Key takeaways
- The Climate Protection Contracts intend to enable the climate-friendly and, at the same time, economical operation of large, energy-intensive production facilities in Germany.
- Following the conclusion of the first bidding round in 2024, the preparatory procedure for the second bidding round has already been carried out. Only companies that took part in the preparatory procedure (vorbereitendes Verfahren) can participate in the second bidding round.
- On 14 March 2025, the European Commission granted state aid approval for the second bidding round.
- Climate Protection Contracts continue to be very popular with industry stakeholders. Recent political developments indicate that the program will continue.
In detail
Germany as a pioneer in the auctioning of contracts for differences for energy-intensive companies
With its Climate Protection Contract program, Germany is a pioneer in the promotion of energy-intensive companies using market-based means. The European Commission's recent approval under state aid law has brought the Climate Protection Contracts back into focus amid the formation of a new German government. The European Commission's approval was required as Climate Protection Contracts, which are strongly characterized by private law, nevertheless constitute state aid. Therefore, they are subject to the European Commission's approval in order to safeguard freedom of competition in Europe.
The aim of Climate Protection Contracts is to prevent energy-intensive manufacturing companies from moving abroad because they are unable to manufacture economically in Germany due to the high costs of converting to low-emission production processes. As contractual partners for the Climate Protection Contracts, the legislator has particularly energy-intensive sectors in mind, especially the paper, chemical, metal and glass industries. The mechanism is structured as a carbon contract for difference. This means that the additional costs incurred by companies for the construction (CAPEX) and operation (OPEX) of climate-friendly plants compared to conventional plants are offset by the state under the Climate Protection Contracts. When climate-friendly production can be carried out more cost-effectively than conventional production, the payment obligation is reversed. The subsidized companies must then return surplus payments to the state.
To conclude a Climate Protection Contract, companies must submit a description of their planned project in an initial phase called the preparatory procedure. This is followed by a bidding contest in the bidding procedure, in which companies submit a bid on how much it would cost them to reduce greenhouse gas ("GHG") emissions by modernizing or replacing their production facilities. The bidder that submits the best offer in terms of costs in relation to GHG emission savings receives the funding, i.e., it can conclude a Climate Protection Contract. The subsidy amount is based on the respective bid price and therefore determined individually. Simplified, one could say that the state "acquires" emission reductions from the subsidized companies. The Climate Protection Contracts have a term of 15 years, during which the state reimburses the companies for the additional costs of converting to climate-friendly production. If climate-neutral production becomes more favorable than a comparable production with conventional energy sources during the term of the subsidy, the subsidized company must repay the saved costs to the state.
Bidding procedure enters second round
Following the conclusion of the first bidding round on 11 July 2024, in which 17 bids in the amount of EUR 5.3 billion were received in the bidding process, the first Climate Protection Contracts were concluded with 15 German industrial companies in October 2024. While the first bidding round was still under review, the Federal Ministry for Economic Affairs and Climate Action (Bundeswirtschaftsministerium) launched the preliminary procedure for the second bidding round on 19 July 2024. The preparatory procedure for the second bidding round ended on 30 September 2024. As the European Commission granted the necessary state aid approval on 24 March 2025, the second bidding round will now begin, subject to a corresponding resolution by the new German government.
Revised funding principles — new opportunities
For the second bidding round, the underlying funding guidelines for Climate Protection Contracts (Förderrichtlinie Klimaschutzverträge) were revised and adapted to the feedback from science and industry. Companies are now to be given the opportunity to react more dynamically and at short notice to unforeseen events and developments. To this end, Climate Protection Contracts now provide for greater scope for deviation from the contractually agreed emission reductions. Only if there is a deviation of 5% or more from the agreed GHG reduction or the energy source in one or more calendar years does the subsidized company have to obtain prior approval from the authority. Overall, there may be no deviation from the absolute path of greenhouse gas reduction, but the authority may approve exceptions if the funded company is not responsible for the deviation. The possibility of eligibly using hydrogen and industrial steam has also been made easier. Furthermore, the eligibility of carbon capture, utilisation and storage ("CCU/S") projects that use technologies to capture CO2 for later storage or use in order to reduce GHG emissions has been introduced.
Second bidding round and third tendering procedure very likely
The deadline for participating in the second bidding round has already expired due to the conclusion of the preliminary procedure for the second bidding round. This means that companies that did not participate in this round cannot take part in the bidding pro-cedure that could begin shortly. Due to the current formation of a new government in Germany between the Christian Democratic Union ("CDU/CSU") parties and the Social Democratic Party ("SPD") party and the possible new programmatic orientation in the area of climate protection, the future of the Climate Protection Contracts program has been uncertain until now. This is because even the implementation of the second round of bids, as well as future rounds, requires a corresponding resolution by the new German government. However, more recent reports on the negotiations between the CDU/CSU and the SPD suggest that Climate Protection Contracts are to be retained.
Preparing transformation projects — monitoring developments
Due to the aforementioned remaining political uncertainties, the exact time frame cannot yet be definitively predicted. However, it is unlikely that the new German government will decide against the Climate Protection Contracts program despite the positive feedback from industry and business. On the contrary, the future government's recent announcements suggest that the program will probably be continued. However, due to the tight deadlines and the obligation to participate in the preparatory procedure, manufacturing companies from energy-intensive sectors should closely monitor developments in climate protection policy and, if the Climate Protection Contracts program is continued, consider preparing to participate in the next possible (preparatory) tendering procedure. Projects at EU level, such as the recently announced "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.
*****
Lennart Heider, Law Clerk, has contributed to this legal update.
Click here to read the German version.
