The European Commission has approved, under EU State aid rules, a €5 billion German scheme to help companies subject to the EU Emission Trading Scheme (‘ETS’) decarbonise their production processes. The scheme contributes to the achievement of Germany’s energy and climate targets as well as of the EU’s sustainable prosperity and competitiveness objectives.
The German scheme
The scheme notified by Germany, with a budget of €5 billion, is aimed at helping the German industry reduce carbon dioxide (‘CO2‘) emissions in their production processes thanks to technologies such as electrification, hydrogen, carbon capture and storage (‘CCS’), carbon capture and use (‘CCU’), and energy efficiency measures. It follows a scheme approved by the Commission in February 2024.
The projects supported under the scheme will range from fuel switches in the cement and lime sector to electrification in the chemical sector, and the replacement of traditional steel production processes by hydrogen direct reduction processes.
The beneficiaries of the scheme will be companies active in sectors subject to the EU ETS, such as the chemistry, plaster and glass sectors. The projects will need to achieve a 60% emission reduction in three years and a 90% emission reduction by the end of the supported project, compared to a reference system based on the ETS benchmarks.
The projects that will benefit from the aid will be selected through an open competitive bidding process, and will be ranked on the basis of the lowest aid amount requested per tonne of avoided CO2 emissions.
Under the scheme, the aid will take the form of two-way carbon contracts for difference, called ‘Climate Protection Contracts’, with a 15-year duration. Beneficiaries will receive annual grants based on their bids and on the evolution of relevant market prices such as ETS allowances or energy inputs, compared to the conventional technology. The measure only covers the actual additional costs linked to the new production processes compared to conventional methods. However, if operating the supported projects becomes cheaper, beneficiaries will have to pay back the difference to the German authorities.
The Commission’s assessment
The Commission assessed the scheme under EU State aid rules, in particular Article 107(3)(c) of the Treaty on the Functioning of the European Union, which enables Member States to support the development of certain economic activities subject to certain conditions, and the Guidelines on State aid for climate, environmental protection and energy (‘CEEAG’), which allow Member States to support measures reducing or removing CO2 emissions.
The Commission found that:
- The scheme is necessary and appropriate to support decarbonisation in sectors covered by the ETS, in line with the European and national environmental targets.
- The scheme has an incentive effect as the beneficiaries would not carry out the investments in decarbonisation to the same extent without the public support.
- The scheme has a limited impact on competition and trade within the EU. In particular, the aid is necessary and appropriate for Germany to contribute to the European and national environmental targets. In addition, it is proportionate and any negative effect on competition and trade in the EU will be limited in view of the design of the bidding process, which will ensure that the amount of aid is kept to the minimum.
- Finally, Germany committed to ensure that the aid delivers overall CO2 reductions and that it does not merely displace the emissions from one sector to another.
On this basis, the Commission approved the German scheme under EU State aid rules.
Background
The 2022 CEEAG provide guidance on how the Commission will assess the compatibility of environmental protection, including climate protection, and energy aid measures which are subject to the notification requirement under Article 107(3)(c) TFEU.
The EU ETS is a key tool of EU policy for reducing greenhouse gas emissions cost-effectively in the Union and fighting against climate change. It is the world’s first major carbon market and remains the biggest one. The review of the EU ETS Directive, under the Fit for 55 legislation and now in force, has strengthened the existing system and extended carbon pricing to new sectors.
More information: European Comission
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