Global Insight Perspective | |
Significance | Five eastern European Union (EU) states have criticised the stricter Phase III of the ETS, saying that it would increase their dependence on Russian gas. |
Implications | It is cost, not dependence that is at the heart of these objections. There are significant implications for the economies of these countries if they have to compete for carbon allowances with the wealthy states of Western Europe. |
Outlook | The Polish government has already run into opposition from trade unions over its attempts to reform the loss-making coal sector. Given the windfall profits made by countries like Poland in Phase I of the ETS, the European Commission is unlikely to back down at the simple mention of Russian dependence, especially as it remains committed to cutting carbon emissions by 20% by 2020. |
The five member states issued a statement after talks in Warsaw, saying: "The [EU’s] climate and energy package will significantly increase the demand for imported natural gas in some member states, enhancing their dependence on external sources of energy." Poland said it would be required to decrease its coal usage significantly and switch to gas, despite having an abundant supply of indigenous coal. Despite the rhetoric on Russia, the issue of cost was also raised. The statement continued: "Each EU member state’s situation should be fully taken into account… a gradual approach to auctioning in the energy generation sector should be adopted." Poland had previously claimed that EU plans to force power generators to purchase all their permits for carbon dioxide production at auction (as of 2013), would drive electricity prices up by as much as 70%.
The ETS, the East, and the West
Phase III of the ETS is due to begin in January 2013. The current Phase II sees polluters get carbon allowances for free from the EU member states' governments. The European Commission has proposed, among other things, that from 2013 onwards a greater share (60+ %) of permits would be auctioned rather than freely allocated. Former Soviet states that have joined the union in recent years have enjoyed less stringent Kyoto Protocol and EU emissions targets and were therefore considered natural sellers in the EU ETS. In fact, Poland benefited from windfall profits in Phase I of the ETS. The current Phase II has seen these ‘natural’ sellers have their carbon allowances slashed following the EC's decision to deliberately target new member states in order to curb a potential excess of credits, as seen in Phase I. This month (October) will see an EU summit at which these five countries are expected to lobby for leniency under this programme. Poland has said that competing for carbon permits in pan-European auctions will mean that Polish electricity producers will have to compete for permits with their richer counterparts from Western Europe, effectively resulting in higher costs for Polish energy firms. In Poland, with 90% of electricity production based on coal, the new CO2 regulations are likely to exert upward pressure on domestic electricity prices.
Spotlight on Poland
Although there are other countries involved in this latest lobbying effort, Poland stands out as a particular example of where the European Community might choose to get tough. The Polish government has been hampered in its attempts to reform the country's loss-making coal sector by the country's powerful unions. Loss-making mines are slated for closure, but this policy faces union opposition over the proposed job cuts. The EU's Large Combustion Plant Directive (LCPD), which came into effect from 1 January 2008, is forcing many of Poland's power plants to meet increasing restrictions on the release of SO2, NOx, and dust or else face limited operating hours for the remainder of their lives. Yet, having benefited from Phase I of the ETS, if the EC recognizes Poland as a "special case" from 2013 onwards, it is step toward not only exempting Poland from the ETS altogether but also a tacit admission by the EC that its ETS doesn't work where it's most needed.
Outlook and Implications
Switching to gas-fired stations is what these countries will most likely do if carbon allowances cost them too much, although Hungary in particular is predominately nuclear powered. Upping the volume of Russia rhetoric embarrasses the EC as its energy policy is not consistent when it comes to diversity of supply and environmental sustainability. However, the EC will lose more face if it exempts these countries from the scheme, as that will impact greatly on emission reduction plans. However, the polarisation of East and West European economies may occur unless some measures are taken. The summit this month will be the start of negotiations around this problem.