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The Warsaw Voice » Business » December 1, 2014
Central Europe Energy Partners
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EU Climate Policy and CO2 Targets: A Done Deal?
December 1, 2014   
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Part 2

by Bogdan Janicki

(The first part of this article appeared in the November issue of the Voice).

Combating emissions from coal

The use of the term “decarbonization” instead of “emission” leads to a major conceptual confusion. Decarbonization is rightly associated with the molecular formula, CO2, where carbon is one of its components. Unfortunately, in most cases, EU officials and MEPs associate decarbonization with combating coal. Instead, the aim is to combat CO2 emissions, which are not only generated by coal, but also all organic components including fuels, natural gas, organic waste, and organic products. If we are to fight to reduce CO2 emissions, we cannot only simply target coal. This differentiation should be absorbed at all levels within the EU. We should be combating CO2 emissions, not coal.

CO2 emissions in the EU

Emission levels in individual EU countries are highly diversified, and EU directives should not adopt a single, standard stance for all the countries. Cutting emissions by 20 percent in Luxembourg, which is the biggest producer of CO2 per capita, at 21.75 tons, and at the same time the richest EU member state, with a per capita GDP of 83,400 euros, is a completely different story from doing the same in Romania, where emissions are the lowest, at 3.91 tons per capita, and the GDP per capita is a tenth of Luxembourg’s, at 7,100 euros. Taking into consideration these disproportions, Romania’s industry should be granted the chance of unconstrained development, and the country should be exempted from any EU commitments, and supported by EU funds to bolster its industrial development if it complies with the best available technology (BAT) approved by the sector. The only constraints should result from regulations set by the Romanian government, which knows how to protect the country’s environment and foster its industrial potential to “catch up” with the EU within the framework of cohesion policy.

I would like to take this opportunity to debunk a myth to the effect that Poland “pollutes” the EU as a heavy coal consumer. This myth is harmful to Poland because in reality the use of coal in the country is decreasing and Poland produced only 8.42 tons of CO2 per capita in 2012. To compare, Luxembourg emitted 21.75 tons that same year, Estonia produced 15.75, the Czech Republic 10.81, Finland 9.88, the Netherlands 9.82, Germany 9.75, and Belgium 9.85. Seven EU member states exceeded Poland in CO2 production. Moreover, Denmark, which is generally considered to be an environmentally-friendly EU country, produces 6.97 tons of CO2 per capita and 48 percent of its electricity is generated from coal.

If we look at the reduction in emissions in the period from 1990 to 2012, countries such as Austria, Slovenia, Ireland, Greece, Portugal and Spain not only failed to cut their emissions, but in fact increased them. This shows that we should take diversity into consideration when drafting EU directives.

Objectives by 2030

Decreasing greenhouse gas emissions in the EU by 40 percent compared with 1990 is a very incoherent goal. Some countries already complied with this objective a long time ago, while others are still aiming to achieve it, and the road leading to it is very costly. If we assume that lowering CO2 emissions costs about $600 per ton, then, once we multiply this by millions of tons, the total figure is exorbitant. Individual countries should be able to decide what they can or cannot afford and the EU should provide financial support for solutions that lead to a reduction of emissions with the use of BAT within each industry separately.

The emissions trading system (ETS) is a very controversial solution that in practice has not been implemented anywhere in the world except the EU. The division of emissions into a portion covered by the ETS system and the remainder not covered by this system is somewhat artificial. To achieve climate goals, it is irrelevant whether the reduction in emissions is made in transport (see Obama’s plan in this respect) or by establishing an efficient waste treatment system in cities, or in the cement, steel, refinery or chemical industries. The results obtained in fields excluded from the ETS are equally—and, in some cases, probably even more—interesting than those in fields covered by the ETS, owing to increasing social awareness and various EU and national programs.

However, the ETS system seems to be serving only those who want to benefit from speculating with emission allowances, because the ETS, as shown by our experience in the last few years, does not stimulate a reduction in CO2 emissions. Supporters of the ETS would like the price of a ton of CO2 to be as high as possible and are in effect working against technological developments that provide the market with inexpensive CO2 allowances. This does not allow financial investors to earn as much as they had planned. That is why, under the banner of combating CO2, backloading was introduced—in my opinion, MEPs were not fully aware of its implications. Investors and lobbyists, on their part, want the system to be even stricter, by introducing the so-called Market Stability Reserve (MSR) aiming to reach the price of CO2 at least at the level of 40-50 euros. The MSR should come into force starting in 2021, but supporters of the system advocate that it should be introduced in 2017. At the same time, the carbon leakage list enabling energy-intensive industries to be derogated from obligations connected with CO2 emissions will be phased out.

Under existing regulations, it is assumed that the 20-percent target for decreasing CO2 emissions by 2020 will actually be surpassed. The price of EUAs (European Union Allowances) was expected to be at the level of 50-60 euros, but it is currently at the level of 5-6 euros, which means 10 times less than expected, and the 2020 target will be achieved. Therefore the question is: do we need an ETS to decrease CO2 emissions? The answer is very simple. We do not need the system at all, neither do other industrialized countries. We should take into consideration the fact that, according to the information we have, the EU is 15 years ahead of other industrialized countries in terms of CO2 emissions. If theoretically, the EU froze its emissions program today until 2030, and other countries fulfilled their programs, then in 2030, the EU would still be surpassing them in CO2 emissions. The question is: why does the EU want to be so strict? After all, the EU has many other important problems to be solved.

The new ETS combined with the SMR has triggered a lot of discussion and controversy. One of the main duties of the EU is to develop its industry in order to decrease unemployment and increase competitiveness. At the same time, the development of new technologies will contribute to a decrease in emissions.

What will happen to energy-intensive industries such as steel, chemical, refineries and cement when the carbon leakage list is wound up?

Reforming the ETS

The EU does not want to destroy its industry, and it has created the possibility of a temporary opt-out from the ETS regulations (carbon leakage) for some industries. Clearly, this is a positive solution, but being added to the carbon leakage list requires EU regulations, and this does not foster long-term planning and investments in periods of 15-20 years, because a given entity can be taken off the carbon leakage list at any time. This does not foster economic development.

The EU has to choose what it cares more about—economic development, or rich countries getting richer. The claim that high CO2 prices stimulate the development of renewable energy sources (RES) does not correspond with reality, because RES are experiencing a phase of rapid development despite the low price of CO2 per unit. It is also well known that, given the current state of technological capacities, exceeding the level of RES by 25 percent in the total energy mix in individual countries is causing problems in the absorption of such energy (obviously, I’m referring to wind and solar energy, not hydropower, here). The best example is Germany. The price of energy generated from RES is another factor. It is estimated that in Germany, for example, the price of electrical energy is almost 80 euros a year higher per capita due to RES (wind, solar). Germans can afford this given their GDP per capita of 32,300 euros in 2012, compared with the EU11’s average GDP per capita of 9,700 euros (not to mention Bulgaria’s 5,400 euros). The burden of 80 euros per capita in Germany would mean a burden of 240 euros in Central Europe considering the difference in GDP per capita. Besides, this extra cost would cause opposition, even in Germany. We care about cheap energy as it determines the social development of our countries.

We should grant member states the right to make their own decisions on how fast they should absorb renewable energy sources and on the costs they are willing to accept. High prices of CO2 will trigger the shutting down of coal-fired power plants. These plants are based on the cheapest energy source. Countries with coal-fired power plants should not be automatically treated as the largest CO2 producers in the EU, as the new technologies make it possible to cut emissions by over 30 percent. These technologies should be fostered by the EU and EU-based banks. Today they are not. This leaves the floor to Chinese and South Korean banks. Why is that? It is precisely because lower emissions mean cheaper CO2. Such a situation in the EU is absurd.

My proposal is as follows: the ETS should be scrapped immediately and the EU’s efforts should be aimed at expanding its industrial base with the use of cutting-edge technologies. If the proposal is not accepted for industry without barriers, there should be other solutions considered as a benchmark, defined by industry experts. The benchmark would be technologically acceptable, and based on technologies analogical to or already used by industrial players, for at least 30 percent of a given sector.

Due to the fact that there are big differences between EU member states in terms of GDP per capita, some member states have to develop far more quickly in order to catch up with the rest of the member states. This requires a lot of investment, which in total may increase CO2 emissions, even if state-of-the-art technologies are applied. Member states with a GDP per capita below 60 percent of the EU average may opt to continue to receive free allowances for the energy sector and energy-intensive sectors until 2030.

The author is a legal adviser and senior adviser at Central Europe Energy Partners (CEEP).

Central Europe Energy Partners (CEEP) is an association formed by energy and energy-intensive industries that aims to unite the energy sector in Central Europe and strengthen the position of this sector in the European Union. This is the first industry-specific organization from Central Europe of a regional character. The association represents the Central European energy sector (for example coal, oil, renewables, grids) as well as energy-intensive industries (steel, chemicals and others). Its main aim is to support the integration of this energy sector within the framework of a common EU energy and security policy. At present, CEEP has 25 members—companies and research institutions from countries including the Czech Republic, Lithuania, Poland, Romania and Slovakia. In June 2014 CEEP celebrated its fourth birthday.
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