Introduction
The EU emissions trading scheme (ETS) is the flagship climate
policy of the European Union. First established in 2005 it
covers some 11,000 installations - ranging from energy
generation to steel production - which account for around
half of the CO2 emitted by the EU each year, or 2 billion
tonnes of CO2 equivalent. All EU member states are a part
of the ETS and are affected in different ways by the policy.
The Czech Republic is the 8th biggest polluter in the EU in
the emissions trading scheme.
Unfortunately the ETS has not functioned as initially
envisaged. Firstly the ETS was established using overly
optimistic assumptions about what levels of economic
growth Europe could expect. Secondly industry lobbied hard
to protect themselves from the scheme. As a result many
countries chose to insulate certain industries from the effects
of the scheme by allocating them a generous number of free
allowances. The power sector - who generally has more
abatement options than other sectors - took on a greater
burden of the scheme, allowing more free allowances to be
CZECH FAT CATS 2011
given to the industrial sectors. While this trend is true of
most countries, it’s not the case for all. The Czech Republic
is conspicuous in that CEZ, despite being a large power
generator, is in the most favourable position of all Czech ETS
participants. CEZ’s position will be explored in more detail
below.
Country Profile
Graph 1 shows that, from the start of the scheme, the
number of allowances have been continuously above Czech
Republic’s actual emissions. While the first phase of the ETS
was a test phase, excess allowances from the phase II can be
used in subsequent phases without any restriction. Currently
at this stage in Phase II the Czech companies have a surplus
Graph 1
The EU ETS was designed to be the most cost effective way
for companies to reduce their emissions. By putting price a
on carbon companies would be inclined to reduce emissions
as a way of avoiding the compliance costs involved with the
EU ETS, instead investing in low carbon technologies as an
alternative.
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of 41.2 million allowances which almost equals to yearly
emissions of neighbouring Slovakia. While the unforeseen
recession accounts for a significant proportion of this,
over allocation is likely to be responsible to have played a
significant role.
Fat cats
While some companies are being affected by the ETS,
85% of installations have a surplus of permits at this stage
of phase II. Table 1 shows the top ten companies with
the greatest surplus of carbon allowances in the Czech
Republic. The top ten companies own more than ¾ of the
total Czech excess allowances (see graph 2). These surplus
allowances can be used either to hedge against anticipated
future shortfalls or sold to gain revenues. However, the
companies provide little information on what they do with
extra allowances received for free. In 2006, the first from the
top ten – CEZ - has made a public commitment to “reinvest
profits from saved allowances within the EU emissions
trading scheme into measures for the further reduction of
greenhouse gas emissions, modernization and measures
to improve the quality of the environment”1
and promised
to report annually on this. The last CEZ´s publicly available
CSR report is from 2009 and neither specifies the amount
of profits from surplus allowances nor the costs of initiated
projects.2 Looking at the annual reports of the top three,
one can find that while the 2010 report of CEZ includes its
profits from sold allowances (CZK 1,6 billion), in the 2011
1 http://www.cez.cz/edee/content/file/energie-a-zivotni-prostredi/
cez-action-plan.pdf
2 http://www.cez.cz/edee/content/micrositesutf/odpovednost2010/
rozcestnik/index.html
3 Jan Ondřich and Martin Bebiak (2011): Power Abuse. ČEZ and the
abuse of dominant market power. Candole Partners.
4 EU ETS Directive 2003/87/EC, resp. 2009/29/EC.
Rank Company Phase II Surplus EUAs (Million) Estimated value (CZK billion)
1 ČEZ 7,1 2,58
2 ArcelorMittal 6,95 2,6
3 Energetický a průmyslový holding 5,81 2,27
4 Veolia Environnement 3,71 1,47
5 PKN Orlen 2,8 1,11
6 AGC Group 0,71 0,25
7 Sokolovská uhelná 0,67 0,28
8 MVV Energie CZ 0,54 0,21
9 Holcim 0,47 0,18
10 Mondi Group 0,44 0,19
Table 1
Note: Arcelor Mittal has a higher value of permits despite a lower volume of them due to the way we have calculated the value. The volume of surplus EUAs
in any year is valued at the average spot price that year, taken from BlueNext exchange data. Exchange rate EUR/CZK=25.
report this information is missing. Similarly, ArcellorMittal in
the Czech Republic and Energetický a průmyslový holding do
not inform on their revenues of ETS surpluses.
CEZ
Overall within the EU, steel and cement companies dominate
the list of those with the greatest surpluses of allowances.
This is not the case of Czech ones and CEZ is conspicuous in
this regard. As the table above shows CEZ has the greatest
surplus of allowances of all Czech companies. Since 2008 it
has amassed a surplus of some seven million allowances, with
an estimated value of CZK 2,6 billion (103m). This generous
surplus means CEZ is insulated from the additional cost
burden that the ETS would bring. It’s no coincidence that CEZ
had been left with this surplus, rather it’s likely to have been
a deliberate choice of the Government while developing
their national allocation plan (NAP) – the document which
set out each installations entitlement to free allowances.
The rationale could be to prevent power consumers from
paying higher prices, but as CEZ is majority state owned –
the government could also stand to benefit from the surplus
permits. CEZ is able to both use the advantages of partly
liberalised Czech electricity market and its partial regulation.
Given its dominance on the Czech market CEZ can sell its
products for “German prices” while having to pay for the
“Czech” costs. The price of electricity in Germany is relatively
high due to costs of emissions allowances, other pollution
costs and more gas share in their energy mix, while for CEZ
these costs are relatively negligible.
From 2013 – the start of Phase III – the power sector will be
obliged to purchase all their allowance requirements from
auctions. There are exceptions to this rule, notably article
10c of the ETS Directive1
which allows for a limited number
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of free allowances to be issued for free to power generators.
This rule exists specifically for those countries whose power
generating capacity meets certain conditions: including
being dependent on a single form of fossil fuel. As the Czech
Republic produced 59%5
of its power from coal in 2010, this
allows it to apply for additional allowances. In September
2011 the Czech authorities have requested an additional
108 million6
free allowances worth about 47,5 billion CZK
for power producers after 2012. Almost 70 % of them (75
million) have been requested for CEZ. With more than 60
% of installed capacity owned by CEZ, and almost 75 %
of country’s electricity produced by CEZ in 2010, the Czech
electricity market is one of the most concentrated in Europe.
High market concentration hampers competition and
increases the risk of undue competitive distortions. What is
more, with such a large number of surplus allowances from
Phase II, it seems likely that CEZ will financially gain from the
ETS. It is therefore imperative that CEZ are transparent about
how financial gains are invested.
5 http://www.tradingeconomics.com/czech-republic/electricity-pro-
duction-from-coal-sources-kwh-wb-data.html
6 http://www.mzp.cz/C1257458002F0DC7/cz/derogace/$FILE/ozk-za-
dost_10c-20110819.pdf.pdf
Policy recommendations
• Call on the Czech Government to support a set aside
of at least 2.2 billion allowances, with the aim to
permanently remove them from the ETS.
• Call on the Commission to conduct a thorough review
of the Czech application for free allowances to the
power sector to examine whether it complies with the
requirements of the EU ETS Directive and State Aid Rules.
•
7
• Increased transparency of how CEZ and other benefiting
companies fulfil the investments proposed in exchange
for further free allocation after 2012.8
(Footnotes)
7 Investments in power plants Chvaletice, Pocerady, Melnik and
Ledvice.
8 Annex of the Czech Application for free allowances to the power
sector.
Contacts:
Sandbag
www.sandbag.org.uk
Damien Morris
damien@sandbag.org.uk
+44 (0) 7914669569
Centre for Transport and Energy
www.cde.ecn.cz
Barbora Hanžlová
+420 605 276 909
barbora.hanzlova@ecn.cz
Graph 2
Call on the Commission to reject Czech applications for
investments that may lead to a strengthening of CEZ’s
dominant market position.