Benefits from rising prices of CO2 emission allowances
Discussions about rising prices of CO2 emission allowances will not remain silent. When buyers pay more, the state budget gains. Poland should allocate these funds for low-carbon modernisation.
Since August 2017, the dynamics of CO2 allowance prices have been causing hot emotions among energy market participants. The discussion about the impact of this situation on electricity prices in Poland, in which the energy mix is still dominated by carbon-intensive coal, is not silent.
When some see an increase in costs, others see an increase in revenue. Revenue from the sale of allowances goes to the state budget. What amounts are we talking about? In May, the Wysokie Napiecie portal estimated that this year's revenues from auctions could reach nearly PLN 4.5 billion. This is the same as in the previous five years in total.
Even more in the future
Two years ago, Forum Energii (known as the Forum for Energy Analysis) together with WiseEuropa tried to estimate how much the Polish budget would gain in that period. Today we are closest to the scenario of reaching EUR 20 per tonne in 2021 and reaching EUR 50 in 2030. Under these assumptions, in this period the revenues from the auction will amount to over PLN 100 billion.
The ETS Directive recommends the use of at least 50% of the revenues from the auctioning of allowances for low-carbon modernisation. If half of the revenues from the auction had been transferred for this purpose, in the perspective of 2021-2030 we would have 51 billion PLN at our disposal. Of course, Poland can also dedicate the entire pool to modernization.
Missing in the budget
Poland is one of the countries where revenues from CO2 emission rights are melted by the central budget and are not specially marked for low-carbon investments. This is possible if a Member State allocates the equivalent of at least 50% of the auction revenues to the environmental goals set out in the ETS Directive.
In its annual reports, pursuant to Article 50 of the Act of 12 June 2015 on the greenhouse gas emission allowance trading system, our country shall indicate which specific projects have been subject to the equivalent of at least half of the revenues from the auctioning of allowances. Last year's list included financing by the Ministry of Energy of the negative balance of RES, i.e. the difference between the price guaranteed in the auction and the market price for the installations operating in the auction system, whose capacity exceeds 500 kW. There are also exemptions from excise duty on electricity from RES, or the possibility of applying a preferential VAT rate by enterprises engaged in railway transport (due tax) settled by the Ministry of Finance. However, the vast majority of the projects mentioned above are the activities of the National Fund for Environmental Protection and Water Management and provincial funds. These include numerous programmes of thermomodernization, reduction of low emission and air protection, but also co-financing of the LIFE programme, co-financing of the Operational Programme Infrastructure and Environment, or environmental education. In addition to financing the installation of heat pumps and photovoltaic panels, the list includes plantings, trees, bushes and the development of simplified forest management plans. At the same time, environmental and water management funds generate revenues mainly from fees and penalties for the use of the environment, maintenance and concession fees, energy sector fees, fees resulting from the Act on Recycling of End-of-Life Vehicles and from the sale of greenhouse gas emission units under the Kyoto Protocol.
Although the sum from the Polish report corresponds to the requirements of the ETS Directive, its components are undoubtedly not the result of the implementation of a coordinated plan to dedicate the revenues from the auctions to low-carbon modernization. It is simply a list of activities carried out by the Polish administration which have been found to meet the criteria of the Directive.
What to spend the money on
The approach to the proceeds from the auctioning of allowances after 2021 should be systemic and ensure that the available amount is actually used in accordance with the requirements of the Directive. Forum Energii recommends the use of all revenues for energy and climate purposes. The main task (about 75% of the pool of funds) should be to support low-carbon investments, i.e. thermomodernisation, dispersed energy, modernisation of heating and zero-carbon transport. This objective should be coordinated or combined with support from the Modernisation Fund. As the revenues from the auctions will be higher than the Fund, they should be used to finance cost-intensive infrastructure development and investment in low-carbon urban transport.
In addition to low-carbon investments, no more than a quarter of resources should be allocated to a mechanism to shield energy-intensive industries and other energy consumers - including the poorest - from indirect costs. A direct link between this mechanism and the proceeds from the ETS auctions will ensure that the costs of the shielding measures are covered regardless of the price of allowances and the situation of public finances.
The third and last objective recommended by Forum Energii is to support employment restructuring in post-mining regions linked to unproductive mines. This is an important measure, but - due to the low capital intensity and limited time of operation - only 2-3% of the auction proceeds should be transferred to it. It is also worth linking them to the Structural Funds aimed at developing human capital, which will be available in the new financial perspective.
In the next decade, Poland will receive at least PLN 100 billion (depending on the price of CO2 allowances), which should be allocated for low-carbon modernisation. At the same time, projects such as thermomodernisation and modernisation of district heating require a concept and long-term support. Therefore, it is worth developing a coherent plan for spending funds from the ETS auction. Otherwise the money will disappear into the budget. We could use the rising prices of CO2 emission allowances in this way for the benefit of society. However, this requires appropriate strategic preparation for the 2021-2030 perspective.
Author: Paweł Mikusek, Forum Energii
Date of publication: 6 November 2018