(Bloomberg) -- Germany should not rush ahead with subsidies for decarbonizing its steel industry and instead wait for an EU-wide system of green steel certificates, according to experts advising the government. 

The government is eying so-called carbon contracts for difference as part of a package worth at least €10 billion to transform the country’s heavy industry, and wants to start deals with companies in the first half of 2023. Germany’s steel sector counts for about 30% of industry carbon emissions, and is seen as crucial to reach the country’s climate goals.

However, such contracts — in which the state covers the cost difference between the production of conventional steel and “green”, zero-carbon steel — can “lead to significant overfunding” as well as “hinder competition and slow down the development of new technologies,” said Klaus Schmidt, chairman of Germany’s scientific advisory board.

Those types of contracts should only be used for a few pilot projects as it would get very expensive in case of wider application, the experts added. A better tool would be to create an open market for green steel certificates, they say, which should be closely coordinated at the European level as well as with important trade partners. 

Such markets “promote competition, new providers can enter the market, and the price effect provides strong incentives to improve climate-friendly technologies and make them cheaper,” said economist Achim Wambach, who contributed to the report.

--With assistance from Eddie Spence.

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