Transition to a Low-Emissions Economy in Poland

1 This Knowledge Brief is based on the recent report Transition to a LowEmissions Economy in Poland, part of the World Bank‟s series on low-carbon growth studies. The report explores the question of how Poland, an EU member 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. its lower income level, the Polish economy comes out as among the least carbon-efficient. Poland‟s transition to a market economy since 1989 had a co-benefit of sharply reduced CO2 emissions; however, the link between growth and emissions has re-emerged in recent years. A critical difference in the make-up of Poland‟s emissions is the dominance of the power sector and its extraordinary dependence on coal. Over 90% of electricity in Poland is generated from coal and lignite, the highest share in the EU. This makes Poland an outlier, both globally and in Europe (Figure 1). Outside the energy sector, Poland‟s transport sector has experienced very high rates of emission growth, and energy efficiency, although considerably improved over the past 20 years, has not yet reached Western European standards.

its lower income level, the Polish economy comes out as among the least carbon-efficient. Poland"s transition to a market economy since 1989 had a co-benefit of sharply reduced CO2 emissions; however, the link between growth and emissions has re-emerged in recent years. A critical difference in the make-up of Poland"s emissions is the dominance of the power sector and its extraordinary dependence on coal. Over 90% of electricity in Poland is generated from coal and lignite, the highest share in the EU. This makes Poland an outlier, both globally and in Europe (Figure 1). Outside the energy sector, Poland"s transport sector has experienced very high rates of emission growth, and energy efficiency, although considerably improved over the past 20 years, has not yet reached Western European standards.  That EU-wide target was translated into a national target for Poland of an increase in its non-ETS emissions by 14%.

A Suite of Models to Assess Emissions Abatement
Three (and a half) complementary and interlinked models for Poland were developed to quantify the economic impact of CO 2 mitigation, taking advantage of available data and leveraging existing models. The most familiar of these models is likely the widely-used Marginal Abatement Cost (MAC) curve which provides a simple first-order ranking of technical options for GHG mitigation by sector, based on the net present value of costs and savings per metric ton of CO 2 equivalent avoided. Then, two different economywide models were developed for economic impact assessment. The Macroeconomic Mitigation Options (MEMO) model, a DSGE model of Poland revised to include energy and emissions, assesses the macroeconomic impact of the options costed in the microeconomic MAC curve. The Regional Options of Carbon Abatement (ROCA) model, a country-level CGE model for energy and GHG mitigation policy assessment adapted to Poland, analyzes implementation of the EU 20-20-20 policy in the context of global policy scenarios. The last "half" model is a detailed sectoral approach for road transport, the sector with the fastest growing emissions. It makes use of the EU transport and environmental model, TREMOVEPlus. Figure 2 summarizes the modeling approach.

Figure 2: Model Suite for Low-Emissions Growth Assessment for Poland
Source: World Bank, 2011.

Poland's Growth Path before a Low-Emissions Strategy
A business-as-usual scenario is fundamental to the calculation of costs of emissions abatement. If Poland were to take no action (the "business-as-usual scenario"), the models developed in this report suggest that overall emissions in 2020 will stand roughly 20% above 2005, while 2030 levels will be 30% to 40% higher. It is difficult to project the path of an economy over a 15 or 25 year period, and it is not surprising that sectoral details differ significantly across models constructed via alternative methodologies and using separate datasets. For example, the overall projections of emissions for 2020 are similar across models. However, the MEMO projections indicate a heavier burden for ETS sectors to comply with EU targets, while according to ROCA projections, the major challenge will be faced by the non-ETS sectors. to low-emissions energy supply (via energy sector investments) and with energy and fuel efficiency improvements. The latter measures are most important in the early years ( Figure 3).

Figure 3: Decomposition of Abatement by Micro-Package
Source: World Bank, 2011.

The Macroeconomic Impact of the Abatement Package
Implementation of the full abatement package will reduce incomes modestly, costing an average 1% of GDP each year through 2030. For the comprehensive abatement package, the MEMO model simulations find an economic impact that is generally negative but appears affordable. The MicroMAC curve can be transposed into a Macroeconomic Marginal Abatement Cost (MacroMAC) curve to examine in detail the impact on economic growth associated with the implementation of specific abatement measures (see Figure 4).
Onshore wind and small hydropower plants are superior to many energy efficiency measures by the metric of GDP growth. Nuclear power offers the biggest abatement potential but remains a drain on growth even with a twentyyear horizon -still myopic for plants with 60-year lifespans. The MacroMAC curve presents the marginal abatement impact in terms of GDP of each abatement option, making it easy to see which measures are "cheaper". The area under the MacroMAC curve defines the overall impact of the entire abatement package on real GDP, an interpretation similar to that of the bottom-up MicroMAC curve (in which the area under the curve equals the financial cost of the abatement package).

Implementing EU Climate Policy
In complying with the requirements of the EU's 20-20-20 package, Poland bears a higher economic burden than the 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 Abatement (ROCA) model, a country-level CGE model for GHG mitigation policy assessment adapted to Poland, considers key aspects of EU climate policy and several variations on climate policy design. The market segmentation created by the EU"s division of economic sectors according to energy intensity greatly elevates the marginal cost of abatement for less energy-intensive industries. Removing that segmentation reduces overall compliance costs for Poland.
Similarly, allowing emission reductions in the least-cost location dramatically reduces compliance costs and the need for adjustment, as most abatement is off-shored. Then, an additional aspect of EU policy is incorporated into the ROCA model -overlapping regulation in the form of an EU target for renewable energy sources -to determine conditions in which it may be (counter-intuitively) welfareimproving. The model considers various policy choices under the control of the Polish government. First, alternative revenue recycling via wage subsidies is analyzed, which generates a weak "double dividend" (reducing emissions while easing distortions in the labor market) and lower unemployment. Then, the loosening of restrictions on the scope of nuclear power is found to cut compliance costs for Poland by about one-third (although installation of so much nuclear capacity is unlikely to be feasible by 2020). Lastly, the granting of free emission allowances to energy-intensive and trade-exposed sectors, which might be vulnerable to "carbon leakage" (the offshoring of high-emissions production), preserves sector output but generates overall losses in GDP.

Energy, Energy Efficiency, and Transport
The switch to low-emissions energy supply, end-user energy efficiency measures, and transport policy will be the central pillars of Poland's low emissions growth strategy.
The switch in the power sector, in which aging infrastructure is ready for replacement, provides a timely opportunity for a shift in direction. With long lead times of the investments, the structure of the power sector will shift slowly. Even if a full low-emissions package is implemented, coal will likely remain the fuel for half of Poland"s electricity in 2030.
With lower capital costs and earlier returns, end-user energy efficiency measures hold out the promise of relatively low cost abatement that works directly to delink emissions from growth, the essence of a low-emissions economy. Energy efficiency measures play a central role in the MicroMAC curve analysis because of their substantial potential, apparent low price, and impact on growth. Although most energy efficiency measures individually have little potential, if they could be grouped together for implementation, they could be an important emissions abatement tool. With most technological solutions already in place, difficult behavioral changes will be needed (moving from private cars towards public and non-motorized transport), but even proactive abatement policies are unlikely to hold emissions growth within the EU target for these sectors.

Conclusion
Capturing the full package of technologically feasible and economically sensible abatement measures requires coordinated and early action by the Government of Poland.
With an ambitious approach, Poland can aim to reduce its GHG emissions by about one-third by 2030 (relative to 1990) with little cost to incomes and employment. Similarly, meeting the EU targets for 2020 appears generally feasible for Poland at modest cost, albeit likely more challenging for less energy-intensive sectors such as transport. Poland has already weathered one economic transition and emerged with a strong and flexible economy. This next transition -to a low emissions economy -while requiring an evolution in lifestyles and priorities over the next 20 years, may well turn out to be much easier.