Bogdan Turek in Warsaw -

The European Commission's decision to slash Poland's permitted greenhouse gas emissions by nearly 27% could seriously hamper the country's expected 7% growth rate this year, industry and economic experts are warning.

The reduction announced March 26 took the Polish government by surprise. The revised Polish National Allocation Plan, which called for a cut in carbon emissions to 208.5m tonnes a year from the original 284m set for the second phase of the bloc's carbon trading scheme from 2008-12, could mean that enterprises will be short of their allowances under the EU Emissions Trading Scheme. If they are unable to buy allowances, they will have to slow production, say critics of the scheme.

Poland has spent nearly $4bn to modernize industry in the past 18 years and leads Europe in reducing emissions, having slashed greenhouse gases by 32% since 1988. However, it still is the EU's third-largest polluter, as it relies on its vast coal reserves to produce 95% of its electricity.

Polish Environment Minister Jan Szyszko says the Commission not only ignored Poland's progress, but has "punished" it instead of rewarding it with higher allowances. The cap is slightly above Poland's actual emissions in 2005, but the minister argues it's unfair to use 2005, a warmer-than-average year, to calculate the new limit.

"We need a higher limit of emissions," says Szyszko. "It is a vital issue for our economy."

He warns that Poland might follow the lead of Slovakia, which is suiing the Commission in the European Court of Justice after its emissions level was cut by 50%, part of the EU's plan to cut greenhouse gases by at least 20% by 2020. On April 3, Slovakia's legal efforts hit a snag when the EU rejected its request for fast-track proceedings in the lawsuit against a cut in the annual emission cap.

Big polluters

Among those industries that could be hardest hit is the Polish power sector, which is 95% powered by coal and where it will take at least a decade and substantial investment to meet EU standards. Hikes in electricity rates are regarded as inevitable.

Stanislaw Poreba, director of the energy policy department at BOT, the largest power producer in Poland, says his company was short of allowances in 2005 and had to purchase an extra amount. "The company reduced electricity production by 3.4% in 2005," says Poreba. "If we get fewer allowances than we need in the 2008-2012 period, we'll also have to buy and the price of electricity will grow for sure."

BOT power plant

Industrial managers at an international steel conference in Krakow on April 3 urged Jos Depondt, a European Commission official in charge of steel, to persuade the Commission to reconsider its decision. Depondt said the criticism should be addressed directly to the European Council of Ministers.

Jerzy Podsiadlo, deputy chief executive officer of Mittal Steel Poland, which produces 70% of the country's steel, says the decision is forcing his company —which has invested about €1bn in modernization over the last three years — to rethink its investment.

"The decision shook our development strategy," says Podsiadlo. "The decision must be changed."

Romuald Talarek, CEO of the Polish Steel Association, worries that the emission cap could force Poland to import steel from Asia or other cheaper sources. "We have received a signal to slow down our future development," he says.

There are also wider concerns about how this will affect Poland's overall development. Janusz Mikula, deputy minister at the Regional Development Ministry (MRR), believes the decision will undercut Poland's development strategy. Poland received €67bn under the 1993 EU Cohesion Fund for various projects to modernize its economy in 2008-2012. The goal of the fund is to equalize the economic differences among EU member states.

Due to the funding, "we've got an incredible chance to increase investments in various projects," said Mikula — a chance that he says could now be thwarted.

Analysts predict Poland's GDP will exceed 7% in 2007. Poland's economy grew at an annual rate of 5.8% in 2006, twice the EU average, and it has picked up the pace so far this year.

Mikula recalls that the Commission granted extra allowances to Spain and Portugal for the period 2005-2007 to let them grow, and the same should be done to Poland. "We expect equal treatment for all EU members," he says.

Energy analysts say some industry managers' predictions may be exaggerated, but agree that economic growth might be hindered.

Wlodzimierz Giller, an analyst in for Deutsche Bank in Warsaw, says the purchase of extra allowances may not be such a high financial burden for the companies, especially if the price of one tonne of carbon dioxide — now about €1 – does not rise. "The uproar is not fully justified," he argues.

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