US embassy cable - 04MADRID2762

UNCLAS SECTION 01 OF 03 MADRID 002762 
 
SIPDIS 
 
STATE FOR EUR/WE, COMMERCE FOR CALVERT 
 
E.O. 12958: N/A 
TAGS: ECON, EIND, ENRG, EPET, SP 
SUBJECT: SPAIN UNVEILS NATIONAL KYOTO PLAN 
 
1.  SUMMARY:  In an eleventh hour move to avoid EU penalties, 
Spain's Ministries of Environment and Industry unveiled the 
provisional National Allocation Plan (NAP) on 7 July.  The 
NAP is the GOS attempt to bring domestic carbon dioxide (CO2) 
emissions in line with the first tranche of the Kyoto 
Protocol.  The GOS was particularly concerned about the 
Spanish energy sector, with its high number of coal-powered 
plants and how to control CO2 emissions without causing 
capacity cuts or price hikes.  Spain will need new investment 
in power plants and should improve importation infrastructure 
in order to meet demand for electricity.  The new socialist 
government (PSOE) blames the former People's Party (PP) 
government for not negotiating with enough foresight to see 
that Spain's rapid GDP growth and industrial output would 
also increase its emissions. END SUMMARY. 
 
EMISSIONS PLAN PUBLISHED 
------------------------ 
 
2.  Spain's Ministries of Environment and Industry presented 
the provisional draft of the National Allocation Plan (NAP) 
on 7 July.  The NAP outlines the level of carbon dioxide 
(CO2) emissions that certain sectors of the economy will be 
allowed to produce between the years 2005 and 2007, as 
mandated by the Kyoto Protocol.  The EU threatened to take 
Spain and a handful of other EU countries to the European 
Court of Justice for delaying the rollout of their NAPs.  GOS 
officials sped up analysis and drafting of the NAP to avoid 
EU reprimand at the last minute.  The Ministries of 
Environment and Industry led the task of permit allocation to 
the petroleum refinement, steel, cement, industrial ceramics, 
paper, and energy sectors.  The NAP does not cover the 
transportation, agriculture, chemical, services, non-iron ore 
metals, residential, or other industrial services emissions, 
but later rounds will restrict CO2 and other emissions 
generated by these sectors.  The GOS will distribute CO2 
emissions permits based on sectoral projections that account 
for future capital and existing plants in the industries, 
except in the special case of the energy sector.  The 
Ministry of Environment created a formula for Kyoto 
compliance that accounts for future growth and historical 
emissions from power plants in a way that that maintains a 
competitive sector and assures a sufficient energy supply. 
 
ALLOCATIONS 
----------- 
 
3.  The Kyoto Protocol uses 1990 CO2 emissions levels as its 
base year measurement.  Spain's total allotment of 161.25 
million tons of CO2 emissions is a 15% increase over 1990 
levels.  Last year's CO2 emissions levels summed to more than 
40% over (402.7 million tons) 1990 totals.  The GOS's 2012 
target is to bring CO2 emissions down to 24% over 1990 
totals.  Individual firms with excess emissions, mostly in 
the energy sector, will buy CO2 emissions credits in the 
European CO2 Emissions Market that is scheduled to open in 
January 2005.  The GOS hopes that replacement of older 
capital with new cleaner technology will eliminate these 
excesses in the long run.  Spain will also receive an extra 3 
million tons of CO2 credits from Kyoto provisions for forest 
lands and their conversion of greenhouse gases into oxygen. 
This equates to a 2% cushion that effectively increases the 
15% limit over 1990 figures to 17%. 
 
4.  The emissions breakdown per sector is as follows: 
 
SECTOR:                       TOTAL EMISSIONS: 
Petrol. Refinement            15.97 million tons 
Steel                         11.94 
Cement and Calcium            30.04 
Glass and Ind. Ceramics 11.12 
Paper                         5.35 
Reserve                       0.43 
TOTAL INDUSTRIAL              74.85 
 
Energy                              86.40 
TOTAL (energy   ind.)         161.25 
 
5.  We met with Teresa Rivera, General Manager of the Office 
of Climate Change of the Ministry of Environment, who gave us 
details regarding the development of the NAP.  She said that 
since May 25, GOS officials working on Kyoto had redoubled 
their efforts to complete Spain's NAP.  An interministerial 
committee led by the Ministry of Environment and made up of 
assistant secretary-level officials from affected Spanish 
ministries, such as the Ministries of Environment, Industry, 
and Economy, met weekly to work out the details of Spain's 
NAP.  A working-level group from the same ministries met more 
frequently.  These groups consulted regularly with industry 
experts and the autonomous regional governments.  Rivera 
noted that the PP government had organized a working group 
that laid the groundwork for Kyoto compliance, but seemed 
reluctant to go further.  A steel industry contact told us 
that during the PP administration, GOS officials promised 
industry leaders they would have all of the emissions permits 
they asked for and were very concerned about Kyoto in the run 
up to the campaign in March.  He told us that PP officials 
asked the industry not to talk with the press.  Contacts in 
the chemical industry claim that PP administration officials 
told them privately that Spain would not comply with Kyoto. 
Nevertheless, the research and analysis from the previous 
administration allowed the current PSOE administration to act 
quickly.  The new government, acting on its campaign pledge, 
pulled together all of the pieces necessary to enact Kyoto 
legislation in two months. 
INDUSTRY IS PLEASED BUT HESITANT 
-------------------------------- 
6.  The industrial sectors (ie. refineries, steel cement, 
ceramics and paper) made out well in this first tranche of 
Kyoto, receiving on average about 97% of the emissions 
permits they requested from the GOS.  Our steel sector 
contact said this was in recognition of the fact that all of 
the sectors except for energy had little room to maneuver 
because their production processes could not change, 
therefore their CO2 emissions were more or less fixed.  He 
said industry is concerned the next round will not be so 
pleasant.  Energy took the real blow, despite the fact that 
the sector received half of all NAP emissions allowances. 
 
THE TROUBLES WITH ENERGY 
------------------------ 
 
7.  The NAP Interministerial Committee found Spain's energy 
sector to be the most troublesome not only because of its 
massive emissions but also because of the threat of lost 
electrical capacity and rate increases.  The provisional NAP 
allocates 86.2 million tons of CO2 permits, more than 
one-half, to the energy sector.  The energy sector is also 
the only one in which the GOS is directly allocating permits 
to firms instead of to the governing sectoral body for later 
allocation to individual firms. 
 
8.  The two largest electricity companies, Endesa and 
Iberdrola, each lobbied for different methods of emissions 
allocation.  Endesa wanted historically-based assignments, 
which would have favored their heavier reliance on coal 
produced electricity.  Iberdrola favored a plan that only 
included projected emissions, because of their use of more 
efficient combined cycle generators.  The NAP council decided 
to distribute emissions credits using a mixed formula.  New 
combined cycle gas plants that meet all regulations to begin 
operations by 2005 will be included in the assignments of CO2 
credits. 
 
 
9.  Coal plants will receive permit assignments according to 
historical data and combined cycle generators will receive 
CO2 credits based on projected emissions.  The Ministry of 
Industry representative on the NAP working group told econoff 
that one of the GOS's goals is to eliminate coal produced 
electricity by gradually transitioning into gas-generated 
electricity combined with some imported electricity.  Spanish 
mining companies and workers in northern Spain stand to lose 
out on phased-out coal production along with the U.S., which 
is the largest exporter of coal to Spain.  Electric bills 
will likely also increase, despite the Minister of Industry's 
declaration to the press that they should not increase above 
the normal rate. 
 
10.  Jesus Candil, Director General for Industrial 
Development in the Ministry of Industry, Tourism and 
Commerce, informed us that Spain needs to increase capacity 
to connect with foreign sources of electrical capacity in 
order to be flexible and to meet future demand and Kyoto 
requirements.  He said that Spain is "electrically an island 
in Europe," with almost zero trade in electricity between it 
and the rest of the EU.  He went on to say that the GOS goal 
is to increase its electricity import capacity to 10% of 
demand. He hastened to add that Spain did not need to import 
the electricity, but should develop the capability to do so 
in the event that it is necessary.  The GOS recently approved 
a gas and electrical pipeline between Algeria and Spain. 
This pipeline will partially accommodate Spain's growing 
electricity demand through both increased gas supplies and 
direct importation of electrical power from Algeria-based 
power plants.  But both Rivera and Candil concurred that the 
energy sector needs to augment its production ability with 
new capital, which is expected to solely come through private 
investment. 
 
THE ROAD AHEAD 
-------------- 
 
11.  The NAP Interministerial Committee is now drafting the 
royal decree to legally enact the NAP.  Our contacts predict 
that the Council of Ministers will pass NAP legislation on 
July 30.  Teresa Rivera commented that drafting the final 
plan took two months of intense work, but they are finding 
enacting it will be even more difficult.  The GOS must now 
form some kind of regulatory body, distribute permits, 
monitor for excess gas emissions, and enforce the NAP. 
Industry and government leaders are currently discussing 
implications of the NAP in what is known as the period of 
public criticism, although the last draft of the NAP is only 
expected to change negligibly, if at all, before approval by 
the GOS Counsel of Ministers. 
12.  COMMENT: It is unclear whether the previous government 
intended to comply with the Kyoto Protocol.  The PP 
government formed an initial working group to provide 
emissions research, but never moved forward in drafting a 
definitive NAP.  With harsh EU penalties looming it is likely 
that a new PP administration would also have stepped up the 
pace after elections to finish work on the NAP.  The PSOE 
pledged to comply with Kyoto as part of its campaign.  The 
industrial sector fared well in this tranche, while the 
energy sector will need to undergo some restructuring. 
Spanish businesses are concerned that these regulations may 
reduce international competitivity due to higher costs for 
Kyoto-compliant countries vs. non-compliant countries. 
Consumers are concerned that producers will pass along 
increased costs to them.  END COMMENT. 
ARGYROS