COALED CASH - CZECH EMISSION TRADING PLAN: DRAFTED

UNCLAS SECTION 01 OF 02 PRAGUE 001848

SIPDIS

SENSITIVE

BUDAPEST FOR KARYN POSNER-MULLEN

E.O. 12958: N/A
TAGS: SENV EIND EZ EUN
SUBJECT: COALED CASH - CZECH EMISSION TRADING PLAN: DRAFTED
BY BUSINESS, FOR BUSINESS, WITH THE UNPRECEDENTED SUPPORT
OF BOTH THE GOVERNMENT AND THE OPPOSITION.


Sensitive but Unclassified -- not for Internet distribution.


1. (U) SUMMARY. The Czech Republic has proposed to the EU an
emissions trading scheme that increases the ceiling on
emissions above current levels. Environmental groups point
to conflicts of interest, say the Czech proposal ignores
submission criteria and the government's own stated energy
policy, and argue it amounts to massive subsidies to
state-run and private firms; the Environment Ministry echoes
this view. But governing left-of-center Social Democrats
have come down firmly on the side of business, and the
Ministry of Industry and Trade largely dictated the terms of
the Czech proposal. Because of their delay in submitting a
proposal for vetting, the Czech Republic will not be a part
of the EU emissions trading scheme when it begins January 1.
End Summary


2. (U) The sectors of Czech industry that will participate in
the emissions trading scheme have historically emitted
approximately 89 million tons of CO2 annually. Environmental
NGOs, in the spirit of the Kyoto Protocol, asked the
government to submit a National Allocation Plan (NAP) under
the EU's emissions trading scheme of 85 million tons, a small
reduction. However, the latest version of the Czech's NAP,
which won't be approved by the European Commission in time
for the January 1, 2005 start of the trading scheme, sets
allocations levels at 107.6 million tons, an increase of
roughly 21 percent.

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POTENTIAL TO REDUCE COAL CONSUMPTION NOT INCLUDED IN NAP
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3. (U) The Czech Republic gets approximately 80 percent of
its electricity from power plants that burn a soft form of
coal. The State energy plan had called for some of the
dirtiest coal burning plants to be retired as the nuclear
plant at Temelin came on line, or by 2010 at the latest.
Temelin's two reactors have just finished their trial period
and are now operating at full capacity. Nearly all of their
output is exported. In fact, the Czechs are now the 7th
biggest exporter of electricity in the world. But none of
the coal-fired plants have been shut down, nor have the
reductions in coal consumption that these shutdowns would
bring been included in the NAP, even though these shutdowns
are part of the government's published energy policy.


4. (U) Other potential reductions could be found in wasteful
heating systems, and the old communist-era factories. Older
Czech buildings and the water pipes that deliver heat are
badly insulated. Many factories could reduce emissions
simply by switching fuel from coal to gas. But once again,
there is no assumption in the NAP that any reductions will
occur.


5. (U) The Czech NAP was drawn up by the Ministry of Industry
and Trade, which has not revealed the methods it used to
arrive at the figure of 107.6 metric tons. The business
community was consulted. The government then cited business
confidentiality as the reason for excluding NGOs from the

SIPDIS
process. Just under two-thirds of the allocations would go
to the energy sector, the main company of which, CEZ, has
the Czech government as its main shareholder. Another
beneficiary would be the commercialized firm, Viltcovice
Steel, which also has the state as its main shareholder. As
one environmental NGO pointed out, the Czech government has
no incentive to force itself to make costly changes and
reduce emissions at state-run firms. On the contrary,
surplus allocations of 18.6 million tons a year, if the
market price stays near the current value of 9 Euro, could
mean an extra 220 million dollars a year for Czech firms.

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CREATING A MARKET WHEN YOU,RE THE ONLY PLAYER
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6. (U) Last year the world's biggest emissions and coal
brokerage firm, Evolution Markets, teamed up with a Slovak
Firm, Menert, to form Evolution Menert. This firm advised
several Central European governments, including the Czechs,
on how to draft a NAP. The firm, which has offices in
Bratislava and Prague, is currently the only emissions broker
in the two countries. It stands to make healthy profits off
the trade of surplus allocations. As the firm,s own web
page points out, "Slovakia and the Czech Republic are
positioned to be major participants in global greenhouse gas
markets. Both countries are currently well below their
greenhouse gas emission reduction targets under the Kyoto
Protocol. In addition, Slovak and Czech government officials
are encouraging investment in their energy infrastructure
that will not only improve services, but also reduce overall
levels of greenhouse gas emissions."


7. (U) Environmentalists ask why, if the Czech Republic is
already below its emissions target, and the government is
encouraging further reductions in the levels of emissions,
did the government and Evolution Mennert draft a plan with
emission allocations 21 percent higher than the target? Ivo
Mravinac, the spokesperson for the Ministry of Industry and
Trade offered one answer to this question: &It,s useful for
the firms to have permission for emissions at higher levels
so that if they do not use up their quota, they could trade
the remainder with other countries.8
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MINISTRY OF INDUSTRY AND TIRADE
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8. (SBU) The Czech emissions trading proposal has touched off
debate between government ministries, but there has been
little political debate. Both major political parties -- the
center-left Social Democrats, who lead the governing
coalition, and the center-right Civic Democrats, who are the
main opposition party and generally practice a policy of zero
tolerance towards the government -- support the proposed
scheme. Large Czech businesses, which initially opposed the
emissions trading scheme, but now embrace it having realized
the potential windfall it represents. On the political
scene, matters came to a head on November 2nd when the lower
house of parliament undertook the second reading of a bill
that would set conditions for participation in the scheme.
The Ministry of the Environment had insisted that any
revenues generated by the sales of allowances be spent on
green technologies. But a coalition of pro-business forces
defeated this motion. The Minister of the Environment, Libor
Ambrozek, felt that parliamentarians from both the government
and opposition were conspiring, along with the directors of
the nation,s largest industrial firms and the Ministry of
Industry and Trade, to draft a bill that would favor business
at the cost of the environment. He sent the company
directors SMS messages saying "the changes have undoubtedly
been prepared by you and the Ministry of Industry and Trade."
Ambrozek, a Christian Democrat normally considered a soft
spoken gentleman, included a vulgar expression in his SMS,
which touched off calls for his resignation by one member of
parliament's committee on trade.


9. (SBU) The Czech Plan is one of 4 NAPs that the European
Commission must still approve. Poloff spoke with Dr. Jiri
Hlavacek, a special advisor to the Minister of the
Environment about the Czech NAP's chances in Brussels. He
acknowledged that most of the new EU states have had their
NAP proposals cut by 20 percent, but added, "We are prepared
to go to Brussels and fight for this." However, others at
the ministry confided to Poloff that, "He has to say this,
although the current plan is politically indefensible."


11. (SBU) Comment: We can only wait and see how far the
European Commission will cut back on the Czech NAP. But it
seems clear enough that the Czechs are not hoping for a
market-based method of producing the most cost-effective
reductions in greenhouse gases. Instead, it appears that
they, as was the case with other members of the former Soviet
Bloc, see the scheme as a distortion of market forces, that
might allow some Czech firms, including those run by the
state itself, to reap windfall profits while avoiding the
reductions in emissions that are the principal reason for the
scheme,s existence.
CABANISS