The European Commission has moved swiftly to deny a Polish data analysis contending that plans to suspend - or ‘backload’ – 900 million carbon allowances from auction on the Emissions Trading System (ETS) will blow a hole in the revenues of new EU member states.
With a turnover of some €90 billion in 2010, the EU's Emissions Trading System is the world's largest carbon market. It aims to force companies to invest in low-carbon technologies by setting a CO2 cap and then allocating or selling firms allowances to pollute. The most efficient companies can then sell unused allowances or bank them.
The ETS’s ‘10c derogation’ allows newer EU member states – mostly from the former eastern bloc – to claim exemptions from power plants which were planned and whose investment process was ‘physically initiated’ before the ETS came into effect.
According to the Polish document, obtained by EurActiv, Warsaw stands to lose over a billion euros and 16% of its allowance revenues, under the proposed backload plan, put forward by Brussels last month to shore up Europe's battered carbon market.
Hungary would forego €189 million and almost a quarter of its revenues, while the Czech Republic would lose €375 million and 13.6% of its revenues, according to the analysis by Poland, which opposes the EU plan.
Warsaw says that the numbers are an aggregate of figures from Annex 6 of the impact assessment accompanying the European Commission's carbon market reform proposal.
The analysis has been sent to all new EU member states - mostly from eastern Europe but also including Cyprus - in advance of an EU environment ministers council on 17 December.
But the Commission's reaction was dismissive.
“I don't know where their numbers come from,” Isaac Valero-Ladrón, spokesman for Climate Commissioner Connie Hedegaard, told EurActiv in an emailed statement. “Backloading is expected to deliver positive fiscal impacts for Member States in times of austerity.”
A Commission ‘Fiscal impacts of backloading’ analysis, seen by EurActiv and sent to all 27 EU states last week, projects an increase in the carbon price from €10 in 2013 to €12 in 2015 as a result of backloading – compared to a steady €5 price without the measure.
The higher the carbon price goes, the higher the incentive for industries to invest in less polluting technologies, which was Europe's ultimate objective when it launched its carbon market to meet its obligations under the Kyoto Protocol on climate change.
Overall, the Commission estimates that between 2013 and 2015 member states auctioning revenues would increase by 59% with backloading.
No Polish sources approached by EurActiv would go on the record to contest this.
But off the record, officials insisted that the ‘10c derogation’ that Poland and other mostly East European states are pursuing to reserve free allocation of carbon allowances for their power sector would now end up draining their pool of auctionable credits.
“We would like to bring to the Council’s attention the fact that backloading might not actually be beneficial to countries with 10c arrangements,” one Polish government source told EurActiv.
But the country still plans to allocate over 404 million free allowances to its mostly coal-based power sector. The rest of the new EU member states are together allocating 267 million 10c allowances to their power plants.
Commission sources say that while revenues for Bulgaria, the Czech Republic, Estonia, Hungary, Lithuania and Romania would still increase, albeit more slowly than without backloading, Poland would see a slight fall.
Carbon allowance prices are currently languishing at around €6 a tonne, way below the levels needed to encourage low carbon investment, or propel the EU towards its decarbonisation target for 2050.
Warsaw argues that this does not matter as the EU should still meet its 2020 target for a 20% cut in emissions on 1990 levels, even if carbon prices fall to near zero. However, an EU consensus rejects this as obstructive, environmentally crass, and economically naïve.
On 9 December, Hans ten Berge, secretary-general of Eurelectric, Europe’s electricity industry association, said the electricity market was currently “uninvestable” because of market fragmentation and a poorly functioning ETS.
"I'm not green,” he continued, “I'm just rational. I'm thinking that we have got a serious problem with CO2 in the world. I want to make as much money as possible," he told Reuters.
"The carbon price should rise over time from the current level to a magnitude around €100," ten Berge added. The former UN secretary-general Yvo de Boer last week told EurActiv that a carbon price of €150 a tonne would be needed to avoid runaway global warming.
The idea behind backloading is to modestly increase that price on pollution by creating a temporary market scarcity - which the Commission retains the option of making permanent - thus providing enough uncertainty about future demand to boost prices.
“If there is a consensus, or a quasi-consensus that we should go fast, then we have a solution, which is the permanent cancellation of allowances,” the EU’s chief climate civil servant Jos Delbeke said on 16 November. “That is presented as something that still could be done say in the coming 20-24 months.”
Sources in Warsaw have confirmed that, despite compiling figures which assume a carbon price collapse after 2015 and no permanent cancellation – or set-aside - of allowances, the Polish government views the latter measure as an inevitable follow-through.
“The whole idea of backloading is just an ‘introduction,’” one source said.
The data analysis by Kobize, the Polish government’s National Centre for Emissions Management, was conducted on the assumption that backloading would be “no good” for the country’s economy, other sources in Warsaw confirmed.
“The intent was to calculate results and the result was that it would hurt Poland,” one official said, tongue-in-cheek.
Environmentalists retort that only one market projection for 900 million backloads in the EU annex that Poland says it based its figures to 2020 on, actually goes through to 2020 - and that only showed a slight price decline.
“Poland is desperately trying to create a split between East and West, but after misusing its self-proclaimed role as defender of the interests of Central and Eastern European member states already quite a few times, its credibility on climate policies with other EU governments is decreasing,” Greenpeace spokesman Joris den Blanken told EurActiv.
"The proportionate impact assessment has covered this [backloading impact] aspect," Isaac Valero-Ladron, the spokesman for the EU's climate commissioner, Connie Hedegaard told EurActiv. "Fiscal impacts is one element considered by Member States in forming positions on backloading. In order to support Member States, the Commission has circulated a set of figures on possible fiscal impacts arising from backloading."
Remi Gruet, an expert at the European Wind Energy Agency agreed. "As shown by the EC, backloading should increase auctioning revenues for almost all member states," he told EurActiv in a statement. "Poland is seeing a small decrease as a result of its decision to give free EUAs to its power sector instead of auctioning them. You cannot have the cake and eat it too!"
But a Polish official with knowledge of the Kobize data analysis insisted that "all the numbers [in it] are strictly from the EC’s papers. [But] It depends what kind of numbers the EU is speaking of, as it introduced one paper with the backloading impact assessment and a second set of numbers in the fiscal impacts document for different member states. They introduced different price scenarios and we don't know from which financial institutions prognoses they assumed this. They're totally different numbers from the previous documents of two weeks before."
"Analysis by the Germany-based Öko-Institut shows that postponing emission allowance auctions results in higher revenues over the 2013-2020 period for all EU governments, including the governments in Central and Eastern Europe that exempted their power sector from having to buy emission allowances in the next years,” said Joris den Blanken, EU climate policy director for the Greenpeace European Unit.
- 13 Dec.: Climate Change Committee meeting
- 17 Dec.: European Parliament environment committee to outline draft report
- 1 Jan. 2013: Third phase of EU ETS trading scheduled to begin, and continue until 2020
- 19 Feb. 2013: European Parliament environment committee scheduled to vote on a crucial one line amendment authorising carbon market action by the European Commission
- March 2013: Potential plenary vote in European Parliament on European Commission proposal