Warsaw, 23^rd July 2021

Memorandum of the Union of Entrepreneurs and Employers on the post-pandemic recovery
of the Polish economy

 

1. Introduction

The coronavirus pandemic that broke out in Q1 2020 led to an unusual recession on a global scale. It was sudden and deep, and left a lasting mark on several sectors of the economy. According to the calculations of the World Bank, the global economy shrank by 4.3% last year. The scale of the recession was milder than it had been assumed at the beginning due to, among other things, the fact that developed countries dealt with the pandemic relatively well.

The pandemic recession affected individual sectors of the economy in various ways. The industries that lost customers due to restrictions on the movement of people were affected most – these include industries such as tourism, food services, air transport, and hospitality. On the other hand, the broadly understood technology industry has benefited from keeping people at home. Certain industries and sectors passed through the worst period of the pandemic in a relatively neutral manner.

The pandemic also had, of course, a negative impact on the Polish economy, leading to the sharpest decline in GDP since the economic transformation. It amounted to -2.7% last year, and was the worst result of the Polish economy since 1991.

The year 2021 brings a post-pandemic rebound, stimulated by governments and central banks. Governments have launched bailouts totalling trillions of dollars. Central banks have kept rates at very low levels – and even lowered them in numerous cases – thereby offering cheap money and readily available credit.

The GDP growth rate in Q1 2021 turned out to be positive in many of the most important economies. In the US, it was 0.4% year-on-year (hereinafter y-o-y). In China, it skyrocketed to 18.3% y-o-y. In Singapore, it came to 1.3% y-o-y. According to the forecasts of the World Bank, the global economy is to grow by 5.6% this year, which is to be the quickest pace in 80 years. The International Monetary Fund (IMF) claims in turn that it will grow by 6%, and then the growth rate will become slightly moderate in 2022 (4.4% y-o-y). This is without any doubts an effect of a low base, but some readings suggest that optimism has returned to the world economy. Let us have a look, for instance, at the IHS Markit Eurozone Manufacturing PMI – the index of the economic situation in the manufacturing industry in the euro area – which reached in June this year historic highs (63.4 points), after 12 months of increases.

How does the Polish economy compare to others? What does the pandemic rebound in our country look like? Which industries are recovering faster and which ones slower after last year’s recession? How do the phenomena taking place in our main trading partners (e.g. demand shifts) affect selected sectors of the Polish economy? The next wave of the pandemic, possibly to emerge in autumn this year, how destructive could it be? This study tries to earnestly answer these important questions.

2. Rebound of the Polish economy at the beginning of 2021

In Q1 2021, Poland’s real gross GDP (that is, inflation-adjusted) was higher by 1.1% than in the previous quarter according to Statistics Poland (GUS). However, year-on-year, it decreased by 0.9%. (data not adjusted seasonally), which turned out to be a better result than economists expected (the forecast mentioned an increase by 0.9% quarter-on-quarter and a decrease by 1.2% y-o-y).

Investment expenditures positively surprised in Q1 2021 (increase by 1.3% y-o-y, while an 8.6% drop was expected after dropping by as much as 15.5% in Q4 2020). Private consumption increased by 0.2% y-o-y, while a decline was expected. Exports increased by 5.7% y-o-y, and imports by 10%.

How did the Polish economy compare to others in Q1 2021? The economy of the euro area shrank by 1.3% y-o-y (forecast: -1.8%), so it fared well compared to developed European markets. Also compared to other countries of the region, it did quite well, because the Czech economy, for example, shrank by 2.1% y-o-y, while the Lithuanian and the Slovak grew by 1.2% and 0.2% y-o-y respectively.

 

Poland – GDP growth rate y-o-y
[% year-on-year (stable prices of the previous year)]

Source: SpotData / Puls Biznesu

 

Median of Poland’s GDP growth forecasts in 2021
[% year-on-year]

Source: SpotData / Puls Biznesu

 

Data on the Polish economy in May this year turned out to be very good. May was the first month that the economy fully opened after the winter/spring restrictions. Retail sales in May rose in real terms by 13.9% y-o-y after an increase of 21.1% y-o-y a month earlier, and – in nominal terms – it increased by 19.1% y-o-y. Construction and assembly production increased 4.% in May y-o-y against -4.2% y-o-y in April. Sold industrial production increased by 29.8% in May y-o-y after an increase of 44.5% y-o-y in April (which resulted from the low base for April 2020). Therefore, one can see that the domestic economy is in the phase of rapid economic growth, and the construction industry is chasing sales or trade.

 

Poland – level of activity in the economy

[Index, January 2020 = 100 retail sales industrial production construction production]

Source: PKO BP Analyses Centre

 

In this case, what are the forecasts for Q2 and the entire 2021? According to economists at PKO BP, the GDP growth in Q2 amounted to approx. 10% y-o-y, and throughout the year the reading may exceed 5.1% (e.g. due to a revival in investments). According to economists at Bank Pekao, GDP in Q2 could have grown in double-digit terms (approx. 11% y-o-y), and for the entire 2021 it will grow by over 5%. According to the economists at Credit Agricole, the period of shrinking of the Polish economy came to an end with Q1 2021, because in the quarters to come the “base effect” will take effect – exports and consumption will grow. In turn, the Polish Economic Institute (PIE) forecasts that the Polish GDP growth rate this year will amount to 4.4%, mainly due to the effect of delayed demand. The European Commission raised its economic growth forecasts for Poland for 2021 in early July from 4% up to 5% in its own forecast, while the Union of Entrepreneurs and Employers forecasts an increase of 4% in 2021 and 5.1% in 2022.

The dynamic economic rebound – not only in Poland, but around the world – results in a significant increase in the demand for raw materials, which creates price pressure. The so-called non-financial barriers to business appear. In May, the indices of delays in deliveries, production costs, and prices of finished goods reached record highs, whereas the employment, semi-finished stock, and production backlog indices were close to their maximum levels. The data shows a high demand for labour, which, combined with production backlogs, results in insufficient processing capacity, which means that there is need for investment.

 

Business barriers – shortage of raw materials, materials, and semi-finished products (due to non-financial reasons)

Source: PKO BP Analyses Centre

3. Dynamic rebound in certain sectors – manufacturing industry, transport, and trade

As the pandemic recession began last year, economists wondered what shape it would take on as the rebounded afterwards – whether it would be V-shaped (deep crisis, quick rebound), W-shaped (series of recessions and rebounds) or L-shaped (a long-term recession). Today we know that none of these scenarios took place, as the K-scenario took over. This means that certain industries and sectors have quickly and dynamically emerged from the pandemic recession, while others are still in an unenviable situation.

The manufacturing industry, transport, and trade are the best survivors of the pandemic recession, and are recovering the fastest from it. Sold production of industry in Q1 2021 was 7.8% higher than a year ago (when an increase of 0.9% y-o-y was recorded). In May, sold industrial production increased by 29.8% y-o-y, after it skyrocketed by 44.5% in April y-o-y. The Polish manufacturing industry is a beneficiary of the recovery in the global economy.

It is worth taking a look at the export results from Q1-Q2 2021. From January to April, total exports amounted to EUR 90 billion (+19 percent y-o-y) according to GUS. In April, exports of goods increased by 69.2% y-o-y compared to 27.7% y-o-y in March, and in May by 41.7% y-o-y. These double-digit results from April and May are an effect of a low base, but also a display of the strength of demand for Polish goods. Importantly, such results were achieved by Polish exports in connection to the accelerating German economy, our main trade partner.

The demand for car batteries, TV sets, catalytic converters, clothes and furniture produced in Poland is high and growing. The export-oriented automotive industry has a great influence on the excellent results of the industry. Producers of food, plastics, and metal products can also boast a high contribution. Producers of electrical devices, who sell most of their production abroad, also do not disappoint according to GUS and PontInfo data. It is noteworthy too to pay attention to the production of household appliances: according to the report “Household appliances manufacturers and suppliers in the face of new trends and challenges” (“Producenci i dostawcy AGD w obliczu nowych trendów i wyzwań” by Bank Santander and SpotData, May 2021) Polish producers satisfy approx. 2% of the global demand, and this increased in the pandemic due to the phenomenon of expenditure substitution (consumers saved on entertainment, so they decided to replace their old washing machines or refrigerators).

 

10 biggest household appliances exporters (billion USD)
[China, Germany, Mexico, Poland, Italy, Turkey, United States, the Netherlands, Thailand, South Korea]

Source: Bank Santander / SpotData

 

Refrigerators and freezers – production in Poland (thousand)

Source: Bank Santander / SpotData

 

However, the industry faces a challenge: supply constraints make production not keeping up with the dynamically growing orders. A great example is the shortage of semiconductors, which has been a big deal in recent weeks, also due to the problems of Tesla. At the same time, in Poland, there are no problems in the automotive sector so far, because vehicle production in May sared by as much as 103.9% y-o-y, after an increase by 370% in April (this was due to an extremely low base).

Trading companies have very good prospects. Private consumption in Q1 2021 increased by 0.2% y-o-y, compared to a decline of -3.2% y-o-y in Q4 2020). Retail sales in May rose in real terms by 13.9% y-o-y, after an increase of 21.1% y-o-y in April. In May, textile sales increased by 92.2% y-o-y and sales of furniture, electronics and household appliances increased by 30% y-o-y.

Furthermore, PKO BP data from payment cards show that in April 2021 consumer demand was under the pressure of anti-pandemic restrictions, but at the beginning of May – along with the opening of the economy – it literally exploded and remained at a high level in the following weeks. Savings of households “forced” by pandemic lockdowns amount to around PLN 85-102 billion, which correspond to 6.5-7.8% of private consumption in 2019. During the pandemic, the savings rate of Poles increased from 3% to in 2019 up to 10% in 2020. Consumers in countries that are leaders in vaccination, such as Israel or Canada, spend a lot after the restrictions were lifted, and Poles will probably do the same.

In 2021, the transport industry is gaining momentum. Transport companies in Q2 2021 evaluated their situation as the best in 30 months – this is indicated by the EFL Barometer reading for the transport industry at 65.6 points (+10.4 points quarter-on-quarter) reflecting optimistic forecasts for investments and sales.

4. How are those most affected by pandemic restrictions doing – services, hospitality, and tourism

Let us now have a look at the industries and sectors that were hit the most by the pandemic and the restrictions that followed. It is mainly the broadly understood services sector – tourism, HoReCa, and the event industrt (concerts etc.) in particular. Its activity for a large part of 2020 and in Q1 2021 was very limited, and people were reluctant to travel or make use of attractions drawing larger numbers of people (such as aquaparks, ski sloped, and restaurants). Furthermore, companies have significantly reduced the number of business trips.

The contribution of the hotel and food services sector as well as cultural activities to the annual GDP growth in Q4 2020 amounted to -0.9 and -2.0 percentage points respectively according to GUS. In Q1 2021, in hotel and food services sector, added value decreased by 77.2% y-o-y (almost as much as in Q2 2020: -78.4% y-o-y), and for the first time in almost a decade, the number of entities in the tourism industry removed from the National Court Register exceeded the number of new companies. Nearly 80 companies disappeared from the Polish tourism market in Q1 2021, and another 185 were suspended, the operation of nearly 500 hotels and accommodation facilities was suspended (+50% y-o-y) according to Dun & Bradstreet.

“In Q4 2020, the profitability of the hotel industry amounted to -83.6%, and of the food service industry to -6.0%. Revenues were respectively 65% and 15% lower y-o-y (companies with 49+ employees). According to the Polish Hotel Industry Chamber of Commerce, the number of closed hotels increased to 17% in March 2021, and 8 out of 10 open facilities recorded an average occupancy rate well below the break-even point. The moods of 62% of surveyed hotel operators in March 2021 are more pessimistic (+10 percentage points) than a month ago. In the Corona Mood report by Gfk, it was stated that 8% of food services establishments closed down for good and 25% suspended their operations,” say analysts of PKO BP.

One ought to add that the service industry is very sensitive to the administrative risk that still looms over it due to the pandemic. A perfect example is the sudden decision to introduce a mandatory 10-day quarantine from 24^th June for all people coming to Poland from non-Schengen and non-EU countries. This restriction was introduced by the legislator with a vacatio legis of mere few hours, which outraged the tourism industry, and was obviously a blow to business, as it reintroduced uncertainty among tourists in terms of planning holidays outside of the EU.

The HoReCa and tourism industries are not doomed to fail, because the demand for their services will soon exceed the reduced supply, and the margins on these activities may be very high in the short term. However, it cannot be denied that companies in this industry may be forced to scale up their operations according to the principle of “grow or die”. Moreover, there are signs that these industries are facing an employee-related problem, as they reskilled in search of stable income and stabilsation during lockdowns, and found alternative employment in other sectors.

5. Autumn wave – a threat to economic recovery?

How will the Polish economy fare throughout 2021? Is there a chance for a positive GDP growth rate, even if another wave of COVID-19 appears in the autumn, and with it further restrictions in socio-economic life?

The vast majority of economists are optimistic as to how Poland will handle economic activity in the coming months. The World Bank assumes that the Polish economy in 2021 will grow by 3.8%, that is faster than, for example, the Russian economy (3.2%), but still well below the average growth rate of the world economy (5.6%) or the emerging economies (6%).

“Despite the next wave of the pandemic and the long-term shutdown of many of the largest EU economies, Poland’s return to the pre-pandemic GDP level will be possible already at the beginning of 2022,” said Beata Javorcik, Chief Economist at the European Bank for Reconstruction and Development, in an interview for “Obserwator Finansowy” in April this year.

According to economists at Bank Millennium, the economic losses for 2020 will be made up for already this year.

“The worsening of the pandemic and the related sanitary restrictions will slow down the GDP growth in Q2 2021. Our baseline scenario is the stabilisation of the epidemic within that quarter, which seems realistic given the announced clear acceleration of the vaccination process, as well as the natural increase in the immunity of this part of the society that has been infected with the coronavirus. (…) The economy will be fuelled by consumption and exports, although as uncertainty subsides, corporate investment should also enjoy revival,” economists of Bank Millennium stated in the publication “Makro i Rynek. Oczekiwanie na letnie ożywienie”(April 2021).

Assuming that Polish businesses have already developed measures under the restrictions, and that at the end of the year, the majority of Polish society will have been vaccinated, on can say with a high degree of probability that each subsequent possible wave of COVID-19 will to a decreasing extent interfere with economic activity (as long as vaccines are effective, and possible SARS-CoV-2 mutations are not more aggressive and resistant). Of course, we are talking about activities in those industries and sectors that do not run businesses based on – or requiring – people to gather in a relatively small space. During subsequent quarantines, companies from the hotel industry or broadly understood entertainment (sports events, concerts etc.) may again be affected. Meanwhile, the industrial or commercial sector should operate increasingly efficiently during possible lockdowns, within the already developed rules of conduct, habits, and security measures.

This means that most industries, and the Polish economy as a whole, should be doing ever better in a prolonged pandemic. Therefore, it may be possible to avoid a classically defined recession – that is, a decline in GDP for at least two consecutive quarters. However, it is not completely out of the question, nor is just one quarter with a decline in GDP (it may be Q4 2021 or Q1 2022). At the same time, taking into account the base effect, the occurrence of a recession in the winter of 2021/22 would have to be associated with a significant reduction in economic activity, for instance due to the emergence of a dangerous and/or aggressive mutation of the coronavirus.

 

Number of people who received at least one vaccine dose
[Poland, Canada, Israel, the European Union]

Source: PKO BP Analyses Centre

6. Summary

The driving force of the Polish economy during the post-pandemic recovery are – and it is not a big surprise – exports, whose dynamics is high and corresponds to what is happening in the global economy. The Polish economy currently benefits from a dense network of connections not only with the German economy, but also with economies from around the world (the United Kingdom, the Czech Republic, the Russian Federation and the US). One can assume that the position of Polish exporters will strengthen as a result of the pandemic – especially within the eurozone.

In some industries and sectors, the rebound is dynamic, as if they were using some kind of “trampoline”, built primarily on global demand. This phenomenon chiefly concerns the manufacturing industry and production companies (especially those that carry out most of their sales abroad). But not all of them are able to use the trampoline, and in fact remain in quarantine – here we should indicate particularly the broadly understood services and entertainment industries.

The situation on the labour market is good (unemployment is at 6.1%), although certain sectors of the economy may be affected by a shortage in workforce. Food services and tourism could be mentioned in this context, because people working in these sectors during lockdowns were, in a way, forced by their life situation to reskill.

Obviously, it is not that such a dynamic rebound will last forever. The first cracks are appearing, and the threats to the prosperity are already to be spotted on the horizon. First of all, one should bear in mind the issue of the fourth wave this autumn, related to the spread of the so-called Delta variant. It is worth emphasising here, however, that only in a negative scenario – assuming the appearance of a dangerous and contagious mutation of the coronavirus, which would force further “hard” lockdowns – one can expect another recession within the Polish economy in the coming quarters (and thus further blows to trade and services). The baseline scenario should assume effective vaccinations and the acquisition of herd immunity as well as economic growth, possibly a quarter with negative GDP. The optimistic scenario should in turn assume a permanent, or even solid, economic growth, among other things, due to an excellent global economic situation and very high savings of households, which will directly drive trade and, indirectly, other sectors of the economy.

However, the coronavirus and the possible autumn lockdown are not the only “black clouds on the horizon”. It is enough to indicate in this regard the issue of shortages of some raw materials or semi-finished products (this may be a blow to industrial companies), and the issue of price pressure (a global boom raises the prices of raw materials). Moreover, a shift in the demand structure in the West is likely to come – consumers will adjust their interest from goods to services. There are regulatory risk factors hanging over the service and tourism industry (as shown by the example of the sudden introduction of a 10-day-long quarantine for people coming to Poland from non-Schengen countries).

Therefore, the post-pandemic jumping on the trampoline may end quite quickly. Nevertheless, one should hope that even if the pandemic continues, the economy will not revert back to recession, as the extent of consumers’ and companies’ adaptation to a changed reality will be significant.

 

See more: 23.07.2021 Memorandum of the Union of Entrepreneurs and Employers on the post-pandemic recovery of the Polish economy

Warsaw, 26^th July 2021

Position of the Union of Entrepreneurs and Employers on the draft Polish Export Policy

In the opinion of the Union of Entrepreneurs and Employers, the draft Polish Export Policy (hereinafter referred to as “PEP”) presented for pre-consultation is a document of strategic importance, aiming to shape an orderly system of support and promotion of exports, addressed to, among others, domestic companies from the SME sector. In our view, the consistent increase in the strength of Polish exports is an essential activity in the context of contributing to the wealth of the country and its citizens. As a rule, the increase in exports also causes an acceleration of economic growth and a decrease in unemployment, therefore a positive trade balance is one of the most important economic indicators.

The Union of Entrepreneurs and Employers generally agrees with the Ministry of Development, Labour and Technology as to the direction of the proposed solutions in the field of supporting domestic exports, however, we would like to present a number of postulates, the inclusion of which will significantly improve the effectiveness of the proposed strategy.

1. Diversifying the geographic structure of exports

First and foremost, the Union would like to indicate the fact that exports largely focus on markets within the EU. According to the information provided in the PEP, exports to EU member states currently account for approximately 76% of all Polish exports. Moreover, according to the data of the Polish Economic Institute, Germany is the market of highest significance for Polish goods, as it accounts for 27.5% of all Polish exports.[1] Strong focus on trade with Germany has made us globally the fourth largest supplier of goods to our western neighbour and the second largest in Europe. Only the Netherlands exported more to Germany, while only China and the USA did so from outside of Europe.

It is natural that neighbouring countries or those located nearby are responsible for the largest volume of exports and imports. The above-mentioned concentration also results from the single European market, and as a consequence, follows a significantly lower number of barriers to the movement of goods within the European Union. However, one should not disregard the negative aspects of such high concentration of exports solely to European markets.

First of all, one must mention the vulnerability of domestic exports to economic fluctuations in European countries. As things stand, Poland remains largely dependent on local economic conditions, which in the event of a recession in EU member states will have negative consequences for the Polish economy.

Therefore, in our view, the PEP should pay particular attention to the above-mentioned aspect, and as part of measures counteracting dependence on the economic situation in the EU, a greater emphasis should be placed on supporting exports to countries Poland has marginal trade with, as well as destinations oof significant export potential.

We believe that, while searching for new markets, Poland should look to, for instance, Asian countries whose significance on the international area has been steadily growing and thus also play an increasingly important role in the context of global trade. Currently, Poland’s largest trade partner from the Far East is the People’s Republic of China which only receives as much as 1.1% of all Polish exports.

It is our opinion that the geographical diversification of exports will help maintain the business security of domestic companies, as due to a de-concentration of exports, they will be less dependent on local economic conditions.

2. Public authorities reacting to protectionist measures in other countries

In the SWOT analysis presented in the PEP, the authors of the draft defined protectionist actions by other countries as a barrier to the internationalisation of enterprises. However, no instruments were introduced to prevent or respond to such behaviour by third countries.

In the report prepared by the Union of Entrepreneurs and Employers “Problems of Polish entrepreneurs in France”, we identified a number of measures undertaken by the French public administration against Polish entrepreneurs. These should clearly be classified as restricting the rights and freedoms embedded in the single market. Basing on examples cited in that report, one could argue that French authorities allow their local companies to build their position in violation of European law, to the detriment of consumer safety, and against the interests of entrepreneurs from other member states.

Therefore, in our opinion, it is important to strengthen the role of economic diplomacy, as its importance presently seems to be underestimated by bodies of the public administration. We call for a proactive diplomatic stance supporting Polish entrepreneurs in the context of overcoming protectionist barriers imposed by individual states. Both public administration, embassies, consulates, as well as Foreign Trade Offices of the Polish Investment and Trade Agency should be involved in any and all cases regarding Polish entrepreneurs experiencing difficulties in running a business abroad, providing them with all the necessary legal and diplomatic assistance.

In our view, an equally important element missing in the PEP project is an educational campaign and other activities addressed to exporters, aimed at increasing their awareness of legal instruments at their disposal in disputes with authorities in other EU member states. In this place, the SOLVIT system should be mentioned as the first instance when a government agency of another EU country does not respect the rights of individuals or companies under EU law. Unfortunately, due to the low awareness of entrepreneurs, SOLVIT is of marginal use when it comes to out-of-court dispute resolution with the administration of another EU country.

3. Necessity to complete the catalogue of industries covered by Sectoral Promotion Programmes

As part of the Sectoral Promotion Programmes (pp. 13 and 14), support is to be provided for various sectors of the economy relevant to exports, but – as is usually the case with closed catalogues covering a list of specific industries – it seems that this list too should be re-analysed and supplemented accordingly. One could point out, for example, that support for producers of household chemicals was not included in the Sectoral Promotion Programmes. It is noteworthy that the importance of the domestic detergent sector has grown as a result of the COVID-19 pandemic, resulting in increased demand for biocidal products. Meanwhile, worldwide demand for detergents remains increased due to sanitary requirements and restrictions still in force – it seems that this could be the right moment to boost the position of Polish producers on the global market. Bearing in mind such a shortcoming as this one, the list of industries covered by promotion programmes should be re-examined and supplemented considering the export potential of individual sectors.

4. No link between the strategic goals of PEP and the assumptions of the Polish Hydrogen Strategy

According to the contents of the presented document, the Polish Export Policy aims to create forms of support for industries that are most prospective in terms of export and, at the same time, have the greatest potential to build a positive image of the Polish economy. The current wording of the export strategy does not mention the opportunity resulting from the emerging global megatrend: the use of hydrogen as an energy source. The PEP refers to the Polish Industrial Policy numerous times, indicating that both strategies are correlated with each other. However, no actions are foreseen to consolidate the Polish Hydrogen Strategy with the Polish Export Policy.

Due to an adequate promotional support, hydrogen technologies or public transport vehicles that are being developed in Poland stand a great opportunity to enter foreign markets. We are aware of the fact that the Sectoral Promotion Programmes provide support for sectors such as the automotive sector or the rail transport sector, however, in our opinion, there is concern that, under these programmes, the export potential of hydrogen-related goods will not be fully utilised whereas the aid will be allocated to, for example, the promotion of vehicles using traditional fuels. Therefore, we recommend distinguishing the hydrogen sector as a separate category for which additional promotional support would be provided.

5. Significance of e-commerce

We share the diagnosis made by the Ministry, according to which there is a chance to increase the share of Polish exporters in the dynamically growing global e-commerce market. The development of on-line sales through export to foreign markets is a real opportunity for Polish companies from the SME sector. Owing to the relatively low employment and production costs, they have the possibility of competing with Western companies in terms of price, and additionally – thanks to the highly developed digital competences of Polish employees – they also have a chance to compete in terms of the quality of customer services, no matter where the customer is from.

However, according to the results of the study commissioned by the Union of Entrepreneurs and Employers about e-commerce in Poland[2], a significant number of companies trading via the Internet are not present on foreign markets. According to the results of the survey, from all the surveyed companies that sell online 53% are exclusively or only present on foreign markets. This percentage is higher among manufacturing companies, larger ones, and those that have longer been on the market.

The arguments above indicate an enormous potential that lies dormant in Polish enterprises that have not yet decided to expand abroad. Indeed, one of the barriers to entering foreign markets is the lack of knowledge how to develop sales outside the Polish jurisdiction, especially among representatives of companies from the SME sector. Therefore, in our opinion, the PEP should provide support in the field of increasing competences in the use of the e-commerce channel.

Moreover, we suggest analysing the major barriers to digital internationalization of Polish SMEs – that are largely of a technical and organisational nature, as well as focusing on defining tools and methods for their removal. One of the barriers that we observe are, among others, the lengthy and complicated customs and tax processes in exports, and thus – the need to devote the limited resources of companies from the SME sector to administrative activities, instead of focusing on effective foreign expansion.

At the same time, we call for the processes of exporting goods to non-EU markets to be simplified and digitised. One possible solution would be to create a national platform facilitating formalities regarding exports, which would enable a completely new approach to international trade, while giving the National Revenue Administration full control over this process. We would definitely see the development of the concept of such a tool and its implementation as an element of the Polish Export Policy. Perhaps more detailed solutions could be developed within working groups composed of representatives of business and administration.

6. Summary

Impacted by the global COVID-19 pandemic, the world finds itself in the midst of major economic changes. Broken supply chains in the era of the greatest sanitary restrictions or problems with transporting goods to Europe have caused companies to look for alternatives to products and raw materials from Asia. Polish producers, who are able to compete with producers from Asian countries in terms of prices, can take over some of that production and orders that have so far been sent to the East. To do this, however, it is necessary to quickly enforce the solutions provided for in the Polish Export Policy in order to take advantage of the moment at hand, while supply chains are still being redefined.

To sum up, we call for the introduction of solutions and instruments that will simplify export processes. Without a doubt, complex and bureaucratic procedures affect smaller companies, whose human and financial resources are significantly limited, the most.

The cornerstone of the strategy under construction should be the pro-entrepreneurial approach of the authorities and institutions aiding exports. Their effectiveness largely determines whether entrepreneurs will more often and more willingly decide to export goods to other countries, instead of focusing only on the local market.

We also point to the need to diversify the sales markets, as this will limit the impact of a potential economic crash in individual countries on the situation of Polish exporters. A strong focus on trade relations with only one partner may generate significant business risks for companies, also due to the protectionist measures undertaken by some countries.

***

[1] “The transformation of Polish exports – 30 years of growth and what next?” („Transformacja polskiego eksportu – 30 lat wzrostu i co dalej?”), Polish Economic Institute, December 2020

[2] “Survey on companies selling online” („Badanie firm dot. sprzedaży on-line”), Maison & Partners commission by the Union of Entrepreneurs and Employers, April 2021

 

See more: 26.07.2021 Position of the Union of Entrepreneurs and Employers on the draft Polish Export Policy

Warsaw, 28^th July 2021

Memorandum of the Union of Entrepreneurs and Employers on alternative solutions for entrepreneurs in the Polish New Deal

The Union of Entrepreneurs and Employers postulates to resign from burdening entrepreneurs with the National Health Fund premium proportional to income or revenue, and to abandon the possibility of deducting the NHF premium from the personal income tax paid by entrepreneurs.

We propose that only three forms of running a business in the system be left in the system, all of which are simple from a tax point  of view:

1. a small one-person business activity (sole proprietorship) for those with revenues up to PLN 120 thousand annually;
2. flat tax on the current terms;
3. lump sum on revenues with revised tax rates.

Furthermore, we propose a gradual increase in the basis on which health insurance premiums are calculated and paid by entrepreneurs to the level of 90% of the average wage.

The following concepts may help supplement the budget revenues that were to come from the solutions described in the Polish New Deal:

1. a uniform VAT rate of 18.75% (for the least wealthy, we propose a compensating solution in the form of a social card);
2. a minimum CIT rate of 1% of the revenues generated in a given tax year.

 

See more: 28.07.2021 Memorandum of the Union of Entrepreneurs and Employers   on alternative solutions for entrepreneurs in the Polish New Deal

Warsaw, 14^th July 2021

Polish entrepreneurs are hoping that the CJEU will recognize the so-called „VAT paid sooner” (PL: szybki VAT) on intra-Community acquisitions of fuel, which is a pillar of the government’s regulatory package known as the “fuel package”, as compliant with EU law

Fuel industry organizations (Polish Chamber of Liquid Gas – PIGP, Polish Chamber of Liquid Fuels – PIPP, Polish Petroleum Industry and Trade Organization – POPiHN, Polish LNG and BioLNG Platform – PPLNG ) and Union of Entrepreneurs and Employers – ZPP, took a position in a case pending before the CJEU, regarding the compliance of Polish VAT-14 regulations with EU law (C-855/19). The case is pending at the request of the Supreme Administrative Court in the case of G. Sp. z o.o. v Director of the Tax Chamber in Bydgoszcz. The reason for the joint motion was the opinion of the Advocate General of the CJEU, who found the regulations under review to be inconsistent with EU law.

The letter to the CJEU was agreed with the companies most widely using the existing rules. The signatories work for a competitive, customer- and business-friendly market, ensuring the safe and sustainable development of the economy, taking into account EU standards and European values. Following the amicus curiae* tradition of Roman law, these organisations submitted a position paper to the CJEU to assist the CJEU in deciding the case before it.

The scale of illegal fuel trading in Poland in 2015 reached over 20% of the legal market. One of the most popular models used by criminals was the importation of fuel by so-called “disappearing taxpayers”. The proposal to accelerate VAT prepayments on intra-community fuel acquisitions was proposed by fuel companies even before 2015. Such a solution, although it had a negative impact on the liquidity of entrepreneurs, was nevertheless necessary to combat organized crime.

Changes in regulations, especially the acceleration of the deadline for paying VAT advance on fuel purchases and the monitoring of transport, developed in cooperation with the fuel industry, resulted in a large increase in recorded sales. According to POPiHN calculations, tax revenues paid by the fuel industry in 2015 from VAT, excise duty and fuel surcharge were PLN 50 billion, and in 2019 ca. PLN 74 billion. Most of this increase was due to a reduction in the activities of criminals.

A formal and legal analysis may also support the conclusion that the mechanism of „VAT paid sooner” (PL: szybki VAT) is compatible with the EU law. The argumentation used by the Advocate General a contrario when comparing the scope of Articles 273 and 395 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax raises key doubts.

According to Krzysztof Rutkowski, legal counsel – The Advocate General of the CJEU presented a biased opinion that omits arguments for Poland’s position. In particular, there are doubts as to the interpretation of Article 273 of the VAT Directive according to which the demand for payment by way of future tax may concern only ‘net’ amounts and must therefore relate to the ‘result’ of the amount of VAT due for a given period, and not to the ‘gross’ amount of VAT. In my view, AG Saugmandsgaard’s view that under Article 273 of the directive Member States may impose only such ‘additional obligations’ which would be fully (i.e. 100%) compatible with the other provisions of the VAT directive is also incorrect. Such an interpretation deprives Article 273 of its substance and meaning.

Adoption of the Advocate General’s position may undermine the assumption of rationality of the EU legislator and should not be acceptable in the current legal system. At the same time, the position draws attention to the fact that the adoption of such an interpretation by the CJEU would means that national law would have to be amended in the contested area. In other words, one of the pillars of tax sealing, which significantly contributed to reducing gigantic pathologies in the liquid fuels market sector, will be undermined. 

Polish entrepreneurs hope that the CJEU will acknowledge the compliance of the “VAT paid sooner ” with the EU law. The adoption by the CJEU of the position of the Advocate General could undermine the confidence of legal business in EU law and EU institutions, and would also entail the risk of an increase in illegal fuel trading in Poland – said Marcin Nowacki, Vice-President of ZPP.

All members of the aforementioned organizations hope that the Court will take advantage of the benefit from the institution of amicus curiae and will accept the interpretation that Polish legislation on „VAT paid sooner” is consistent with EU law.

* Amicus curiae – a person or organization that is not a party to the litigation and voluntarily, on its own initiative, offers the court a legal or other opinion concerning the subject matter of the litigation.

See: Polish entrepreneurs are hoping that the CJEU will recognize the so-called „VAT paid sooner” (PL: szybki VAT) on intra-Community acquisitions of fuel, which is a pillar of the government’s regulatory package known as the “fuel package”, as compliant with EU law

Warsaw, July 13, 2021

 

Warsaw, 8^th July 2021

Commentary of the Union of Entrepreneurs and Employers regarding the proposal to tighten the ban on Sunday trade

On 1^st March 2008, restrictions on Sunday trade were enforced in Poland, which over time evolved into an almost complete ban. The authors of the act which made this solution law had two main goals in mind: to improve the situation of employees in the retail sector, and to boost the competitive position of small stores against larger chains.

From the very beginning of the debate revolving around this act, experts of the Union of Entrepreneurs and Employers have warned that most likely that neither of the assumed goals would be achieved. To back their thesis, they discussed other European countries that have in recent years been abandoning restrictions of this kind in the trade sector rather than introducing them.

Three years later, one can clearly say that our forecasts came true. The structure of the retail sector continues to change to the detriment of small shops (their numbers are decreasing, while the position of supermarkets and discount shops is growing). Retail chains have learnt to use new solutions in such a way as to change the purchasing habits of consumers and, as a result, the Hungarian scenario has become true in Poland – aggressive sales on Fridays and Saturdays have made customers used to making larger purchases once a week. At the same time, approximately half of the employees in the retail sector are still work on Sundays.

With the above-listed facts in mind, we evaluate the proposals to tighten the ban on Sunday trading, by restricting the exceptions mentioned in the act, as negative and consider them pointless.

First of all, in line with the arguments presented above, the ban on Sunday trade does not give a helping hand to  small shops. Statistical data on the number of stores shutting down for good seems to confirm this thesis sufficiently, however, we decided to develop an additional econometric analysis.

Using an econometric model, we examined the impact of the ban on sales volumes in small businesses. Increasing restrictions on trade on Sundays by merely a level causes a 6.3% drop in the value of food and drink sales in specialised stores which are companies employing less than 10 people, provided other factors remain unchanged. On the other hand, the introduction of a complete ban on Sunday trading causes a 25.2% decrease in the value of retail sales of food and beverages in stores that  are companies employing less than 10 people, providing other factors remain unchanged. Small neighbourhood grocery stores, which are supposed to be among the main beneficiaries of the Sunday trade ban, obviously lose out on this solution to the competition.

Secondly, the ban does not significantly improve the situation of employees in the trade sector. A significant part of them are still working on Sundays, and those covered by the act face increased traffic on the days preceding those when it is not allowed to sell goods. In this context, a much more effective solution would be to introduce a guarantee in the Labour Code of two Sundays off every month month for each employee, which we have been proposing for years.

And finally, there are significant doubts of a technical nature concerning the proposed model of tightening the ban. This is because (according to media reports) it would be based on the analysis of the share of revenues obtained by a given institution in the scope of activities covered by the exception. As a result, in order for a point of sales, which also operates as a post office, to be able to make use of the exception provided for postal points of contact and operate on Sundays, it would have to obtain at least 50% of revenues from the provision of postal services in the month preceding the inspection. This means that theoretically it would be possible for a particular institution to be open on Sundays in one month and be closed the following one. Moreover, such a construction would require recording revenues according to the division into activities covered by the exception to the ban on Sunday trading and other activities. Thus, additional confusion would arise – both from the point of view of customers who would not be sure whether a particular shop is open on Sundays in a given month, and from the point of view of entrepreneurs who would have to deal with new administrative obligations.

To sum up, the Union of Entrepreneurs and Employers opposes the Sunday trade ban and consequently also opposes the tightening of regulations in any scope. If the legislator were to consider any kind of modification to the regulations enforced in 2018, it should go in the opposite direction and aim at liberalising regulations and free trade on Sundays. The experiences of recent years have shown that the ban failed to achieve any of its original objectives.

 

See more: 08.07.2021 Commentary of the Union of Entrepreneurs and Employers regarding the proposal to tighten the ban on Sunday trade

Brussels, 19 July 2021

Open Letter on the Digital Services Act (DSA) and Digital Advertising

 

We are a broad-ranging coalition of European stakeholders from the digital advertising and media ecosystem, including digital media publishers, content creators, communications agencies, technology providers, eCommerce businesses, entrepreneurs, and software developers. As the European Parliament moves to finalise its position on the proposed Digital Services Act (DSA), we respectfully voice our firm opposition to the ban on targeted advertising that has been put forward by some political groups. More broadly, we call on the EU legislator to recognise the value of the EU’s existing legal framework for privacy and data protection and to avoid the inclusion of provisions in the DSA that would undermine it.

We fully support requirements in the DSA proposal that seek to improve the overall B2B and B2C transparency of digital advertising. However, we cannot endorse a European law that aspires to constrain online business models through bans and prohibitions of practices that are already comprehensively regulated by existing privacy and data protection laws. If reflected in the final text, such disproportionate, unjustified restrictions would heavily undermine the sustainability of European media and the open internet as well as perpetuate legal uncertainty, including by creating unprecedented complexity in compliance and enforcement.

The functioning of democracies critically depends on citizens having access to services, knowledge and information online. A ban on targeted advertising would effectively strip businesses of critical revenue that enables them to guarantee such access and deprive European citizens of a significant portion of the content and services they benefit from today. Without a clear alternative, more content and services would be pushed behind paywalls, with disproportionate effects on lower-income households in particular. Consumers who do not wish to receive personalised advertising or be “tracked” online can simply leverage existing law to refuse it, before they even start consuming ad-supported content.

The recently-released Reuters Institute Digital News Report 2021 cites ‘pressing concerns about what happens to those who have limited interest or who can’t afford it’ as ‘more high-quality content [is] disappearing behind paywalls’, whereas a study requested by the CULT Committee ‘Europe’s media in the digital decade’ warns of a ‘decline in the access to relevant information’ as a result of content becoming paid-only.

Moreover, such measures would undercut market entry opportunities for start-ups and SMEs in need to reach their customers, create brand awareness and scale, especially in current times when economic recovery is key. Personalised ads are instrumental for regional SMEs and exporters with unique products who need to reach a global customer-base, but also essential for EU´s big brand champions whose business is fundamentally supported by improved addressability, as they seek to provide the right marketing messages to the right audience at the right time.

The EU has the most sophisticated privacy and data protection legal framework in the world, with heavy sanctions. If the Parliament wishes to increase consumer trust online – one of the adduced objectives of theDSA proposal – it should insist on effective enforcement of that current framework and reject the temptation to extend the scope of the DSA in ways that would create regulatory turmoil and put the financial stability of the Europe’s local businesses and media in peril.

See more: Open Letter on the Digital Services Act (DSA) and Digital Advertising

Warsaw, 16^th July 2021

 

The Union of Entrepreneurs and Employers launched a project to help companies from Belarus in cooperation with the city of Łódź

 

The Union of Entrepreneurs and Employers (ZPP) has launched a Contact Point for Entrepreneurs from Belarus, the purpose of which is to provide comprehensive organisational assistance to Belarusians interested in investing in Poland, including temporarily relocating their business. The project is a joint venture with the city of Łódź.

Support offered by ZPP includes, among others:

• providing information on the enterprise registration process and the regulatory environment for business in Poland;
• consultancy in the field of economic expansion, gaining local contacts and business partners;
• support in contacts with relevant public authorities;
• assistance in other areas, allowing investors to efficiently and safely develop their business in Poland.

The Union’s project is co-created with the Łódź City Hall known for creating favourable conditions for Belarusian companies to function normally and scale their business. Entrepreneurs deciding to grow their business in Łódź can count on the support of the Economic Development and International Cooperation Office. The representatives of the City of Łódź are focused on supporting entrepreneurs and overcoming barriers together. Importantly, the City of Łódź has experience in conducting effective onboarding of foreign investors and is characterised by a flexible and pro-entrepreneurial approach.

All entrepreneurs interested in finding more about business development opportunities in Poland are invited by the Union of Entrepreneurs and Employers to contact us at belarus@zpp.net.pl.

“We want to shape good standards of cooperation between the world of business and local governments. Communities will only benefit from it. Presently, due to domestic difficulties, Belarusian companies are in part transferring their operations to other countries. At the beginning, we focused on the IT sector as Łódź is a hotbed for companies from this sector, and IT companies from Belarus quite often have an international and global dimension. Three companies have already benefited from our assistance, and approximately 30 more have contacted us,” commented Marcin Nowacki, Vice President of the Union of Entrepreneurs and Employers.

During the joint conference inaugurating the project, Hanna Zdanowska, the Mayor of Łódź, welcomed Belarussians to Łódź:

“We invite the people of Belarus to Łódź. We invite Belarusian companies. Join us, work and live with us, be safe. Apart from the ZPP Contact Point, we also opened the Łódź Multicultural Centre in ul. Narutowicza 8/10. Foreigners living in Łódź will have the chance to receive psychological support or assistance in the event of violence or discrimination. It is also important that foreigners have the opportunity to benefit from the support of an individual assistant who speaks one of four languages: English, Ukrainian, Belarusian or Russian,” said Mayor Hanna Zdanowska. “Over the year to come, we will research and investigate what kind of problems foreigners have encounter in our city. Based on experiences from other cities, we know that these are often problems related to language or insufficiently comprehensible official forms. Legal consultations are also essential. Łódź has always been an open city and we cordially invite our new neighbours and fellow entrepreneurs. There is work in Łódź, decent costs of living, and a creative, interesting and positive atmosphere. Welcome to Łódź.”

Warsaw, July 16, 2021

 

ZPP’s comment on the proposal to establish a global CIT tax

 

The Union of Entrepreneurs and Employers is concerned that initiatives aimed at harmonizing tax regimes on a global scale might be detrimental
to the competitiveness of the Polish economy. Moreover, the proposals to establish a global minimum CIT tax are unlikely to solve the problem of tax base erosion
and the use of aggressive optimization mechanisms. Thus, we believe that a much more appropriate direction is to replace the corporate income tax with a low-rate sales tax.

On July 1, 2021, Poland, along with 129 other countries of the world, issued a joint statement on the willingness to develop new rules for taxing large international enterprises, including the taxation of Big Tech. As a result of over two years of work at the forum of the Organization for Economic Co-operation and Development (OECD), solutions are divided into the so-called two pillars.

The First Pillar consists of activities aimed at developing new rules concerning the place of income taxation and new rules for allocating income to individual countries in which the activity is carried out. On the other hand, the Second Pillar assumes the creationof a global minimum CIT tax. The minimum tax rate on the income
of multinational companies has been set at least 15 percent but may be increased as international negotiations progress on the implementation of Pillar Two.

In our view, the implementation of these initiatives will hit the competitiveness of the Polish economy.

Poland has one of the lowest effective CIT rates in the European Union, amounting to 15.3%. The chart below shows the inverse relationship between the inflow
of foreign direct investment and the amount of the effective corporate tax rate. In other words, international capital tends to migrate to jurisdictions with lower CIT rates.

 

Figure 1. Effective CIT rate and FDI flows

Source: own elaboration based on: OECD, Effective tax rate, online: Effective Tax Rates (oecd.org); OECD, FDI flows, online: Foreign direct investment (FDI) – FDI flows – OECD Data.

 

The inflow of foreign capital, referred to as Foreign Direct Investments (FDI), results in the transfer of technology to the country receiving capital, contributes to the development of the local labour market, and the integration of international trade. Moreover, it helps to create a more competitive business environment and accelerates the development of enterprises.

All the above-mentioned effects translate into higher economic growth, which is the most effective tool for reducing the economic distance between developed countries and developing countries, including Poland. It should be mentioned in this context that the so-called FDI played a key role in generating growth in the economies of the former socialist bloc. Countries such as Estonia, Poland, Czech Republic, and Slovenia, in the period of economic and political transformation, offered preferential CIT rates as an additional magnet to attract multinationals.

The proposed reform introducing the so-called global CIT will take away the so-called emerging countries their predominance in the form of preferential tax rates. Thus, the beneficiaries of the proposed solutions will be primarily the richest countries with an established position, which do not have to compete with the amount of tax burdens. The projected, additional tax revenues will mainly go to countries where international corporations eligible for the minimum CIT is their headquarters.
In addition to the direct fiscal effects of the global CIT agreement on national budgets, one should also bear in mind the indirect effects of global taxes, such as shifting the burden of additional liabilities onto employees of multinational corporations or consumers, or a decline in the profitability of international investments.

To sum up, the solution consisting in establishing a minimum rate of global CIT tax is an instrument favoring the most developed countries with a strong, established position in the global economic landscape. The adoption of the above rule will largely negatively affect the interests of small countries, or those whose economies have been based on free-market principles for just a few dozen years, and thus have not managed to develop an appropriate position on international markets.

Therefore, taking into account the above, we believe that Poland should retain the ability to compete in the tax system with other countries because as a motor of economic development.. Moreover, the introduction of the international tax regime will have a destructive effect on the domestic economy due to the decline in Foreign Direct Investments. It should be noted that along with capital from abroad, we also receive organizational culture and know-how, thanks to which our industry participates in the process of technological transformation, and is also an important element of global supply chains.

The ZPP emphasizes that the actions of states to limit tax avoidance and evasion must take a positive dimension to a greater extent, attracting taxpayers
and entrepreneurs not only with the amount of levies but also with the simplicity and transparency of the entire tax system. The occurrence of tax competition causes countries to strive to improve the quality of the adopted law or to develop tax mechanisms supporting entrepreneurship.

We believe that the shaping of tax policy should unconditionally remain the sovereign matter of each country, as only such an approach can reflect both the needs
and fiscal capacity of each country. On the other hand, the state of affairs in which there is natural competition between states as tax jurisdictions with varying degrees of attractiveness is a welcome phenomenon as it stimulates global economic growth.

Regardless of the above considerations, we point out that the proposals resulting from the project lasting more than two years, carried out as part of the OECD’s work, will probably not solve the most important problem, which is the erosion of the CIT tax base. Thus, the introduction of sales tax seems to be a much more effective solution, the more so as EU law does not contradict this idea.

 

See more: 16.07.2021 ZPP’s comment on the proposal to establish a global CIT tax

 

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Warsaw, 13 July 2021

 

ZPP Commentary: EU’s climate goals come at a cost of deforestation

 

The Union of Entrepreneurs and Employers is alarming that the EU’s climate goals come at a come of deforestation while bringing little positive effect on greenhouse gas emissions. Ill-fitted policies and a focus on self-imposed targets rather than actual impact are primary reasons why this is happening. Given the costs related to the European Green Deal as well as the importance of achieving climate neutrality, we urge the European Commission to put limits to the use of bioenergy as renewable energy in the upcoming RED II revision.

Tomorrow, on July 14, the European Commission (‘Commission’) is expected to publish the ‘Fit for 55’ legislative package implementing the European Green Deal and ambitious goal to reduce its greenhouse gas emissions by at least 55 per cent by 2030. The package will include many long-awaited proposals, including the revision of the Emissions Trading Scheme (‘ETS’) and the project of carbon border adjustment mechanism.

Among other controversial policies, there is also a revision of the Renewable Energy Directive (‘RED’). First published in 2009, the Renewable Energy Directive classified bioenergy (i.e. biodiesel and biomass) as climate-friendly and obliged member states to achieve a 10 per cent renewable energy share in the final transport energy consumption (RES-T) by 2020. In 2018, a recast of RED (so-called RED II) was adopted, closing some legal loopholes and increasing the target to 14 per cent. The current revision of RED II is expected to increase the goal to 24 per cent RES-T, showing the growing reliance on bioenergy.

The role of biomass is especially important from the perspective of the Member States, which are obliged to reach climate goals. Since the evidence on the negative side-effects of increased reliance on bioenergy is growing, an idea of striking biomass and biodiesel of the renewables list has been gaining support. In response to the idea, ministers from 10 Member States have signed a letter where they urge the Commission to declare all forms of solid, gaseous and liquid bioenergy as ‘long-term sustainable energy sources’ given their ‘crucial role of bioenergy in the Member States’ energy mix to reach the EU climate goals’.[1]This letter shows that the pressure to achieve administratively set targets is so big, that the Member States are eager to overlook the negative impact on the climate of the bioenergy.[2] And the case against sustained use of bioenergy keeps growing. Below we enumerate two key arguments against it.

First, burning biofuels are responsible for more GHG than fossil fuels. On the one hand, fossil fuels such as gas and coal have higher energy density than wood pellets or biodiesel, hence it’s necessary to burn more fuel per energy unit. On the other hand, there is an issue of indirect land-use change (ILUC), namely cutting down trees (the carbon dioxide absorbent factor) in order to plant palm and soy, needed for biofuels, or worse to use it as pellets.[3]

The Commission has conducted two studies, which quantified the land-use related emissions of biofuels. They found that when ILUC was accounted for, all vegetable oil-based biodiesel had more emissions than fossil fuel. Interestingly, the more recent of the two studies have found that palm and soy oil have three and two times more emissions than fossil diesel respectively.[4] Hence, when we account for ILUC the situation looks rather grim. Since 2011 39 Mt of palm and soy biodiesel have been used, emitting 381 Mt CO2eq – 245 Mt more than the same amount of fossil diesel. If nothing changes, in the next 10 years the EU will emit 174 Mt of CO2eq more than the conventional diesel emissions. This is equivalent to the emissions of 95 million extra cars on the road.

Second, the sustained use of biofuels leads to massive and unsustainable land conversions. A study by Transport & Environment has found that the EU’s demand for soy and palm required 4 million hectares of land, while the demand for palm oil alone required conversion of 1.1 million hectares of mature land in Southeast Asian countries into new palm plantations. According to Euractiv, the deforested area corresponds to the size of the Netherlands. To make the matters worse, the forests that were converted are the habitat of the remaining orangutan population. T&E estimate that the EU’s increased demand for palm oil diesel is responsible for the destruction of 10% of the world’s remaining orangutan habitats. A further increase to 24 per cent renewable energy share in transport can double the deforested area. It is clear that such a strategy is contrary to the EU’s Biodiversity Strategy.

To sum up, the EU’s increased use of biofuels led to numerous negative consequences for the environment: increased GHG emissions, equivalent to emissions of 95 million cars, deforestation of the size equivalent to the area of the Netherlands and the destruction of 10 per cent of remaining orangutan habitats. Nevertheless, in theory, the EU’s is meeting its’ climate targets, since biofuels have been classified as ‘green’. Given the tremendous costs related to the implementation of the Green Deal as well as the importance of climate protection, we urge the Commission to look beyond its targets and take into consideration wider and real implications of its policies. In our opinion, the use of bioenergy should be limited within the framework of the upcoming RED II revision in order to avoid further negative effects on the environment.

 

[1] Among signatories there were countries who greatly depend on wood in their energy mix, such as Sweden, Finland and Estonia, but also Visegrad countries, including Poland.

[2] The same point can be seen in the demand for biofuels during the Covid-19 crisis. Despite the record low demand for energy, the volume of biofuels used by EU transport sector did not decrease, while in some countries like Germany or Italy it has even increased. This can be best explained by reference to the EU transport targets under the RED as well as Fuel Quality Directive for 2020.

[3] The EU rules officially prohibit cutting down trees to source pellets, and allow only for wood residue to be used for purposes of biomass, while environmental protection activities claim that it is a standard practice.

[4] The issue was to a certain extent addressed by RED II, which classified palm oil as high ILUC risk and introduced a phase out by 2030. Nevertheless, the problem was not solved completely since other crop based feedstock, including soy, and biomass is still allowed. Keeping in mind the potential increase to 24 per cent RES-T, unsustainable use of land, deforestation and biodiversity loss is very likely to occur.

Sources:

https://www.government.se/493efb/contentassets/764497619c0d4dda9c433db8c0d6ab5b/ministers-letter-on-bioenergy-in-taxonomy

https://www.transportenvironment.org/sites/te/files/publications/Biofuels%20briefing%20072021.pdf

https://www.ft.com/content/c3b00115-562e-4d06-bd11-f46a3f9366b1

https://www.euractiv.com/section/transport/news/eu-biofuels-goals-seen-behind-deforested-area-as-big-as-the-netherlands/

 

See more:  ZPP Commentary: EU’s climate goals come at a cost of deforestation

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