Coronavirus exclusion of Poland from the EU ETS?

Last week, Deputy State Assets Minister Janusz Kowalski stated that interference with the EU Emissions Trading Scheme (EU ETS) was necessary in the wake of the coronavirus pandemic.

Does this mean that the Green Deal will give way to the Epidemic Deal?

The scheme is the EU’s primary tool for reducing greenhouse gas emissions by obliging mainly energy-intensive industrial installations to purchase allowances or pay for excess carbon emissions. The Deputy Minister believes that this mechanism hits the Polish economy, which has a high share of coal in its energy mix, particularly hard. This, in turn, results in high operating costs for power plants in Poland and, as a result, higher electricity and heat prices for end users. In this situation, the Deputy Minister proposes that the negative consequences of the pandemic should be mitigated by abolishing the system or excluding Poland, whose economy is particularly painfully affected by the functioning of the EU ETS.

Leaving aside the fact that the scenario of Poland’s withdrawal from the ETS or, going further, its complete abolition in practice seems unrealistic (an amendment to the EU Directive establishing the EU ETS would be required and, to this end, the support of other Member States), the question arises as to whether reform of the system would lead to an improvement in the economic situation of businesses at all.

At the same time, however, it pointed out that this weakening could result in a surplus of allowances and, consequently, a fall in their prices.

History likes to repeat itself, and it is worth recalling that we already faced such a situation with the last economic crisis in 2009.

Emissions were cut more than expected, which in turn created a surplus of allowances.

This in turn led to a reduction in the price of allowances and consequently reduced the incentive to reduce emissions.

We may be facing a similar situation this time.

This seems to be confirmed by the clear drop in allowance prices seen in recent days.

Paradoxically, it could therefore turn out that the pandemic will lead to a reduction in the burden of the EU ETS, so that Polish power plants or industrial plants emitting carbon dioxide will, to some extent, become ‘beneficiaries’ of the crisis.

Nevertheless, the government seems to be hedging against a less positive scenario for companies materialising.

According to information provided by the Climate Ministry, the government is currently working on proposals for specific solutions to reduce emissions where it is most necessary and to ensure the smooth functioning of the energy system.

However, time will tell what concrete shape these proposals will take on the legislative path.

The ministry also signalled that if the difficult economic situation persists, the government will propose ad hoc solutions to the European Commission that could improve the situation.

However, for the time being, there are no signals from the Commission that could result in a reduction of the EU ETS burden.

This does not mean, however, that the Commission does not see the impact of the pandemic on the functioning of the system, as well as on the operators of installations themselves.

This Thursday, it issued a position paper on emission reports as the deadline for their submission approaches.

The Commission seems to be aware that some operators may have difficulties in submitting verified reports on time and has indicated possible solutions to this problem.

It pointed out that, under the legislation, if a report is not submitted on time, the competent authorities may make a conservative estimate of the installation’s emissions (to be carried out in April in due time) so that the operator concerned can comply with the surrender obligation by 30 April.

This obligation is in fact of paramount importance for the Commission.

The question is, however, whether it will be possible to fulfil it at all if the epidemic threat and the associated restrictions persist.

For the time being, it is difficult to rule out a negative scenario in this respect, so the industry has no choice but to follow developments and further reports from the Polish government and the Commission itself.