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Wires in WarsawSee our newest paper “Sharing the Burden – EU ETS Support to Central and Eastern Europe” for detailed policy solutions regarding low-carbon funds in the EU ETS revision.

To anybody that follows the post-Paris developments it’s clear that the debate about European climate ambition for 2030 is in deadlock. On 17 March, the European Heads of State met in Brussels, but the outcome of COP21 dropped off their agenda due to a strong opposition to increased 2030 climate ambition from lower-income member states.

Europe could easily raise its 2030 climate offer, but to do so requires greater support for modernising Central and Eastern European[1] energy systems. Ageing Soviet-era grids are powered by inefficient coal power stations. The scale of the transition needed in the CEE countries is even greater than in Western Europe and according to the Commission can require 84 billion euros of additional investment during 2021-2030.

The Polish government made it clear in their resolution that

“The Council of Ministers does not accept a situation in which the vision and mechanisms of the EU climate policy may violate the security of business, including lowering competitiveness of individual Member States. The Government also notes that the EU climate policy targets agreed in the Oct 2014 European Council Conclusions require from Poland a huge investment effort in modernisation of the Polish energy sector. At this point it should be stressed that Poland has achieved a reduction of greenhouse gas emissions at the level of approx. 30% and thus at a level much higher than 6 % adopted under the Kyoto Protocol.”

It’s not yet clear if the post-Paris process of updating the EU’s pledge requires unanimity in the Council. The views of an emerging blocking minority could be very important. It wouldn’t be the first time that Poland had vetoed higher climate ambition but today their arguments have changed, and become more focused on cost.

Two years ago we looked at Poland’s role in establishing the EU 2030 targets “Sharing the load – Poland’s coming of age on climate policy”. Back then, we showed that growth is not impeded by Poland’s climate responsibilities. Poland has actually achieved its Kyoto commitment by achieving 30% emission reductions. Now, the facts are that similar further reductions won’t be achieved again without a huge investment effort. This needs to be financially supported in order to protect Polish consumers.

Poland

Poland needs significant support for decarbonising its power sector. In 2014 Polish power emissions reached 154.45 million tonnes of CO2.  In our new briefing “Sharing the Burden – EU ETS Support to Central and Eastern Europe” we show how the EU ETS could financially support Poland in decarbonising their energy sector by drawing on the special provisions for CEE states agreed by the Oct 2014 European Council. These include the Modernisation Fund and the continuing use of Article 10c derogation allowances.

The Modernisation Fund and the Art. 10c derogation policy measures represent as much as one billion allowances, 223 million of which are a net transfer from non-CEE Member States auctions towards the Modernisation Fund[2]. Nevertheless, the actual value of these will depend on the average carbon price after 2020. The current average carbon price projections suggest € 13.65 per tonne for 2020[3]. This price won’t provide the finance on the scale needed. More worryingly, new analysis published by Barclays estimates that the carbon price will average just €5 across 2021-2030.[4]

So, counterintuitively, it is in the interest of lower-income CEE countries to support stronger climate ambition in the European climate and energy package. Every €1 increase in the carbon price could increase the value of the low-carbon funds by nearly €1 billion. In addition, every €1 increase in the carbon price will provide additional auction revenues of €1.7 billion to CEE treasuries after subtracting the potential revenues from 10c allocation. These can then be used to compensate for indirect costs incurred by the manufacturing industries.

Table. 1 The increased value of low-carbon funds with each €1 carbon price increase (2021-2030)

Table 1
Source: Sandbag calculations based on split of Phase 4 cap. *Change in the value of funds and treasuries’ income for every €1 increase in the carbon price. The “all other auctions sensitivity” does not include the potential revenue from auctioning the Art. 10c derogation entitlement and assumes no Market Stability Reserve adjustment during Phase 4.

An increased carbon price will have a minimal impact on industrial sectors covered by free allocation of allowances and carbon leakage protections until 2030. Our table below shows heavy industry will only need to buy an insignificant volume of allowances to cover its emissions even out to 2030, thanks to pre-existing free allocation.

Table. 2 Additional EUAs needed by the CEE heavy industry under carbon leakage rules (2021-2030)

Table 2
Source: EUTL database. Sandbag calculations using the current emissions growth scenario and year-on-year 1% downfall adjustment for the technology benchmark.

Funds flowing from the Modernisation Fund and Article 10c should be focused on financing long-term carbon reductions – which will, in turn, protect the CEE power sectors from the future impact of the declining carbon cap – an objective that has not been made clear in the current ETS Phase for the Art. 10c derogation.

If these funds are not used to modernise the energy sectors, then the increasing carbon price will begin to bite. It is essential that all funds are used for low-carbon investments.

To avoid the carbon price bite and to maximise the benefit derived from the low-carbon funds, recipient Member States should devise comprehensive decarbonisation strategies that could support European targets to cut emissions by 80-95% by 2050. The ETS Directive should continue the use of the 10c derogation national investment plans as the only measure fit for such long-term planning. Member States should be allowed to deliver the long-term net emissions reductions from their energy sectors through deployment of technologies best suited to their national energy strategies. Not all Member States are currently willing to incorporate high volumes of renewable capacity in their energy mix. A broad range of zero- and low-carbon technologies are needed, alongside renewables, and comparable incentives should be put in place.

For detailed policy solutions we advocate Central and Eastern European Member States should support during the EU ETS revision see our newest paper “Sharing the Burden – EU ETS Support to Central and Eastern Europe”.


[1] Member states with the GDP per capita below 60% of the Union’s average in 2013, namely Poland, Czech Republic, Romania, Hungary, Slovakia, Bulgaria, Croatia, Estonia, Lithuania, Latvia.

[2] The proposed split of the EU ETS cap for Phase 4. Modernisation Fund is made of the 2% share of the auctionable allowances before redistribution to member states’ auctions.

[3] BNEF, Commerzbank, Consus, Energy Aspects, GDF Suez Trading, HSE, MKonline, Nomisima Energia, Point Carbon, Societe Generale, Vertis, Virtuse. See the Carbon pulse poll for detail about their forecasts, http://carbon-pulse.com/15315/.

[4] Barclays analyst report, for details see Carbon Pulse, http://carbon-pulse.com/16673/.

Electrical wires in Warsaw, image by Kuba Bożanowski on Flickr, used under a creative commons licence.