US embassy cable - 05BRATISLAVA160

UNCLAS  BRATISLAVA 000160 
 
SIPDIS 
 
 
SENSITIVE 
 
BUDAPEST FOR KPOSNER-MULLEN 
 
E.O. 12958: N/A 
TAGS: ECON, SENV, LO, EU 
SUBJECT: CO2 EMISSION RESTRICTIONS SQUEEZE ECONOMIC GROWTH 
 
Sensitive but unclassified - protect accordingly 
 
1. (SBU) Summary:  In October 2004, the EU mandated that the 
GOS reduce its National Allocation Plan (NAP) for CO2 
emissions by 14 percent.  Recently, local companies, 
including U.S. Steel Kosice (USSK), have complained that the 
European Commission (EC) is targeting new EU members to 
reduce CO2 emissions, yet allowing EU-15 members to maintain 
current emission levels.  These companies fear this will 
unfairly limit economic growth in the new member countries 
while protecting large-scale polluters in "old Europe". 
Prime Minister Mikulas Dzurinda is equally concerned that the 
EU's allotment methodology could hamper Slovakia's economic 
growth as well as its competitiveness with non-EU countries. 
USSK challenged the EU's actions in court and invited the GOS 
to join the law suit.  However, the GOS decided instead to 
comply with the terms of the amended NAP by imposing a 
two-tier reduction schedule featuring an eight percent 
reduction for USSK and other large companies. End Summary. 
 
CONSPIRACY? 
----------- 
2. (SBU) USSK explained to post that the EC method for 
calculating NAP allotments favors the EU-15 states and 
discriminates against new member states with stronger 
economic growth. USSK asserted that the Minister of 
Environment, Laszlo Miklos, was strong-armed into accepting a 
significant 14 percent decrease in emission allotments for 
Slovakia.  Further, USSK, speaking on behalf of several 
companies in Slovakia, expressed concern that this decrease 
will negatively impact manufacturing and retard current 
economic growth. In support of its claim of discrimination, 
USSK provided the following statistics: The EC has confirmed 
13 of the EU-15's NAPs, of which six countries (Denmark, 
Finland, Germany, Spain, Sweden and Great Britain) received 
no reduction while four (Austria, Belgium, France, and 
Ireland) had their emissions cut less than 1.1 percent, and 
three more (Portugal, Netherlands, and Luxembourg) received 
reductions ranging from 1.8 to 4.4 percent.  (Note: Great 
Britain is currently attempting to amend its NAP to allow for 
an increased emissions level.)  On the other hand, of eight 
confirmed NAPs for new members, the EC imposed a greater than 
12 percent reduction in emissions on four of these countries, 
including Latvia (29), Slovakia (14), Lithuania (13), and 
Estonia (12.4).  The other four new member states were 
granted 0 to 1.0 percent reductions and the Czech Republic 
and Poland still do not have approved NAPs. 
 
3.  (SBU) Following imposition of the reduced emissions 
requirement, Dzurinda repeatedly told USSK that the GOS would 
seek to rectify this problem by increasing its CO2 emissions 
allotment under an amended NAP.  However, at the same time, 
the Ministry of Environment's (MOE) Air Pollution Department 
told econoff that the ministry had no plans to amend the 
current NAP. The GOS's failure to take any action or 
delineate allocation of the 14 percent among the companies 
prompted USSK to file a legal action against the EU to annul 
the revised Slovak NAP. Despite contrary indications earlier, 
other Slovak companies have decided that they will not join 
the lawsuit. 
 
DIFFERING METHODOLOGY 
--------------------- 
4. (SBU) Initially, the GOS submitted a NAP that was well 
below Kyoto requirement levels for CO2 emissions, which would 
allow it to sell its excess rights.  In USSK's view, the EU 
pressured Miklos to accept a 14 percent decrease in CO2 
emissions, or face mandatory imposition of a 24 percent 
decrease.  However, Peter Lakata, economic advisor to 
Dzurinda, denied this to econoff based on reports from the 
Slovak mission to the EU.  Essentially, the discrepancy 
between the GOS's original NAP and the EC's proposed figure 
is a result of using different methods for calculating an 
equitable level of CO2 emissions. The GOS based its requested 
allocation upon projected emission figures provided by the 
country's major emission producing companies, including USSK. 
 On the other hand, the EC calculated the allocation based on 
a single formula applied to all member states. The EC 
utilized Slovakia's recorded emissions from 2002 and then 
calculated additional emission allotments based upon GDP 
growth forecasts by the Slovak Ministry of Finance for 2003 
and 2004.  The methodological difference resulted in the GOS 
requesting 14 percent higher emissions to reflect the 
disproportionately large role the leading CO2 producers play 
in the Slovak economy. The reduction in emissions allotments 
resulted in a debate as to whether the companies' figures 
were credible or whether the EU methodology failed to account 
for the rapid economic growth in central European countries. 
 
5.  (SBU) According to Lakata, the GOS contended that the 
 
EC's methodology is flawed because it does not acknowledge 
that Slovakia is already below Kyoto requirements.  Slovakia 
would lose this buffer, which will be dispersed among EU-15 
members exceeding their allotments. The EC responded that 
under EU regulations, excess emissions quotas cannot be 
traded because they are supposed to be dispersed to other EU 
countries exceeding their emission requirements.  The EC 
pointed out that GOS's submitted figure did in fact provide 
for excess emissions that would later be traded in violation 
of this regulation. The EC also underlined that all member 
states were subject to the same formula, and that an earlier 
decrease in emissions had been directed against all EU-15 
members. 
 
CREDIBILITY ISSUE 
----------------- 
6.  (SBU) The situation was further complicated when the EC 
accused the companies of exaggerating their allotment needs 
and Miklos agreed.  Then, Lakata said it was difficult to 
argue that Slovakia required such a large increase from 2002, 
when all the old member states were decreasing their numbers 
from the 1990 level as agreed.  In addition, Miklos has 
stated the 14 percent decrease was not accurate because the 
MOE miscalculated the initial figures supporting the NAP, 
which resulted in an over-estimation by three percent. 
Therefore, the GOS would only need to reduce emissions by 11 
percent, and the MOE believes that each company built in 
reserves that would satisfy this amount.  Miklos' assertion 
is based upon the ministry's estimates for emissions using 
growth figures for the relevant business sectors. Lastly, the 
MOE claimed that, even if USSK had to purchase excess 
allotments  (from non-EU members), it would not severely 
impact it given the large profits the company earns in 
Slovakia.  (Note: According to GOS calculations, USSK would 
need to pay approximately USD 14 million annually to purchase 
allotments.)  Dzurinda asked the Ministry of Foreign Affairs 
to assist the MOE in preparing an analysis of the risks and 
rewards for potential outcomes should GOS join USSK's 
lawsuit.  USSK suggested that the MOE would not provide 
accurate findings in its report given that Miklos was solely 
responsible for accepting the 14 percent reduction.  To 
counter this potential bias, USSK offered its own experts and 
analysts to assist the MOE, which the MOE declined.  Several 
senior GOS members have expressed concern that Miklos does 
not consider this a serious matter. 
 
MOVING FORWARD 
-------------- 
7.  (SBU) On January 26, the Slovak Cabinet developed several 
options to address the concerns of USSK and other large and 
economically important polluters.  The GOS decided to grant 
the most important CO2 producers (including USSK) an eight 
percent decrease while the other companies would receive a 15 
percent reduction.  The cabinet agreed upon this alternative 
since most pollution is caused by state-owned companies and 
the GOS can demand a decrease in their emissions more easily 
than private, especially foreign, companies. 
 
8.  (SBU) The Cabinet also debated whether to renegotiate 
with the EC to garner a larger allotment.  Dzurinda and the 
Minister of Health, Rudolf Zajac, supported USSK's position 
and suggested that Slovakia should join its lawsuit against 
the EC.   However, the Ministry of Economy did not provide an 
opinion on joining the law suit and the Ministry of Finance 
felt that the potential for success was too low to make it 
worth pursuing. 
 
9.  (SBU) Lakata said Dzurinda supported joining the lawsuit 
for five reasons: 1) This NAP will set the standard for 
future emission NAPS - both for CO2 and other pollutants; 2) 
Emissions are already down 20 percent since 1990 and Slovakia 
should benefit from this reduced level; 3) Slovakia is not as 
developed as "old Europe" so room for growth is crucial; 4) 
The applicable regulation requiring the reduction is a 
directive addressed to the EU-15 members and should not be 
applicable to GOS; and 5) Slovakia's competitiveness with 
non-EU states, such as Serbia or Ukraine, will be negatively 
impacted if the 14 percent reduction is not removed. 
 
10. (SBU)  Finally, on February 16, the MOE's analysis was 
presented to the cabinet for a final decision.  The cabinet 
declined to join USSK's lawsuit at this time, but noted that 
the GOS could change its position at a later date. Instead, 
it agreed to comply with the amended NAP stating which 
companies would receive an eight percent reduction and which 
a 15 percent cut to meet the 14 percent total reduction. 
USSK intends to press forward with its lawsuit once the 
parameters of the NAP are clarified. 
 
TROUBLE ELSEWHERE 
 
----------------- 
11. (SBU) Whether the EC's method of calculation is fair or 
intentionally discriminates against new EU members as 
asserted by USSK, the end result could limit growth and 
investment among the budding economies of central and eastern 
Europe.  In this regard, Lakata cautioned that Poland and the 
Czech Republic's lack of approved NAPs did not bode well, 
because he believed it indicated a potentially large 
discrepancy with the EC. He provided statistics showing that 
the GOCR had requested three times as many allotments as 
Slovakia, and unless the Czech republic's 2002 emissions and 
GDP growth for 2003 and 2004 are three times higher than 
Slovakia's, its companies will be required to drastically 
reduce emissions.  March 1 marks the initial date that 
emissions begin to accrue against the NAP allotments. 
THAYER 
 
 
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