Climate Contracts for Difference · Glossary

Climate Contracts for Difference, CCfD for short, are long-term contracts between the state and industrial companies. The name Carbon Contracts for Difference is more common in the technical literature; in Germany they are referred to as Klimaschutzverträge (climate protection contracts) or CO₂-Differenzverträge (CO₂ contracts for difference). Through them the state compensates the additional costs of climate-friendly industrial production compared with an emissions-intensive reference process, partially or fully depending on the contract. The contracts are intended for investments whose climate benefit is politically desired, but whose profitability cannot be reliably calculated because of uncertain CO₂ and energy prices, sales markets and technology costs.

CCfD are not a simple investment grant. An investment grant reduces the initial costs of a plant once. A CCfD, by contrast, takes effect during operation, usually over many years. It covers ongoing additional costs, revenue risks and price uncertainty. This matters above all for industrial plants with long lifetimes, high capital costs and strong competition, for example in the steel, cement, lime, glass, paper and chemical industries. There, it is not enough that a climate-friendly plant can technically be built. Over the years it must produce goods at costs that allow them to be sold.

Basic mechanism: payments in both directions

The basic principle is that of a two-sided contract for difference. The contract sets a reference price, often called base contract price, climate protection price or strike price. In German climate protection contracts this is generally a price per tonne of avoided CO₂. It indicates the CO₂ price at which the climate-friendly plant could keep pace with the fossil reference process. In an auction, companies bid how many euros per tonne of CO₂ saved they need. If the relevant CO₂ price is below the agreed price, the state pays the difference for the demonstrably avoided emissions. If it is above, or if climate-friendly production becomes cheaper than conventional production for other reasons, the company must pay the difference back to the state.

A simplified calculation example without energy price adjustment and without special rules: A contract has a base price of 150 euros per tonne, and the plant avoids 100,000 tonnes of CO₂ in a year. At a CO₂ price of 90 euros, the company receives 60 euros per tonne, i.e. 6 million euros. If the CO₂ price rises to 180 euros, the company pays back 30 euros per tonne, i.e. 3 million euros. In real contracts, the base price is additionally adjusted to the development of key energy prices. The contract is thereby also hedged against fluctuations in, for example, electricity, natural gas or hydrogen prices. According to the European Commission, the annual payments depend on the development of the prices of emission allowances and of energy carriers compared with the conventional technology.

Why the difference matters

Many processes for decarbonising industry are more expensive today than established fossil processes. These include hydrogen-based direct-reduced steel, electrically heated high-temperature processes, low-CO₂ basic chemicals and cement with carbon capture and storage. They often require large quantities of renewable electricity, hydrogen, new infrastructure or additional plant components. Their products, however, compete with conventionally produced goods that fulfil the same technical function and are barely distinguishable in the end product.

The European emissions trading is meant to make fossil production more expensive and thus trigger investment in low-emission processes. For very capital-intensive projects, the CO₂ price alone is often not sufficient. Its future path is uncertain, and political rules can change. Anyone planning a plant today for several decades needs a reliable revenue basis for financing and equity. An expected CO₂ price is not enough for that. CCfD turn climate policy expectations into a fixed, contractually predictable payment rule. As a result, part of the risk shifts from the company to the public sector. The state does not make the business decision, but it takes on a price risk that arises politically or is politically influenced.

Implementation in Germany: Klimaschutzverträge

Germany implements CCfD as a funding programme of the Federal Ministry for Economic Affairs. The contracts run for 15 years and are awarded competitively. The first bidding procedure started on 12 March 2024. In October 2024 the ministry handed over the first contracts to 15 companies, including manufacturers in the glass, ceramics, paper and chemical sectors. The maximum funding amount is around 2.8 billion euros. Because payments flow in both directions, the ministry expected that significantly less would actually be paid out.

For the second round, the 2026 bidding procedure, the European Commission approved on 7 May 2026 a revised scheme with a budget of 5 billion euros (State aid case SA.122980). It replaces a version approved in March 2025 that Germany did not implement in that form. Funding goes to projects in sectors covered by the EU emissions trading system. They must involve fundamental technology changes, for example electrification, hydrogen, carbon capture with storage or use of CO₂ (CCS/CCU), biomethane, and heat recovery and heat storage. Hydrogen used must meet the EU requirements for renewable or low-carbon hydrogen. According to the Commission, the German authorities have verified that indirect emissions from the electricity used remain limited in relation to the overall reduction.

For the 2026 bidding procedure, according to reports, a base volume of 3 billion euros and an additional volume of 2 billion euros were planned. Only companies that had previously taken part in the mandatory preliminary procedure were allowed to bid, and the applicant had to be the operator of the plant. The bidding deadline ended in September 2026. By then 21 bids had been received, including from chemicals, glass and ceramics, gypsum, lime, metals, paper and cement. For the first time, CCS and CCU projects were also included, and the funds applied for clearly exceed the budget. The minimum emission reduction requirements were lowered. Projects must now reduce their emissions by at least 50 percent within four years and by 85 percent by the last contract year. In the 2025 version, the figures were 60 percent after three years and 90 percent by the end of the project. Awards go, under the pay-as-bid procedure, to the projects with the lowest costs per tonne saved, until the budget is exhausted. The award was announced for the end of 2026.

Distinction from subsidies, CO₂ pricing and green lead markets

CCfD are often described across the board as a subsidy. That is correct, but imprecise. Under State aid law they are State aid, which the European Commission must approve on the basis of the Guidelines on State aid for climate, environmental protection and energy (CEEAG). They are, however, a special form of contract with variable payment. Its amount depends on reference prices, actually demonstrated emission savings and the contract terms, and it can also become negative.

CCfD differ from the CO₂ price in direction and targeting. A CO₂ price makes emissions more expensive and creates a general incentive to avoid them. A CCfD specifically supports individual low-emission investments when this general incentive is insufficient or too uncertain. The two instruments complement each other: if the CO₂ price rises, the need for funding falls. If it is weak or fluctuates strongly, the need rises.

Green lead markets start on the demand side, for example through public procurement, quotas, product standards or private willingness to pay for green steel, cement or low-CO₂ chemicals. CCfD, by contrast, act on the production side. If green lead markets work, CCfD trigger fewer payments. If they are missing, the state compensation payments remain important for longer.

CCfD must also be distinguished from classic contracts for difference in the electricity market. For renewable energy, contracts for difference refer to the electricity price: the plant operator receives the difference between the agreed remuneration rate and the market price, or pays it back. With CCfD, the focus is on avoided emissions and industrial production costs. Electricity prices can play a large role here, but they are only one reference point among several.

Significance for the electricity system

CCfD are not an electricity market instrument in the narrower sense, but they have a strong effect on the electricity system. Many of the supported processes replace fossil energy carriers with electricity or with hydrogen, which in turn is produced using electricity. As a result, industrial electricity demand rises, in part with high capacities and long operating times. For grid planning, generation and flexibility, it is not only the additional quantity of energy that matters, but also the load profile. A directly electrified plant can place additional strain on grids in regions that are already heavily loaded. Electrolysers, by contrast, can under certain conditions be operated flexibly, if storage, supply contracts and process requirements allow it. Whether a plant operates in a grid-supportive way is not automatically determined by the CCfD. This results only from the interplay with electricity tariffs, grid charges, procurement strategy and technical requirements.

CCfD thus also affect system costs. A supported plant can reduce emissions and at the same time trigger additional need for grid expansion, renewable generation, reserve capacity or hydrogen infrastructure that is not reflected in the contract itself. It is therefore important which electricity supply quality, which emission factors and which guarantees of origin are included in the calculation of the reduction. The European Commission expressly paid attention to this point in its approval with regard to indirect electricity emissions.

Typical misunderstandings

No guarantee of a climate-neutral industry: The contract initially only regulates payments under certain conditions. Whether the reduction actually occurs depends on the technology, the electricity or hydrogen used, capacity utilisation and the definition of the reference case. The German contracts therefore link minimum reduction targets to the funding.
No assumption of all risks: Construction costs, technical availability, product quality, demand, management errors and parts of the energy price risk remain with the company. What is mainly hedged are differences that are politically or market-wise hard to predict.
No permanent solution: CCfD are intended as a bridge. They are meant to trigger early investments and learning curves until CO₂ prices, product standards, border adjustment and green demand become more robust. If the contracts are wrongly dimensioned, there is a risk of windfall effects or of hedging technologies that remain permanently too expensive.
Not a sole solution against relocation: CCfD can reduce carbon leakage, that is, the relocation of production and emissions to regions with lower climate costs. However, this additionally requires rules for imports, standards along the value chain and integration into European State aid and climate law.

Contract design as climate policy steering

How well CCfD work depends heavily on their design. Important factors include, among others, the term, reference emissions and comparison processes, the adjustment to energy prices, repayment rules, reporting obligations and sanctions. Tenders direct the funding to projects with lower costs per avoided tonne. However, they only work if the projects are comparable and there is enough competition. The ratio of 17 bids to 15 awards in the first round shows how limited competition was at the outset. In the 2026 round, by contrast, demand clearly exceeded the budget.

CCfD are demanding for the budget because future payments depend on uncertain prices. With low CO₂ prices and large energy price differences, high expenditure can arise; with high CO₂ prices, the state can even receive refunds. Programmes therefore usually state a maximum funding amount rather than a fixed sum. Policymakers must bear this uncertainty and reflect it credibly in the budget. Otherwise the contracts lose their value for investors who are precisely seeking planning certainty. Properly understood, CCfD are neither a free pass nor a substitute for CO₂ pricing. They are a form of contract that hedges investments in low-emission production where market prices, infrastructure and regulation do not yet provide a viable basis.

Sources

Commission approves €5 billion German State aid scheme to support decarbonisation of industry (IP/26/997) — Europäische Kommission; 2026-05-07. Pressemitteilung; Inhalte zu Technologien, Wasserstoff, indirekten Stromemissionen und SA.122980 über Suchergebnisse mit wiedergegebenem Pressetext geprüft
Erste Klimaschutzverträge übergeben – 15 Transformationsprojekte können starten — ee-news.ch (Wiedergabe der Pressemitteilung des BMWK); 2024-10 (genaues Datum unbekannt). Pressemitteilung, Gesamtabschnitt
Industry demand for German decarbonisation aid exceeds earmarked volume of 5 billion euros — Clean Energy Wire; 2026-09-18. Nachricht, Gesamttext
Zweite Gebotsrunde für Klimaschutzverträge nach Genehmigung durch die Europäische Kommission gestartet — Raue Partnerschaft von Rechtsanwälten; 2026-05 (genaues Datum unbekannt). Abschnitt Gebotsverfahren 2026 im Überblick
Commission approves €5 billion German State aid scheme to help industries decarbonise (IP/25/846) — Europäische Kommission; 2025-03 (genaues Datum unbekannt). Pressemitteilung, Abschnitte The German scheme und Commission's assessment

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Edited by eCMS on 11.11.2026 17:26