US embassy cable - 04PRAGUE1848

UNCLAS SECTION 01 OF 02 PRAGUE 001848 
 
SIPDIS 
 
SENSITIVE 
 
BUDAPEST FOR KARYN POSNER-MULLEN 
 
E.O. 12958: N/A 
TAGS: SENV, EIND, EZ, EUN 
SUBJECT: COALED CASH - CZECH EMISSION TRADING PLAN: DRAFTED 
BY BUSINESS, FOR BUSINESS, WITH THE UNPRECEDENTED SUPPORT 
OF BOTH THE GOVERNMENT AND THE OPPOSITION. 
 
 
Sensitive but Unclassified -- not for Internet distribution. 
 
1. (U) SUMMARY.  The Czech Republic has proposed to the EU an 
emissions trading scheme that increases the ceiling on 
emissions above current levels.  Environmental groups point 
to conflicts of interest, say the Czech proposal ignores 
submission criteria and the government's own stated energy 
policy, and argue it amounts to massive subsidies to 
state-run and private firms; the Environment Ministry echoes 
this view.  But governing left-of-center Social Democrats 
have come down firmly on the side of business, and the 
Ministry of Industry and Trade largely dictated the terms of 
the Czech proposal.  Because of their delay in submitting a 
proposal for vetting, the Czech Republic will not be a part 
of the EU emissions trading scheme when it begins January 1. 
End Summary 
 
2. (U) The sectors of Czech industry that will participate in 
the emissions trading scheme have historically emitted 
approximately 89 million tons of CO2 annually.  Environmental 
NGOs, in the spirit of the Kyoto Protocol, asked the 
government to submit a National Allocation Plan (NAP) under 
the EU's emissions trading scheme of 85 million tons, a small 
reduction.  However, the latest version of the Czech's NAP, 
which won't be approved by the European Commission in time 
for the January 1, 2005 start of the trading scheme, sets 
allocations levels at 107.6 million tons, an increase of 
roughly 21 percent. 
 
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POTENTIAL TO REDUCE COAL CONSUMPTION NOT INCLUDED IN NAP 
--------------------------------------------- ----------- 
 
3. (U) The Czech Republic gets approximately 80 percent of 
its electricity from power plants that burn a soft form of 
coal.  The State energy plan had called for some of the 
dirtiest coal burning plants to be retired as the nuclear 
plant at Temelin came on line, or by 2010 at the latest. 
Temelin's two reactors have just finished their trial period 
and are now operating at full capacity.  Nearly all of their 
output is exported.  In fact, the Czechs are now the 7th 
biggest exporter of electricity in the world.  But none of 
the coal-fired plants have been shut down, nor have the 
reductions in coal consumption that these shutdowns would 
bring been included in the NAP, even though these shutdowns 
are part of the government's published energy policy. 
 
4. (U) Other potential reductions could be found in wasteful 
heating systems, and the old communist-era factories.  Older 
Czech buildings and the water pipes that deliver heat are 
badly insulated.   Many factories could reduce emissions 
simply by switching fuel from coal to gas.  But once again, 
there is no assumption in the NAP that any reductions will 
occur. 
 
5. (U) The Czech NAP was drawn up by the Ministry of Industry 
and Trade, which has not revealed the methods it used to 
arrive at the figure of 107.6 metric tons.  The business 
community was consulted.  The government then cited business 
confidentiality as the reason for excluding NGOs from the 
 
SIPDIS 
process.  Just under two-thirds of the allocations would go 
to the energy sector,  the main company of which, CEZ, has 
the Czech government as its main shareholder.  Another 
beneficiary would be the commercialized firm, Viltcovice 
Steel, which also has the state as its main shareholder.  As 
one environmental NGO pointed out, the Czech government has 
no incentive to force itself to make costly changes and 
reduce emissions at state-run firms.  On the contrary, 
surplus allocations of 18.6 million tons a year, if the 
market price stays near the current value of 9 Euro, could 
mean an extra 220 million dollars a year for Czech firms. 
 
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CREATING A MARKET WHEN YOU,RE THE ONLY PLAYER 
--------------------------------------------- 
 
6. (U) Last year the world's biggest emissions and coal 
brokerage firm, Evolution Markets, teamed up with a Slovak 
Firm, Menert, to form Evolution Menert.  This firm advised 
several Central European governments, including the Czechs, 
on how to draft a NAP.   The firm, which has offices in 
Bratislava and Prague, is currently the only emissions broker 
in the two countries.  It stands to make healthy profits off 
the trade of surplus allocations.  As the firm,s own web 
page points out, "Slovakia and the Czech Republic are 
positioned to be major participants in global greenhouse gas 
markets.  Both countries are currently well below their 
greenhouse gas emission reduction targets under the Kyoto 
Protocol.  In addition, Slovak and Czech government officials 
are encouraging investment in their energy infrastructure 
that will not only improve services, but also reduce overall 
levels of greenhouse gas emissions." 
 
7. (U) Environmentalists ask why, if the Czech Republic is 
already below its emissions target, and the government is 
encouraging further reductions in the levels of emissions, 
did the government and Evolution Mennert draft a plan with 
emission allocations 21 percent higher than the target?  Ivo 
Mravinac, the spokesperson for the Ministry of Industry and 
Trade offered one answer to this question: &It,s useful for 
the firms to have permission for emissions at higher levels 
so that if they do not use up their quota, they could trade 
the remainder with other countries.8 
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MINISTRY OF INDUSTRY AND TIRADE 
------------------------------- 
 
8. (SBU) The Czech emissions trading proposal has touched off 
debate between government ministries, but there has been 
little political debate.  Both major political parties -- the 
center-left Social Democrats, who lead the governing 
coalition, and the center-right Civic Democrats, who are the 
main opposition party and generally practice a policy of zero 
tolerance towards the government -- support the proposed 
scheme.  Large Czech businesses, which initially opposed the 
emissions trading scheme, but now embrace it having realized 
the potential windfall it represents.  On the political 
scene, matters came to a head on November 2nd when the lower 
house of parliament undertook the second reading of a bill 
that would set conditions for participation in the scheme. 
The Ministry of the Environment had insisted that any 
revenues generated by the sales of allowances be spent on 
green technologies.  But a coalition of pro-business forces 
defeated this motion. The Minister of the Environment, Libor 
Ambrozek, felt that parliamentarians from both the government 
and opposition were conspiring, along with the directors of 
the nation,s largest industrial firms and the Ministry of 
Industry and Trade, to draft a bill that would favor business 
at the cost of the environment.  He sent the company 
directors SMS messages saying "the changes have undoubtedly 
been prepared by you and the Ministry of Industry and Trade." 
 Ambrozek, a Christian Democrat normally considered a soft 
spoken gentleman, included a vulgar expression in his SMS, 
which touched off calls for his resignation by one member of 
parliament's committee on trade. 
 
9. (SBU) The Czech Plan is one of 4 NAPs that the European 
Commission must still approve. Poloff spoke with Dr. Jiri 
Hlavacek, a special advisor to the Minister of the 
Environment about the Czech NAP's chances in Brussels.  He 
acknowledged that most of the new EU states have had their 
NAP proposals cut by 20 percent, but added, "We are prepared 
to go to Brussels and fight for this."  However, others at 
the ministry confided to Poloff that, "He has to say this, 
although the current plan is politically indefensible." 
 
11. (SBU) Comment:  We can only wait and see how far the 
European Commission will cut back on the Czech NAP.  But it 
seems clear enough that the Czechs are not hoping for a 
market-based method of producing the most cost-effective 
reductions in greenhouse gases.  Instead, it appears that 
they, as was the case with other members of the former Soviet 
Bloc, see the scheme as a distortion of market forces, that 
might allow some Czech firms, including those run by the 
state itself, to reap windfall profits while avoiding the 
reductions in emissions that are the principal reason for the 
scheme,s existence. 
CABANISS