Key Aspects of climate Protection Contracts

• objective: Enable climate-kind and economical operation of energy-intensive production facilities in Germany.
• Second Bidding Round: Only companies participating in the preparatory procedure were eligible.
• EU Approval: The European Commission granted state aid approval on March 14, 2025, for the second bidding round.
• Industry Support: The program remains popular, with political developments indicating its continuation.

Germany: A Trailblazer in Carbon Contracts for Difference

Germany is at the forefront of promoting energy-intensive companies through market-based mechanisms.The European Commission’s approval under state aid law has highlighted the Climate Protection Contracts, especially with the formation of a new German government. This approval was essential because thes contracts, while rooted in private law, constitute state aid and require validation to ensure fair competition within europe.

The primary goal is to prevent energy-intensive manufacturers from relocating due to the high costs of transitioning to low-emission production. The program targets sectors like paper,chemical,metal,and glass industries. It operates as a carbon contract for difference,where the state offsets the additional costs (CAPEX and OPEX) of climate-friendly plants compared to conventional ones. If climate-friendly production becomes more cost-effective, companies must return surplus payments to the state.

To participate, companies must initially describe their planned project in a preparatory phase, followed by a bidding contest. Companies bid on the cost to reduce greenhouse gas (GHG) emissions by modernizing or replacing facilities. The most cost-effective bid secures funding through a Climate Protection Contract. The subsidy amount is based on the bid price, effectively allowing the state to acquire emission reductions.These contracts last 15 years,during wich the state reimburses the additional costs. If climate-neutral production becomes cheaper than conventional methods, companies repay the saved costs.

Second Bidding Round Commences

Following the first bidding round on July 11, 2024, which saw 17 bids totaling EUR 5.3 billion, the first Climate Protection Contracts were finalized with 15 German industrial companies in October 2024. Even as the first round was being reviewed, the Federal Ministry for Economic Affairs and Climate Action initiated the preliminary procedure for the second round on July 19, 2024, concluding on September 30, 2024. With the European Commission’s approval on March 24, 2025, the second bidding round is set to begin, pending a resolution by the new German government.

Revised Funding Principles: new Opportunities

The funding guidelines for the second bidding round have been revised based on feedback from science and industry. Companies now have greater flexibility to respond to unforeseen events. climate Protection Contracts allow for more deviation from agreed emission reductions. Prior approval is needed only if deviations exceed 5% in GHG reduction or energy source in a calendar year. the absolute path of greenhouse gas reduction must be maintained, though exceptions may be approved if the company is not responsible for the deviation. The use of hydrogen and industrial steam has been simplified, and carbon capture, utilization, and storage (CCU/S) projects are now eligible.

Likelihood of Second Bidding Round and Third Tendering Procedure

The deadline for the second bidding round has passed due to the conclusion of the preliminary procedure. Companies that did not participate in this round cannot participate in the upcoming bidding procedure. The future of the Climate Protection Contracts program had been uncertain due to the formation of a new government between the Christian Democratic Union (CDU/CSU) and the Social Democratic Party (SPD), possibly leading to a new programmatic orientation in climate protection. Implementation of the second round and future rounds requires a resolution by the new government. However, recent reports suggest that Climate Protection Contracts will be retained.

Preparing Transformation Projects: Monitoring Developments

Due to remaining political uncertainties, the exact timeline remains unclear. However, it is unlikely that the new German government will abandon the Climate protection Contracts program, given the positive feedback from industry. Recent announcements suggest the program will likely continue. Manufacturing companies in energy-intensive sectors should closely monitor developments in climate protection policy and prepare to participate in the next possible tendering procedure, considering the tight deadlines and the requirement to participate in the preparatory procedure. Projects at the EU level, such as the “Industrial Decarbonization Bank” funding project and the increasing popularity of CCU/S procedures, are likely to have synergy effects with the German Climate Protection Contracts program in the future.