The Polish problem for the EU’s green drive

Welcome back. As our FT colleagues reported over the weekend, relations between Brussels and Warsaw are in trouble, with the European Commission set to freeze huge packets of financial support to Poland over alleged suppression of judicial independence.

These tensions have serious implications for the continent’s clean energy transition, where the EU is aiming to set the pace for the rest of the world. Poland — with about 40mn people, an assertive rightwing government and a huge reliance on coal — has become one of the biggest headaches for the architects of the EU’s green strategy.

During a fascinating recent visit to Warsaw, I got a feel for some of the flashpoints in Poland’s energy debate, which has been supercharged by this year’s energy market chaos. My reflections on that trip are below — along with Tamami’s insights on how regulatory developments in Europe are rippling through to South Korea’s green agenda. See you on Wednesday. (Simon Mundy)

Poland’s coal addiction will be hard to kick

As energy market turmoil continues, countries across the northern hemisphere are bracing for a tough winter — but perhaps none more so than Poland.

Its European neighbours have it bad enough, with the cost of gas-powered heating far higher than last year. But Poland has an exceptionally strong reliance on coal to heat its homes — specifically on a grade of coal that, until recently, it imported heavily from Russia. With Russian coal imports now banned by the government, citizens are rushing to secure supplies ahead of the winter, in a country where temperatures can fall below minus 30C.

“People are making huge preparations for winter,” Magdalena Maj, head of energy and climate at the Polish Economic Institute, told me. “They’re driving to regions far away to get whatever amount of coal they can.”

This is just one aspect of the country’s extraordinary dependence on coal — an increasingly stark challenge not only for Poland, but also for the EU’s push towards carbon neutrality. During my recent visit to Warsaw, I gained a sense of just how complex that challenge is proving.

Even more important than the heating issue — from both economic and climate perspectives — is electricity, where coal accounts for about 70 per cent of Polish generation. That’s a figure matched by no other EU country — indeed, by few other countries in the world.

Unlike with the grade of coal used for heating homes, Poland has rich reserves of the stuff used in power stations. That’s long been viewed as a protection against reliance on energy imports — particularly from Russia, which effectively controlled the country for decades until the fall of Polish communism in 1989.

“For years, everyone has known that we cannot trust the Russians. Poland knew that it could be thrown under the bus,” Aleksander Śniegocki, head of Warsaw’s Reform Institute think-tank, told me.

The problem with Poland’s state-owned coal mines, though, is that they are heavily lossmaking, meaning that taxpayers have been propping up this uneconomic industry for years. This means that — in contrast with countries such as the US or Australia, where fossil fuel workers have won passionate support from some conservative politicians and voters — Poland’s coal miners enjoy limited affection from any part of the political spectrum, Sebastian Jabłoński, chair of energy trading company Respect Energy, told me.

“Ninety-five per cent of Polish people hate the miners,” he claimed, citing the perception of generous pay and benefits in a heavily subsidised industry.

So the conversation around the energy transition seems less about culture wars, and more about tricky issues of investment and economics. For now, Poland’s 80,000 coal miners are still vital to near-term electricity generation — and they are able to exert strong pressure on the government through their well-organised unions. “It’s ridiculous how much influence that tiny group of people has,” said the Reform Institute’s Zofia Wetmańska. And amid the furious debate over how to phase out coal power, she added, there had been far too little attention paid to exactly what would replace it.

The path ahead remains unclear. Although Poland has endorsed the EU’s goal of achieving net zero emissions across the 27-nation bloc by 2050, it has not followed other members by setting a corresponding national target.

And while countries like Austria are urging a strong emphasis on rolling out renewables, Poland seems keen on investment in natural gas, having opened a major new pipeline from Norway just last month. Polish members of the European parliament were among the strongest supporters of the controversial decision to include some forms of gas power in the European green taxonomy.

The focus on gas is excessive, according to Jabłoński, who argues that Poland — with negligible domestic gas reserves but strong wind power potential — should focus on jumping rapidly from coal to renewables.

One factor that could be hugely helpful in Poland’s green transition is increased support from the EU, both to speed its renewables investment and to soften the fallout for its coal-reliant regions.

Tensions between Warsaw and Brussels remain conspicuous, however. The EU continues to withhold billions of euros in economic assistance over concerns about the independence of Poland’s judiciary. And Warsaw is still pushing for a suspension of the emissions-trading system that is at the centre of the EU’s green agenda.

But it is, on one level, encouraging that the Polish government’s slow progress on decarbonisation seems driven by economic and practical worries, rather than by ideology. As Jabłoński put it: “They want to find a way to do it, but without bearing the cost.” (Simon Mundy)

South Korea follows EU’s lead on classifying gas and nuclear as green

Europe has enjoyed a reputation as a standard-setter in the global energy transition. So, when the European parliament voted in July to include gas and nuclear within the EU’s taxonomy of sustainable energy sources, climate activists were concerned about how this decision would affect the rest of the world.

Ever since the South Korean government added nuclear to its own sustainable taxonomy — known as the K-taxonomy — last month, some in the ESG sector are pointing fingers at the EU.

“The EU’s recent decision to label nuclear power as green in EU taxonomy is directly influencing the Korean taxonomy,” said Taehan Kim, principal researcher at the Korea Sustainability Investing Forum (KoSIF) and CDP Korea.

The ministry of the environment was able to update its taxonomy to include nuclear power based on a clause that permitted amendments “if there’s a change in external circumstance”. In this case, it was the EU’s decision on gas and nuclear power, Kim explained.

Yet some specialists believe that a larger factor altering the taxonomy is the new South Korean administration’s ambition to grow the country’s nuclear industry.

Daul Jang, government relations and advocacy specialist at Greenpeace East Asia in Seoul, argued that President Yoon Suk-yeol’s administration “would have included nuclear regardless of the EU’s decision” and only “pretended to refer to the EU’s case”. Yoon took office in May.

Whether the EU’s decision is the main driver or not, South Korea’s move to certify nuclear as green energy will affect how global ESG investors will view the country’s energy transformation. The K-taxonomy is expected to be finalised by the end of the year.

Many ESG-minded investors are critical of treating nuclear as an alternative to renewable energy sources such as solar and wind. For example, the Dutch pension fund APG has said that nuclear is not eco-friendly no matter which taxonomy it is included in.

In addition, since the Korean taxonomy lacks the enhanced safety standards that the EU has implemented around nuclear power, the fund is going to “conduct extra diligence on its Korean investments”, YK Park, head of responsible investment and governance Asia Pacific at APG, told Moral Money.

Climate activists in Korea fret that the controversy around the K-taxonomy will result in reduced investment in the green economy. If the taxonomy fails to win the trust of those individuals and institutional financial consumers who think nuclear is not green, Kim at KoSIF and CDP Korea said, they will stop putting their money into funds or other financial products using the K-taxonomy.

“[It] will damage the future competitiveness of the Korean economy,” Kim told me. (Tamami Shimizuishi, Nikkei)

Smart read

Ex-Bank of England governor and Brookfield Asset Management vice-chair Mark Carney joined our colleague Edward Luce for a lunch with the FT at New York’s Odeon restaurant. Carney weighed in on the antitrust law issues that have been dogging his corporate net zero initiatives, saying: “You cannot be absolutist under antitrust law. It would be pure collusion.”