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

Polish glass industry in the European CO₂ emissions trading system

Statement of Tomasz Chruszczow, Director of "Polish Glass" Employers' Union

Since 1 January 2005 nearly a thousand Polish companies have to comply with the obligations imposed by directive 2003/87/EC on emissions trading. Among them there are 40 glass manufacturers. Over 200 smallest brick manufacturers have been excluded from the system but they will eventually have to meet the new legal requirements in 2008. "Polish Glass" Employers' Union whose main goal is to represent the interests of the glass industry at the economic, social and political level, for nearly two years has been actively participating in the implementation of CO₂ emissions trading system in Poland.

The directive as well as national regulations which implement its provisions are designed to allow the European Community to achieve reduction targets set out in the Kyoto Protocol. The Kyoto Protocol was adopted in 1997 and entered into force on 16 February 2005 after it had been ratified by Russia. It established emission limits and obliged industrialized countries (listed in Annexe B) to reduce greenhouse gas emissions in the years 2008-2012. The Protocol, together with its instruments (Joint Implementation, Clean Development Mechanism and Emissions Trading), gave new perspective on the problem of climate change. Governments, entrepreneurs and installation operators have become participants in the global programme and are jointly responsible for its success or failure. Poland committed itself to reduce CO₂ emissions by 6% compared to 1988 levels.

Before the Kyoto Protocol entered into force, the European Union had committed itself to an even greater reduction of emissions. This political decision has become the basis for the creation and adoption of the above mentioned directive. Under the directive all member states had to simultaneously introduce from 1 January 2005 a unified system of emissions trading. Until that date they were obliged to draw up National Allocation Plans and to obtain the EU's approval for its implementation. The directive covered all EU countries, including ten new member states with Poland, without any transition periods. The Kyoto commitments concern total CO₂ emissions. About 12 thousand installations under the system in all 25 EU member states are responsible for about 45% of emissions produced. The rest comes from other industries and from dispersed sources - transport, domestic heating systems and municipal services, small industrial installations, agriculture.

The idea of emissions trading system as a means to achieve environmental goals by market-based methods has been known for many years. It was first adopted in America which sought to cut sulphur dioxide emissions in a way which would both facilitate business activity and avoid workforce reductions. Emissions trading fulfilled this condition. Companies which were able to reduce emissions at lower costs exceeded their own needs and could sell the emission surplus on the market thereby recovering part of the outlays. On the other hand, installations where emissions reduction would be very expensive or impossible at all could buy necessary allowances at a price lower than modernization costs. What is important, the was no reduction in workforce.

In the emissions trading system environmental results are achieved where reductions are economically justified. Both sides benefit - those who thanks to investments can effectively reduce their emissions below the installation needs and those who acquire surplus emission credits at lower costs. In such a system the level of total emissions falls at passably low economic and social costs.

This is how it is to be also in the European Union. Emissions trading is supposed to reduce emissions of greenhouse gases into the atmosphere and thus help to achieve a global environmental goal - i.e. reduction of the temperature rise caused by excessive greenhouse gas emissions from industry, transport, agriculture.

The system, together with its market-based mechanisms, constitutes a very innovative approach to the problem of emissions reduction. Instead of putting restrictions on individual entrepreneurs, as it has been happening so far, they were given more freedom in managing tradable emission allowances. Such an allowance can be sold, pledged, kept or used for the annual emissions balancing. It can also be used as a transaction guarantee etc. The only requirement for the installation operator is to hold appropriate quantity of allowances necessary to cover his own emission needs at the time of the annual emissions reporting. A negative allowance-emissions balance would mean a penalty of 4 euros in the years 2005-2007 or 100 euros from 2008 for each missing permit to emit 1 tonne of CO₂. The operator could be also obliged to buy missing allowances on the free market. At the current market price of 24-25 euros, emission of CO₂ uncovered by allowances would mean an expense of 65 euros for each missing allowance. After 2008 this price will be at least twice as high and will reach 130 euros and more.

In Poland, it is basically not necessary yet to introduce the system of CO₂ emission reductions. Our country has more than met the Kyoto Protocol commitments. We have already achieved a 25% reduction in relation to the emission limits set for 2008-2012. We are thus in a completely different situation than the "old" EU member states. Poland has significantly exceeded the Kyoto targets. The government holds a considerable surplus of "free" emission permits. However, Polish companies did not notice this "wealth".

National Allocation Plans which were drawn up in all EU member states had to be then approved by the European Commission. The main aim of this procedure was to avoid excess allowances and thus a distortion of competition on the common market. As a result, the Commission questioned the allowance pool of over 90 million tonnes of CO₂ emissions annually. Half of that volume constitutes the reduction of the Polish NAP.

Our Plan envisaged the possibility of CO₂ emissions increase due to, among other things, the assumption of a stable GDP growth of at least 4% in 2005-2007. The experience of the year 2005 (3.3%) and the forecasts for the near future (including budget projections which assume a 4.3% growth in 2006 and 4.6% in 2007), show that this is feasible. The draft plan let the Polish economy take a breath. It allowed for allocation reserves in the energy sector and gave room for development in individual industrial processing sectors.

It seems, however, that the successive decisions made by the European Commission have led to the strengthening of institutions proper to capital markets against the background of environmental protection issues. A lot is being said and written about the emissions allowance market. It is being calculated how many hundred millions of euro Polish companies will easily earn. The March decision of the European Commission to reduce significantly the Polish NAP was justified mostly by market well-being.

It could seem that the emissions trading system is an ideal tool for companies operating on the free market. This would be the case if it wasn't for major flaws which need to be eliminated from the directive - this in turn means at least two years of tedious work in the European Commission, the Council and the European Parliament.

One of the major flaws is that the system is extremely complicated on the technical, legal-tax and procedural level. It is also ineffective. The system treats a huge power generator which emits several million tonnes of CO₂ on a par with a small brickworks emitting a few tonnes of CO₂ annually. The market-based mechanism was supposed to be effective but what kind of effectiveness it is if over 80% of system participants are responsible for a dozen or so percent of the total emissions?

This situation occurs in all EU member states except for Poland. A preventive measure was supposed to be the possibility to exclude smaller installations from the system and thus exempt them from costly monitoring, reporting and verification procedures. It can be applied, however, only in the first trading period covering the years 2005-2007. From 1 January 2008, the Polish system will include over 200 brickworks and small glassworks emitting in total about 340 thousand tonnes of CO₂ annually. In this way nearly 20% of installations under the system will account for 1.5 per mille of domestic emissions!

Another problem is also the lack of harmonisation between member states. There is no common understanding of many terms which are very important for the competitiveness of both companies and national economies. The term "installation", for example, was understood differently across countries. The base emission - against which allowances are allocated - was calculated in different ways. Most countries adopted the so-called historical emissions method but in some of them allowances were allocated based on a benchmarking principle with the assumption of the CO₂ emission per production unit rate (energy volumes, product volumes).

The extremely tedious process of developing national allocation plans is drawing to an end in all EU countries. Work is underway to create emission registers and implement legal, technical and organisational mechanisms necessary to monitor, report and verify emissions.

All installations under the allowance plan have been participating in the European emissions trading system since 1 January 2005. In Poland although they do not yet hold permits or allowances they are already subject to all requirements, especially the emission monitoring requirement. All European, hence also Polish, companies will be rigorously scrutinised and no delays in the implementation of formal procedures will be accounted for by the lack of required procedures and documents in individual companies. Each installation will have its annual report on CO₂ emissions verified, of course at the expense of its operator. If the verifier comes to the conclusion that the documented emission volumes are not sufficiently accurate, he may reject the report and calculate higher emission volumes, in which case the operator will have to face a penalty.

The emissions monitoring requirements are set out in European Commission Decision No. 156 of 2004. The Polish Ministry of the Environment has already published on its website a draft regulation on its implementation. The government does not, however, have much saying in this matter because all provisions of the Decision must be implemented into the Polish legislation. The Decision is very demanding; it would be hard to find a document with more detailed, difficult, or sometimes even impossible, and costly requirements. In particular the verification principles are criticised by entrepreneurs throughout Europe. It turns out that what is enough to meet tax, product safety or product quality requirements is not enough in this case. Everything must be certified and controlled, all this at the companies' expense. Environmental protection has turned out to be merely a pretext for constructing a very expensive, complicated and, what is worst, bureaucratic system with severe penalties.

Regardless of when the Polish regulation of the Minister of the Environment will be adopted in this matter, the industry must implement adequate emissions monitoring systems as soon as possible, in accordance with the above mentioned EC Decision No. 156/2004. The verifier will no doubt visit every operator covered under the NAP, obviously at the expense of the operator.

However, a reliable monitoring system of CO₂ emissions does not only mean costs. It will help to verify companies' forecasts submitted at the time the NAP was being developed. It will allow to check whether we have properly inventoried all emissions sources, which is very important if we think about the draconian penalties. Proper monitoring will also supply us with necessary information which could be useful in negotiating the next National Allocation Plan for 2008-2012 to be submitted to the European Commission by 30 June 2006 - that is in less then a year. We still have not appointed a General Administrator and the experiences connected with allocation plans (not only in Poland) show that a year may be not enough.

We should already start working on the new allocation plan and the necessary system modifications, at least those which do not require amending the directive. Let us take a look at some of the problems which, in our opinion, need to be solved urgently.

The main feature of glass industry is that it is one of the so-called energy intensive industries. There are two sources of CO₂ emissions in glass manufacturing. The first one is fuel combustion -in Poland only natural gas. The second one is conversion of the mix of sand and necessary supplements into a form of glass. Thus, we are talking here of fossil fuel emissions and process emissions.

From our point of view, the first major problem is how the allowance allocation process will take into account the fact that glass production leads to process emissions, which represent 35 to 50% of the total CO₂ emissions. These kind of emissions cannot be avoided for most types of glass produced. Only in the production of packaging, thanks to recycling, some raw materials can be substituted by cullet, whose smelting does not cause emissions. However, there is not enough of cullet and the solution does not lie with the industry. Until efficient systems of selective collection and recycling of used glass packaging is created, there can be no suggestion of a greater share of cullet in the total volume of raw materials. Nonetheless this share will certainly not be as large as in Germany or Holland. Although Poland is obliged to achieve the 2008 recycling levels of the most wealthy EU members states by 2014, this will still be an extremely ambitious task if we consider the time and money these countries had to spend to develop efficient recycling systems and to educate their nationals.

The problem of process emissions does not concern solely the glass industry. This type of emissions occurs also in the process of ceramics kilning - clay contains carbonates. It is also connected with the production of cement and calcium.

Reduction of fossil fuel emissions is not an easy task either. The glass industry substituted high-emission fuels (generator gas from coal or mazout) with the environmentally friendly natural gas a long time ago. The next overhauls of metallurgical furnaces include replacement of burners with more modern and efficient ones. The problem is that once a metallurgical furnace is fired up, it is remains in operation for 10-12 years and during this time no changes can be made. What is more, the natural processes of wearing-out of fireproof materials result in efficiency loss of around 1-1.2% annually. This requires combustion of 1-1.2% more gas. Studies on this problem were carried out by the Dutch TNO¹⁾ institute. They proved also that we should not compare furnaces of different sizes. It is easy to guess why - a bigger furnace means better energy parameters and lower fossil fuel emissions. However, we need furnaces in different sizes. The biggest ones are used for the production of flat glass and mass production of packaging. The biggest glass manufacturers produce several millions of bottles and jars a day. There are, however, products and companies which need significantly smaller volumes of packaging and their demand is covered by smaller glassworks. The same applies to artistic glass, crystals, glassware, lighting glass or laboratory glassware which cannot be substituted by anything. These types of glass are manufactured in small furnaces. The modern market demands variety and glass industry responds to these needs.

Due to process emissions representing on average 35-50% of the total emissions from installations, the reduction of total emissions by 10% means in fact a reduction of fossil fuel emissions by 15 to 20%. In other already mentioned industries (especially calcium industry) this ratio is even more unfavourable.

We are very happy to say that the these arguments were met with understanding by the Ministry of the Environment and that appropriate corrections to the NAP were made. Thanks these corrections the glass industry can operate normally in the years 2005-2007. It seems, however, that this problem should be solved at the EU level, especially as the mineralogical industry, which comprises also glass industry, has been excluded from the directive on excise duties on energy carriers.

Emissions from glass manufacturing can be called an environmental cost. However, glass is a source of environmental benefits too. This is especially evident in the case of glass packaging or flat glass. For example, cullet from waste packaging is used in the production of bottles and jars, which not only leads to CO₂ emissions reduction but also helps to solve the problem of large amounts of waste ending up in landfill sites. Reaching a 60% level of glass packaging recycling in Poland will help reduce by 2014 the amount of waste in landfill sites by at least 700-800 thousand tonnes. On the other hand, flat glass is used in the production of modern windows of very good thermal isolation.

Another problem to consider, therefore, is how to include into the allowance allocation process the balance of environmental profits and losses connected with greenhouse gas emissions.

The results of the studies carried out for the European Association of Flat Glass Manufacturers - GEPVP²⁾ published in March 2005, show that we could achieve significant results if modern windows with low emission double glazing were installed throughout Europe. The production of such windows causes emissions of about 25 kg of CO₂ per square meter of the window surface. Substituting single glazed windows, which are popular in Western Europe, with this type of windows would help reduce emissions from domestic heating by about 91 kg of CO₂ per each square meter of the window surface. The incurred environmental cost would be balanced after tree and a half months. In the case of traditional double glazed windows it takes about 11 more months. Furthermore, the average longevity of a new window is 30 years. Thus, the positive environmental impact of the new low emission glass is evident.

It is estimated that in the European Union domestic heating systems are responsible for about 765 million tonnes of carbon dioxide emissions annually. Modern windows could reduce these emissions by about 140 million tonnes a year, which is over 1.5 times more than reduction targets imposed on the member states by the European Commission. The whole European construction glass industry emits about 4.6 million tonnes of CO₂. But we believe that it is worth bearing these environmental costs (i.e. the emission of the 4.6 million tonnes of CO₂) to achieve immense energy savings and emission reductions. This would translate also into huge financial savings of households, lower costs of office heating etc. However, we also of the opinion that the industry which helps to achieve these savings should be able to gain these financial benefits.

The costs of energy in the glass industry are increasing (gas, electricity). The industry, which is subject to emission targets just like usual combustion installations, will have to bear additional costs of allowances by relocating production outside the European Union. A market-based solution would be to include municipal services or even households into the emissions trading system. This would be of course nonsensical economically wise and would simply lack common sense. However, it is worth noting that national allocation plans include a pool of allowances to cover emissions from sectors which are not included in the trading system. These allowances remain at the government's disposal and are used to prove that the Kyoto targets are being met.

In our opinion there are no rational obstacles to allocating part of the allowance pool to the industry which can reduce emissions and thus help to meet the Kyoto targets. Possible formal obstacles to this should become an issue for Poland in the Council on Environment.

Environmental protection has long ago ceased to be an issue for ecologists only, it is not just a matter of nature protection. It is above all a vital economic issue which concerns everyone. Emissions trading system covers the energy industry and selected branches of the processing industry. Achieving the 2013-2017 targets will require a different approach to greenhouse gas emission reduction. It is nearly certain that the system will include other gases - methane, nitrous oxide. We can thus expect that the obligations imposed on the industry will also apply to local governments responsible for managing landfill sites which are the source of methane emissions. The same will happen in agriculture. It will be necessary to create mechanisms to effectively implement projects aiming at reduction of household emissions, otherwise the 15-30% reduction of CO₂ emissions after 2013 will be impossible.

Emissions trading is the first new approach to environmental protection: instead of restrictions we have emission allowances, instead of administrative inspections - a market-based mechanism, instead of a reduction target for a single installation - a reduction target for the whole country or a group of countries (European Union).

Emissions trading relies on mechanisms known from capital markets. Allowance trading - option trading etc. Right decisions on the capital market may give greater income than the operational activity. A similar thing may happen on the allowance market. If you bought allowances last year at a price of 10 euro per tonne, you could sell them three months ago at nearly 30 euros and then buy them the next month at 19 euros. The current price is about 24-25 euros for an allowance to emit 1 tonne of CO₂. This is just the beginning.

This example shows clearly that the policy of allowance management is not a task which can be assigned to employees responsible for environmental protection. Poor management of allowances may destroy the company and, on the contrary, sound management may help to strengthen its competitive position.

A lot of attention is paid by the media and politicians to the issue of privatisation. It is being checked - and rightly so - whether the potential new owner is not going jeopardize the interest of the company and its employees. In case of industries under the emissions trading scheme (energy industry, oil refineries, metallurgy, coking plants, heating industry) we can speak of national strategic importance of some of the companies. The sale of their shares is supervised by the National Securities Commission, administrative bodies and sometimes even the Sejm. And yet it is not necessary to use capital instruments to take control over a company or even to bring it to bankruptcy. A few missed transactions or accumulation of allowances by a bank or a broker acting for the competition is enough to precipitate the company's disaster.

The European allowance market is not a liquid market; there is shortage of available allowances. According to PriceWaterHouseCoopers³⁾ estimates, in the first trading period at the usual operation of the economy, the European market will be a short of allowances for around 200 million tonnes of CO₂. In this situation, accumulation of emissions credits by the competition may lead to bankruptcy caused by the inability to pay the penalties. A complicated take-over procedure, layoff severances etc. would not be necessary. Let us hope that this scenario remains fiction but we should keep it in mind while managing emissions allowances.

From the point of view of Polish entrepreneurs, the key issue is to meet the obligations of the successive trading periods. Starting from 2008 it will be possible to use the flexible Kyoto mechanisms and we should already start preparing ourselves for that. The Polish surplus of emission credits may help to finance modernization of the entire economy which is necessary if we don't want to be left behind.

¹⁾ "Energy efficiency benchmarking of glass furnaces", Ruud G. C. Beerkens et al, TNO-TPD Eindhoven, Glass Sci. Technol. 77(2004) No 2

²⁾ "Energy and environmental benefits from advanced double glazing in EU buildings", GEPVP, Brussels 2005

³⁾ "Responding to a Changing Environment" PWC, 2005 n

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