It is important to act now so the steel industry “will still be competitive and environmentally friendly … in 30 years' time,” Economy Minister Peter Altmaier said.
A proposed plan includes new criteria for awarding public contracts, a minimum quota of low-carbon or carbon-neutral steel in finished products, and a new “green steel” label, Altmaier said.
Industry figures cited by the economy ministry suggest steelmakers will need an extra €30 billion ($34 billion) to become carbon neutral by 2050.
But the plan unveiled Wednesday did not include any new government subsidies.
Europe's steel industry has been hit hard in recent years by falling prices owing to global overproduction, especially by China, and by US sanctions introduced in 2018.
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The coronavirus crisis piled on more pressure with a drop in demand from key sectors such as the auto industry.
German steel production has fallen by 10 percent since 2010 and the number of workers in the sector has dropped by 4,000 to 86,000.
Industrial giant Thyssenkrupp said in May it was looking for a partner for a possible merger of its steel division, after years of troubles including a blocked merger with India's Tata Steel.
As part of its coronavirus recovery plans, Germany unveiled in June a nine-billion-euro scheme to become the world leader in green hydrogen technology.
Berlin is betting that fuel produced from renewable energy sources can both reduce carbon emissions — including in steelmaking – and stimulate the economy.