Project

Problem definition: industrial transformation towards greenhouse gas neutrality

Climate protection policy in the EU, and also on a national level in Germany has gained momentum in recent years. With the Green Deal, the EU has put forward a set of policies to make the EU net greenhouse gas neutral by 2050 and to achieve the interim target of a 55% reduction in greenhouse gas emissions across all sectors by 2030. The regulatory framework for industry is provided in particular by the EU Emissions Trading System (EU ETS), flanked by the Carbon Border Adjustment Mechanism (CBAM) as a carbon leakage instrument.

Germany’s Climate Change Act stipulates climate neutrality as a target for the economy as a whole by 2045 and sets ambitious interim targets for each sector up to 2030. The resulting pressure to swiftly implement effective measures that lead to significant emission reductions in the industrial sector is enormous. In order to achieve these ambitious targets, the industrial transformation must begin on a relevant scale before the end of this decade. The political instruments to support the implementation of greenhouse gas-neutral production processes must take into account the long reinvestment cycles as a result of the long lifetimes of the technical facilities in industry. In addition, they must also consider the fact that the uncertainties with regard to innovative facilities are still high in some cases and are also caused by the different energy carriers required by the technologies. 

Climate Protection Agreements as funding instrument

Climate Protection Agreements based on the concept of a CCfD (carbon contract for difference) aim to compensate for the lack of competitiveness of climate-friendly production processes compared to the prevailing conventional technologies on the market. They make use of the existing carbon pricing system of the EU ETS in such a way that investments in new production facilities on an industrial scale can already be made in the current decade. Key design criterion is a contractually defined price for emission avoidance that will be dynamically adjusted to CO₂ and energy prices with a specific contract duration. Contracts will be awarded by an auction, with the main selection criterion being the level of the subsidy per emission avoided. As soon as competitiveness is achieved, e.g. due to a shortage of CO₂ certificates on the market and high CO₂-prices, repayments will be made to the state. New climate protection agreements will then presumably no longer be concluded in the sector concerned and the instrument will have fulfilled its function. Climate protection agreements are therefore a transitional instrument for accelerating industrial transformation and realising investments in climate-friendly production processes earlier that would otherwise have been postponed.

Specific information on the funding programme

Information from the German Ministry of Economic Affairs and Climate Action on the legal design of the funding instrument and detailed information on calls for funding and the participation in the funding programme can be found on the BMWK website under the following link:

https://www.bmwk.de/klimaschutzvertraege

The project supports the design of the funding scheme called Klimaschutzverträge (climate protection agreements) using CCfDs (Carbon Contracts for Difference) based on scientific principles. The scientific findings aim to support the development of the funding programme as directly as possible. However, they also form the basis for answering scientific questions within the scope of the project.

Relevant sectors and production processes will be analysed in detail with regard to their cost structure and the expected abatement costs, which strongly depend on the expected energy costs. These partly determine the risk assessment of those companies that should be addressed by the CCfD scheme. The interaction of climate protection agreements with other policies for emission-intensive industries, such as other subsidy instruments, but in particular also the EU ETS and CBAM, is seen as a key element. This also raises reflections on instruments such as demand quota or green lead markets as well as questions concerning the possible additional "green" revenue of potential projects by the lower carbon footprint of their products. Furthermore, we analyse interactions with connected markets, in particular with those for hydrogen and renewable electricity. Questions arise about certification, initially of hydrogen as a potential energy source for the projects, but also of the products themselves. Where necessary, the aforementioned work is supported by legal expertise in a cross-cutting role, with a focus on European State Aid regulations.

Fraunhofer ISI  coordinates and manages the project together with IREES. In addition to the overarching mechanics of climate protection agreements, a particular focus of the work is on auction design and the definition of the assessment basis for emission reductions of projects. Together with PIK, a techno-economic model is being developed that enables quantitative analyses with reference to the climate protection agreements. Their interaction with the EU ETS and CBAM is an additional focus of our work. Furthermore, we are working on issues related to hydrogen and electricity markets in the project.

Publications, others in preparation:

Oliver Lösch, Johannes Eckstein, Nele Friedrichsen, and Jörn C. Richstein. “Carbon Contracts for Difference as Essential Instrument to Decarbonize Basic Materials Industries,” -1, 2022. https://publica.fraunhofer.de/handle/publica/429596. 

August 2021 - July 2024

• Federal Ministry for Economic Affairs and Climate Action (BMWK)

• IREES Institut für Ressourceneffizienz und Energiestrategie GmbH
• Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
• Potsdam Institut für Klimafolgenforschung PIK
• Öko-Institut e. V., Institut für angewandte Ökologie, Deutschland
• Prof. Dr. Stefan Klinski, Berlin

We support the development of the Climate Change Agreements in the frame of the project "Scientific analyses on the introduction and scaling of Carbon Contracts for Difference (CCfD) for the decarbonisation of the primary industry" and with some of the project partners as part of the project "Scientific support for climate policy and action plan".