Germany’s successful state aid application for Climate Protection Contracts – a mechanism also referred to as Carbon Contracts for Difference (CCfDs) – marks a significant milestone in Europe’s efforts to decarbonise heavy industry. Ireland can learn from their implementation as it prepares for its 2027 State Aid application, positioning CCfDs as a cornerstone of industrial transformation.
What is State Aid?
State Aid refers to financial support provided by Public Bodies (e.g., national governments, local authorities, or state-owned entities) to businesses or industries within individual EU Member States. The provision of state aid requires approval from the European Commission to ensure it applies with EU competition rules to prevent market distortion. To be compatible with national aid for environmental and climate protection (2022 guidelines), the aid must meet the following three key criteria:
- Objective of Common Interest: The aid must contribute to EU climate and environmental goals, such as reducing emissions or increasing renewable energy use.
- Necessity and Proportionality: The aid must be essential for achieving the proposed goal and limited to the minimum financing required to incentivise the activity.
- Avoidance of Undue Negative Effects: The aid must not distort competition or trade within the EU beyond what is justified.
Ireland’s Previous Success: The Capacity Remuneration Mechanism
Ireland’s previous state aid application successfully secured approval for its Capacity Remuneration Mechanism (CRM). Introduced alongside the Integrated Single Electricity Market (I-SEM), the CRM was designed to ensure security of electricity supply. In essence, the CRM ensures that enough capacity is available to meet electricity demand, even during times of system stress, by providing payments to generators and other capacity providers for making their capacity available when needed. The European Commission approved the application as it met the three key criteria by:
- Addressing energy security, a critical concern for Ireland’s grid stability and economic competitiveness.
- Tackling a clear market failure where the energy-only market did not incentivise adequate capacity investment.
- Implementing a technology-neutral, competitive bidding process.
The Need to Decarbonise Industry
EAI’s ‘Electrifying Society’ policy paper outlined that, for the year 2022, Ireland’s industrial sector accounted for 12.7% of greenhouse gas emissions and over 30% of GDP. Decarbonising this sector is vital for meeting climate targets. However, industries face significant cost barriers when transitioning to clean technologies. CCfDs address this issue by offering a tailored solution to incentivise decarbonisation, mitigate energy price volatility, and accelerate the adoption of clean technologies.
What are CCfDs and Why are they Necessary?
CCfDs are financial agreements designed to incentivise industries to adopt low-carbon technologies by addressing the financial disparity between the conventional high-carbon industrial production methods and low-carbon alternatives, such as green hydrogen. This mechanism ensures that industries can invest in clean technologies while remaining globally competitive by compensating for the cost difference when the carbon market prices are below a pre-agreed ‘strike price’, and requiring repayment when market prices exceed this threshold.
This mechanism is essential because the current EU Emissions Trading Scheme (ETS), while effective, does not fully account for the costs of decarbonisation in energy-intensive sectors like steel, cement, and chemicals. CCfDs address these market failures, reducing business risks and enabling large-scale emissions reductions.
Germany’s Approach
Germany’s approved €4 billion scheme for CCfDs targets projects that substantially reduce industrial emissions by supporting transformative technologies such as green hydrogen and industrial electrification. Beneficiaries are selected through a competitive bidding process, where cost effectiveness (€/tonne of avoided) is key. Payments are determined annually based on verified emissions reductions, energy price fluctuations, and carbon market developments. This model ensures public funds are used effectively while maintaining Germany’s industrial competitiveness. Germany’s success hinged on demonstrating clear alignment with the EU’s three criteria for state aid by arguing that:
- The projects funded under the scheme directly contribute to reducing GHG emissions in hard-to-abate sectors critical to the EU’s industrial base.
- New industries face significant financial barriers to investing in clean technologies due to their high upfront costs and limited market incentives (e.g., low carbon market prices under the EU ETS).
- It would provide a transparent and competitive selection process based on the lowest cost per tonne of emissions abated.
A Path Forward for Ireland
Ireland can learn from Germany’s approach as it prepares for its 2027 state aid application. By focussing on CCfDs, Ireland could potentially address the market failure in industrial decarbonisation and deliver measurable environmental benefits while ensuring a secure, sustainable, and low-carbon future.