CO2 EMISSION RESTRICTIONS SQUEEZE ECONOMIC GROWTH

UNCLAS BRATISLAVA 000160

SIPDIS


SENSITIVE

BUDAPEST FOR KPOSNER-MULLEN

E.O. 12958: N/A
TAGS: ECON SENV LO EU
SUBJECT: CO2 EMISSION RESTRICTIONS SQUEEZE ECONOMIC GROWTH

Sensitive but unclassified - protect accordingly


1. (SBU) Summary: In October 2004, the EU mandated that the
GOS reduce its National Allocation Plan (NAP) for CO2
emissions by 14 percent. Recently, local companies,
including U.S. Steel Kosice (USSK),have complained that the
European Commission (EC) is targeting new EU members to
reduce CO2 emissions, yet allowing EU-15 members to maintain
current emission levels. These companies fear this will
unfairly limit economic growth in the new member countries
while protecting large-scale polluters in "old Europe".
Prime Minister Mikulas Dzurinda is equally concerned that the
EU's allotment methodology could hamper Slovakia's economic
growth as well as its competitiveness with non-EU countries.
USSK challenged the EU's actions in court and invited the GOS
to join the law suit. However, the GOS decided instead to
comply with the terms of the amended NAP by imposing a
two-tier reduction schedule featuring an eight percent
reduction for USSK and other large companies. End Summary.

CONSPIRACY?
--------------

2. (SBU) USSK explained to post that the EC method for
calculating NAP allotments favors the EU-15 states and
discriminates against new member states with stronger
economic growth. USSK asserted that the Minister of
Environment, Laszlo Miklos, was strong-armed into accepting a
significant 14 percent decrease in emission allotments for
Slovakia. Further, USSK, speaking on behalf of several
companies in Slovakia, expressed concern that this decrease
will negatively impact manufacturing and retard current
economic growth. In support of its claim of discrimination,
USSK provided the following statistics: The EC has confirmed
13 of the EU-15's NAPs, of which six countries (Denmark,
Finland, Germany, Spain, Sweden and Great Britain) received
no reduction while four (Austria, Belgium, France, and
Ireland) had their emissions cut less than 1.1 percent, and
three more (Portugal, Netherlands, and Luxembourg) received
reductions ranging from 1.8 to 4.4 percent. (Note: Great
Britain is currently attempting to amend its NAP to allow for
an increased emissions level.) On the other hand, of eight
confirmed NAPs for new members, the EC imposed a greater than
12 percent reduction in emissions on four of these countries,
including Latvia (29),Slovakia (14),Lithuania (13),and
Estonia (12.4). The other four new member states were
granted 0 to 1.0 percent reductions and the Czech Republic
and Poland still do not have approved NAPs.


3. (SBU) Following imposition of the reduced emissions
requirement, Dzurinda repeatedly told USSK that the GOS would
seek to rectify this problem by increasing its CO2 emissions
allotment under an amended NAP. However, at the same time,
the Ministry of Environment's (MOE) Air Pollution Department
told econoff that the ministry had no plans to amend the
current NAP. The GOS's failure to take any action or
delineate allocation of the 14 percent among the companies
prompted USSK to file a legal action against the EU to annul
the revised Slovak NAP. Despite contrary indications earlier,
other Slovak companies have decided that they will not join
the lawsuit.

DIFFERING METHODOLOGY
--------------

4. (SBU) Initially, the GOS submitted a NAP that was well
below Kyoto requirement levels for CO2 emissions, which would
allow it to sell its excess rights. In USSK's view, the EU
pressured Miklos to accept a 14 percent decrease in CO2
emissions, or face mandatory imposition of a 24 percent
decrease. However, Peter Lakata, economic advisor to
Dzurinda, denied this to econoff based on reports from the
Slovak mission to the EU. Essentially, the discrepancy
between the GOS's original NAP and the EC's proposed figure
is a result of using different methods for calculating an
equitable level of CO2 emissions. The GOS based its requested
allocation upon projected emission figures provided by the
country's major emission producing companies, including USSK.
On the other hand, the EC calculated the allocation based on
a single formula applied to all member states. The EC
utilized Slovakia's recorded emissions from 2002 and then
calculated additional emission allotments based upon GDP
growth forecasts by the Slovak Ministry of Finance for 2003
and 2004. The methodological difference resulted in the GOS
requesting 14 percent higher emissions to reflect the
disproportionately large role the leading CO2 producers play
in the Slovak economy. The reduction in emissions allotments
resulted in a debate as to whether the companies' figures
were credible or whether the EU methodology failed to account
for the rapid economic growth in central European countries.


5. (SBU) According to Lakata, the GOS contended that the

EC's methodology is flawed because it does not acknowledge
that Slovakia is already below Kyoto requirements. Slovakia
would lose this buffer, which will be dispersed among EU-15
members exceeding their allotments. The EC responded that
under EU regulations, excess emissions quotas cannot be
traded because they are supposed to be dispersed to other EU
countries exceeding their emission requirements. The EC
pointed out that GOS's submitted figure did in fact provide
for excess emissions that would later be traded in violation
of this regulation. The EC also underlined that all member
states were subject to the same formula, and that an earlier
decrease in emissions had been directed against all EU-15
members.

CREDIBILITY ISSUE
--------------

6. (SBU) The situation was further complicated when the EC
accused the companies of exaggerating their allotment needs
and Miklos agreed. Then, Lakata said it was difficult to
argue that Slovakia required such a large increase from 2002,
when all the old member states were decreasing their numbers
from the 1990 level as agreed. In addition, Miklos has
stated the 14 percent decrease was not accurate because the
MOE miscalculated the initial figures supporting the NAP,
which resulted in an over-estimation by three percent.
Therefore, the GOS would only need to reduce emissions by 11
percent, and the MOE believes that each company built in
reserves that would satisfy this amount. Miklos' assertion
is based upon the ministry's estimates for emissions using
growth figures for the relevant business sectors. Lastly, the
MOE claimed that, even if USSK had to purchase excess
allotments (from non-EU members),it would not severely
impact it given the large profits the company earns in
Slovakia. (Note: According to GOS calculations, USSK would
need to pay approximately USD 14 million annually to purchase
allotments.) Dzurinda asked the Ministry of Foreign Affairs
to assist the MOE in preparing an analysis of the risks and
rewards for potential outcomes should GOS join USSK's
lawsuit. USSK suggested that the MOE would not provide
accurate findings in its report given that Miklos was solely
responsible for accepting the 14 percent reduction. To
counter this potential bias, USSK offered its own experts and
analysts to assist the MOE, which the MOE declined. Several
senior GOS members have expressed concern that Miklos does
not consider this a serious matter.

MOVING FORWARD
--------------

7. (SBU) On January 26, the Slovak Cabinet developed several
options to address the concerns of USSK and other large and
economically important polluters. The GOS decided to grant
the most important CO2 producers (including USSK) an eight
percent decrease while the other companies would receive a 15
percent reduction. The cabinet agreed upon this alternative
since most pollution is caused by state-owned companies and
the GOS can demand a decrease in their emissions more easily
than private, especially foreign, companies.


8. (SBU) The Cabinet also debated whether to renegotiate
with the EC to garner a larger allotment. Dzurinda and the
Minister of Health, Rudolf Zajac, supported USSK's position
and suggested that Slovakia should join its lawsuit against
the EC. However, the Ministry of Economy did not provide an
opinion on joining the law suit and the Ministry of Finance
felt that the potential for success was too low to make it
worth pursuing.


9. (SBU) Lakata said Dzurinda supported joining the lawsuit
for five reasons: 1) This NAP will set the standard for
future emission NAPS - both for CO2 and other pollutants; 2)
Emissions are already down 20 percent since 1990 and Slovakia
should benefit from this reduced level; 3) Slovakia is not as
developed as "old Europe" so room for growth is crucial; 4)
The applicable regulation requiring the reduction is a
directive addressed to the EU-15 members and should not be
applicable to GOS; and 5) Slovakia's competitiveness with
non-EU states, such as Serbia or Ukraine, will be negatively
impacted if the 14 percent reduction is not removed.


10. (SBU) Finally, on February 16, the MOE's analysis was
presented to the cabinet for a final decision. The cabinet
declined to join USSK's lawsuit at this time, but noted that
the GOS could change its position at a later date. Instead,
it agreed to comply with the amended NAP stating which
companies would receive an eight percent reduction and which
a 15 percent cut to meet the 14 percent total reduction.
USSK intends to press forward with its lawsuit once the
parameters of the NAP are clarified.

TROUBLE ELSEWHERE

--------------

11. (SBU) Whether the EC's method of calculation is fair or
intentionally discriminates against new EU members as
asserted by USSK, the end result could limit growth and
investment among the budding economies of central and eastern
Europe. In this regard, Lakata cautioned that Poland and the
Czech Republic's lack of approved NAPs did not bode well,
because he believed it indicated a potentially large
discrepancy with the EC. He provided statistics showing that
the GOCR had requested three times as many allotments as
Slovakia, and unless the Czech republic's 2002 emissions and
GDP growth for 2003 and 2004 are three times higher than
Slovakia's, its companies will be required to drastically
reduce emissions. March 1 marks the initial date that
emissions begin to accrue against the NAP allotments.
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