Germany launches “pioneering” subsidy system to slash industry emissions

Germany is starting a novel subsidy programme worth billions of euros in a bid to make its prized heavy industry climate neutral. Following a preparatory phase beginning in early June, the country plans to introduce so-called Carbon Contracts for Difference (CCfDs) that compensate energy-intensive companies for the extra costs of climate-friendly production, the economy ministry said. The contracts will "give companies the investment security they now need," said climate action and economy minister Robert Habeck. He argued Germany is "a pioneer" in introducing the new instrument, which serves not only to protect the climate, but also to ensure the country's industrial future in an answer to the U.S. green industry subsidy programme IRA.

In a bid to trigger the massive investments needed to switch to climate-neutral industry production, Germany has started preparations to introduce the novel "climate contracts" later this year. The economy ministry (BMWK) said it is starting a preparatory phase this week, which is mandatory for companies wishing to finance climate-neutral investments with the help of so-called Carbon Contracts for Difference (CCfD).

Germany aims to become climate neutral by 2045, but CO2 reductions in basic material industries such as steel, cement, paper, glass and chemicals are difficult because deep emissions cuts can't be achieved simply by replacing fossil fuels with renewable power. Instead, entirely new and often expensive production methods are required, which cannot yet be operated competitively. CCfDs are designed to overcome this problem: They compensate companies for the additional costs of switching to climate-neutral production.

"It's a new instrument. We are a pioneer," Habeck said, adding that the Netherlands were the only other country that has already introduced these contracts. He said the new climate contracts alone are set to save a total of 350 million tonnes of CO2 by 2045; equivalent to a third of the total industry emissions cuts needed to reach the country's climate targets. Habeck stressed that the contracts not only serve to protect the climate, but also to develop clean technologies. This is designed to make domestic industry fit for a climate-neutral future, and is a reaction to green tech subsidies in the U.S. sparked by the Inflation Reduction Act (IRA).

"It is not only about climate protection, but also about a response to the IRA," Habeck said. He added that Germany should be the country that proves the feasibility of deep industry decarbonisation to the world. "Germany's role is to show that it is possible."

In Germany's industry decarbonisation scheme, companies have to bid how much government support they need to avoid one tonne of CO2 with their transformative technology. As a result, only those companies that convert their production at the lowest cost are awarded a 15-year climate protection subsidy contract.

Habeck said the government had reserved a mid-double digit billion-euro amount over this period to finance the measure. He stressed that the instrument was also open to Germany's famed "Mittelstand" companies (Small and medium-sized firms), provided they emit at least 10,000 tonnes of CO2 per year. "It's not just about the big industrial heavyweights in Germany, but also about the broadest possible participation of small and medium-sized enterprises," Habeck said.

The government also expects that the new instrument will lead to technological advances in decarbonisation. "Mechanical engineering will benefit. New technologies will be developed. We will see the ramp-up of intelligent control of companies and energy systems. That in turn will lead to the price of decarbonisation coming down," Habeck said. He added that even companies that don't participate in the scheme will benefit in the longer term, because they can also benefit from technological advances.

CCfDs to refund companies for investments in low-emissions technologies could be a key tool to ensure industry starts the transition to climate-neutral production, according to energy policy think tank Agora Energiewende. Agora has estimated this would cost the state up to 43 billion euros, depending on factors including the price development in the European emissions trading system (ETS).

"That's the only way for Germany to prepare for a globally growing market for climate-friendly products and maintain competitiveness as an industry location," said Frank Peter, head of Agora Industrie.

Hefty subsidies by Europe's economic powerhouse for its domestic industry are bound to irk neighbouring countries with less financial leeway. The scheme will still have to be approved by the EU Commission to ensure it does not violate the bloc's subsidy rules. But Habeck said the Brussels-based EU executive had already signalled basic agreement. "We practically have a direct line to Brussels," he said.

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