IW study: guarantees could help finance steel industry decarbonisation

State-backed guarantees could play a larger role in financing the decarbonisation of Germany’s steel and other energy-intensive industries, but they cannot compensate for missing hydrogen and CO₂ infrastructure or insufficient demand for low-carbon materials, according to a new study by the German Economic Institute (IW).

The study, commissioned by Stiftung Mercator, examines how guarantees and sureties could mobilise private capital for Germany’s transition to climate-neutral industry. The authors estimate that around €55 billion of investment will be required for the transformation of German industry by 2030, with basic materials producers facing particularly capital-intensive changes to their production processes.

This is particularly relevant for the steel industry, where investments in technologies such as hydrogen-based production and carbon capture can involve high upfront costs, long payback periods and uncertainty over future energy prices, infrastructure and markets for low-carbon products. The IW identifies the uncertain profitability of climate investments as a particularly important obstacle for large companies and energy-intensive industries.

Guarantees could make transformation projects bankable

According to the study, public guarantees can reduce the credit risk faced by banks and thereby improve companies’ access to debt financing. This could enable private capital to finance projects that are fundamentally viable but difficult to fund because of new and difficult-to-assess transformation risks.

The IW argues that guarantees can be particularly useful for first-of-a-kind projects. Financing such projects can create operating and financial experience with new technologies, making their risks easier for banks to assess and potentially facilitating purely private financing of subsequent projects.

Unlike direct investment grants, guarantees primarily address financing risk rather than reducing the investment cost itself. They can also leverage comparatively limited public resources to mobilise larger volumes of private capital.

The authors therefore recommend that existing German state and federal-state guarantee schemes be geared more systematically towards green industrial investments. They also call for clearer risk criteria, professional portfolio monitoring and long-term programmes that are less vulnerable to changes in government.

Hydrogen, CCUS and green steel markets remain crucial

However, the IW stresses that guarantees address the financing consequences of transformation risks rather than eliminating the underlying risks themselves.

For steelmakers, this distinction is important. A state guarantee does not make green hydrogen cheaper, ensure that hydrogen or CO₂ pipelines are available, or create customers willing to pay a premium for low-carbon steel.

The institute therefore sees guarantees as complementary to other industrial-policy instruments. It calls for a financing mechanism for an initial CO₂ transport network, simplified carbon contracts for difference covering additional operating costs associated with hydrogen and carbon capture, utilisation and storage (CCUS), and the creation of initial green lead markets for basic materials.

Such lead markets could be particularly important for basic-material industries by reducing uncertainty over future demand for more expensive low-carbon products. Measures could include standards and labels as well as requirements in public procurement or quotas that generate demand for greener materials.

Germany has made limited use of green guarantees

Germany already makes extensive use of public guarantees in general, but the IW finds that programmes explicitly targeting the green transformation remain relatively limited.

One example is North Rhine-Westphalia’s “Green Transformation” guarantee programme, introduced in late 2024. It can cover up to 80% of the default risk on loans of between €2.5 million and €25 million for transformation projects that struggle to obtain financing because of insufficient collateral.

The federal government has also introduced climate-related guarantees for projects abroad. Its Klima-UFK programme can guarantee loans for transformation projects linked to long-term supply agreements with German companies, including green hydrogen projects. Federal exposure under the programme had reached €1.4 billion by the end of 2025.

The IW concludes that guarantees could become an important part of the financing architecture for industrial decarbonisation, including steel. But their effectiveness ultimately depends on whether Germany simultaneously creates the infrastructure, energy supply, regulatory framework and markets required to make low-carbon industrial production commercially viable.

Source: IW Köln, Photo: Fotolia