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Glossary · Energy industry & energy transition

Carbon Contracts for Difference

Carbon contracts for difference CCfD Climate contracts for difference Industry Carbon price Decarbonization Emissions Trading hydrogen

Carbon Contracts for Difference (CCfD) are contracts between the state, or a public body acting on its behalf, and an industrial company. They hedge investments in low-emission production processes against uncertain CO₂ prices. The contract specifies a price per tonne of CO₂ avoided, often called the contract price or strike price. At this price, the climate-friendly process would be economically viable compared with a fossil reference plant. If the relevant CO₂ price is lower, the company receives the difference as a compensation payment. For two-sided contracts the reverse case also applies: if the price is higher, the company pays the difference back to the state. A CCfD is thus a special form of contract for difference. It does not relate to an electricity price, but to the cost of CO₂ abatement.

A simplified example: a company needs 200 euros per tonne of CO₂ avoided for a new plant to pay off. The market price is 80 euros. The contract then compensates the missing 120 euros per tonne actually avoided. If the price later rises to 230 euros, a two-sided contract may require a repayment of 30 euros per tonne. What is funded is therefore not the tonne of CO₂ as such. What is closed is the cost gap between two ways of producing.

Terms: Carbon, Climate and Klimaschutzverträge

Besides Carbon Contracts for Difference, Climate Contracts for Difference are often mentioned. The term can be broader and also hedge other additional costs justified by climate policy, for example for renewable hydrogen or process conversions. In practice the boundaries blur. The German programme, too, adjusts payments to energy prices, for example for electricity, natural gas or hydrogen, through so-called dynamisation. It therefore hedges more than just the CO₂ price. In Germany the instrument was first called Klimaschutzverträge. Since the 2025/2026 round, the Federal Ministry for Economic Affairs and Energy (BMWE) has used the designation CO₂-Differenzverträge.

Distinction from CO₂ pricing, subsidies and emissions trading

A CCfD does not replace a CO₂ price. The CO₂ price sends a general scarcity signal: fossil production becomes more expensive, low-emission processes become relatively cheaper. The contract for difference steps in where this signal is too low or too uncertain for a specific investment. This is the case, for example, when a company fears that the price will be politically weakened in ten or fifteen years. A further risk is competition from countries without comparable CO₂ costs, keyword carbon leakage. The contract turns an uncertain future price development into a calculable quantity.

A CCfD differs from a classic investment grant because it responds to actual price developments. If the CO₂ price rises, the funding need falls or turns into repayments. Emissions trading creates a market price for emission allowances. The CCfD does not guarantee this market price but merely supplements it for specific projects. In the German programme, payment is made only once the company has actually delivered the annually agreed greenhouse gas reduction.

The German programme: CO₂-Differenzverträge

Germany uses CCfDs as a competitive bidding procedure for energy-intensive installations in the EU emissions trading system. Companies bid a price per tonne of CO₂ equivalent avoided. In it they can price in investment and operating costs. The lowest bids are awarded contracts until the funding volume is exhausted. The contracts run for 15 years.

  • First round 2024: The bidding procedure started in March 2024. In October 2024, 15 companies received contracts with funding of up to 2.8 billion euros in total. According to the Federal Government, they are to save up to 17 million tonnes of CO₂ equivalents over the contract term. Projects funded included those in chemicals, paper and glass, several of them using hydrogen or electrification.

  • Second round 2026: The funding call was published on 5 May 2026 on the basis of the revised funding guideline FRL CCfD, after the EU Commission had approved the scheme under state aid law. The volume is 5 billion euros. Of this, 3 billion euros is base funding volume with sectoral and project-related limits, and 2 billion euros is an additional volume without a sector limit. Only companies that had previously completed the preparatory procedure were allowed to participate.

  • Key parameters of the 2026 round according to an analysis of the funding call: The maximum price is 550 euros per tonne, after 600 euros in 2024. The reference plant must emit on average more than 5,000 tonnes of CO₂ per year; in 2024 it was 10,000 tonnes. From the base volume, a single project receives at most 700 million euros. From the fourth full calendar year, a reduction of at least 50 percent compared with the reference system must be demonstrated, and at the end of the term at least 85 percent. In 2024 these were 60 and 90 percent. Operational start is in principle to take place no later than 1 January 2031. New are also an implementation security and a right of termination before start of operation, both amounting to 1 percent of the maximum funding amount.

  • Extended scope: In 2026, projects with CO₂ capture and storage (CCS) or utilisation (CCU) are eligible for funding for the first time. A condition is, among other things, that mainly hard-to-abate process emissions remain. Also new is an industrial steam reference system for integrated sites where process heat is provided centrally as steam. For hydrogen and its derivatives, separate requirements apply to infrastructure, accounting and dynamisation.

  • As of November 2026: According to the BMWE, 21 bids were received. The funds applied for were significantly above the 5 billion euros available. Awards were planned by the end of 2026. Results were not yet available at the editorial deadline.

Relevance for industry and the power system

CCfDs target sectors with hard-to-abate emissions and long-lived plants, such as steel, cement, lime, glass, paper and chemicals. Anyone investing in direct reduction with hydrogen, electric process heat or new chemical routes ties up capital for decades. A fluctuating CO₂ price alone is often not sufficient for this.

For the power system, CCfDs are indirectly but clearly relevant. Many routes to decarbonisation increase the demand for renewable electricity, either directly through electrification or via electrolysis for hydrogen. New large consumers place a burden on the power grid, influence siting decisions and create a need for flexibility. The contract can close the profitability gap. But it does not build a line, does not speed up a permitting procedure and does not guarantee a hydrogen or CO₂ connection. The longer deadlines of the 2026 round are also a response to such infrastructure dependencies.

Typical misunderstandings

  • Not a blanket climate bonus: How well a CCfD works depends on the reference system, reference price and proof obligations. If the fossil comparison plant is set too cheaply, the funding turns out too high. If it is unrealistically strict, no project comes about.

  • No guarantee of competitiveness: The contract does not solve problems with supply chains, skilled labour, permits, grid charges or sales markets. Technical risks such as low plant availability or poorer efficiencies remain largely with the company.

  • Not necessarily a permanent subsidy: Two-sided contracts provide for declining payments or repayments if CO₂ prices, markets for green products or technology costs develop favourably. This requires transparent price indices, clear settlement periods and verifiable data.

  • Not a perfect guide: Auctions make costs visible. But whoever defines sectors, reference systems and permissible technologies makes selection decisions that should be openly justified.

Contract design and institutional consequences

Auctions create cost competition but presuppose comparable projects. In the German 2026 round, according to the funding call, the only award criterion is funding cost efficiency. Individual negotiations are better suited to very complex plants. There, however, the information asymmetry is greater, because companies know their costs better than the public sector. The contract term is also a trade-off. Short contracts reduce risks for the budget. Long contracts provide more planning certainty, but tie up public funds and can perpetuate perverse incentives.

A key question is which risks the state bears and which remain with the company. Through dynamisation, the state can assume parts of the energy price risks. Depending on which base prices are set for electricity, gas or hydrogen, the incentives for procurement and operation of the plant change. Where CCfDs coincide with other funding, for example for energy infrastructure, cumulation rules govern the offsetting. The quality of a CCfD shows in whether it enables real emission reductions, provides for repayments under better market conditions, does not conceal infrastructure dependencies and clearly separates risk hedging from permanent cost coverage.

Sources

Related glossary entries

Edited by eCMS on 11.11.2026 16:57

© 2026 Erik Schmidt. All rights reserved. Quotations with a link to the source are welcome.