VISEGRAD: Poland leads rebel charge against carbon market reform

By bne IntelliNews September 22, 2015

Wojciech Kość in Warsaw -

 

Adding to the growing rift between the eastern and western halves of the European Union over the migration crisis, a group of CEE member states are still voicing their opposition to another key policy of the bloc, the carbon market.

Poland, alongside Bulgaria, Croatia, Hungary and Romania – economies where coal and other fossil fuels play an important role in energy generation – said they could not support the Council of the European Union’s decision on September 18 to move forward the starting date of the carbon market reform to 2019. Poland and its CEE allies favoured 2021 as the kick-off date for the reform, giving their power generation sectors more time to adapt,

Poland and its allies  initially won a delay in the reform but this has now been reversed and they are now bound by the council’s decision.

The reform, known as Market Stability Reserve (MSR), is designed to cut oversupply of carbon dioxide (CO2) emissions allowances on the EU’s Emission Trading System (EU ETS), the bloc’s mechanism to curb industry’s impact on the climate.

The reform is expected to lift the allowances’ current low price and push emissions-heavy industries such as power to invest in less polluting means of power generation, for example burning natural gas or renewable energy.The MSR is part of the EU’s broader climate policy target to cut at least 40% of CO2 emissions by 2030 compared to 1990 levels.

But in Poland, for example, the transition towards a more climate-friendly power sector has stalled. The new law on renewable energy has taken four years to write and the country’s most important new power generation project is a coal-fired power plant, developed by state controlled PGE in Opole.

Leave it to the market

The CEE countries said in a statement following the council’s decision to start the MSR in 2019 that an early start date would impair the EU ETS’ predictability, be detrimental to their economies and have a negative social impact.

“In our view, the early operation of the reserve (from 2019) together with the placing of the back-loaded and unallocated allowances directly into the reserve will not only change the current legal framework of the 2010-2020 Climate and Energy Framework, but it will seriously undermine the predictability of the carbon market for industry as well,” the countries said in a statement.

Poland especially has been championing the view that any change in the carbon market should be left to market forces rather than come as a result of the EU’s administrative decision. Poland’s opposition is grounded in its power generation sector’s reliance on hard and lignite coal, which are burned to produce relatively cheap energy, as long as the price of emission allowances is low.

According to Poland and its CEE peers, should emission prices shoot up, it would create huge macroeconomic problems for the eastern part of the bloc, which is hoping to converge with the living standards of the “old” EU in the next decade or so.

Apart from increasing electricity prices, weakening competitiveness, and impairing investment in the power sector, CEE countries argue that the MSR-induced increase in emission prices will also raise the risk of carbon-leakage, i.e. some carbon-intensive industries moving away from Poland.

The real impact of the reforms will be better known in 2020 as its effect will coincide with another change in how the carbon market will function in the EU. Poland and other CEE economies can still grant their power sectors emissions for free, but these sectors are facing a gradual decrease in free emissions to zero in 2020, while the number of those they will have to buy is set to go up.

The sooner the allowances’ price will increase, the sooner utilities will have to open up their wallets to pay for emissions, while their investment needs are only set to grow. In Poland, utilities will retire up to 10GW of power generation capacity as soon as by 2022, lobby group TGPE said in early September.

The disagreement over the carbon market reform also comes at an especially difficult time for climate policy in the EU and beyond. In two months, the EU will lead the climate change conference in Paris that is expected to end in a global agreement to reduce emissions. While the EU has a joint position for the Paris meeting, the clearly visible internal rift about the carbon market could prove an obstacle to achieving a wider international agreement on using carbon markets to decrease climate change.

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