Polish "Exceptionalism": Retroactive Exemption from European Energy Obligations?

The core message in the current Parliamentary elections for Law and Justice (PiS) on energy issues is to repeal Poland's commitment to participation in the European Emissions Trading Directive and other environmental requirements that limit the unfettered use of coal in Poland. Their argument is that Poland is so dependent on coal that it is unfair to require the same things of Poland that other EU Member States have not only committed to, but are doing.

The assumption of this argument is that, but for the emission charge on CO2, that coal energy would be profitable. This is a fundamental fallacy for several reasons. First, the current system grants free allowances for coal emissions and coal-fired power is still not profitable.[1] The current electricity rates make it difficult for the power companies to invest in new facilities, but simultaneously those rates are higher than Germany next door. The profitability of the coal-fired electricity sector is already very weak without any payment of carbon fees for emissions.

Second, other countries with no carbon fees are still experiencing a decline in coal supplied electricity. In the United States, while shale gas is driving down coal prices and is growing part of the production mix, renewable energy is also growing while coal is declining. The U.S. Energy Information Agency has estimated that the levelized cost of producing electricity from coal is now more expensive than onshore wind energy. In China, with no carbon charges, coal consumption in 2015 is down 40%, while the country has passed the EU in total annual investment in renewable energy. Experts predict that both wind and PV energy will be cheaper than coal in the foreseeable future in China. Virtually anywhere in the world, if you made a decision today to build a coal-fired power plant and opened it in three years (fast assumption), during much of its operational life it would be among the most expensive providers of electricity in your market.  This is the case even where there are no carbon emission fees.

There is, moreover, absolutely no economic justification for the assumption that reducing or suspending fees of carbon emissions will make burning Polish coal profitable in Poland.  Polish coal is more expensive, has higher ash content and more sulfur than the imported coal here. Every year less and less Polish coal is mined and the insolvency of the state-owned mines means that this trend will not be reversed in the future. The Polish politicians' fight to burn coal is increasingly a fight to burn foreign coal.

The economics of burning coal will, of course, get worse if the theoretical changes in the market drive the price of carbon allowances to 15-20 Euro a ton or higher - and if the free allowances ran out. However, free allowances and assistance to energy intensive industries have and will continue to blunt the impact. But if this plan works and carbon prices go up significantly, it will not be the major reason for the economic decline of coal. Nor will the effects on the general economy be as bleak as Polish politicians allege.

The heart of the issue is that Poland is somehow unique because it has a higher dependence on coal for energy. That fact is true (as shown below) but it is only a part of the story.

Germany actually is still using a lot more coal than Poland. Several countries in the EU have dramatically lowered the reliance on coal over recent years. Overall coal use has declined significantly, largely replaced by renewable energy sources.



This has come at a cost to consumers, since renewable energy has been significantly more expensive over this period. Other EU members have been incurring the cost of this transition - a cost that Poland is now trying to avoid by an exemption. The cost of Poland catching up on the shift away from coal is now significantly lower than the costs incurred by our European colleagues. Other Europeans have basically financed the development of the technology and the establishment of a mature market for RES, so that Poland can now replicate the same transition at a much lower cost. See below.

This is particularly ironic since the EU has been providing Poland will very significant financial support to transition away from coal. But much of this past support has often been used for other purposes and often has been employed to simply shore up coal mines and coal-fired power plants. "The vast majority of the estimated 12bn euros of European allowances and transfers intended to tackle climate change and diversify the energy mix between 2013-19 will – instead – be spent on coal,.."[2] The European Commission has limited some of this abuse, but Poland constantly is trying to get under the wire.

Despite Poland's bad faith in using the EU money for other purposes, the European Community is still willing to provide hundreds of millions of Euro in the next climate deal, agreed to by the current Polish Government. Major funding from the European Bank for Reconstruction and Development and the European Investment Bank and several other huge private European funds have been and remain willing to finance the shift from coal to other energy sources in Poland.

Poland has also been given extra time in its accession treaty agreement to been the Large Combustion Source Directive, affecting emissions from coal-fired power plants. This time has been used up without a significant and pervasive shift in the energy mix of the major electricity producers in Poland that own these plants. Modest levels of RES - by European standards -  have been added but principally by subsidizing the coal-fired plants use of biomass in small quantities in the fuel mix. This is enormously profitable and has actually been the major source of net profit for many of these old coal-fired plants in Poland. Poland has been given time and resources to make the transition (while our richer neighbors pay their own way). But this opportunity has been largely squandered.

So Poland is asking to be exempt from steps that other EU countries have already been taking - largely at their own expense and at the expense of their consumers, industry and taxpayers. Poland has been and is being offered continual financial help to make this transition which comes from these same countries. This continues to be offered, even though many of the manufacturing jobs from Western Europe from been migrated east into Poland due to lower costs of production.

The circumstances hardly make the equity of the Polish demand for "exemptions" look very persuasive. But more to the point, the attempt to obtain the exemptions comes at a time when the point of doing so has been rendered largely moot. The coal that Poland wants to keep depending upon is increasingly foreign coal (not Polish coal which is dirty, deep and expensive). The cost of new coal-fired plants within the period that they can be constructed and would operate is now higher than the costs of most renewable energy sources. The energy security or independence that is the intellectual rationale for the exemption argument is undermined by not only the increasing role of imported coal in Poland, but by the insecurity and unreliability of the coal model: centralized, huge electricity sources have proven to be quite problematic in terms of system reliability and efficiency.
Energy diversity is now widely understood to be a key to energy security.

All of the above assumes that some form of exemption or retrenchment is legally and politically feasible in Brussels. It is plainly not legally possible or politically feasible as to all of the underlying obligations already made. The Council of Europe has already approved the 2030 package. The European Parliament by an overwhelming majority approved the climate package on October 8, 2015. "[T]the conservative Law and Justice party (PiS) can do little to evade Brussels’ commitment to cut emissions and deploy clean power...." [3] Any further retroactive concessions are likely to be met with a cold shoulder based on Poland's history of acting in bad faith on the deals and decisions already made. Extra time and extra money have always been subverted and used to perpetuate the problem that our European colleagues thought they were helping to eliminate. Where additional funding for the transition is coming, it will be controlled more carefully to focus on its intended purpose.

Politically clumsy and naive nationalistic appeals may well fool a lot of Polish voters, especially the less educated, but they will not go very far in Brussels. As the coal mines - whoever technically holds their shares - start closing due to bankruptcy in 2016-2017, and the coal-fired power plants continue to be unable to produce the necessary electricity on demand this winter and in the future, the Polish public's commitment to keep pursuing coal at any cost will fade into history.



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[1] The expansion of the PGE Opole plant is the famous example. It simply makes no economic sense. CO2 fees and pressure from renewable energy sources add to the coal-fired plants problems, but their underlying profitability has been declining in any event. Fitch Ratings (2015).

[2] Greenpeace Energy Desk.  The latest plan in Brussels funnels the Polish investment list through the European Investment Bank to assure that the money is used for "decarbonization" not perpetuation of the dependence on coal.

[3] Alex Pashley, Climate Exchange News. Allowing any new Member State government to renegotiate a deal done by the prior government would obviously open the door for enormous gamesmanship and instability in the European Community. Poles should not expect any breakthrough on this issue under the circumstances. See Bloomberg Business [also noting that the "qualified majority" rule that starts in 2017 will even end the Polish ability to block new initiatives].


UPDATE: October 31, 2015.  The Polish experts point out that the regulatory things that matter on CO2 (the caps and allowances and fee per ton) are controlled by the European Union under a directive (not directly under an international treaty). So Poland's domestic veto of the Doha accord does nothing to undermine the regulatory scheme that is raising the price of carbon emissions. In addition, due to early votes within Europe, the EU itself will be the negotiator for Europe in Paris. The speculation is that the new hard line will, at best, be a way to negotiate other concessions (maybe).

UPDATE:  November 30, 2015,  the new governing party has reluctantly agreed that Poland cannot retroactively back out of the earlier agreements and rules that call for CO2 reduction and RES growth. The new Minister of the Environment just "toned these [previous]statements, noting that so far there is no termination of the climate package in October 2014. Because if you do not want to leave the Union, we must act in accordance with those obligations CO2 reduction of 40 percent. 2030. and increasing to 27 percent. the share of renewable energy sources in the Community and to improve energy efficiency in 2005 by 27 percent."

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