Cutting Greenhouse Gas

Economic News

22 Jul 2010
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The EU's new tougher restrictions on Bulgaria's greenhouse gas emissions have the potential to slow the country's economic growth and burden heavy industry with increased costs. EU representatives said cuts are necessary to ensure Bulgaria helps uphold the bloc's commitment to the Kyoto Protocol.

On October 26 the European Commission (EC) declared that Bulgaria's greenhouse gas emissions quota for 2008 to 2012 would be 42.3m tonnes, 37% lower than the 67.6m tonnes the country had requested.

Under the EU's Emissions Trading Scheme (ETS) each member country receives permits to emit a certain volume of carbon dioxide (CO2), one of the main gases responsible for global warming. Any country exceeding its cap is expected to buy carbon offsets in the form of EU Allowances (EUAs) or invest in renewable energy projects in developing nations.

The EC's decision was met with criticism from both the Bulgarian government and business groups who said they believe the reduced allowance will harm economic growth. The Bulgarian Industrial Association (BIA) reported that reducing emissions by the mandated 27.4m tonnes would dramatically slow the growth of energy intensive industries such as cement, construction and ceramics. Dimitar Brankov, director of the Clean Industry Centre at the BIA, said that each year Bulgarian industry would have to purchase 10m to 20m tonnes of EUAs at an annual cost of around 700m euros (a little over $1bn).

Todor Kostov, CEO of Holcim Bulgaria, a subsidiary of the Switzerland-based cement company, told OBG, "The scale of the cutbacks came as quite a shock. The cement industry has grown rapidly in recent years and consumption is set to expand next year as demand increases. The cement industry has done its homework over the past few years and has already improved its energy efficiency to reach Western European levels. Either the sector cuts production or prices will have to rise."

In addition, while setting emissions permits the EC factored in a GDP of 5.2% in 2008 and 2009 although government figures forecast a rate of over 6%. A local newspaper reported, the EC also failed to calculate the growing contribution of the industrial sector to the country's GDP growth and the lessening contribution of agriculture. Both measures, critics said, lead to an unfair allocation of permits.

The government is concerned the tough new limits will mean local industry will have to cut production or spend money to offset excess carbon emissions. The cost of one EUA, which represents the right to emit one tonne of excess carbon dioxide, is currently hovering around $32.25 but some analysts have predicted this could rise to up to $58.63 in the wake of the new emissions targets. Bulgarian Environment Minister Dzhevdet Chakarov told local press the government would "not allow Bulgaria to turn from a potential seller of carbon credits into a buyer".

Chakorov said Bulgaria, along with seven other Central and Eastern European nations in similar circumstances, would launch an appeal against the EC's decision.

While fears about the effect the new targets will have on business are justified it is worth reflecting on the role of the ETS in the EU's policy to uphold its Kyoto Protocol commitments to reduce emissions. Bulgaria signed the protocol in 2002 and committed to reducing emissions by 8% between 2008 and 2012 compared to the 1990 base level.

The ETS was devised to create a shortage of permits in the EU, thus providing an incentive for European businesses to reduce emissions. In the first round of the ETS, which lasted from 2005 to 2007, this did not happen. A report by Open Europe, a London-based think tank, said, "The ETS is supposed to be the EU's main policy tool for reducing emissions. But so far, it has been an embarrassing failure. In the first phase of operations, more permits to pollute have been created than there is pollution." In many EU member countries CO2 allowances were set so high that there was little need to reduce emissions.

Many analysts have said they believe the new limits, which call for a 10% reduction of emissions across the EU, are more in line with the ETS' objective of meeting Kyoto commitments.

Andres Piebalgs, the EU commissioner for energy, told OBG that in 2005 Bulgaria was 47% below its emissions allowance and that for the 2008-2012 period "Bulgaria is in a comfortable position and under current trends emissions will stay well below the minus 8% target agreed in the framework of the Kyoto protocol."

Piebalgs said Bulgaria's high proportion of thermal power generation poses challenges in terms of emission control for CO2 but that in the future, carbon capture and storage is expected to make a substantial contribution towards reducing CO2 emissions from coal-fired power plants.

The EU is responsible for pushing Bulgaria to close its old nuclear power generation units in Kozloduy. As a result there is more pressure on polluting coal-fired plants to make up the difference. One way to reduce emissions would be to speed up the replacement of Kozloduy with new nuclear units at Belene, thus phasing out some of the worst polluting coal-fired power plants.

Another way Bulgaria could decrease emissions would be to increase energy efficiency in the country. Compared to the EU average, the Bulgarian economy uses twice as much energy to produce one unit of GDP. The World Bank-backed Bulgaria Energy Efficiency Fund (BEEF) is planning to increase its capitalisation to $30m by the end of 2008. The fund finances small retail and industrial projects, primarily in rural areas, aimed at improving energy efficiency.

In 2004 the European Bank for Reconstruction and Development set up an energy efficiency renewable energy credit line aimed at providing credit to businesses looking to reduce their energy intensity and improve competitiveness. Working in conjunction with six local banks, by the end of June 2007 the fund had granted almost $28m in loans to co-finance energy efficiency investments and another $76m for renewable energy projects.

Additionally, according to Piebalgs, the country has the potential to increase threefold the proportion of energy coming from renewable sources, which currently stands at 5.6%. He told OBG, "With a large agricultural sector, there is a particularly good potential for the production of biomass which can be used for both heating and the production of biofuels. However, all renewable energy technologies could be developed in Bulgaria, including solar thermal and solar photovoltaic applications. Greater use of renewables will curb emissions substantially, yield important security of energy supply benefits and help to create jobs, often in rural areas."

While it seems likely that the EU's emissions policy could have a negative effect on growth, especially in energy intense industry, it could provide impetus for the country's fledgling renewable energy companies.

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