Scientific analyses on the introduction, design and scaling of climate protecting contracts (CCfD) for the decarbonisation primary industries

Client

Federal Ministry for the Environment, Nature Conservation and Nuclear Safety

Duration  August 2021 – July 2024

Background

Climate protection policy in the EU and also nationally in Germany is noticeably picking up speed. With the Green Deal, the European Commission has proposed to make the European Union net greenhouse gas neutral by 2050 and at the same time to raise the interim target for 2030 to a reduction of 55%. A European climate protection law is to be passed. The form it should take, especially about effort sharing, is currently being debated within the European institutions. In Germany, a decision by the Federal Constitutional Court on the national climate protection law in March 2021 resulted in a considerable tightening of the target framework. In addition to bringing forward the goal of climate neutrality to 2045, the interim goals were also significantly adjusted, including the annual and sector-specific interim goals for the period from 2023 to 2030. The resulting pressure to quickly implement effective measures that lead to significant emission reductions is enormous. For the industrial sector, this results in the need to reduce emissions from the relevant source groups 1.A.2 and 2 to 118 Mt CO2 eq. in 2030 instead of 140 Mt CO2 eq. as before. Taking into account the typically very long reinvestment cycles and technical plant lifetimes in the emissions-intensive primary industry, both the required climate neutrality in 2045 and the very ambitious targets for the industrial sector for 2030 allow no other conclusion than that the specific challenges of these sectors outlined above, i.e. the market introduction of innovative and largely greenhouse gas-neutral production processes, must be started on a relevant scale before the end of this decade.

Climate protection contracts according to the CCfD approach offer the possibility to compensate for the lack of competitiveness of climate friendly production processes compared to conventional technologies already within the framework of the existing CO2 pricing system together with other instruments (e.g. decarbonisation funding scheme amde available by BMU, IF) to such an extent that investments in new production plants on an industrial scale can already take place in the current decade. The central design criterion is contractually defined, dynamically adjusted contract prices over a certain contract term. As soon as the climate policy framework changes (e.g. new CL protection mechanism) and the CO2 market becomes scarce and competitive, climate protection contracts will foreseeably lose their function. It is therefore a transitional instrument to accelerate industrial transformation and to realise pull-forward effects.

Goals

Considering the background described above, the proposed project pursues differentiated and broad objectives. On the one hand, this corresponds to the relevance of the topic in the current political discussion on the decarbonisation of industry, and on the other hand to the fact that project-based climate protection contracts for industry are a new instrument that does not yet exist in practice.

An important focus is on the further design and monitoring of the BMU’s national pilot programme on climate protection contracts, based (not exclusively, but in particular) on the concept study by Lösch et al. 2021. The findings of the project are to be incorporated into the further development of the programme as required and as targeted as possible; the development of policy recommendations for the funding agency as a result of the work packages described below is central to the effectiveness of the proposed project. For this purpose, a close and regular exchange with the BMU is necessary and planned. Particularly for the purpose of monitoring the pilot programme, selected relevant sectors and production processes are to be analysed in detail, especially with regard to their cost structure and thus the expected abatement costs.

Although climate protection contracts/CCfDs are a project-specific instrument, the preconditions (e.g. price parameters such as CO2 price) as well as the effects are likely to affect the entire energy system. Therefore, interactions with the energy system are also examined. Financing needs for companies may also be different through the use of CCfDs. Climate protection contracts / CCfDs should also be considered as a policy instrument in their interplay with other policies for emissions-intensive industry, for example other support instruments, the ETS as well as CBAM and possible new instruments such as demand quotas. This applies in particular against the background of current efforts, nationally and at EU level, to achieve a more ambitious climate policy. In this context, questions regarding interactions with other markets should also be mentioned, especially for hydrogen and renewable electricity. Consideration should also be given to green lead markets and criteria/definitions, e.g. for green hydrogen and green raw materials, and to ensuring consistency with regulations, e.g. within the framework of RED II/III.

The aforementioned work is supported by legal expertise as required in the sense of a cross-sectional function.

The work will be complemented by networking and transfer, both through its own events and through networking with other parallel scientific projects, as well as through the publication of results in various formats.

Overall, it can be expected that the results achieved, which are based on the aforementioned objectives, will indirectly contribute to the establishment of climate protection contracts as an instrument of climate policy in industry and thus also to the implementation of concrete projects for the decarbonisation of industry.

Tasks of IREES

  • IREES coordinates the project together with Fraunhofer ISI

  • Contributions and the development, further development and monitoring of the national KSV pilot programme.

  • IREES analyses a number of specific industrial productions with regard to their cost structures

  • Analyses of the interactions of climate protection contracts with other policies, also at EU level

  • Development of an LCA for imported hydrogen

  • Networking of the project consortium and transfer of project results

Project partner

  • German Institute for Economic Research DIW e.v

  • Potsdam Institute for Climate Impact Research PIK e.V.

  • Fraunhofer Institute for Systems and Innovation Research (ISI)
  • Öko-Institut e.V.

  • Prof. Dr. Stefan Klinski

STAFF

Oliver Lösch
Oliver Lösch
Jana Deurer
Jana Deurer
Dr. Felipe Toro
Dr. Felipe Toro