to incentivise and support companies in emission intensive sectors to invest in climate-friendly production facilities. The measures fall within the scope of the CEEAG, and more specifically under the category of aid for the reduction and removal of GHG emissions, including through support for renewable energy and energy efficiency. The Commission has therefore assessed the scheme under both the general compatibility provisions in Section 3 CEEAG and the specific compatibility criteria in Section 4.1 CEEAG.

By enabling support for both the additional operating and investment costs of decarbonisation technologies, as well as reducing the business risks associated with price volatility, the scheme is expected to enable decarbonisation on a scale that would otherwise not be possible, according to German authorities.

In order to be eligible, projects will need to achieve a 60% emission reduction in three years and a 90 % emission reduction in 15 years compared to the best available conventional technologies based on ETS benchmarks.

The level of aid awarded to each beneficiary will be defined on the basis of a 
competitive bidding process and will take the form of direct grants. In using a competitive bidding process, the German government will ensure that projects compete for available aid in a transparent and non-discriminatory manner. Applications meeting the eligibility criteria will be ranked on:

• Funding cost efficiency, based on the level of the bid, which corresponds to the aid requested per tonne of CO2e emissions avoided as a result of the project (accounted for by 80%).
• The relative reduction of GHG emissions that the proposed project plans to achieve in comparison with the identified reference system, calculated according to the period from the operational start of the project during the first five years within the term of the Climate Protection Contract (accounted for by 20%).

Successful beneficiaries will be awarded “Climate Protection Contracts”, which entail yearly payments for a duration of 15 years. The payment schedule will begin upon the operational start of the project, which in general may not occur later than 36 months after the award of the Climate Protection Contract. The aid given to the beneficiary will be equal to the difference between their bid (in terms of EUR per tonne of CO2-equivalent saved) and the avoided carbon price, plus a “dynamisation component” corresponding to the differential price evolution of energy inputs compared to the reference system, multiplied by the total CO2 emission reduction achieved by the beneficiary in the given year as a result of the project.

German authorities will monitor the implementation of supported projects and the actual GHG emissions reduction resulting from the supported projects. If the GHG emissions savings achieved by the project will be below the objectives of 60% by the beginning of the third year of the project’s implementation and 90% by the last twelve months of the contract duration, aid payments will be reduced. Contractual penalties or a full reclamation of aid may also be imposed in certain cases.  

The funding programme aims to directly save around 350 megatonnes of CO2 equivalents by 2045.

Looking to the future

The scheme announced by the BMWK on 12 March is a pilot programme. Following the first round of bidding that has now been initiated, further rounds will follow.

Other countries have already shown interest in the CCfD scheme’s concept and mechanism and are expected to follow Germany's example.

For more information on Germany’s CCfD scheme, contact your CMS client partner or these CMS experts: Dr. Michael Bauer, Luisa Thomasberger.