The cost of kick-starting the decarbonisation of Germany's industry through investment grants and carbon contracts for difference (CCfDs) will vary widely depending on the role that other policy instruments play, according to think-tank Agora Industrie.
A study presented by Agora today puts the cost for the necessary investment aid and 10-year CCfDs for the country's steel, ammonia and cement industries at €10bn-43bn, depending on how other policy instruments develop. An ambitious reform of the EU emissions trading system (ETS) and the introduction of a carbon border adjustment mechanism (CBAM), the creation of "green lead markets", a rapid deployment of renewable power and a quick reduction in costs for hydrogen could substantially reduce the need for — and hence cost of — CCfDs, Agora says.
The federal ministry of economic affairs and energy has said it will present in the summer a concept for investment grants and CCfDs. The CCfDs would compensate industry firms for higher operational costs, for instance owing to the use of renewable hydrogen instead of fossil fuels.
The Agora study, carried out in co-operation with consultants FutureCamp and research bodies Ecologic and Wuppertal Institute, concludes that CCfDs could help the country's steel, ammonia and cement sectors cut their CO2 emissions by 21mn t CO2, accounting for almost a third of the 68mn t CO2 that must be cut by 2030 compared with 2020 levels under Germany's climate protection law.
Agora Industrie director Frank Peter said today that total costs will be all the lower the more successfully the necessary infrastructures — including power grids — are set up, the quicker the costs for renewable power and hydrogen can be reduced, and the more consistently the reform of the carbon market and creation of green lead markets are carried out.
CCfDs are the "short-term means of choice to initiate the long-term transformation of the industry towards climate neutrality", the Agora study says. CCfDs can react flexibly to changes in framework conditions, Agora says.
The steel sector, Germany's biggest emitter, faces the challenge of converting its production from the blast furnace route to climate-friendly direct reduced iron (DRI) or electric arc furnace (EAF) production with hydrogen. Building DRI or EAF facilities with production of 12mn t will require around €8bn, which should "ideally" be subsidised through investment grants, Agora says.
When it comes to the steel sector's additional operational costs, to be covered by CCfDs, Agora calculates that they could be €2bn-27bn depending on the other measures and policies.
With regard to Germany's ammonia industry, which will not need new production sites, its shift to hydrogen may need to be subsidised with CCfDs worth up to €6.6bn. But Agora stresses that in the "best-case scenario", the ammonia industry may be able to do without CCfDs. To enable the rapid transformation of the ammonia industry, it is essential that the infrastructure for the production, storage and transport of low-carbon hydrogen be rapidly developed, Agora says.
In the cement industry, unavoidable process emissions will need to be reduced through carbon capture and storage (CCS). The additional operational costs, to be carried by the state, will be around €100mn, Agora says. Agora suggests investing an additional €500mn in bioenergy with CCS technology, thereby enabling the cement industry to generate negative emissions of 1mn t/yr of CO2 equivalent at "relatively moderate costs". Setting up a CCS infrastructure will also benefit the agriculture sector with its similarly unavoidable greenhouse gas emissions.
