Blog entry

Status update on the Nenskra hydropower plant project

Almost two years after Salini Impregilo, a major construction company, mysteriously abandoned the Nenskra hydropower plant (HPP) project before construction had even begun, activity on the project remains at a standstill. Salini Impreglio’s replacement has still not been selected: official sources have yet to confirm media reports about the selection of Hyundai Engineering & Construction (Hyundai E&C) and Turkish Limak as winners of the USD 737 million tender for the Nenskra Engineering Procurement and Construction (EPC) contractor.

Once the selection of the EPC contractor is concluded, the new company will almost certainly propose changes to the project design, including changes to the locations of project components such as the dam wall and the derivation channel. The conclusions of ongoing studies on the impact of climate change on the Nenskra project should be taken into account when these changes are designed. The project site is located under glaciers, so climate change poses severe risks to both the project and, importantly, to local villages that have experienced regular floods in recent years.

Project financiers have informed Bankwatch that the costs of the project are expected to increase and no progress is expected before autumn. Nenskra Hydro clarified in media interviews that the Memorandum signed with the Georgian government will be changed and all the major parameters, such as tariffs and project costs, will be agreed in negotiations with the EPC contractor.

As we speak, the Nenskra project’s costs continue to grow and to pose a threat to the fiscal stability of the country. Electricity purchase prices are fixed in US cents in the Nenskra project contract, and the depreciation rate of national currency is extremely high. Thus, the project is expected to drastically increase electricity prices and create energy security problems in Georgia, even worse than was previously predicted in 2018 by a World Bank study.

Meanwhile, the preparatory construction works have stalled and the project is significantly behind schedule. According to the project documentation, the main construction period was planned to start in March 2018 and last for four years until 2022. Power generation itself was planned to start in 2021. Despite the proposed schedule, the so-called ‘early works’ are still far from finalised and have not moved the project closer to the main construction phase.

Works on the ground

The Nenskra HPP project schedule is expected to be even further delayed, as Georgia announced a state of emergency due to the global COVID-19 pandemic in March 2020.

Yet just a few days before the state of emergency was announced, the project company tried to end the project’s long standstill by organising a public meeting with the affected community. The public protested in view of health and safety concerns, so the meeting was cancelled.

Invitation by the project company for a public meeting to the affected community

Cancellation of the meeting after reactions from activists

However, Nenskra Hydro requested from the Georgian government to be included among the companies that can continue their economic activities during the state of emergency.

In the first days of April, the company announced that ‘as [Nenskra is] one of the major infrastructure projects it will not stop even under [the] general quarantine announced in the country’ and that the active process of construction is ‘underway at several locations at the same time in Chuberi: six bridges with a capacity of 100 t; widening of the road and arrangement of rock layers; preparing the foundation for the pipe-bridge; excavation of fundamentals of the so-called Residential Buildings for Operators Village, etc.’ According to the statement, up to 300 people are employed on the project. 130 of these employees are local, and they all work in full compliance with the sanitary-epidemiological norms, in accordance with WHO recommendations and regulations established by the Government of Georgia.

However, according to local sources, until now almost all preparatory works have been stopped, with few expectations. In addition, there are concerns that the company owes local employees at least three months of salaries. Some works have been restored only after they received a promise that salaries will be fully covered in the beginning of April.

The Prime Minister of Georgia promised that after the COVID-19 emergency, Nenskra Hydro would be one of the priority projects, together with other planned hydropower projects. Meanwhile, the EBRD announced that it is stepping up cooperation with Georgia during the crisis, as it is ‘working to support the upgrade of the electricity grid to further support the renewable energy generation sector’.

Stakeholder engagement in times of lockdown

As Nenskra project promoters appear determined to unblock the project, questions arise about the legitimacy of a possible project restart at a time when there are significant challenges to proper public participation. In the current emergency situation, the Georgian Government has decided that the scoping and public hearings for Environmental Impact Assessments will not be conducted as required by national law (and international standards), but will instead be substituted with electronic communication. In response, Georgian civil society promptly demanded that all decision-making on environmental matters that is not urgent in nature be suspended.

In a rapid response to the crisis, international financial institutions are issuing solidarity support loans that undergo streamlined procedures of approval. This situation provokes additional concerns about lack of transparency, inadequate due diligence and ability to closely oversee project appraisal and implementation in line with their safeguard policies and good governance standards.

In the case of the Nenskra HPP project, no corners should be cut. To avoid doing harm to local communities and their unique culture and environment, all comprehensive studies and public consultations should be conducted to the highest standard of compliance with the policies of its international financiers. Before a new project design is considered, a comprehensive study of project alternatives is needed, among other additional studies, to justify the safest and most economically feasible option – both for Georgia and for the local communities.

Ukrainian activists taken to court by longstanding EBRD client after sounding the alarm on impacts of planned wood processing factory

The charges against Ecoclub were filed by ‘TECHNOPRIVOD INVEST GROUP’ LLC, which is owned by Kronospan, an Austrian company with a particularly controversial track record. The first court hearing is scheduled for Monday, April 13.

Kronospan has enjoyed generous financial support from the European Bank for Reconstruction and Development (EBRD). Although the planned Horodok facility is not financed by the EBRD, over the past 17 years, the bank has awarded Kronospan more than a billion euros for at least 11 other projects in Romania, Russia, Belarus and Ukraine. Many of these projects have been associated with environmental pollution and the suppression of local civil society.

In 2019, the EBRD issued a statement that it will not tolerate retaliation or any type of coercive practices of its clients against project affected people and stakeholders. Indeed, the facility in Horodok is not financed by the EBRD, but the numerous investments in Kronospan raise questions about the company’s corporate policies with regards to stakeholder engagement.

In addition, it calls into question the effectiveness of the EBRD’s due diligence process for corporate clients. This process is supposed to assess the ability of potential borrowers, let alone a long standing strategic partner such as Kronosopan, to live up to the bank’s social and environmental standards, including policy requirements concerning public participation.

The EBRD has agreed with Kronospan Ukraine to invest EUR 75 million in the company’s facility in the Volyn region, and EUR 41 million for the company’s balance sheet restructuring. At the same time, Kronospan is planning to invest EUR 200 million from foreign direct investment in the Horodok wood processing factory, its second in Ukraine.

In February 2020, the regional authorities approved the Horodok facility’s environmental impact assessment (EIA), but an analysis released by Ecoclub found Kronospan’s factory could exceed the allowed levels of formaldehyde concentration in the air. The environmentalists also raised concerns that toxic waste from the plant could be sent to local municipal landfill and that the EIA lacks a study of alternatives.

During a meeting with the representatives of the company and authorities, local people questioned the land acquisition for building the plant as well as its timber supply. In addition, they argued that public consultations preceding the construction have been flawed. For example, the meeting invitations were published in unpopular local media and people were asked to vote at the meeting, which is not required at public consultations in Ukraine.

Protestors at a February rally in Rivne, Ukraine against Kronospan Credit: Vladislav Martynchuk

Controversial track record

Kronospan is operating in 24 countries, and it is far from the first time its operations have been associated with problematic practices. A 2018 report published by the NGO Earthsight revealed that Kronospan and Swiss-Krono ‘have continued to purchase large volumes of timber from Ukrainian State Forestry Enterprises whose top officials are the subject of ongoing criminal corruption probes’.

In 2013, Kronospan started the construction of a facility in Ufa, Russia, without public consultations and without obtaining permission. In February 2020, 30 residents from the region Egorievsk, home to another Kronopsan facility, took the company to court over the plant’s alleged environmental pollution.

Kronospan was also fined for polluting the Viliya river in Belarus in 2015-2016. In Romania, the company was fined multiple times between 2004 and 2015 for breaching environmental regulations. In addition, Kronospan’s formaldehyde production plant in Sebes was built without an EIA and prior permit, in breach of EU law, according to a warning issued by the European Commission in 2010.

Kronospan’s activities have also been harming the environment in the UK, Poland, Bulgaria and the Czech Republic. And many of these cases – which involved manipulation of emissions calculations, the use of outdated technologies, corruption and illegal logging – have been uncovered by local activists.

In one case after another, Kronospan’s environmental offenses were met with public outcry including petitions, blockades and pickets. Most recently, in January 2020, residents of Horodok, Obariv and Rivne staged a demonstration to protest the company’s plans to build the wood processing factory in Horodok.

Similarly, the lawsuit against Ecoclub isn’t the first time Kronospan has sued its critics. The company lodged similar lawsuits against environmental defenders in Romania, but dropped it later.

Thus, we call on the EBRD to address the risks of human rights violations resulting from the operations of Kronospan Ukraine, and to ensure the strict implementation of its non-retaliation policy framework. Affected communities in Ukraine have a right to safely raise their concerns, and the EBRD has committed to provide the space for this through its investments.

“Kronospan wants to make money by polluting our air and consuming our forests. However, when we simply compare the expected pollutant levels taken from the EIA Report with the safe concentrations, Technoprivod Invest Group went to court trying to collect money out of Ecoclub ‘due to damage to business reputation’. Local residents who will breathe formaldehyde from the planned enterprise expect completely different behavior from a responsible investor.” – Andriy Martynyuk, Executive director of Ecoclub

Green Agenda for the Western Balkans – time to plan for a resilient and protective future

These days, more than ever before, we find ourselves reflecting on what the future will look like: what measures are the governments taking and will they be good enough to safeguard our health and wellbeing, how will the economy revive itself, what will our supply chains be, whose support can we count on, how will our mobility needs change and, ultimately, what role can each of us play. The Western Balkan countries, together with the EU, have the opportunity to make a bold decision about moving forward alongside the block towards a sustainable decarbonised future and reap the region’s potential for a healthier environment.

In December 2019, the European Commission launched its flagship policy: the European Green Deal. Its achievement would take Europe to climate neutrality by 2050 and see European Union economies producing net zero carbon emissions by that date. In other words, flatten the business-as-usual curve, and re-design a growth that is mindful of our environmental limits.

The EU also understood that to maximise the impact of the European Green Deal for the whole continent, it should make the Western Balkans a part of this deal and ensure the countries are given equal opportunities and weight. This way, the EU can guide the region towards the 2030 and 2050 targets while benefiting from the added value the Western Balkans could offer, and that’s how the “Green Agenda for the Western Balkans” emerged.

While responding to the global health crisis, the European Commission is determined to pursue the design and adoption of this policy in the Western Balkans and today a group of 16 civil society groups, including Bankwatch, have presented their position on what the Green Agenda for the region should focus on to deliver the best outcomes.

The proposed policy for the Western Balkans is centered around five pillars: decarbonisation, circular economy, pollution reduction, sustainable farming and biodiversity and will be counting on coordination with international financial institutions as well as civil society organisations, but the key for its success will be that any commitments to the Green Agenda take a legally binding form. Too often we have witnessed that the countries of the region are rather reluctant regulations followers, despite the ecological and health benefits of EU environmental legislation.

Therefore the Energy and Transport Community Treaties, as well as the EU accession process need to become key implementation tools. The process must include a legal climate commitment from all Western Balkans countries as well as robust monitoring and sanction tools must be used to achieve full implementation.

The Green Agenda must be based on sustainable decarbonisation of the Western Balkans’ economies by 2050, in line with the Paris Climate Agreement and EU climate and energy policies. All countries need to commit to climate and energy targets by 2030, in line with the EU’s ambition. These must be complemented by concrete implementation measures, support and financing, and reflected in the National Energy and Climate Plans (NECPs) and Nationally Determined Contributions (NDCs).

The circular economy must be used as a tool for delivering part of the 2050 decarbonisation agenda, and adopting the circular economy package is the place to start. In financial planning of this pillar, budgets should be allocated only for measures which contribute to the circular economy, especially waste prevention, recycling, and composting. They must not be used for waste incineration, which locks in cities, financially and materially, for decades.

Reducing the pollution in the Western Balkans will not be an easy task, considering how long the countries’ heavily coal reliant economies have been damaging the air, water and soil, but decarbonisation of the electricity, heat and transport sectors have immense potential in that respect. It is also one of the pillars already having legislation in place, and the immediate focus should be on compliance with existing obligations under the Energy Community Treaty – the Large Combustion Plants Directive – with fines for polluters high enough to be dissuasive and proportional to the health damage caused.

The Western Balkans is also well-known as a global biodiversity hotspot. It is home to hundreds of unique freshwater and terrestrial species, many of which are under risk of extinction because of infrastructure development. Therefore, mainstreaming biodiversity safeguards across all economic activities needs to guide the EU’s and national governments’ political and financial decision-making. Adoption of the Water Framework and Birds and Habitats Directives, together with enforcement of Environmental Impact Assessment and Strategic Environmental Impact Assessment Directives in the region must be seen as a precondition for further sustainable infrastructure development.

We’ve all heard too many times that going beyond business-as-usual economic development models is costly and the countries of the Western Balkans are too cash-strapped to afford the luxury of rethinking their future in sustainability terms. Truth be told, much of the apparent difficulty in finding public financing in the countries is the result of mis-prioritisation and wasteful spending, rather than an overall lack of funds available.

The next round of EU funds for pre-accession as well as the European Investment Bank, or the “EU climate bank” as it now likes to present itself, will be playing a key role. Their funding priorities should however be coordinated with those of other actors such as the EBRD, World Bank/IFC, KfW and others. As we expect a shift in the development of coal mining regions, with a decrease in coal jobs and need for reskilling, more funds will be needed for a just transition of mining regions, which could take the form of grant-based co-financing for local development measures, plus a public sector loan facility by the EIB.

Therefore, in gearing up for the challenging times ahead of us, we strongly recommend governments of the region to stop building infrastructure which is not in line with a decarbonised, efficient, circular economy. This would free up funds for measures that are. No more coal or gas capacities! Ambitious results need bold decisions at the right moment. Now certainly feels like the right moment and the countries of the Western Balkans can count on the EU’s and NGOs’ support if their will is in the right place.

¹The Energy Community is an international organisation established in 2006 which brings together the European Union and its neighbours in the Western Balkans, Moldova, Ukraine and Georgia to create an integrated pan-European energy market. While entering the EU energy market, the participating countries need to apply selected environmental legislation.
The Transport Community is an international organisation established in 2017, which brings together the EU and the six Western Balkan countries aimed at the development of the transport network between the European Union and the South East European Parties and applying selected environmental acquis.

²Commitments that governments have agreed, under the Paris Accord, to devise to tackle the climate crisis and periodically submit to the UN.

Croatian hydropower plant highlights loopholes in EIB environmental policies

In 2012, the EIB signed a loan for the Croatian Bank for Reconstruction and Development (HBOR) to use for smaller projects that the EIB could not usually finance. One of these was the Ilovac hydropower plant in the river Kupa Natura 2000 site, for which a sub-loan was signed in 2014. The plant went online in 2015.

The project used an existing weir, but a concrete reinforcement and inflatable rubber dam raised it from 1.3 m to 3.4 m, turning the river into a reservoir stretching several kilometres upstream.

Did the environmental assessment miss endangered species?

The environmental impact assessment (EIA), approved in 2010, left numerous questions unanswered. The two sampling visits carried out in 2009 did not establish whether the endangered Danube Salmon (Hucho hucho) was present at the site or not. It had been identified at other times in the Kupa, but no additional efforts were made to establish its presence for the EIA. One specimen of the endangered Pontian Shemaya (Alburnus sarmaticus) was found during the sampling visits, but the project’s impacts on the species were not explored separately in the EIA. In the years following the approval of the EIA for Ilovac, it was established that the Alburnus sarmaticus present in the Kupa were in fact specimens of another, newly identified species, Alburnus sava, which has been found only at 6 locations in Croatia, in the Kupa, Sava and Dobra rivers.

Altogether, the EIA identified three endemic fish species, five strictly protected ones, three considered endangered in Croatia, one considered critically endangered in Europe, one considered endangered in Europe, and fifteen protected under international rules like the Bern Convention or Habitats Directive, but still – miraculously – considered that the dam would not have significant impacts on them.

Little attention was paid to other species living around the river and it appears that the sections of the EIA on non-fish fauna may have been written without carrying out field visits.

The study also failed to assess the cumulative impacts with other hydropower plants downstream – an old one at Ozalj and a planned one at Brodarci. All of this would have anyway been unacceptable, but especially at a site that should have been designated as critical habitat under EIB policy due to the species present, thus requiring additional in-depth assessments.

Danube Salmon, CC: Jovana Milanko Photography

Reservoir or no reservoir?

The EIA also seems to have under-estimated the size of the area impacted by the plant. It was expected no reservoir would be created, even though, at the dam, the average water level rise would be 2 m. The study claimed that at the very border of the area of influence, 4 km upstream from the dam, the increase in the water level would not be more than 2 cm.

A cascade near the village of Obrež-Vivodinski is at the upper end of the river stretch slowed down by the dam. The environmental permit prescribed exceptional care in maintaining low water level oscillations and avoiding the flooding of the sections with rapids, particularly in spring. This is important because such rapids are a potential habitat of Alburnus sarmaticus / Alburnus sava.

Yet field observations by a team from BIOTA showed that the cascade was flooded during a visit on 3 July 2019, while it was visible during a visit on 11 September 2019, when the hydropower plant was not in operation. This reduced the water level by around 0.5 m and uncovered the flooded cascade. This would not be the case if indeed the impact of the dam at this location was as described in the EIA, as the difference could not be accounted for by seasonal variation.

No additional checks by the EIB

During the period when the Ilovac project was being developed, as part of Croatia’s EU accession process, the European Commission several times raised concerns about the quality of environmental permitting processes. Yet as far as we know, the EIB did nothing to double-check HBOR’s due diligence or the quality of the EIA, and the gap between Croatian standards and EU and EIB standards remained unaddressed.

No-one knew about the EIB and HBOR’s involvement

Under normal circumstances, civil society organisations would have alerted HBOR and the EIB to their concerns and tried to ensure the project’s impacts were properly assessed. But this was impossible to do before the plant was built, because it was only in 2016 that the EIB disclosed its role in the project at all. Since then, the EIB has directed most questions about the project to HBOR. HBOR systematically refuses to disclose information to the public about its projects and other activities, despite having lost 31 court cases on access to information.

Habitat loss

Given that it was not completely clear what was living at the site before the plant was built, it is also hard to measure the exact impacts since the plant started operation in 2015. Moreover, different monitoring visits have found different results.

According to the environmental permit, monitoring was supposed to happen annually in the winter period. However, as of early 2020, it had been carried out only in May 2017 and June 2018. It is not clear why it was not done in the winter months as required by the permit. In addition, the power plant was not working during either of the visits.

Unsurprisingly, this official monitoring did not find major impacts, and concluded that the habitats remained typical of fast moving water. This is important because both the environmental permit and the guidelines for the protection of habitats and wild taxa in the Kupa Natura 2000 site prescribe the preservation of rapids in the river Kupa.

What the official monitoring did find, though, was that the fish pass was dysfunctional. Another informal visit was made by the authors of the official monitoring report in March 2018, when the dam was operating, and even with very high water levels, the turbulence and water velocity were too high for the pass to work properly.

On the other hand, an independent study commissioned by WWF Adria and carried out by BIOTA in 2019 states that the habitat has already changed into one supporting fish species living in slow-moving, still or stagnant water, and that there has been a drop from 18 species surveyed in 2010 and 2011 to 11 in 2019 (counting species found both above and below the dam). The number of species of Community interest (i.e. those protected by the EU’s Habitats Directive) found during the sampling dropped from seven to three.

Can the damage still be reversed?

What has been lost at these spots is suggested by BIOTA’s research next to the village of Orljakovo, 7 km upstream from the dam. The survey showed a much better ecosystem status compared to the dam location: 16 species in total, and 7 of those species of Community interest. It identified the presence of the common dace (Leuciscus leuciscus) and Alburnus sava.

These species thrived under the cascades and in the fast-flowing waters downstream between Orljakovo and the former weir at Ilovac that are now flooded. These habitats have been lost, although BIOTA’s assessment is that the damage is not irreparable for now. They could be restored if the dam in Ilovac was removed or did not raise the water level upstream and if it had a functional fish pass, tailor-made for this location and the species present.

Policy updates needed

Some of the issues raised result from failure to properly implement existing EIB policies, while others point to improvements needed in the bank’s environmental and social policies, whose revision is scheduled later this year. Improvements are needed in terms of:

Stronger environmental due diligence

The bank’s forthcoming new Standard on Financial Intermediaries must require referral of high-risk projects to the EIB for assessment before approval, just as the EBRD’s 2019 Environmental and Social Policy does. A list of high-risk project types should be included and must include hydropower projects—no matter the size or design.

The EIB’s 2019 Hydropower Guidelines rightly emphasise the importance of a strategic approach to hydropower development. This needs to be further stipulated in the bank’s environmental and social policies, with clear instructions on quality control of strategic studies, in particular outside of the EU.

Although there was an implementation failure of existing EIB Standards on Natura 2000 sites and critical habitats, these also need to be strengthened, especially for investments outside of the EU.

Where non-EU countries lack legislation similar to the Habitats Directive, equivalent protection must be ensured via critical habitat requirements, and clear procedures for implementation need to be prescribed. Financial Intermediaries should not be allowed to finance projects in Natura 2000 sites or critical habitats at all.

However, problems also exist in EU countries, and EIB needs to introduce a tailored approach to Member States that are lagging behind in applying EU legislation such as the Water Framework Directive and Nature Directives. Additional assessments may be needed.

Transparency of intermediated investments

For financial intermediary projects referred back to the EIB for due diligence, the EIB also needs to publish environmental information on each project, prior to the signing of the sub-project’s financing contract with the final beneficiary.

Stricter monitoring requirements

The EIB also needs to do regular project-level monitoring of intermediated investments that are deemed high-risk. Such monitoring requirements should be spelled out in the Bank’s Practices and Procedures and in contracts with financial intermediaries.

The bank also needs to make sure that the investor’s own monitoring costs are included in the project financial calculations, and that they publish real-time environmental information such as environmental flow, water levels in the reservoir, and live streaming showing the fish pass. Given the dispersed locations of small hydropower plants, this is the only way that regular monitoring can be carried out reliably, without plant operators being able to adjust the plants as inspectors approach.

More information in detail can be found on the latest case study by CEE Bankwatch Network and WWF Adria here.

A dozen green deal steps for the new Slovak government

Should the government follow this plan in its first few weeks in office, the results can prove vital for society and the economy without major implications for the state budget. The government must:

1. Finalise the most important carbon neutrality provisions from the recently approved low carbon Long Term Strategy and revise the National Energy and climate plan (NECP) to align with the upcoming Long Term Strategy on building renovations.

2. Define energy poverty to include all people who are unable to secure the necessary energy for the optimal functioning of their household. It should then design and prepare the implementation of related solutions.

3. Include energy efficiency to all relevant standards and documents.

4. Assess the steps taken so far towards a just transition of the coal region and set the transformation of carbon-intensive regions and sectors with an emphasis on phasing out fossil fuels.

5. Begin the preparation of criteria for the sustainable use of all renewable energy sources, which will be approved by the end of 2020 in the Strategy of the Environmental Policy of the Slovak Republic until 2030.

6. Build sufficient technical, expert and financial capacities to implement climate and energy policies at the regional level so that local and regional authorities do not perceive national and European climate targets as an administrative burden but rather as an opportunity to save money, emissions and increase resilience and self-sufficiency.

7. Reallocate unspent funds from the EU budget’s Quality of Environment programme to provide additional support for the renovation and improvement of energy performance of public buildings, such as schools, medical facilities and offices. Allocate the necessary amount of resources from the new budget, in combination with private capital, in a way that can generate investments needed to restore three per cent of public buildings annually.

8. Integrate subsidies for insulation, renewable energy sources and boilers in a user-friendly way, like using one application for all. The programmes should motivate applicants not only to replace heating sources or install renewables but to reduce heat losses and thus energy consumption in family homes.

9. Promote EU funded programmes for thermal insulation in single-family homes to improve the stock of single-family homes 20 fold by 2021.

10. Replace the Regulatory Office for Network Industries, including the chairman and members of the Regulatory Board, as it has not operated transparently and has ignored EU legislation responsible for introducing network fees.

11. Oblige the Regulatory Office for Network Industries to publish all documents related to the pricing procedures of monopoly regulated entities via an amendment to the Act on Regulation in Network Industries.

12. Abolish the moratorium on connecting new renewable energy sources to the grid with an emphasis on increasing the sustainable use of renewable energy in Slovakia.

The Slovak Climate Initiative is a platform that brings together individuals and organizations to make climate change and environmental protection a society-wide priority.

The establishing members of the Slovak Climate Initiative are Buildings for the Future, Friends of the Earth–CEPA, the Slovak Association of Photovoltaic and Renewable Energy Industry and the Institute for Forecasting of the Slovak Academy of Sciences.

EU carbon tax: A much-needed nudge for decarbonisation in the Western Balkans?

One of the pledges made by the current EU Commission before taking office was to introduce a carbon border tax. This should ensure the competitiveness of EU companies is not damaged by improving the EU’s response to climate change through the Green New Deal.

EU carbon tax

EU polluters are included in the European Emissions Trading Scheme (ETS) and have to acquire allowances for every tonne of CO2 emitted from a market where the cost in early 2020 reached EUR 28 per tonne. Some sectors, such as steel, have been allowed free allowances in order to prevent the supposed threat of them moving production outside of the EU, but this cannot continue if emissions in the EU are to be seriously reduced.

The carbon border tax is meant to reduce imports of carbon-intensive goods into the EU from countries where there is no carbon pricing. It could include energy-intensive sectors such as electricity, steel, aluminium and cement, but it is so far not clear exactly which sectors the EU plans to focus on. In any case, it only makes sense if it also means an end to free ETS allowances for all sectors within the EU.

The European Commission has this month opened an initial consultation on the idea, with a deadline for inputs on 1 April.

EU’s electricity import

Bankwatch’s submission has focused on electricity – a sector in which we strongly support a carbon border tax. The EU is not predicted to be a net importer of electricity in the coming years, but it does import electricity from, and trade electricity with, carbon-intensive countries on its borders such as Bosnia and Herzegovina, Serbia, Ukraine, Belarus and Russia.

The Western Balkans and Ukraine are part of the Energy Community Treaty, which allows them to join the EU energy market. They are obliged to comply with the EU’s now superseded Large Combustion Plants Directive. However their power stations are far from compliant with this legislation, adding to the appalling air pollution problems in the countries, which also impact the EU.

EU accession and compliance

Serbia and Bosnia and Herzegovina even plan to build more new coal power plants, built by Chinese companies, financed by Chinese banks and not compliant with EU industrial emissions legislation or State aid rules. The countries assume that they can avoid paying carbon costs until they join the EU.

But, as they have access to the EU energy market, they need to comply with the same environmental standards, State aid rules, and carbon pricing in the energy sector already. Failure to do so distorts the market, disadvantaging electricity generators in countries at the edge of the EU who have to face cheaper competition from more polluting plants. It also makes joining the EU harder, for those countries planning to, as they will need to run faster to catch up.

Given that EU accession is not expected within the next few years at least, this is too long to wait. If the Western Balkans want to participate in the EU energy market, they need to play by the rules, and action has to be taken now.

Investing in renewables instead of coal

The Energy Community Treaty Contracting Parties need to introduce a carbon price. Montenegro and Ukraine have already made some progress, but there is so far little incentive for others to follow their steps, or for these countries to ensure that carbon prices are high enough to be a real deterrent, if they are also allowed to keep selling their electricity to the EU under the same conditions as now.

For non-ETS countries exporting to the EU, especially smaller ones like those in the Western Balkans, a carbon border tax would help ensure that the life of power plants countries is not artificially prolonged and that new ones are clearly seen to be uneconomic. This way, it would implicitly address not only carbon emissions but also air pollution and other violations of the Energy Community Treaty in the coal sector.

The Energy Community countries could be exempt from the carbon border tax if they start to apply CO2 emissions pricing on their own at a level which serves as a real incentive to decarbonise.

It is in the Western Balkans’ interest to introduce their own CO2 emissions pricing rather than being subject to an EU carbon border tax, because they will then get to keep the revenues themselves, and can use them for energy savings and advancing solar and wind power.

But the EU should not wait for them to act. It needs to introduce a carbon border tax as soon as possible, and to use its proceeds to advance a just and sustainable energy transition.

Notes

CEE Bankwatch Network’s feedback to the consultation: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12228-Carbon-Border-Adjustment-Mechanism/F509801

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