US embassy cable - 05WARSAW1396

UNCLAS  WARSAW 001396 
 
SIPDIS 
 
 
SENSITIVE 
 
STATE FOR EUR/NCE TARA ERATH AND MICHAEL SESSUMS 
STATE FOR OES MCMURRAY HARLAN WATSON, OES/PCI, G 
STATE PASS TO EPA ANNA PHILLIPS, STEPHEN JOHNSON, CHARLIE 
AUER, AND SUSAN HAZEN 
WHITE HOUSE OF OSTP 
COMMERCE FOR ENERGY AND ENV 
ENERGY FOR PUMPHREY, PATRICK HAMILTON 
 
E.O. 12958: N/A 
TAGS: SENV, ENRG, ECON, PREL, PL, EUN 
SUBJECT: BRUSSELS CUTS TWO BILLION DOLLARS WORTH OF CO2 
ALLOWANCES FROM POLAND'S NATIONAL ALLOCATION PLAN 
 
 
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Summary 
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1. (SBU) On March 8, the European Commission issued its much- 
delayed decision on national CO2 allotments under the EU's 
Emissions Trading Scheme.  The EU conditionally accepted 
Poland's National Allocation Plan, but cut its proposed 
emissions by 16.5 percent (from 286 to 239 million tons). 
Although Poland expected the EC to shave its suggested 
allocation, it is angered by the depth of the cuts.  The EU 
decision would shift Poland from being a net seller of CO2 
credits to the rest of Europe to being a net buyer. 
Environment Ministry officials figure the decision will cost 
Poland $685 million per year from 2005-2007 in foregone 
revenues or additional expenses.  The GOP is also upset that 
the EC did not dispute Poland's proposal on technical 
grounds, but rather made a political decision to boost 
allocations for under-performing West European emitters.  As 
a result, Poland may choose not to participate in the EU's 
Emissions Trading Scheme, an option it feels it has.  End 
summary. 
 
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Deep Cuts 
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2. (SBU) In September 2004 Poland submitted its National 
Allocation Plan for approval to the European Commission, a 
prerequisite for Polish CO2-emittting installations to 
participate in the EU's Emissions Trading Scheme.  On March 
8, 2005 the EU Commission approved Poland's participation, 
but ruled that it must cut CO2 emissions proposed under its 
National Allocation Plan by 16.5%.  Specifically, the EU 
instructed Poland to cut its proposed allocation by 47 
million tons, or from 286 million tons to 230.2 million for 
installations, with an additional 8.8 million tons to be 
held as a national reserve.  The head of Poland's National 
Emission Centre, Krzysztof Oledrzynski, said the EU decision 
is "nonsense," because it requires Poland to reduce targeted 
CO2 emissions below the country's actual 2004 levels. 
(According to the Environment Ministry, Poland emitted 257.6 
million tons of CO2 in 2002.) 
 
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Impact on Poland 
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3.  (SBU) Polish officials estimate the 47 million ton 
annual reduction of CO2 credits for the 2005-2007 period 
will cost Poland $2.05 billion over three years (assuming a 
price of 11.20 EUR/$14.56 per ton).  According to 
specialists at Ernst and Young, the allocations would be 
regarded as an intangible asset on an installation's balance 
sheet, an asset whose value the EC has now effectively 
reduced by 16.5%. 
 
4. (U) If Poland accepts the EU Commission's conditions, 
many Polish companies will need to purchase allocations 
elsewhere or take measures to cut emissions.  The EU cuts 
will affect private investors as well, reducing the ability 
of U.S. energy companies and others to sell credits. 
Several U.S. investors say they wanted to use income from 
the sale of allowances to finance environmental upgrades of 
their facilities in Poland in anticipation of the future, 
more expansive phase of the Emissions Trading Scheme in 
2008. The Ministry of Economy had hoped to use some of the 
money from the sale of credits to foster investments in 
cleaner energy. 
 
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Poland May Opt Out 
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5. (SBU) On March 1, the chief negotiator from Poland's 
Ministry of Environment, Secretary of State Tomasz 
Podgajniak, told the press that Poland might opt out of the 
European Emissions Trading Scheme altogether.  Jacek Mizak 
from the Environment Ministry's International Cooperation 
Department said that although the EU established the 
Emissions Trading Scheme by directive, Poland views the 
directive as a tool to meet Kyoto targets.  Since Poland 
 
 
already has met its Kyoto obligation, non-compliance with 
the directive is a legal option.  Wojciech Jaworski, the 
director of the Environmental Protection Instruments 
Department at the Ministry of Environment, explained that if 
Poland does not participate in the Emissions Trading Scheme, 
the country as a whole would still be able to trade CO2 
credits with other European countries, albeit through a more 
labor-intensive process as outlined in the Kyoto protocol. 
However, individual installations could not directly buy or 
sell credits on the EU market. 
 
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Tough Negotiations in Brussels 
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6. (SBU) Oledrzynski, who was a member of Poland's 
negotiating team in Brussels, said negotiations with the EU 
Commission were difficult, as the Commission did not 
consider seriously Poland's arguments.  The EU side did not 
have any experts and did not question any of the technical 
aspects of the Polish National Allocation Plan.  Instead, 
the EU seemed to only take political factors into 
consideration.  Jaworski also criticized the negotiations, 
saying Brussels was more interested in ensuring that an 
influx of Polish allowances would not reduce the price of 
CO2 credits than in reviewing Poland's National Allocation 
Plan according to scientific and technical criteria. 
 
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Higher Prices for CO2 Credits in Europe? 
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7. (SBU) Oledrzynski expects the cut in Poland's allocation 
to drive up prices in the Emissions Trading Scheme 
throughout Europe, since it would remove a large supply of 
excess allocations.  Jaworski said the price of a ton of CO2 
already has risen 15% (from 9.7 to 11.2 EURO/ton), since the 
EU announcement of its conditional acceptance of Poland's 
National Allocation Plan.  Oledrzynski believes Poland would 
have been the lead seller of allocations in Europe.  Now its 
industrial installations will need to purchase credits if it 
participates.  Jacek Mizak at the Environment Ministry said 
that the Ministry was mistakenly under the impression that 
the new EU-10 would profitably supply allocation credits for 
many of the EU-15 that find it overly costly to meet their 
Kyoto obligations. 
 
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Next Steps 
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8. (U) Poland now faces three options: suing the Commission 
at the European Court of Justice, which Oledrzynski 
privately described as having "a remote chance of 
succeeding;" putting the matter to the European Council in 
an attempt to overrule the Commission; or pulling out of the 
scheme altogether. 
 
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Comment 
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9. (SBU) Poland knows it faces enormous challenges in 
meeting EU environmental standards over the next decade. 
Thanks to a massive restructuring of its economy in the 
early 1990s, which reduced CO2 emissions by 32% from 1988- 
2001, Poland had hoped carbon emissions would be the one 
area in which it could make a fast start.  With the stroke 
of a pen, the EC seems to have destroyed that hope.  So far 
our GOP contacts have not indicated any willingness to 
accept the EU Commission's conditions.  We expect the GOP 
will fight hard over this issue, given the significant 
amount of money involved. 
 
Munter 
 
 
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 2005WARSAW01396 - Classification: UNCLASSIFIED