Using Proceeds from Emissions Trading -The Czech example of renewable heat and weatherization

by Aleš Kuták

International trading in greenhouse gas emissions has raised a number of questions from its very inception. Aren’t the wealthiest countries just using it as an inexpensive way to purchase purely formal relief from fulfilling their obligations under the Kyoto Protocol? And won’t we see future increases in greenhouse gas emissions in precisely those countries which are today selling their excess emissions allowances? The example of the Czech Republic illustrates how this mechanism can be used to reduce emissions as well as to support job creation in the regions.

Under the Kyoto Protocol, the Czech Republic has an obligation to reduce its national greenhouse gas emissions by 8% compared to 1990 levels during the 2008-2012 control period, and thus has the right to release 900 million tonnes of CO2 equivalent during these five years. The real amount of released emissions will be lower, however. This is because in the baseline year 1990 extensive and extraordinarily energy-inefficient heavy industry inherited from the period of “real socialism” was still operating in full force in the Czech Republic (then still part of Czechoslovakia). As in other post-Communist countries, the Czech Republic subsequently lost its eastern markets and experienced a partial collapse leaving only a handful of production facilities from among the original enormous factories. In time new greenfield enterprises emerged, but while industry continues to represent a significant share of Czech GDP, compared to the record emissions from the late 1980s and early 1990s we will comply with the Kyoto Protocol with a reserve of at least 100 million tonnes of CO2 equivalent – and perhaps more due to the current economic crisis. The Czech Republic is gradually selling off this surplus of unused emissions allowances – through its Assigned Amount Units (AAUs) and the international emissions trading mechanism under Article 17 of the Kyoto Protocol – to those countries which are unable to completely meet their obligations without purchasing a certain amount of emissions credits from abroad.

Despite the fact that the Czech Republic was in negotiations with potential AAU purchasers even beforehand, the amended Emissions Trading Act of 2008 represented a fundamental step in initiating their sale. This law defined support for measures to reduce greenhouse gas emissions as the sole acceptable method of expending funds thus obtained and entrusted their administration to the State Environment Fund under the Environment Ministry, then controlled by the Green Party. Although a 2006 agreement between the parties of the governing coalition had already defined in greater detail the use of funds from the sale of AAUs, restricting their use to saving energy in residential and public buildings, the law’s approval by coalition MPs was decidedly difficult. Through Civic Democrat MPs, Czech energy giant ČEZ tried to obtain half of the anticipated funds for itself, allegedly for a carbon capture and storage project without further specification. This was only prevented by the prompt intervention of then Green Party chairman Martin Bursík just before the vote in the Chamber of Deputies.

With reference to the above-mentioned amendment, the Czech Republic has thus far managed to sell a total of 76.2 million AAUs since March 2009, the most of any of the countries selling them. The largest buyer has been the Japanese government (40 million) followed by Japanese company, named Mitsui & Co. (25.7 million), Spain (5 million), Austria (3.5 million) and the World Bank (2 million). All buyers are investing into the same pattern, i.e. at the sale they agreed to the use of the funds paid by them for energy savings, for using renewable sources of heat (modern biomass boilers, heat pumps and solar-thermal collectors) in family houses and apartment buildings and for supporting the construction of passive homes. Housing was selected as a priority area because there is significant potential here for reducing greenhouse gas emissions, but only very limited EU funds are available for taking advantage of this. Individual heating especially of family homes with coal results in the release of fine particulate matters, which in the winter reach concentrations exceeding pollution limits set by EU legislation. Additional benefits which cannot be overlooked include reductions in household heating expenses and the creation of jobs, which in the case of home insulation performed by construction companies are more or less evenly distributed in individual regions.

The “Zelená úsporám” subsidy programme was launched for family homes and apartment buildings (except concrete–slab structures) at the end of April 2009, and in September of the same year it was expanded – following successful completion of delicate (for they concerned jurisdiction) negotiations with the Ministry for Regional Development – to support the above-mentioned measures for concrete–slab apartment buildings as well, of which there are a significant number in the Czech Republic. At the same time, based on experiences from the first months of the programme’s operation, certain limited support was also permitted for project design, which is significant in particular in the case of more demanding projects such as overall building insulation consisting of insulating the shell, replacing windows and possibly also doors, insulating the attic and/or basement and, in the most progressive projects, also the installation of forced ventilation systems with waste–heat recuperation. In June 2010, the “Zelená úsporám” subsidy programme was expanded in limited extent to provide support for insulating public buildings as well, as funds allocated for this purpose from the EU-financed Operational Programme “Environment” had been exhausted.

For overall building insulation, the “Zelená úsporám” programme supports only projects achieving parameters close to the so-called low-energy standard; for partial insulation projects, it supports the installation of only those elements whose heat-insulating qualities do not inherently rule out a possible subsequent upgrade of insulation to this standard. This requirement was criticised for its alleged excessive strictness by designers and construction companies, although these objections turned out to be purposive in nature. The total financial volume of subsidy requests submitted thus far is approaching the amount obtained for the AAUs sold to date and there is not the least doubt that all available funds will be spent by the end of the Kyoto Protocol control period, i.e. by the end of 2012, as required by buyers of Czech AAUs.

What can be learned from the Czech approach?

1. The longstanding declared intent to obtain, in exchange for AAUs sold, the largest possible amount of funds for energy savings and renewable energy sources in residential and public buildings, supported by a sufficient legislative framework and a choice of the method of sale without and intermediary on the Czech side led to negotiating a very respectable average price in excess of EUR 9.50 for each AAU sold, and significantly limited various pressures from lobbyists regarding the use of the obtained funds. These figures are noteworthy in particular in comparison with Slovakia, which in 2008 sold some of its excess AAUs to a Slovak intermediary company, established solely for this purpose and subsequently dissolved, for EUR 5 each. This sale is now the subject of an investigation by Slovak prosecutors.

2. Successful was also the model of setting the basic purpose in law but leaving the setting of detailed parameters to an administrative body, in this case the Environment Ministry and the Fund it directs. The example of Hungary clearly demonstrates that the Parliament should have neither authority to approve individual agreements on the sale of AAUs nor detailed budgetary frameworks for their use. This is because AAUs, expecially ahead of elections, become the victim of political struggles rather than the subject of a rational consideration of their benefit or lack of benefit for the selling country. And “late” in this segment can very easily become “never”, as selling countries are now offering a greater total number of AAUs than purchasing countries are demanding.

3. Another farsighted step – initially abundantly criticised – was the exclusion of performing the subsidised work as DIY projects, still quite popular in the Czech Republic, and, moreover, the setting of minimum qualifications for companies carrying out such projects. The example of Australia, where a hastily prepared insulation programme carried out in part by insufficiently qualified companies led to a fire involving more than one hundred homes and four deaths, reminded us once again that there are limits to reducing the price of construction work at the expense of the achieved result.

4. To the contrary, an undesired aspect of our approach – which was confusing for applicants – was the amending of certain internal regulations for the administration of subsidies after the programme’s launch. Moreover, our mishandled external communication in the first year led initially to waiting times in submitting a subsidy request, as well as to queues of applicants concerned that allocated funds might run out before their subsidies arrived.

In view of the great potential of residential and public buildings for reducing greenhouse gas emissions and the enormous absorptive capacity for funds allocated in this manner, one must now contemplate what funds the Czech Republic will use to subsidise this area after 2012. One option is income from auctions of its gradually rising share of allowances used in the European emissions trading system. These auctions will conveniently be launched in 2013 and the Czech Republic, according to preliminary calculations, can be expected to raise some EUR 400 million in this first year alone.
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From spring 2007 to spring 2010, Aleš Kuták was Deputy Minister of Environment in the Czech Republic, responsible for the progression of the process described above.