OSW Commentary - Carbon contracts for difference: Germany’s new instrument to decarbonise its industry

The use of the so-called carbon contracts for difference will, for the first time, make it possible to subsidise not only investments in new installations but also the current operational costs, as the state intends to cover the difference between the costs of conventional and low-carbon energy production until the latter becomes more profitable. [...] In 2023, the industrial sector accounted for 23% of Germany’s greenhouse gas emissions and was the second biggest sector of the economy (after the energy sector) in terms of the level of greenhouse gas emissions. [...] Critics of the carbon contracts for difference frequently mention the high cost of the programme, which the German federal budget will need to bear, as well as the significant uncertainty as regards the expected returns. [...] The BMWK estimates that low-carbon technologies will become more profitable than the conventional ones at the beginning of the 2030s, which is when the companies involved in the programme should begin to repay their financial surpluses (which are estimated at several billion euros) to the state budget. [...] This would involve introducing regulations to commit the companies which are involved in the implementation of public investment projects and the producers of certain types of goods to rely on low-carbon products (such as the steel used in the construction industry and in automotive production).