65074 Transition to a Low-Emissions Economy in Poland Erika Jorgensen and Leszek Kąsek Key Messages1 its lower income level, the Polish economy comes out as  Poland can cut its greenhouse gas emissions by among the least carbon-efficient. Poland‟s transition to a almost a third by 2030 by applying existing market economy since 1989 had a co-benefit of sharply technologies, at an average cost of 10 to 15 euros reduced CO2 emissions; however, the link between per ton of carbon dioxide abated. growth and emissions has re-emerged in recent years. A critical difference in the make-up of Poland‟s emissions is  Costs to the economy will peak in 2020. the dominance of the power sector and its extraordinary However, by 2030, the shift towards low emissions dependence on coal. Over 90% of electricity in Poland is will augment growth. Overall, this abatement will generated from coal and lignite, the highest share in the lower GDP by an average 1% through 2030 from EU. This makes Poland an outlier, both globally and in where it otherwise would have been. Europe (Figure 1). Outside the energy sector, Poland‟s  The economic cost in output and employment transport sector has experienced very high rates of of Poland’s required abatement by 2020 under EU emission growth, and energy efficiency, although rules is higher than for the average EU country. considerably improved over the past 20 years, has not yet Also, the restrictions on emissions trading between reached Western European standards. sectors aggravate that cost. Figure 1: Electricity Generation by Fuel, 2007  The energy sector currently generates nearly Coal Oil Gas Nuclear Renewables Other half of Poland’s emissions. However, the transport 100% sector - with precipitous growth and the need for 3 behavioral change in addition to the adoption of 80% new technologies - may end up posing the tougher policy challenge. 10 60%  The World Bank’s work on Poland advances 23 91 40% the approach of low carbon studies. The 59 methodological innovation is integrating ‘bottom- 20% up’ engineering analysis with ‘top-down’ economy- 29 wide modeling. 0% EU27 EU10 Poland Poland’s Greenhouse Gas Emissions Note: The EU10 consists of Bulgaria, Czech Republic, Estonia, Poland is not among the largest emitters of greenhouse Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia. Source: European Commission, World Bank staff calculations. gases globally, but its economy is among the least emissions-efficient in the EU. Poland‟s global share in In making the transition to a low carbon future, Poland greenhouse gas (GHG) emissions is just 1% and its per faces several challenges. What are the technological capita emissions are similar to the EU overall. But, given options available and how expensive are they compared to existing technologies? Would there be high costs in 1 lost growth and employment? Over a shorter horizon, to This Knowledge Brief is based on the recent report Transition to a Low- Emissions Economy in Poland, part of the World Bank‟s series on low-carbon 2020, what are the implications for Poland of growth studies. The report explores the question of how Poland, an EU member implementing EU policies on climate change? state and an OECD member, can transition to a low emissions economy as successfully as it underwent transition to a market economy in the early 1990s. ECA Knowledge Brief with the fastest growing emissions. It makes use of the EU Emissions Abatement Targets and Policy Challenges for transport and environmental model, TREMOVEPlus. Poland Figure 2 summarizes the modeling approach. The international agreement on climate change that is Figure 2: Model Suite for Low-Emissions Growth expected to eventually supersede the Kyoto Protocol and, Assessment for Poland more immediately, compliance with EU policies on climate change, poses policy challenges for Poland. The •Multi-region CGE contraction of GHG emissions that accompanied economic •Peer-reviewed model applied to Poland restructuring in the 1990s caused Poland to outperform •Impact of EU 20-20-20 package against its Kyoto commitments by a large margin. The MacroMAC ROCA Model most demanding of commitments on emissions, however, curve comes from EU policies on climate change mitigation. The •TREMOVE model EU climate change and energy package (or the „20-20-20‟ MEMO (road transport) •Dynamic Model targets) require comprehensive further action by EU stochastic GE •Passenger, freight members to achieve a 20% reduction in greenhouse gas •Poland model + energy and MicroMAC TREMOVE emissions by 2020 relative to 1990, renewable energy as climate redesign Curve Plus •Macro impact of Model 20% of energy consumption, and a 20% improvement in options energy efficiency. •Marginal abatement cost (NPV cost per tCO 2e) The 20-20-20 package requires Poland’s energy-intensive •~120 technology options sectors to contribute to the EU-wide target of a 21% Source: World Bank, 2011. reduction in carbon emissions (compared with 2005) while allowing Poland’s other sectors’ emissions to increase by Poland’s Growth Path before a Low-Emissions Strategy 14%. The EU package segments sectors into two groups while setting multiple targets. Large installations in energy- A business-as-usual scenario is fundamental to the intensive sectors are covered by the EU-wide Emissions calculation of costs of emissions abatement. If Poland Trading Scheme (ETS sectors), a regional carbon market. were to take no action (the “business-as-usual scenario�), Energy, heavy industry, and fuels are ETS sectors. For the the models developed in this report suggest that overall non-ETS sectors, the package requires a reduction in emissions in 2020 will stand roughly 20% above 2005, emissions by 10% compared to 2005 in the EU as a whole. while 2030 levels will be 30% to 40% higher. It is difficult That EU-wide target was translated into a national target to project the path of an economy over a 15 or 25 year for Poland of an increase in its non-ETS emissions by 14%. period, and it is not surprising that sectoral details differ significantly across models constructed via alternative A Suite of Models to Assess Emissions Abatement methodologies and using separate datasets. For example, the overall projections of emissions for 2020 are similar Three (and a half) complementary and interlinked models across models. However, the MEMO projections indicate a for Poland were developed to quantify the economic impact heavier burden for ETS sectors to comply with EU targets, of CO2 mitigation, taking advantage of available data and while according to ROCA projections, the major challenge leveraging existing models. The most familiar of these models is likely the widely-used Marginal Abatement Cost will be faced by the non-ETS sectors. (MAC) curve which provides a simple first-order ranking of technical options for GHG mitigation by sector, based Poland’s Abatement Options on the net present value of costs and savings per metric ton Poland can reduce emissions by 30% by 2030, compared of CO2 equivalent avoided. Then, two different economy- to 2005, at an average cost of 10 to 15 euros per metric wide models were developed for economic impact assessment. The Macroeconomic Mitigation Options ton of CO2 equivalent, according to the Marginal (MEMO) model, a DSGE model of Poland revised to Abatement Cost (MicroMAC) curve, a bottom-up include energy and emissions, assesses the macroeconomic engineering approach. This approach creates a ranking by impact of the options costed in the microeconomic MAC net cost of about 120 emission reduction options, based on curve. The Regional Options of Carbon Abatement existing technologies, and presents the measures via a (ROCA) model, a country-level CGE model for energy and well-known visual summary tool - the MAC curve. When GHG mitigation policy assessment adapted to Poland, measured against the level of emissions that would analyzes implementation of the EU 20-20-20 policy in the otherwise occur in 2030, the reduction is even more context of global policy scenarios. The last “half� model is significant at 47%. The curve identifies that the majority of a detailed sectoral approach for road transport, the sector Poland‟s abatement potential is associated with the switch ECA Knowledge Brief to low-emissions energy supply (via energy sector Abatement (ROCA) model, a country-level CGE model for investments) and with energy and fuel efficiency GHG mitigation policy assessment adapted to Poland, improvements. The latter measures are most important in considers key aspects of EU climate policy and several the early years (Figure 3). variations on climate policy design. The market segmentation created by the EU‟s division of economic Figure 3: Decomposition of Abatement by Micro- sectors according to energy intensity greatly elevates the Package marginal cost of abatement for less energy-intensive 600 agriculture 544 interventions industries. Removing that segmentation reduces overall 550 industry CCS compliance costs for Poland. 500 chemical processes 454 Similarly, allowing emission reductions in the least-cost 450 energy efficiency location dramatically reduces compliance costs and the MtCO2e 400 fuel efficiency need for adjustment, as most abatement is off-shored. Then, 350 an additional aspect of EU policy is incorporated into the mixed energy/fuel efficiency ROCA model - overlapping regulation in the form of an 300 low-carbon energy EU target for renewable energy sources - to determine 288 supply 250 conditions in which it may be (counter-intuitively) welfare- BAU 200 improving. The model considers various policy choices 1990 1995 2000 2005 2010 2015 2020 2025 2030 Low Carbon Path under the control of the Polish government. First, Source: World Bank, 2011. alternative revenue recycling via wage subsidies is analyzed, which generates a weak „double dividend‟ (reducing emissions while easing distortions in the labor The Macroeconomic Impact of the Abatement Package market) and lower unemployment. Then, the loosening of Implementation of the full abatement package will reduce restrictions on the scope of nuclear power is found to cut incomes modestly, costing an average 1% of GDP each compliance costs for Poland by about one-third (although year through 2030. For the comprehensive abatement installation of so much nuclear capacity is unlikely to be package, the MEMO model simulations find an economic feasible by 2020). Lastly, the granting of free emission impact that is generally negative but appears affordable. allowances to energy-intensive and trade-exposed sectors, The MicroMAC curve can be transposed into a which might be vulnerable to „carbon leakage‟ (the off- Macroeconomic Marginal Abatement Cost (MacroMAC) shoring of high-emissions production), preserves sector curve to examine in detail the impact on economic growth output but generates overall losses in GDP. associated with the implementation of specific abatement measures (see Figure 4). Energy, Energy Efficiency, and Transport Onshore wind and small hydropower plants are superior to The switch to low-emissions energy supply, end-user many energy efficiency measures by the metric of GDP energy efficiency measures, and transport policy will be the growth. Nuclear power offers the biggest abatement central pillars of Poland’s low emissions growth strategy. potential but remains a drain on growth even with a twenty- The switch in the power sector, in which aging year horizon - still myopic for plants with 60-year infrastructure is ready for replacement, provides a timely lifespans. The MacroMAC curve presents the marginal opportunity for a shift in direction. With long lead times of abatement impact in terms of GDP of each abatement the investments, the structure of the power sector will shift option, making it easy to see which measures are „cheaper‟. slowly. Even if a full low-emissions package is The area under the MacroMAC curve defines the overall implemented, coal will likely remain the fuel for half of impact of the entire abatement package on real GDP, an Poland‟s electricity in 2030. interpretation similar to that of the bottom-up MicroMAC curve (in which the area under the curve equals the With lower capital costs and earlier returns, end-user financial cost of the abatement package). energy efficiency measures hold out the promise of relatively low cost abatement that works directly to delink Implementing EU Climate Policy emissions from growth, the essence of a low-emissions economy. Energy efficiency measures play a central role in In complying with the requirements of the EU’s 20-20-20 the MicroMAC curve analysis because of their substantial package, Poland bears a higher economic burden than the potential, apparent low price, and impact on growth. rest of the EU en bloc because of the predominance of coal in power generation and the expected strong growth in sectors such as transport. The Regional Options of Carbon ECA Knowledge Brief Figure 4: Macroeconomic Marginal Abatement Cost (MacroMAC) Curve, 2030 Note: A positive value on the vertical axis means that an abatement measure increases GDP. Each column is one of the 120 abatement measures. The height of the columns is the marginal abatement impact in percent of GDP (for each percent of GHG abatement) compared to business-as-usual in 2030. The width is the percent emissions that can be reduced. The area of any rectangle equals the GDP impact (loss or gain) of emissions abatement via any specific lever. Source: World Bank, 2011. coordinated and early action by the Government of Poland. Although most energy efficiency measures individually With an ambitious approach, Poland can aim to reduce its have little potential, if they could be grouped together for GHG emissions by about one-third by 2030 (relative to implementation, they could be an important emissions 1990) with little cost to incomes and employment. abatement tool. Similarly, meeting the EU targets for 2020 appears The transport sector may prove the most challenging to generally feasible for Poland at modest cost, albeit likely hold emissions growth within the EU target; most more challenging for less energy-intensive sectors such as technological solutions are already in place, leaving transport. Poland has already weathered one economic behavioral solutions that are more complicated to transition and emerged with a strong and flexible economy. implement, as perhaps the only choice. Road transport This next transition - to a low emissions economy - while GHG emissions in Poland are converging from a low requiring an evolution in lifestyles and priorities over the historic base towards EU averages. They contribute about next 20 years, may well turn out to be much easier. 10% of overall emissions. Emissions from road transport About the Authors are expected to almost double between 2005 and 2030. Erika Jorgensen is an Economic Adviser in the Poverty With most technological solutions already in place, Reduction and Economic Management Sector Unit of the difficult behavioral changes will be needed (moving from Europe and Central Asia Region of the World Bank. private cars towards public and non-motorized transport), but even proactive abatement policies are unlikely to hold Leszek Kąsek is a Senior Economist in the Poverty emissions growth within the EU target for these sectors. Reduction and Economic Management Sector Unit of the Europe and Central Asia Region of the World Bank. Conclusion Capturing the full package of technologically feasible and economically sensible abatement measures requires “ECA Knowledge Brief� is a regular series of notes highlighting recent analyses, good practices and lessons learned from the development work program of the World Bank‟s Europe and Central Asia Region http://www.worldbank.org/eca