Will the revenues from CO2 emissions disappear into thin air?
Low emission energy transition will cost up to 200 billion EUR in the years to come. This impressive amount may suggest that Poland cannot afford to invest in the power or heating sectors. Meanwhile, building a safe and reliable system is crucial for citizens, economy and climate. It is high time to look at potential sources of financing for low-carbon modernisation, and make sure they do not vanish into the budget.
What's the game all about?
Energy is the bloodstream of the economy, a guarantee of its development. It is also a battlefield for clean air, to which everyone has the right. It would seem that the sale of CO2 emission allowances and the entire emissions trading system are part of the implementation of the right to clean air. In practice, however, instead of supporting investments in changing energy mix, grids or energy efficiency, these funds go directly to the state budget. There are many willing to use this money, and current needs take priority over large, long-term investments. As a result, the rising prices of CO2 emissions increase the costs of the entire coal-based system, and Poles incure increasingly higher health and social costs. Where are the funds for transformation and what money are we talking about?
ETS money is a powerful cash boost
A lot of money will flow from the EU Emissions Trading Scheme (ETS) in the period from 2021 to 2030 in several streams. Assuming the CO2 price at the level of 30 EUR/t (and the exchange rate of 4.4 PLN/EUR), Poland will have at its disposal:
- Funds from the CO2 allowances - 984 million allowances, i.e. approximately PLN 130 billion (more)
- Modernisation Fund - 135 million allowances, i.e. at least PLN 17 billion (more)
- New special fund established after giving up free allocation - 275 million allowances, i.e. at least PLN 36 billion. (more)
In total, by 2030, the Polish budget will have over EUR 41 billion, i.e. over PLN 180 billion. In addition, there is the Innovation Fund - also financed from the ETS, created for the most innovative projects in all the Member States.
Until now, money from the ETS has been transferred to the state budget or (in the case of derogations) to energy utilities. When the prices of CO2 allowances were low (for years they were at the level of EUR 5 per tonne), there was nothing to fight for. Now that the price of allowances has risen by 400% and further raises are expected, the priority should be to redistribute funds for the decarbonisation of the Polish economy. Below we explain the specificity of the three ETS financial sources.
A special-purpose fund
In August, the government announced that it would resign from free allocation of allowances to energy utilities in favour of creating a special fund. The abandonment of the derogation mechanism is not surprising. Free allowances have not contributed to investments in the sector, although this was the aim of their introduction many years ago. The European Commission has therefore proposed replacing the free allocation of allowances with auctions in which companies could submit projects leading to a reduction in CO2 emissions. However, our energy sector was not interested in this solution. Therefore, after 2021, CO2 emission allowances will be sold at general auctions, and the income will be allocated to a yet-indefinite special-purpose fund, which will be managed by the Minister of Energy. The rules of its functioning should be set in the following months in the form of a legal act.
After 2021, the Modernization Fund will be established. It is already known how it will work. It will be operated by the European Investment Bank, and the National Fund for Environmental Protection and Water Management is said to become its operator in Poland. Money from the Modernization Fund are being allocated by the richer EU countries. The greater level of emission, the more money is transferred to the pool. Therefore, Poland is the biggest beneficiary of it. The general principles of functioning of this fund were defined already 5 years ago in the conclusions of the European Council. Money can be allocated mainly for energy efficiency, electricity and heating grids and reduction of emissions. It cannot be used to support coal investments. The fund is perfectly suited to anti-smog measures. The Minister for the Environment is responsible for programming the Modernisation Fund, and he has not yet conducted any extensive public consultations in this area. Priorities and the allocation of resources must be set as soon as possible.
Revenues from auctioning of allowances
The largest pool of money comes from sales of CO2 emission allowances. Despite the fact that this is a huge sum of money, over PLN 130 billion by 2030, it is completely ignored in discussions about the future of the energy sector. The ETS directive is not entirely precise on how to use revenues. Member States should allocate money for a low-carbon transformation, but... are not obliged to. As a result, these funds have been falling into the state budget for years. At the same time, there is a lack of money for low-carbon investments. It is high time that the money was redirected to the modernising of the energy sector. Otherwise, Poland will have to bear increasingly higher costs of purchasing allowances, and it will be difficult for the Polish underinvested energy sector, which is already on a downward slope, to recover. The result of the next few years of abandonment will be the growing import of energy - electricity and resources. And the most polluted air in the European Union.
What should the money be spent on?
For Poland, the priority should be to reduce the costs of energy transition and keep the prices of heat and electricity at a reasonable level. Poland needs a modern and low-emission energy sector. We have to get rid of coal from the heating sector, otherwise its import will grow. Along with it, the costs of heat and the level of smog will also increase. Energy efficiency is also crucial, especially in buildings. Thermomodernisation will not benefit everyone, mainly the least wealthy part of society. It is also important to overcome emissions from transport. We need the development of transmission and distribution systems, the storage of energy and hydrogen fuels, and the expansion of interconnections. We need to invest in integrating renewable energy sources into the energy system and improving flexibility.
New energy financing mechanism vs. general budget support
The ETS could become a new "leverage" mechanism for financing energy investments. The higher the emission allowance price, the more resources should be invested. Although it will not finance the whole transformation, it is no longer just a drop in the ocean of needs. However, there are many people willing to take advantage of the growing revenues from the sale of CO2. If the Minister of Energy and the Minister of the Environment do not fight effectively for these funds, it will mean that low-emission investments will have to be delayed again. The grids will age, the old furnaces will smoke and millions of tons of coal will "supply" the economy and at the same time poison Poles. Can we really afford it?
Author: dr Joanna Maćkowiak-Pandera
Cooperation: dr Aleksandra Gawlikowska-Fyk, Klaudia Wojciechowska
Date of publication: 28 August 2019