Energia - Środowisko
Dodatek promocyjno-reklamowy do "RZECZPOSPOLITEJ".
13 września 2005 r.

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Interview with Zbigniew Bicki, Chairman of the Board, BOT Górnictwo i Energetyka

The implementation of CO₂ emissions trading system will have a significant impact on further development of the Polish economy, especially as coal is our primary fuel. Administrative allocation of emission allowances is a strong interference in business activity. Is such deep administrative interference in the economy necessary in your opinion?

The implementation of greenhouse gas emissions trading system introduces market elements into administrative actions which aim at ensuring that CO₂ emission reduction targets are met. It is worth noting that as such pro-ecological activity necessitates application of new technologies, fuels and appliances, which in turn translates into higher costs of commodity production and services. We are facing thus a principal problem - pro-ecological behaviour entails costs. Another problem is the need of quick results which requires application of administrative tools. Yet the latter, as we know, distort market freedom. Undoubtedly, these two factors will weigh strongly on the Polish economy for many years to come.

The problem of greenhouse gas emissions reduction has emerged because men have disturbed the ecological balance in nature which suffers now from various types of pollution. This is the main reason behind many negative phenomena such as global warming, the ozone hole, catastrophic draughts, storms etc. It is extremely costly to remove the consequences of these phenomena; we have now a fresh example of New Orleans. We should consider, therefore, reducing emissions of environmentally hazardous substances to the level to which nature can adjust; in other words we need to implement sustainable development. Currently one of the main worldwide issues is greenhouse gas emissions reduction, mainly of CO₂ and methane.

The United Nations Convention on Climate Change of 1992 constitutes a turning point in the approach to this problem on a global scale. The Convention has set the direction towards reducing the pace of emissions growth to the level at which nature cope on its own. It was undersigned by nearly all countries participating in the conference and entered into force in 1994. The Convention was declaratory and has lain foundations for future actions. It resulted later in the Kyoto Protocol which commits its signatory countries to meet specific emission reduction targets.

Under the Kyoto Protocol, the signatory states have committed themselves to meet emission targets set against the base year by 2012. For Poland the negotiated base year is 1988 and we are obliged to reduce greenhouse gas emissions by 6%. For other countries the base year is 1990 and the emissions reduction commitment has reached an average of 8%. Not all countries have become party to the Kyoto Protocol. Although this does not mean that they do not take steps to reduce hazardous substance emissions, they do this other than in an administrative manner. An example may be the United States where, as we know, administrative interference in the economy is a last resort.

How did Polish economy meet these obligations?

We have "overperformed" the Kyoto Protocol commitments, which means that we have already reduced emissions below the 2012 target level. Greenhouse gas emissions reduction in Poland is a result of structural changes in the economy on the one hand and pro-ecological steps taken by companies on the other. Electricity and heat production efficiency has grown, fuels are now used more rationally and coal is being substituted by more ecological fuels such as natural gas, for example. Significantly, the "old" EU member states are still lagging behind the Kyoto targets. What is more, there is little chance for them to achieve the required emission targets in 2012.

That is why the EU has decided to implement a mechanism which will help to achieve the Kyoto objectives in a faster and more cost effective manner. It has decided to use market-based mechanisms which introduce CO₂ allowance trading between companies within the EU.

What does emission trading consist in?

In 2003 the European Union adopted a directive on emissions trading which constitutes one of the implementation elements for the fulfilment of the Kyoto objectives.

Pursuant to the directive every member state is obliged to develop a national plan for allocating greenhouse gas emissions permits among economy sectors and individual companies. The emission trading system covers those sectors and companies which have a considerable share in emitting greenhouse gases into air. After the approval of the National Allocation Plan (NAP) by the European Commission, the companies under the system may join in international emissions trading. According to the EU regulations, every company covered by the allocation plan is to receive an allowance share necessary for it to carry out business activities. If it decides to reduce emissions, it can sell the allowance surplus on the market. The NAPs should also allow for a production growth margin so as not to prevent the company from further development. Previous pro-ecological activities of the company may be taken into account. Furthermore, the principles of allowance allocation must not discriminate against individual companies, groups of companies or economy branches. The European Commission has established two allocation periods: the first one covers the years 2005-2007 and the second one for 2008-2012.

Parallel to the implementation of the emission trading system, efforts are being made to reach the Kyoto targets on a global scale; the so-called joint implementation projects and clean development mechanisms are one of the means to achieve the Kyoto objectives. They allow for example to invest in projects which aim at reducing emissions in the countries where it is cheaper or more effective. For, what really counts is the global effect.

Initially the allocation of emission allowances was very favourable for our country. Then the European Commission decided to significantly reduce our allowance pool. What was the reason for that?

While preparing the National Allocation Plan, Poland used the 1988 levels as a basis for its calculations and assumed a linear decline in emissions. The thus calculated base quantity for companies under the system was 286 million tons/year on average in the first obligation phase. Today, as I have already mentioned, we are largely below the emissions target set for 2012. There is a considerable difference between the allocated quantities and the actual emissions. This has resulted in a significant permit surplus which could be traded on international markets. According to the estimates it could amount up to 50-60 million tonnes. Such allowance supply on the EU market could lead to their price decrease and, consequently, CO₂ emission reduction investments would turn out unprofitable. According to EU analysts, in order to stimulate pro-ecological investements, the allowance price should be at least about 20 euros per tonne of CO₂ emissions.

After the analysis of our NAP, the European Commission decided not to accept the total national volume of allowances for installations under the ETS. While determining the allowance pool, the Commission based on the actual greenhouse gas emissions in recent years and the forecasts made in our fairly cautious national plans for economic development. Our pro-ecological actions from the last 14 years have not been taken into account because, among other things, they were not assigned to individual companies. The new national emissions target for the companies under the system is much more stringent. We have gone down from 286 million tonnes to 239 million tonnes. The chart below illustrates the history and the forecasts of CO₂ emissions in Poland. It is worth paying attention to the next years; if Polish economy develops as fast the economy of Ireland or Spain, we will run out of allowances very soon.

The current allowance allocation may turn out insufficient. What are the reasons for allocation problems? What is the situation like in the energy sector?

After the European Commission had reduced the greenhouse gas emissions allowance pool for Poland, the Polish economy has found itself in a fairly difficult situation. Initially the NAP allowed for a big allowance surplus. There were practically no companies which would have to buy permits. The forecasted low allowance prices did not necessitate adoption of rational criteria for allocation among enterprises. After the lowering of the national limit, proportional allowance reduction among companies or application of simplified allocation methods would create a situation in which some companies enjoy an allowance surplus and other have to buy some more emission permits. Since last year, already five official versions of the plan have been created. Each of them assumed different criteria for allowance allocation among sectors and inside individual branches. Under the modified NAP, after the European Commission’s reduction, we have been left with merely 129.9 million tonnes as compared to the initial 143.3 million tonnes of CO₂. The most recent draft of the plan assumes only 126.7 million tones. The thus "saved" allowances were allocated to other sectors of the economy, such as cement or smelting industry which called for a bigger share in the allowance pool putting forward arguments of future growth.

The second problem concerns allowances allocated to individual power plants. The differences in the volume of emission permits allocated under various drafts of the NAP are vast and reach as much as 20-30%. Hence it is not possible to come to an agreement. However, in spite of this fact, the last NAP-6 draft has been already put under discussions as an ordinance of the council of ministers.

If emission allowance prices in a free market satisfy the European Commission, selling allowances may turn out to be more profitable than production. Do we face the threat of a speculative market?

Certainly some companies are licking their lips multiplying tonnes of allowances by Euro. There is a threat of the emergence of a speculative market where you earn without producing anything. This may have a negative impact on electricity prices. Companies which on the basis of the ratio of variable costs to market prices will not produce more, will, under administrative decision, get a bonus worth millions. At the same time, because of insufficient allocation companies which "live" from the energy they produce will face production reductions and development barriers.

If Polish companies sell their allowances in other European countries, it may turn out that the Polish economy will have to buy electricity abroad. Energy companies may be forced to cub production or buy some more permits. In any case this will lead to a sharp increase in electricity prices for end users. The average price of electricity in Poland is around 30 euro/MWh (excluding excise). If Polish companies count allowance purchase into their costs, the increase in electricity price may reach 15 euro/MWh. Such price increase has already occurred in some countries. Yet in these countries the dominating structure in the electricity sector is that of vertical integration, hence the price increase concerns only a small share of electricity subject to free trade. In Poland, however, where production and supplies are nearly completely separated, a price increase could affect all electricity. The Polish economy will not be able to withstand such a shock. That is why one of the basic criteria for allowance allocation should be positive influence on energy prices. It would be best for the Polish economic development to allocate allowances in a way that does not necessitate additional purchase of permits or, if anything, a purchase of only small quantities.

It takes a lot of time and effort to draw up the National Allocation Plan. Are such delays not harmful for the Polish economy and individual companies?

Of course companies interested in selling allowances would like the emissions trading system to be implemented a soon as possible. At the country level we have allowance surplus which could be converted into money. Delays in launching sales means costs of frozen assets but, as I have already said, improper allocation may create barriers in the entire economy. That is why the quality of the National Allocation Plan is more important than short deadlines for its implementation. But above all, the plan should be well prepared taking into consideration the interest of the country’s economy, its sectors and individual companies. In the electricity sector it is very important that the influence of CO₂ allowance allocation on costs and income does not create big disproportions among individual power plants.

Did BOT Group obtain sufficient amount of allowances?

On the basis of the last draft of the NAP, we estimate that in the first obligation period we will have to buy additional permits for about 1.5-2 million tonnes of CO₂ emissions or curb production. We will probably not do it this year but we will use the allowance pool for next years. The costs of additional allowances or moving production to more expensive power generators will cumulate in the last (2007) year, which will in turn translate into a significant increase in electricity prices on the Polish market.

Is there still any chance to negotiate a higher national allowance limit?

In my opinion it worth trying to obtain higher a national allowance limit by virtue of earlier pro-ecological investments. It will not be as high as in the first draft of the NAP but it will help to reach a compromise. One of the arguments may be that many companies, including i.a. power generators, have spent immense sums of money for modernization and have thus significantly reduced emissions, including CO₂. We should highlight actions undertaken by individual companies in the context of the allowance volumes allocated to them. This will be in line with the European Commission’s guidelines and will give a chance for another examination of our national limits. I think that there is still chance and that this could also have an influence on the quantity of allowances allocated for the next trading period.

In principle allowance allocation is based on forecasts for the national economic development. Maybe we should blame ourselves for obtaining a too restrictive allowance pool, since we were not able to assess the pace of economic growth in Poland in coming years?

While preparing forecasts for economic development and energy demand growth we base on assumptions which, although seem rational, are, in my mind, too pessimistic. We estimate, for example, that we will reach the GDP or the per capita electricity consumption level of Portugal or Greece only in 20-30 years. Such development plans do not seem too ambitious. We can certainly do better than that. We have to draw up scenarios with more optimistic periods and use them in negotiations with the European Commission.

For, if we assume a slow economic and, consequently, energy demand growth, the EU policymakers may say: "Why do you want additional allowances if you don’t need them? They will only do harm to the market". If our economy develops at a pace similar to Spain or Portugal we will face a huge barrier to economic growth created by high CO₂ allowance costs. This will inevitably lead to an increase in energy prices or fall in production.

We can obviously say that another solution could be nuclear energy development, greater gas usage or restructuring of the fuel base. We must remember, however, that Poland has a fuel monoculture whose change is very expensive and rather unrealistic, at least in the nearest future.

Environmental protection and sustainable development entails costs. We can agree to pay these costs provided that they are justified. We cannot accept, however, to bear additional expenses only because we have not ensured ourselves a sufficient amount of allowances and because we have been placed in an unfavourable position compared to other EU states. Spain or Portugal forecast further economic growth and a higher level of electricity demand than in Poland. This is reflected by electricity shortages which already occur in these countries. I think that we should draw on the experience of these countries when making forecasts for economic development and energy demand.

For the purpose of negotiations with the European Commission we should have scenarios for faster development and greater electricity demand growth. Will this happen? It is not certain but in this way we will avoid barriers to economic growth. Our policymakers should take this into account when planning allowance allocation for the next phase. If the same situation takes place in the second phase, even provided a moderate pace of electricity consumption growth, we will have to buy additional allowances from other countries. In BOT Group there are three efficient power generators: Bełchatów, Opole and Turów. Over the last 14 years these power plants have spent huge sums of money running into in billions Polish Zloty for pro-ecological investments and they have more than met sulphur dioxide emission targets. Already today in most blocks we meet the 2008 targets for sulphur dioxide, NO_x and dust emissions. So what if we are competitive and well prepared to operate in the market if the production level is regulated by carbon dioxide emissions?

What criteria should the government adopt when drawing up the National Allocation Plan?

Most of the difficulties in reaching a compromise between companies and the Ministry of Environment stem from insufficient allowance quantities, although we cannot blame the ministry for the lack of goodwill or involvement in trying to solve problems.

The criteria adopted by the government should be based on economic calculations. While striving for free market economy we have ceased making such calculations at the level of the national economy. There would have been no wrong in this if it was not necessary to make administrative decisions concerning carbon or maybe even sulphur dioxide emission targets. We are lacking economic scenarios for optimal electricity production scheduling which take into account environmental and technical restrictions. Such scenarios should provide a basis for administrative decisions. Significantly, energy companies develop such plans, sometimes even for the whole country. Unfortunately these plans cannot substitute official documents necessary to make administrative decisions. We are probably the only EU country which does not apply the lowest costs methodology when making administrative decisions concerning allocation of carbon dioxide allowance.

Looking at how the National Allocation Plan for the first phase is being prepared we are concerned about the NAP for the next phase. There are rumours that European Commission will change the current allocation methodology and will introduce allowance indexes per production unit. Such a methodology, despite its pro-market character and minimal administrative interference has a basic flaw - it does not take into account long adaptation periods. It would be unfavourable for Poland, mostly because of our fuel monoculture. That is why we are awaiting deeper involvement of the government in the negotiations with the European Commission and we declare our readiness to help in preparing necessary materials, also in searching for market solutions.

Let us take a look at the German economy which has become short of breath in recent years. Economic slowdown has necessitated, among other things, administrative approach to solving economic problems, including ecology. The German government has introduced an additional electricity purchase tax of 20 euros/MWh for individual consumers and about 5 euros for commercial consumers. Quite clearly, this is an expensive way of financing environmental protection, even for the German economy. It is better we do not adopt this methodology for in many areas competitive market can bring better results; emissions trading is one of them. It is estimated that in the USA thanks to market-based mechanisms emissions reduction costs have fallen even by 1/3. Although it is worth making use of these experiences when introducing CO₂ emissions trading system, we must remember that while combining administrative decisions with market we should not make mistakes which would result in market distortion already from the outset.

PJ

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