BRUSSELS CUTS TWO BILLION DOLLARS WORTH OF CO2

UNCLAS WARSAW 001396

SIPDIS


SENSITIVE

STATE FOR EUR/NCE TARA ERATH AND MICHAEL SESSUMS
STATE FOR OES MCMURRAY HARLAN WATSON, OES/PCI, G
STATE PASS TO EPA ANNA PHILLIPS, STEPHEN JOHNSON, CHARLIE
AUER, AND SUSAN HAZEN
WHITE HOUSE OF OSTP
COMMERCE FOR ENERGY AND ENV
ENERGY FOR PUMPHREY, PATRICK HAMILTON

E.O. 12958: N/A
TAGS: SENV ENRG ECON PREL PL EUN
SUBJECT: BRUSSELS CUTS TWO BILLION DOLLARS WORTH OF CO2
ALLOWANCES FROM POLAND'S NATIONAL ALLOCATION PLAN


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Summary
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1. (SBU) On March 8, the European Commission issued its much-
delayed decision on national CO2 allotments under the EU's
Emissions Trading Scheme. The EU conditionally accepted
Poland's National Allocation Plan, but cut its proposed
emissions by 16.5 percent (from 286 to 239 million tons).
Although Poland expected the EC to shave its suggested
allocation, it is angered by the depth of the cuts. The EU
decision would shift Poland from being a net seller of CO2
credits to the rest of Europe to being a net buyer.
Environment Ministry officials figure the decision will cost
Poland $685 million per year from 2005-2007 in foregone
revenues or additional expenses. The GOP is also upset that
the EC did not dispute Poland's proposal on technical
grounds, but rather made a political decision to boost
allocations for under-performing West European emitters. As
a result, Poland may choose not to participate in the EU's
Emissions Trading Scheme, an option it feels it has. End
summary.

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Deep Cuts
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2. (SBU) In September 2004 Poland submitted its National
Allocation Plan for approval to the European Commission, a
prerequisite for Polish CO2-emittting installations to
participate in the EU's Emissions Trading Scheme. On March
8, 2005 the EU Commission approved Poland's participation,
but ruled that it must cut CO2 emissions proposed under its
National Allocation Plan by 16.5%. Specifically, the EU
instructed Poland to cut its proposed allocation by 47
million tons, or from 286 million tons to 230.2 million for
installations, with an additional 8.8 million tons to be
held as a national reserve. The head of Poland's National
Emission Centre, Krzysztof Oledrzynski, said the EU decision
is "nonsense," because it requires Poland to reduce targeted
CO2 emissions below the country's actual 2004 levels.
(According to the Environment Ministry, Poland emitted 257.6
million tons of CO2 in 2002.)

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Impact on Poland
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3. (SBU) Polish officials estimate the 47 million ton
annual reduction of CO2 credits for the 2005-2007 period
will cost Poland $2.05 billion over three years (assuming a
price of 11.20 EUR/$14.56 per ton). According to
specialists at Ernst and Young, the allocations would be
regarded as an intangible asset on an installation's balance
sheet, an asset whose value the EC has now effectively
reduced by 16.5%.


4. (U) If Poland accepts the EU Commission's conditions,
many Polish companies will need to purchase allocations
elsewhere or take measures to cut emissions. The EU cuts
will affect private investors as well, reducing the ability
of U.S. energy companies and others to sell credits.
Several U.S. investors say they wanted to use income from
the sale of allowances to finance environmental upgrades of
their facilities in Poland in anticipation of the future,
more expansive phase of the Emissions Trading Scheme in

2008. The Ministry of Economy had hoped to use some of the
money from the sale of credits to foster investments in
cleaner energy.

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Poland May Opt Out
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5. (SBU) On March 1, the chief negotiator from Poland's
Ministry of Environment, Secretary of State Tomasz
Podgajniak, told the press that Poland might opt out of the
European Emissions Trading Scheme altogether. Jacek Mizak
from the Environment Ministry's International Cooperation
Department said that although the EU established the
Emissions Trading Scheme by directive, Poland views the
directive as a tool to meet Kyoto targets. Since Poland


already has met its Kyoto obligation, non-compliance with
the directive is a legal option. Wojciech Jaworski, the
director of the Environmental Protection Instruments
Department at the Ministry of Environment, explained that if
Poland does not participate in the Emissions Trading Scheme,
the country as a whole would still be able to trade CO2
credits with other European countries, albeit through a more
labor-intensive process as outlined in the Kyoto protocol.
However, individual installations could not directly buy or
sell credits on the EU market.

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Tough Negotiations in Brussels
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6. (SBU) Oledrzynski, who was a member of Poland's
negotiating team in Brussels, said negotiations with the EU
Commission were difficult, as the Commission did not
consider seriously Poland's arguments. The EU side did not
have any experts and did not question any of the technical
aspects of the Polish National Allocation Plan. Instead,
the EU seemed to only take political factors into
consideration. Jaworski also criticized the negotiations,
saying Brussels was more interested in ensuring that an
influx of Polish allowances would not reduce the price of
CO2 credits than in reviewing Poland's National Allocation
Plan according to scientific and technical criteria.

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Higher Prices for CO2 Credits in Europe?
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7. (SBU) Oledrzynski expects the cut in Poland's allocation
to drive up prices in the Emissions Trading Scheme
throughout Europe, since it would remove a large supply of
excess allocations. Jaworski said the price of a ton of CO2
already has risen 15% (from 9.7 to 11.2 EURO/ton),since the
EU announcement of its conditional acceptance of Poland's
National Allocation Plan. Oledrzynski believes Poland would
have been the lead seller of allocations in Europe. Now its
industrial installations will need to purchase credits if it
participates. Jacek Mizak at the Environment Ministry said
that the Ministry was mistakenly under the impression that
the new EU-10 would profitably supply allocation credits for
many of the EU-15 that find it overly costly to meet their
Kyoto obligations.

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Next Steps
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8. (U) Poland now faces three options: suing the Commission
at the European Court of Justice, which Oledrzynski
privately described as having "a remote chance of
succeeding;" putting the matter to the European Council in
an attempt to overrule the Commission; or pulling out of the
scheme altogether.

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Comment
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9. (SBU) Poland knows it faces enormous challenges in
meeting EU environmental standards over the next decade.
Thanks to a massive restructuring of its economy in the
early 1990s, which reduced CO2 emissions by 32% from 1988-
2001, Poland had hoped carbon emissions would be the one
area in which it could make a fast start. With the stroke
of a pen, the EC seems to have destroyed that hope. So far
our GOP contacts have not indicated any willingness to
accept the EU Commission's conditions. We expect the GOP
will fight hard over this issue, given the significant
amount of money involved.

Munter


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2005WARSAW01396 - Classification: UNCLASSIFIED