Decarbonisation of EU economies: How does it work? | In Principle

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Decarbonisation of EU economies: How does it work?

The issue of decarbonisation of the economies of EU member states, and in particular Poland, generates a lot of heat. Decarbonising the economy was named as one of the EU’s five energy priorities in the Commission communication entitled “A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy.”

In European Union documents, decarbonisation means elimination of CO2 emissions because of their harmfulness to the environment. By 2030, the EU wants emissions to be 40% less than they were in the baseline year of 1990. The basis for the EU’s policy in this area is the Community system of emissions trading, under which installations emitting CO2 may do so only within limits awarded to each installation individually. These installations primarily include power plants and combined heat and power plants, but also steel mills, cement plants, chemical plants, paper mills, and other industrial plants that use combustion of coal and hydrocarbons and process carbon compounds. Emissions from other sources (vehicles, small heating installations in buildings, etc) are not regulated in this way.

Until 2013 each installation received free emissions rights within limits established locally and approved for the given country collectively at the EU level. From 2013, the system for allocation of emissions rights underwent significant changes. Each year until 2020 the number of entitlements will decrease by 1.74%. A separate list was drawn up of 177 branches of the energy-intensive sector particularly exposed to moving of their activity outside the EU, known as “carbon leakage industries.” They were awarded free emissions rights until 2020. Some countries, including Poland, also negotiated the possibility of providing free rights to the power industry. At the level of the entire EU, the number of free entitlements for the power industry is supposed to fall to zero by 2020. From 2014, other installations receive a smaller number of free entitlements; in 2020 this number should equal 30% of the entitlements awarded in 2014. Enterprises can turn to the market to purchase the other rights they need to maintain production.

Currently the prices of emissions rights are about EUR 7 per tonne of CO2. For an average-sized installation, this could add up to tens of millions of zlotys per year. In July 2015 a proposal was announced for further changes in the directive governing the European emissions trading system, which would introduce further, far-reaching restrictions on awarding of free CO2 emissions rights. For every industrial plant emitting CO2 in EU territory, this means many millions in additional costs. Such a plant will either conduct an expensive modernisation to increase the efficiency of its combustion and thus reduce CO2 emissions, or will have to set aside significant sums to purchase additional CO2 emissions rights on the market.

While formally the EU does not prohibit the use of coal for combustion, e.g. in the power industry, the system requiring purchase of CO2 emissions rights burdens coal-based power the most, as it emits the most CO2. The end of the system of free emissions rights for the coal-based power industry therefore could result in a drastic increase in prices of electricity generated from coal, followed by the collapse of this area of the economy, its suppliers (mines), and some of its customers, who could no longer compete because they would have to pay more for electricity.

From a certain level set by available technical solutions, the lack of free emissions rights drastically limits coal-based power and coal processing, because CO2 emissions are an inherent element of production of energy in coal combustion processes, as well as production of coke, steel, and even silicon.

Among all EU member states, Poland falls somewhere the middle in the level of CO2 emissions relative to the population. Poland emits 8.4 tonnes of CO2 per capita every year, compared to 10.4 tonnes in Germany. The Netherlands emits 13.1 tonnes of CO2 per capita per year, and Romania just 4.2 tonnes. It should be pointed out, however, that CO2 is absorbed by plants in the process of photosynthesis, and thus a portion of the CO2 released by the industry in any country is absorbed by the vegetation in that country. If the amount of industrial emissions captured by forests and farms in Poland were factored in, the level of emissions in Poland per capita would be even less.

Weronika Pelc, Energy Law Practice, Wardyński & Partners