Examination of Witnesses (Question Numbers
404-419)
Professor Jerzy Buzek and Professor Krzysztof Zmijewski
22 OCTOBER 2008
Q404
Chairman:
First of all, welcome and thank you very much indeed
for finding the time to come and help us with this inquiry. We
have been doing this inquiry on the EU's Emissions Trading Scheme
for some months now, since before the summer and now into the
autumn, and I suppose it is fair to say that the debate has been
carrying on as we have been doing the study. Would you like to
make any in statements or would you prefer to go straight on to
the questions that we have for you?
Professor Buzek: Could I say a few words?
Q405 Chairman: Yes, please.
Professor Buzek: Thank you, first of
all, my Lord Chairman, for having the possibility to explain the
position of my country. I am also discussing the problem in the
European Parliament, so I have a different point of view in my
mind all the time, and I understand that it could be a different
point of view in their EU 27. Let me also say that it is a special
day for me. I have walked around Parliament quite a few times
in my life but never been inside. It was really a great thought
from my side to think I should improve things also in the future,
and now I have the possibility to explain so important a thing,
not only for one, two, three countries but for the whole European
Union and for the world as a whole. If you are talking seriously
about cutting CO2 emissions, we think that it is necessary to
do absolutely the same all over the world, because we cannot change
the situation as the European Union only. We produce not more
than 14% of CO2 emissions, and if we change it, 20% diminished,
it means a 3% change in the overall world admission. It means
nothing from the point of view of the problems we are tackling
now. To achieve international agreement is very important, so
we need a good, profitable, efficient Emissions Trading Scheme,
not dangerous for the economy, and giving 20% reduction 2020.
In my country there will be the great discussion in two months,
under the umbrella of the United Nations, as you know—the
service convention COP 14, as it was in Bali 10 months ago, and
in 14 months it will be in Copenhagen. The last moment for achieving
agreement. This point is so important, not only for our countries.
Perhaps I could say a few words about myself. I was graduating
from the University of Technology in Upper Silesia and was working
in the universities and also political sciences, and my political
life and public life started together with Solidarity in 1980.
I was organising it and being also a chairman of the first National
Solidarity Congress. It has been the most important event in my
life, I must tell you, and now I am a Member of the European Parliament
on behalf of Poland. Thank you very much.
Q406 Chairman: Would you introduce your
colleague, please?
Professor Buzek: With great pleasure.
He is a professor of the University of Technology from Warsaw.
He has been engaged in energy problems for many, many years. Perhaps
you could say a few words about yourself, professor.
Professor Zmijewski: I have the chance
to work for our Prime Minister as the President of Polish National
Energy Conservation Agency. I used to be a deputy minister in
the Ministry of Construction, responsible for energy efficiency
policy in this sector—which is very important, not only
in Poland but also in the whole of Europe, with 40% of energy
consumption. Now I am an independent expert involved in energy
policy, and especially in the EU ETS, trying to show how we can
achieve the goals which were established one year ago. But this
time, one year, is a year of great changes, because now we should
adapt those goals which were discussed one year ago to the new
situation in which we suffer a lack of trust, a lack of credit,
and a lack of security. That is why the whole concept of the Polish
Government says, "Let us try to achieve these goals with
the lowest possible cost for the society."
Q407 Chairman: Thank you very much. I
will start the questions and then hand over to my colleagues.
It comes across fairly clearly from what Polish ministers have
been saying that they have a concern that the social and economic
impacts of the whole EU climate change package really have not
received sufficient attention: the emphasis has been very much
on the environmental case and insufficient attention to the social
and economic impact. Could you give us a little bit more, explain
the Polish Government's concerns here, and particularly how those
concerns relate to the Emissions Trading Scheme.
Professor Buzek: Thank you very much,
my Lord Chairman, for this question. If I could divide from the
very beginning the whole problem into two parts: one part is energy-sensitive,
for the energy-intensive industry. We have such an industry in
every one of the 27 Member States: cement industry, chemistry
industry, steel industry. In every one country we can find almost
the same influence from the point of view of ETS and probability
of carbon leakages or some perturbation in the economy. We have
it in every one country. On the opposite from the point of view
the energy sector, there are big differences between Member States.
It depends on the energy mix. For example, in Sweden less than
10% of electricity is produced from fossil fuels, but in some
other countries more than 90% is produced from fossil fuels, especially
in Poland. It is an enormous difference. For the electricity sector,
it is quite a different problem from the point of view of the
average interest in the European Union than it is for energy-intensive
industry. If I could, my Lord Chairman, explain mainly the electricity
sector, because from the point of view of the Polish problem or
the Czech problem or the Rumanian problem or even the German problem,
it is a much more interesting because it is a specific problem.
It is the main reason we are suffering more because of ETS than
such countries in which the energy mix is mainly for nuclear or
for renewables and is not influencing so strongly the economy,
householders, and so on and so on. In the case Poland, GDP could
be diminished 0.6%, and we should also expect inflation, a rise
of between 0.2% to 0.4%, and we can also say that costs of electricity
in householders could be not 10%, like it is today, but 16%. It
is a big difference. About 10% less in households will be for
free spending, so for householders it could be a very big difference.
It was counted by our ministers and was also shown in the European
Commission. From this point of view, we can find big differences
in the European Union.
Chairman: Thank you very much. Let us
move on to energy prices themselves.
Q408 Viscount Ullswater: Perhaps I could
you take you up a little bit more on what you have said. The indication
we had from the papers put forward by the Polish Government was
that electricity prices for consumers could double if power companies
were obliged to bid for all their emissions permits at auction
from 2013. I would be grateful if you could explain how you think
that figure is reached, which contrasts very much with the Commission's
own estimation, which is only 15% because they are talking about
the cost of coal being a much more important factor in the price
of energy.
Professor Buzek: Thank you very much,
my Lord Chairman. Let us take this figure as the average for the
European Union—because the European Commission counted the
electricity price for the European Union as a whole. For some
countries, as I mentioned before, in which they must buy CO2 emissions
allowances only for 8%, 12%, 15% of electricity, the change of
electricity price is very small. Mostly in the European Union
we have such countries. In that, I mean that they have less than
30% of coal in the energy mix. Maybe it is also some portion of
gas, but gas is emitting much less CO2 in producing electricity
than coal. So for countries which are having, like Poland, 94%
of electricity produced from coal—only from coal: 94%—it
means that this average, which was counted by the European Commission
of 15%, or sometimes they are saying 20%, for us it means simply
90%. We have prepared some figures. We can leave that here for
information. If anybody, my Lord Chairman, would be interested
in it, we would like to leave it.
Q409 Chairman: Thank you very much.
Professor Buzek: It can be found on these
figures very easily that, with such a big difference, having average
in Europe means that we are not close to the average of all the
countries. From this point of view, it is very easy to count it.
If we take €39 as the cost of one tonne of CO2 emissions
in 2013 and multiply it by the emissions in Poland from coal power
stations, this figure is very simple to achieve. Having average
does not mean that it is connected with all the countries. It
is the main reason I divided the problem at the very beginning
on energy-intensive industries, because cement production or chemistry
is almost the same in all our countries—one of us having
cement, another one steel, another one chemistry—and I think
the Commission is open on our presentation and figures. I was
discussing with the main author of the Directive and he does not
like to change the main issue from the ETS Directive now, but
probably during trialogue there are some possibilities to change
it slightly, because it is very, very difficult for some countries.
Professor Zmijewski: My Lord Chairman,
may I add one sentence on the facts? The specific emission for
Sweden—so how much they need to produce one megawatt hour
of electricity—is 18 kilograms of CO2. The same number for
Poland says 950 kilogram of CO2. Of course, we can calculate the
European average, and the European average will be something like
400 kilograms—and, by the way, for the United Kingdom it
is a little bit more. When we calculate the average, we will obtain
the average for the price which is set by the Commission—but,
unfortunately, we have one leg in the cold water and one leg in
the boiling water, and my country is in the boiling water! Thank
you very much.
Q410 Lord Plumb: I was very interested
in your very clear statement at the beginning saying that you
had to compartmentalise your mind, thinking on the issues in Poland,
thinking on the issues in Europe, and then recognizing that this
is a world problem. I admire you for saying that. I know exactly
how you feel. I had 20 years of it in the European Parliament.
It is not always easy to reconcile the interests of one's country
with the wider, perhaps, interests of the world. All the time
you are thinking of the people who are going to be affected; that
is, the consumer: the woman in her home who is putting on the
gas cooker, or the coal fire, or whatever it may mean in different
parts of the world. Seeing that the total cost of this is only
about 15% of the overall cost of energy, if that is correct, what
is the impact of the ETS? Is the greater proportion coming from
elsewhere instead, due to the factors that are there (the other
methods of producing energy or the cost of energy) compared with
the cost of the programme that is before us?
Professor Buzek: My Lord Chairman, if
I properly understood the question, the question was about proportion
between price rise because of ETS and other problems which could
appear on the market. Let us say, first of all, that our energy
market in the European Union is not enough open, especially in
some countries, so it is very difficult to say about liberal markets.
From this point of view, we cannot say, in such a country like
Poland, that we have something else than monopolies. We do not
have enough cross-border connections, and our producers, as a
matter of fact, are monopolists. Maybe it is different in such
a market like France or Germany or North Italy or some others—big
markets—and it may be working well. From this point of view,
of course, there could be some costs which are growing prices
because of the activity of monopolists, but, as far as we know
now, it is not a very big influence in our country, and we checked
it. Another thing is about coal prices. We are also observing
it, and we can check very easily how much the coal price is influencing
the price of electricity. It is very easy to check it. But if
we talk about electricity prices and a rise of electricity prices
because of ETS, we can count it very easily as well. It depends
on the cost of one tonne of CO2 emissions. It was assumed by the
European Commission that it would be €39. Now some agencies
have prepared quite a different level of costs, let us say 60%
or 70% to one tonne of CO2. It means it will be a quite different
influence on the electricity prices. In the case of such a proportion
you have mentioned a few minutes ago, the real cost of electricity
would be much, much higher than we expect now, so it is impossible
that only 15% of electricity price rise is because the ETS. It
is quite obvious, from many points of view if you want to see
it, that the ETS influence in Poland would be a much, much higher
influence than 15%, as I said during the answer on the first question
you were giving me, my Lord Chairman. So I think it is quite obvious.
Maybe, Professor Zmijewski, you would like to add something.
Professor Zmijewski: If the cost of CO2
is kept at the level of €39, the necessary investment in
the Polish sector to reduce emissions by 20% costs us something
like €10 per megawatt hour, or a little bit less. The same
for the higher possible rise of the fuel costs, because the next
€10 could be only if the price of fuel will double—which
is not very probable. But let us say what will happen if the price
of coal would double: then, the rise of the cost of electricity
will be something like €10. It is not very probable that
that will happen, but still you have the comparison of €10
for investment and €10 for fuel and €39 for 1 tCO2.
In fact, my Lord Chairman, I should take a little bit less because
we should reduce the specific emission, so it will not be €39
but it will result in €35. Definitely, therefore, it is not
true that the rise caused by ETS is 15%. It is definitely much,
much, much more. Two thirds of the rise is EU ETS, and that is
a significant rise, unfortunately.
Q411 Lord Plumb: I am thinking long term.
Will market liberalisation affect the production of coal? Do you
see the production of coal continuing at the present level or
will it be reduced?
Professor Buzek: That is a very important
question in the long perspective. I think if we can develop new
technologies for coal and, in the long perspective also, carbon
capture and storage, which is a very promising technology but
not checked yet in the big scale—in the small scale, in
the Norwegian fjords, yes, fair enough, but not in the big scale—in
these cases, coal could be a very, very important source of energy,
especially for Europe, because we do not have gas and oil and
we have coal—almost in every one European Union Member State,
lignite or hard coal. From this point of view and a long perspective,
we should think about coal as a serious energy source, together
with nuclear and renewables, because we have them, the three of
them, we do not have oil and gas. Our political independence means
nuclear, coal and renewables, and the proportion and energy mix
will be stated by every one country separately. I think coal could
be so important. Also, I would like to add that the Chinese are
opening, in these times, every week, quite a new coal power station.
It means, from the point of view of global warming, to manage
with coal maybe in our continent, in Europe, and to go with this
technology of carbon capture and storage to other countries. That
is only the one really visible idea for the next 50 years—and
I am not saying about five years or ten years but 50 years. Without
carbon capture and storage we cannot manage in India, in Brazil,
and China first of all. From this point of view, this question,
my Lord Chairman, should be a very, very, very important question,
and it is also connected with questions like switching from coal
to gas. It is another question which is different but perhaps
very, very close to the question which was put a few minutes ago.
Q412 Lord Palmer: Is all the coal that
you burn home produced?
Professor Buzek: Yes, 100%. We are also
selling some coal. It depends on the year and on the activity
of our coal mining industry—10%/5%—and it was always
the same a few years ago, 20 years ago and 30 years ago.
Professor Zmijewski: We are buying, also.
It is ballast.
Professor Buzek: Yes, today it is ballast.
Q413 Viscount Brookeborough: What is
the size of your coal industry, both in terms of GDP and in terms
of employment within the country?
Professor Buzek: Employment I know precisely.
It is 130,000 employees, so it is not very big now.
Q414 Chairman: Compared to the British
industry it is.
Professor Buzek: From the point of view
of production, about 100 million tonnes per year, 95 million-99
million tonnes per year. We had a big amount of lignite, first
of all, and we did not use it until now at all, so we are waiting
for the start, if it will be possible. For hard coal we also have
a big amount—today, for 30 or 40 years at least, and if
we start to explore quite new parts of our country, it could be
even for 100 or 120 years. Underground gasification could bring
it even for 300 years, because its deepness is about 1,200-1,500
metres below the level. Then, if we develop underground gasification,
it would be for 300 years, because there is an enormous amount
of coal on this level.
Q415 Viscount Brookeborough: You talk
about lignite and hard coal separately. Is there a difference
in emissions?
Professor Buzek: It is slightly worse
with lignite than with hard coal. From the point of view of electricity
costs, not taking care about the Emissions Trading System and
CO2 emissions, the production of electricity from lignite is cheaper
today. That is if we are not taking into account CO2 emissions
costs; but together with CO2 emissions costs, it will be maybe
the same or maybe lignite will be slightly more costly in the
future. Today it is cheaper.
Q416 Baroness Sharp of Guildford: Could
we move on to the effect of allowances and so forth. If the experience
of the first phase of ETS is anything to go by, we found that
even though the electricity companies were given free allocations
of permits, nevertheless they anticipated the cost and charged
it on to the consumers. Can you explain why you believe that continuing
to allocate free emissions permits to power companies will prevent
them from increasing electricity prices?
Professor Buzek: Thank you, my Lord Chairman
for this question. I would say that it is a very crucial point,
from the point of view of the ETS system, which is proposed by
the European Commission—a crucial point. We are talking
now about so-called opportunity costs. This idea was developed
very widely by Cambridge University professors. Now we can say
it is something like an economical problem, because all the companies
all over Europe added this value they are having together with
free allowances—added to the costs, not paying anything
for that. It is so-called opportunity costs—and it may be
a new name. It appeared because they received allowances without
payment, having the possibility to sell them. So we can say it
was something like a mistake from the point of view of the European
Commission ... . I do not know, I would not like to say about
the European Commission. Generally speaking, however, if we could
say that it is impossible to sell your allowances if you are not
producing electricity, it would not be opportunity costs. In this
case, the solution for that in the electricity sector would be
a so-called benchmarking system. If we assume that for the best
technology you should not pay anything—because you have
today the best technology, so there is no reason to pay anything—and
for the worst technology you must only buy the difference between
the best one and yours, it means that we are not spending such
a big amount of money on CO2 as it is proposed today, the proposal
of the European Commission, to buy all the allowances for the
whole of CO2 emissions. In our proposal, it will be paid only
for this technology which is not efficient enough. It is a very
strong incentive for improving technology—like we want to
achieve—not spending such an amount of money in electricity
production in the whole country. In this case, it would be necessary
to say, if you are not producing electricity, stopping producing,
you do not have any allowances, so you cannot sell them. In this
case, there will be no windfall profits, as we call them. Opportunity
costs and windfall profits, having such a benchmarking system
you can avoid. It is a question if the energy companies would
like to diminish the costs, but it is very probable. I was talking,
I must say, my Lord Chairman, with representatives of some companies:
Euroelectric, first of all, as a representative of all producers
of electricity in Europe, and also with Vattenfall, RWE, and other
companies. They are saying that opportunity costs were obvious,
because we did have free allowances with which we could sell on
the market. Without the possibility of selling, there would not
be any opportunity costs and it would not be possible to add them
to the electricity costs. On the other hand, not having a liberal
market, an open market, we are not sure if, in a country like
Poland, in 2013, when it will be necessary to buy all the allowances
by the proposal of the European Commission today—because
it is a proposal of the European Commission that 100% allowances
must be bought on the open market—really windfall profits
will go to our budget, or maybe new money, additional money, from
customers' pockets. Because windfall profits exist now, and it
will be three or four years until 2013. In 2013 they will be real
costs for energy companies—real costs. Because they are
not real costs and they changed the prices; with real costs, they
can change the prices again. If I am asking about that, they are
not sure what will be the future. From this point of view, today's
proposal for full auctioning, buying 100% of allowances in 2013,
should be very dangerous.
Q417 Viscount Ullswater: Are you suggesting,
then, for the energy sector only, that you should have non tradable
emissions certificates?
Professor Buzek: No. Of course not. Also,
for energy-intensive industry. It is much easier for us to state
it for energy-intensive industry, because everybody is fighting
the European Union for that.
Professor Zmijewski: May I come in? It
is a misunderstanding. We and the Polish government are not against
tradable allowances. We only say that at the level which is defined—some
kind of "best available technology"—the society
should not be punished by paying CO2 allowances. Because if we
can do it better, let us do that; but if we cannot do it better,
why to pay for that? We should pay for everything else. For kind
of wastement of the possibility, this should be paid, of course,
and it should be tradable. It should be tradable. But another
question is: For whom are allowances? We understand that allowances
are for producers and generators, for the power sector and for
the industries, but not during the auctions, not for every one.
Because if we open this market for every one, we open the market
for the great speculation. The offer is stiff; the offer is defined
in a legal way. We know what will be the offer of allowances:
it is already decided by the European Commission. Even if someone
says, "I'm going to pay more," the offer will not rise.
The offer is stiff. There is a danger of buy-off from the speculation
fund, so we say, "Okay, let us make it in such a way: If
this is more or less defined by the technological possibility,
this is for free. The rest should be bought during the auctions.
After that, what you have you can trade, but at the same time
you have an obligation to produce—because you are giving
according to your production, not because of your existence."
My Lord Chairman, may I add one sentence? If we have such a situation
where hospitals are given medicines for free, can we allow them
to sell those medicines on the market? Definitely not. Definitely
not. They are given something for free, it has value, but they
should not sell it on the market, it is to heal the people. Allowances
are to produce electricity and goods, not just for speculation.
Professor Buzek: There are many, many,
many details of course, and I would not like to go into such detail,
I am sorry, but could I only add that we are talking mainly about
the electricity sector because it is the main problem. Of course,
for the energy-intensive industry, the proposal of a benchmarking
system is even easier to explain, but I am not saying about that.
Q418 Baroness Sharp of Guildford: To
clarify in my own mind, you are proposing that you should set
allocations by the standard of the most efficient power stations
and that, therefore, you may well get a free allowance based on
that basis, and the less efficient ones are going to have to pay
extra because they are emitting more.
Professor Zmijewski: Exactly.
Q419 Baroness Sharp of Guildford: They
are going to have to buy for that and this provides a very good
incentive for them to improve their efficiency up to the basis
of the most efficient.
Professor Zmijewski: Yes.
Professor Buzek: It is just a benchmarking
system, yes.
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