Poland’s myopia on climate change

March 11, 2020 9:15 AM
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REUTERS/Kacper Pempel

The European Union (EU) has ambitiously committed itself to becoming climate neutral by 2050—except for one holdout. To protect its large coal-based energy sector and extract more climate transition rent from the rest of the EU, Poland has to date refused to join the effort, potentially undercutting the EU’s ability to rapidly begin to implement its new Green Deal. Ironically, this position places Poland at odds with its own professed strategic national interest, while helping its historic adversary, Russia.

Poland’s resentment over Russian meddling and aggression dates back centuries. But Russia’s status as a petrostate has been most recently dramatized by its refusal to cut back energy production even when that has meant helping to lower world oil prices, apparently because President Vladimir Putin, with more than $550 billion in foreign reserves and a government budget in surplus with an oil price of about $40 a barrel, feels strong enough to try to drive other energy producers (including Saudi Arabia and the United States) out of business. The current dismantling of Poland’s judicial independence obviously will similarly be viewed by the Kremlin  as the natural course of action of any government and will help Putin’s broad goal of undermining liberal democratic values everywhere.

While Russia’s macroeconomic position in 2020 is certainly strong—especially measured against other major oil exporters—it remains a “carbon-fueled state” overwhelmingly dependent on the proceeds from oil and gas exports to sustain its economy and President Putin’s regime. The most recent IMF Article IV report on the Russian economy from 2019 estimates that the Russian nonoil structural primary balance is  –6 percent of GDP, with oil revenue accounting for over 40 percent of Russian federal government revenue. Russian carbon-based energy exports account for over half of Russia’s total exports, and its nonenergy current account deficit equals over 8 percent of GDP.

Thus, without its carbon-based energy exports, President Putin’s regime is less likely to engage in foreign wars in Ukraine, Syria, and elsewhere, a development Poland would surely welcome. Accordingly, the geopolitics of climate change dictate that a successful EU decarbonization would diminish Putin’s political swagger.

The shale revolution has enabled the United States to declare its independence from “foreign oil.” But successful decarbonization in Europe would, however, have far more profound effects on Poland and the EU’s strategic relations with Russia and other energy exporters. EU decarbonization would not only make the EU self-sufficient with, in essence, free energy (solar, wind, and hydro power have essentially zero variable costs once the initial investments are made) but also permanently remove European carbon-based energy demand from the world. Assuming that other countries follow the same decarbonization strategy, global demand for oil and gas will decline dramatically and permanently and so will fossil fuel prices and Russian energy export volumes and proceeds. No EU member would probably benefit more in the long run from such a transition than Poland.

Of course, decarbonization will inflict pain on Poland in the short term, given its dependence on domestically produced coal. Almost half of Poland’s electricity is still produced by coal-fired power plants. Recognizing this dependence, the Polish government recently discontinued special free allowances to its electricity producers available to it under the EU Emissions Trading System (ETS). Instead—in light of the recently rapid increase in the EU carbon price—the government intends to sell these permits on the open market to boost government finances. Poland is also converting its last planned new coal-fired power plant, the 1,000-megawatt Ostroleka project, into a gas-fired one in light of rising carbon prices.

By rejecting the EU decarbonization commitment, Poland hopes to extract cash subsidies from the EU in ongoing EU budget negotiations, to help its transition from coal. But Warsaw would be wise to ultimately accept a deal and the transition cash involved. Once EU carbon prices rise again, Poland’s coal-fired power plants will become financially unsustainable. And if power producers start losing money because of shifts in market pricing, their shareholders and likely ultimately the Polish government will be stuck alone with the bill. In the medium term, and assuming that the EU decarbonization strategy gets off to an early start, the same relative price logic that is now killing EU coal-produced power will also ensure the demise of another transitional fuel, natural gas. Once that begins to happen, Moscow will begin to feel the full economic effects of decarbonization, and Poland’s national security anxiety about Russia’s capabilities and motives will gradually be alleviated.

Of course, no one can predict Russia’s long-term energy, but the forces of climate change will likely compel the kleptocratic Russian state to  have to rely far more on the resourcefulness of the Russian people to supply it with more tax revenue in the future. A less carbon-fueled and probably more democratic Russia would be in everybody’s interest, most especially Poland.

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Jacob Funk Kirkegaard Senior Research Staff

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