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Cablegate: Spain Unveils National Kyoto Plan

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 MADRID 002762

SIPDIS

STATE FOR EUR/WE, COMMERCE FOR CALVERT

E.O. 12958: N/A
TAGS: ECON EIND ENRG EPET SP
SUBJECT: SPAIN UNVEILS NATIONAL KYOTO PLAN

1. SUMMARY: In an eleventh hour move to avoid EU penalties,
Spain's Ministries of Environment and Industry unveiled the
provisional National Allocation Plan (NAP) on 7 July. The
NAP is the GOS attempt to bring domestic carbon dioxide (CO2)
emissions in line with the first tranche of the Kyoto
Protocol. The GOS was particularly concerned about the
Spanish energy sector, with its high number of coal-powered
plants and how to control CO2 emissions without causing
capacity cuts or price hikes. Spain will need new investment
in power plants and should improve importation infrastructure
in order to meet demand for electricity. The new socialist
government (PSOE) blames the former People's Party (PP)
government for not negotiating with enough foresight to see
that Spain's rapid GDP growth and industrial output would
also increase its emissions. END SUMMARY.

EMISSIONS PLAN PUBLISHED
------------------------

2. Spain's Ministries of Environment and Industry presented
the provisional draft of the National Allocation Plan (NAP)
on 7 July. The NAP outlines the level of carbon dioxide
(CO2) emissions that certain sectors of the economy will be
allowed to produce between the years 2005 and 2007, as
mandated by the Kyoto Protocol. The EU threatened to take
Spain and a handful of other EU countries to the European
Court of Justice for delaying the rollout of their NAPs. GOS
officials sped up analysis and drafting of the NAP to avoid
EU reprimand at the last minute. The Ministries of
Environment and Industry led the task of permit allocation to
the petroleum refinement, steel, cement, industrial ceramics,
paper, and energy sectors. The NAP does not cover the
transportation, agriculture, chemical, services, non-iron ore
metals, residential, or other industrial services emissions,
but later rounds will restrict CO2 and other emissions
generated by these sectors. The GOS will distribute CO2
emissions permits based on sectoral projections that account
for future capital and existing plants in the industries,
except in the special case of the energy sector. The
Ministry of Environment created a formula for Kyoto
compliance that accounts for future growth and historical
emissions from power plants in a way that that maintains a
competitive sector and assures a sufficient energy supply.

ALLOCATIONS
-----------

3. The Kyoto Protocol uses 1990 CO2 emissions levels as its
base year measurement. Spain's total allotment of 161.25
million tons of CO2 emissions is a 15% increase over 1990
levels. Last year's CO2 emissions levels summed to more than
40% over (402.7 million tons) 1990 totals. The GOS's 2012
target is to bring CO2 emissions down to 24% over 1990
totals. Individual firms with excess emissions, mostly in
the energy sector, will buy CO2 emissions credits in the
European CO2 Emissions Market that is scheduled to open in
January 2005. The GOS hopes that replacement of older
capital with new cleaner technology will eliminate these
excesses in the long run. Spain will also receive an extra 3
million tons of CO2 credits from Kyoto provisions for forest
lands and their conversion of greenhouse gases into oxygen.
This equates to a 2% cushion that effectively increases the
15% limit over 1990 figures to 17%.

4. The emissions breakdown per sector is as follows:

SECTOR: TOTAL EMISSIONS:
Petrol. Refinement 15.97 million tons
Steel 11.94
Cement and Calcium 30.04
Glass and Ind. Ceramics 11.12
Paper 5.35
Reserve 0.43
TOTAL INDUSTRIAL 74.85

Energy 86.40
TOTAL (energy ind.) 161.25

5. We met with Teresa Rivera, General Manager of the Office
of Climate Change of the Ministry of Environment, who gave us
details regarding the development of the NAP. She said that
since May 25, GOS officials working on Kyoto had redoubled
their efforts to complete Spain's NAP. An interministerial
committee led by the Ministry of Environment and made up of
assistant secretary-level officials from affected Spanish
ministries, such as the Ministries of Environment, Industry,
and Economy, met weekly to work out the details of Spain's
NAP. A working-level group from the same ministries met more
frequently. These groups consulted regularly with industry
experts and the autonomous regional governments. Rivera
noted that the PP government had organized a working group
that laid the groundwork for Kyoto compliance, but seemed
reluctant to go further. A steel industry contact told us
that during the PP administration, GOS officials promised
industry leaders they would have all of the emissions permits
they asked for and were very concerned about Kyoto in the run
up to the campaign in March. He told us that PP officials
asked the industry not to talk with the press. Contacts in
the chemical industry claim that PP administration officials
told them privately that Spain would not comply with Kyoto.
Nevertheless, the research and analysis from the previous
administration allowed the current PSOE administration to act
quickly. The new government, acting on its campaign pledge,
pulled together all of the pieces necessary to enact Kyoto
legislation in two months.
INDUSTRY IS PLEASED BUT HESITANT
--------------------------------
6. The industrial sectors (ie. refineries, steel cement,
ceramics and paper) made out well in this first tranche of
Kyoto, receiving on average about 97% of the emissions
permits they requested from the GOS. Our steel sector
contact said this was in recognition of the fact that all of
the sectors except for energy had little room to maneuver
because their production processes could not change,
therefore their CO2 emissions were more or less fixed. He
said industry is concerned the next round will not be so
pleasant. Energy took the real blow, despite the fact that
the sector received half of all NAP emissions allowances.

THE TROUBLES WITH ENERGY
------------------------

7. The NAP Interministerial Committee found Spain's energy
sector to be the most troublesome not only because of its
massive emissions but also because of the threat of lost
electrical capacity and rate increases. The provisional NAP
allocates 86.2 million tons of CO2 permits, more than
one-half, to the energy sector. The energy sector is also
the only one in which the GOS is directly allocating permits
to firms instead of to the governing sectoral body for later
allocation to individual firms.

8. The two largest electricity companies, Endesa and
Iberdrola, each lobbied for different methods of emissions
allocation. Endesa wanted historically-based assignments,
which would have favored their heavier reliance on coal
produced electricity. Iberdrola favored a plan that only
included projected emissions, because of their use of more
efficient combined cycle generators. The NAP council decided
to distribute emissions credits using a mixed formula. New
combined cycle gas plants that meet all regulations to begin
operations by 2005 will be included in the assignments of CO2
credits.


9. Coal plants will receive permit assignments according to
historical data and combined cycle generators will receive
CO2 credits based on projected emissions. The Ministry of
Industry representative on the NAP working group told econoff
that one of the GOS's goals is to eliminate coal produced
electricity by gradually transitioning into gas-generated
electricity combined with some imported electricity. Spanish
mining companies and workers in northern Spain stand to lose
out on phased-out coal production along with the U.S., which
is the largest exporter of coal to Spain. Electric bills
will likely also increase, despite the Minister of Industry's
declaration to the press that they should not increase above
the normal rate.

10. Jesus Candil, Director General for Industrial
Development in the Ministry of Industry, Tourism and
Commerce, informed us that Spain needs to increase capacity
to connect with foreign sources of electrical capacity in
order to be flexible and to meet future demand and Kyoto
requirements. He said that Spain is "electrically an island
in Europe," with almost zero trade in electricity between it
and the rest of the EU. He went on to say that the GOS goal
is to increase its electricity import capacity to 10% of
demand. He hastened to add that Spain did not need to import
the electricity, but should develop the capability to do so
in the event that it is necessary. The GOS recently approved
a gas and electrical pipeline between Algeria and Spain.
This pipeline will partially accommodate Spain's growing
electricity demand through both increased gas supplies and
direct importation of electrical power from Algeria-based
power plants. But both Rivera and Candil concurred that the
energy sector needs to augment its production ability with
new capital, which is expected to solely come through private
investment.

THE ROAD AHEAD
--------------

11. The NAP Interministerial Committee is now drafting the
royal decree to legally enact the NAP. Our contacts predict
that the Council of Ministers will pass NAP legislation on
July 30. Teresa Rivera commented that drafting the final
plan took two months of intense work, but they are finding
enacting it will be even more difficult. The GOS must now
form some kind of regulatory body, distribute permits,
monitor for excess gas emissions, and enforce the NAP.
Industry and government leaders are currently discussing
implications of the NAP in what is known as the period of
public criticism, although the last draft of the NAP is only
expected to change negligibly, if at all, before approval by
the GOS Counsel of Ministers.
12. COMMENT: It is unclear whether the previous government
intended to comply with the Kyoto Protocol. The PP
government formed an initial working group to provide
emissions research, but never moved forward in drafting a
definitive NAP. With harsh EU penalties looming it is likely
that a new PP administration would also have stepped up the
pace after elections to finish work on the NAP. The PSOE
pledged to comply with Kyoto as part of its campaign. The
industrial sector fared well in this tranche, while the
energy sector will need to undergo some restructuring.
Spanish businesses are concerned that these regulations may
reduce international competitivity due to higher costs for
Kyoto-compliant countries vs. non-compliant countries.
Consumers are concerned that producers will pass along
increased costs to them. END COMMENT.
ARGYROS

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