Wojciech Kość in Warsaw -

Following victory in last week’s European Union talks on the reform of the carbon market, Poland feels it has gained new strength as leader of the CEE region in the ongoing tussle on the shape of the bloc’s climate policy.

Poland, which with a group of other CEE member states (with the exception of Slovenia), managed to push the reform of the carbon market back until 2021 - instead of 2017 as proposed by countries like Germany, UK and Denmark - says regional cooperation was “exemplary”.

“It’s a great success of our coordination in the Visegard Group. Our cooperation in the region is a model and we have proof now that we’re able to fight successfully even on very difficult issues,” Marcin Korolec, Poland’s deputy environment minister, told PAP.

Coal-reliant Poland and other Central and Southeast European member states of the European Union will now have until 2021 to take advantage of depressed carbon emission credit prices.

The delay, agreed in Brussels on March 25, gives CEE countries extra time before higher prices of carbon emissions impact their competitiveness via growing electricity prices. CEE utilities will also have more time to upgrade ageing power generation infrastructure. In Poland alone, these upgrades are estimated to cost PLN30bn (€7.3bn) by 2020.

The reform in question, known as the Market Stability Reserve, is a mechanism to remove the current surplus of permits to emit greenhouse gases, such as CO2, SO2 or NO2, from the market in order to lift their price in the EU Emissions Trading System (EU ETS), the bloc’s marketplace for carbon emissions.

The EU ETS is a fundamental part of the bloc’s climate change policy but some member states, especially those more advanced in energy and climate policies, consider it a failure as low carbon prices – currently credits are trading at around €7 per tonne – do not spur anyone to lower CO2 output.

But the low price of carbon credits has been advantageous for Poland, alongside its CEE peers, because high prices could threaten their emissions-intensive economies.

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

Currently, fast convergers such as Slovakia, Estonia or Poland are at roughly 65% of the EU-12 average GDP per capita. Slow convergers like Hungary, Bulgaria and Romania are at mere 40-50%, according to 2014 data from Deutsche Bank.

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

The eastern member states are also concerned that moving permits off the market will deny them revenues from selling them to companies that need to watch their emissions.

But according to some analyses, this would be offset by the rise in emissions prices that will remain on the market.

“There is a misconception that the MSR will reduce revenues for member states,” Emil Dimantchev, senior carbon analyst at Thomson Reuters, wrote in an analysis in late February. “Market reform will actually bring more money to member states that they can inject back into their economies,” he also wrote.

But the CEE countries seem concerned by rising cost of energy or weakened competitiveness more, not least because of the need in CEE to upgrade its power generation infrastructure, much of which was commissioned decades ago and is past, or nearing, its ‘use by’ date.

Many CEE state-controlled power generation utilities are keen to avoid earmarking extra cash for expensive permits, which would hamper their sizable investment plans. That increases risks of downtime and power disruptions.

The decision to move the start of the MSR until 2021, the latest possible date recommended by the European Commission, goes against member states like Denmark, Germany or the UK, which were in favour of an early start in 2017 for MSR, in order to attract investment into low and zero emission energy sectors.