Carbon plan threat to Poland's energy prices

By Adam Easton in Warsaw and Fiona Harvey in London
Published: September 1 2008 03:00

Poland faces crippling energy price rises which will threaten growth and employment unless the European Union rethinks its carbon trading system, officials in Warsaw are warning.
In January the Commission put forward a plan to cut greenhouse gas emissions by 20 per cent, improve energy efficiency by 20 per cent and produce 20 per cent of the energy used by the 27-member bloc from renewable sources by 2020.
One of the tools to achieve emissions cuts is the EU Emissions Trading Scheme (ETS), under which limits are placed on the amount of carbon dioxide certain heavy industries may emit.
At present power companies receive their allowances to emit CO2 for free. But a new directive proposes that from 2013 power utilities will be forced to buy all their carbon permits in open pan-European auctions.
The directive is due to be debated in the European Parliament in September and poorer new EU member states with energy-intensive and coal-dependent economies are worried that the scheme will hurt their expanding economies.
The European Commission says the package must be passed to ensure fair treatment across the EU.
Poland has been one of the most vocal critics. It produces 92.5 per cent of its electricity from coal-fired power plants. For every megawatt hour of electricity produced in Poland, 0.94 tonnes of CO2 are emitted into the atmosphere. In Sweden, by contrast, where hydroelectricity and other renewables make up a large proportion of power generation, just 0.02 tonnes of CO2 are emitted per mwh.
The European Commission estimates that auctioning permits will raise electricity prices by 22 per cent on average. Krzysztof Zmijewski, an adviser to the Polish government on energy and the former head of the Polish power grid system, said Poland would end up paying much more than countries like Sweden.
"The first result, which is very easy to calculate, will be a dramatic rise in electricity prices of between 100-300 per cent. That's because we are based on coal and we will have to [buy more] CO2 allowances than any other country," he said.
But while the Commission acknowledged that Polish power prices would rise, officials said it would stand firm in support of full auctioning of permits to the electricity generation sector, as the ETS was only a minor factor in raising prices, and safeguards had been built in to help cushion the effects.
"Our research shows that only 15 per cent of any electricity price rise in Poland would be owing to the ETS," said Barbara Helfferich, spokeswoman for Stavros Dimas, the environment commissioner. The price of coal was a bigger factor.
She added this estimate was based on oil at $60 a barrel: higher oil prices would mean even less of the rise was owing to the ETS.
Poland will also receive €1bn ($1.48bn, £800m) a year from the proceeds of the permit auctions in richer member states, and the Polish government will receive an estimated €3bn a year in revenue from auctioning permits. This money could be used to cushion the effect of higher prices to consumers, if the government so decides.
The Commission said electricity companies across Europe had already benefited from passing on to consumers the theoretical cost of buying permits, even though they received the permits for free from 2005-08, and only a small percentage will be auctioned from 2008-12. In theory, this should mean the price of buying permits has already been factored into electricity prices, and future rises owing to the cost of permits should be muted.
The Commission said auctioning permits to the electricity sector from 2013 was necessary to prevent generators from continuing to benefit in this way. Electricity generation must, by its nature, be carried out close to the point of use, so generators are more insulated from international competition than other industries.
Jerzy Buzek, a former Polish prime minister and MEP who sits on the European Parliament's energy committee, said a fairer system would be to group states with similar energy mixes together, so carbondependent countries such as Poland, Estonia, Bulgaria and Greece could phase in the auctioning system over a number of years.
Mr Zmijewski also warned rising energy costs could force energy-intensive industries such as steel and non-ferrous metals, glass and cement plants, to relocate outside the EU to less strict environmental regulations.
"As a result of this price rise we will have so-called 'carbon leakage', which is in fact industrial activity leakage, mostly outside of the European Union area. For Poland it could mean the loss of 500,000 jobs. Such a big rise in unemployment could result in a new wave of emigration to countries in Western Europe," he said.
Copyright The Financial Times Limited 2008