A Czech bid for almost €2 billion of free allowances under the EU’s Emissions Trading System (ETS) – equal to almost half Prague’s 2012 budget deficit – has drawn heavy fire from Brussels and European environmentalists, who say it will do little to combat CO2 emissions. 

The application for 107 million free allowances (worth €1.88 billion) was made under the little known ‘10c derogation’ which exempts 10 of the newer member states from the ETS’s full auctioning rules until 2019, if the resulting funds are used to modernise, diversify, and clean up electricity generation.

Without these, the allowances would simply constitute a market-distorting form of state aid. But this is exactly what Czech environmentalists claim would result from their government’s application for two-thirds of the 107 million allowances to go to the Czech energy monopoly ČEZ.

A report by the Brno-based Environmental Law Service (ELS) alleges that Prague applied for inflated sums to pay for earlier investment plans, mostly by ČEZ, 46% of which were earmarked for coal-fired power plants, and one of which would actually increase CO2 emissions.

In an e-mail to EurActiv, Marta Machková, a spokeswoman for the Czech Environment Ministry, countered that “the investments aim at lowering coal consumption with higher energy efficiency.”

“Projects have been assessed and recommended by independent energy auditors,” she said.

But she declined to identity the auditors, or respond to further questions about how such an investment in coal would aid energy diversification.

A number of discrepancies

An EU request to the Czech Republic for further information in December, which EurActiv has seen, said that the list of installations “appears incomplete” and noted “a number of discrepancies” in their total verified emissions.

One installation – CZ-075 – was “listed twice” for allocation allowances and “clear and substantiated evidence” was requested that all the proposed projects were initiated before the 31 December 2008 deadline.

Machková insisted that EU rules “enable support for these investments,” which environmentalists say date to 2006. “However, they are subject to further negotiations with the Commission,” she added.

The EU’s missive also demanded justification for the currency exchange rate used to convert the Czech koruna into euros, and explanation of how proposed investments would modernise the country’s electricity generation.  

Undue distortions

“On the basis of the information provided, the Commission can at this stage not exclude that the National Plan presented by the Czech Republic gives rise to undue distortions of competition,” the Brussels missive stated.

An EU spokeswoman told EurActiv that Prague had now responded to the request but declined to comment further, adding that “you can expect a decision by the European Commission in July”.

One particularly strong claim in the ELS report is that the cost efficiency ratio of proposed projects varied between €12 per tonne of carbon and €232,000 a tonne – substantially higher than the €9 a tonne market rate.

Machková did not dispute the sums but said that “higher greening costs are often linked with complementary investments”.

Outstanding question

One other outstanding question relates to an official market analysis in Annex III of the Czech application, which environmentalists say lists ČEZData, a subsidiary of ČEZ, as its author.

The Czech environment ministry said that ČEZData’s documents were analysed and processed before submission, but in a sign of the dispute’s increasing bitterness, environmentalists were not assuaged.

“The application was not prepared in line with the requirements set by the legislation, and contains a large number of investments that are not eligible and will contribute to future Czech dependency on coal,” said Jan Šrytr, a lawyer for ELS.

“A review and rejection of the Czech application and the accompanying list of investments is urgently needed,” he said.