Carbon-Neutral Poland 2050 Turning a Challenge Into an Opportunity Mckinsey & Company in Poland

Carbon-neutral Poland 2050 Turning a challenge into an opportunity McKinsey & Company in Poland

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By Hauke Engel, Marcin Purta, Eveline Speelman, Gustaw Szarek, and Pol van der Pluijm Preface

Over the past decades, Poland has Although subject to uncertainty, in the international arena. The study taken steps toward one of the most the transition to carbon neutrality is develops the arguments presented in profound changes in its history: the estimated to require additional invest our earlier reports, including Poland transformation of the energy system. ments of €10 billion to €13 billion a year, 2030: A chance to join the economic Poland, with average GDP growth or 1-2 percent of GDP, for the next 30 big league, Developing offshore of around 4 percent a year1 over the years. Raising and investing that amount wind power in Poland: Outlook and past three decades, has successfully of capital in a highly coordinated fashion assessment of local economic impact, decoupled economic growth from would be a considerable challenge for and Poland 2025: Europe’s new growth emissions.2 the country’s government and business engine. leaders. However, the transition path will In the development of this report and be challenging. The country is not At the time of publication, global its insights, we have worked extensively blessed with rivers that could support attention is focused on countering with, among others, McKinsey’s extensive hydro generation, and it the spread of COVID-19, and on sustainability insights, global energy has only 1,400 to 1,9003 sunny hours blunting the force of slowdown that perspective, sustainability practice, a year (half of what California enjoys). is likely to follow. The exact short- automotive practice, and the McKinsey Natural gas is scarce, and geopolitical term impact of the crisis is as yet Global Institute. In particular, we want factors make it difficult to import it at unknown. However, it is not expected to thank Dickon Pinner and Thomas a sustainable scale. The Baltic Sea to change the fundamental structure Vahlenkamp for their leadership and provides an opportunity for offshore of the Polish economy or the available insights. wind generation in the north, but high- decarbonization technologies. In addition, this report would never consumption areas are located in the Therefore, in this report, it is reasonable have been possible without the input south of the country. Also, Poland does to still base our decarbonization and expertise drawn from a broad not have a single nuclear-power reactor scenario on pre-COVID-19 business spectrum of stakeholders, including (in contrast to other post–Eastern Bloc activity and growth dynamics. EU members such as Bulgaria, Czech leaders from public institutions, aca Republic, Hungary, Romania, and This report does not aim to predict the demia, nongovernmental organiza Slovakia). What Poland does have are future. Rather, it outlines a pathway tions, conservation organizations, and coal-fired power stations progressively for the Polish economy to decarbonize industry players. In particular, The depleting coal reserves, and a huge in the most cost-efficient way. We Woods Hole Research Center (WHRC), agricultural sector. investigate the actions and investments in collaboration with The Nature required and identify opportunities for Conservancy, evaluated the carbon However, the path to decarbonization the economy to benefit from. We hope sequestration potential of Poland's is more urgent than ever as the window our work will serve as a fact base for forests and soils for this report. to keep global warming below 2°C an informed debate on how to make narrows. To become a net-zero- We would like to take this opportunity decarbonization a reality—within emissions economy by 2050, the year to thank all of them for their invaluable and outside of Poland, where the of EU emissions targets and the primary input. pathway could serve as an inspiration reference year in the Paris Agreement, for other countries facing significant Poland will have to triple its rate of decarbonization challenges. decarbonization over the next decade compared with the previous 30 years. It This pro bono effort reflects McKinsey’s Hauke Engel, Marcin Purta, must then further accelerate from 2030 deep commitment to the development Eveline Speelman, Gustaw Szarek, to 2050. of Poland’s economy and its success and Pol van der Pluijm

2 Carbon-neutral Poland 2050 Contents

Key findings 4

Executive summary 6

Chapter 1 15 Defining the decarbonization challenge

Chapter 2 21 Decarbonizing the economy: A pathway to net-zero emissions in Poland

Chapter 3 31 Plausible decarbonization pathways for each sector

Chapter 4 43 Transitioning the energy system

Chapter 5 55 Decarbonization costs and impact

Chapter 6 65 Charting a way forward

Appendix A: Glossary of abbreviations 72

Appendix B: Methodology 73

Appendix C: Key assumptions by industry 74

Appendix D: Bibliography 77

Endnotes 79

About the authors 82

3 Potential changes in higher energy production Key ndings Poland's energy up to ~2.5x in 2050 than now 2050 Energy production, TWh/year 458 429 6% Solar Poland’s emissions levels and potential targets 354 MtCO2e 282 244 73% Wind 447 208 380 179 271 2% Other 3% Gas 2% Coal and lignite 14% Nuclear 2020 2025 2030 2035 2040 2045 2050

8 8 Interconnectors 0 -1 -13 Power to gas -40 0 -52

1990 2017 2030 2050 Potential additional investment needed € billion Main decarbonization levers 80 76 MtCO2e or 63 64 Renewable energy and CCUS €380 bn 59 380 156 1–2% GDP p.a. 42

Years 202125 202630 203135 203640 204145 204650

Heat electrication, energy eciency, and CCUS 88 Potential decarbonization benets

Replacing ICEs with BEVs and FCEVs 62 Insulation and lower-carbon alternatives for boilers and stoves 46 Low-emissions land management Savings Energy security New industries developed and low-carbon fuels 17 6 3 €75 bn 80% 1–2% 250–300K Total Power Industry Transport Buildings Agriculture Waste Negative savings in reduction of energy boost jobs emissions and heat and other emissions operational commodities imports in GDP created 2017 costs in the carbon-neutral scenario Source: Statistics Poland; KASHUE; Eurostat; EIU; KOBiZE; McKinsey & Company analyses

4 Potential changes in higher energy production Key ndings Poland's energy up to ~2.5x in 2050 than now 2050 Energy production, TWh/year 458 429 6% Solar Poland’s emissions levels and potential targets 354 MtCO2e 282 244 73% Wind 447 208 380 179 271 2% Other 3% Gas 2% Coal and lignite 14% Nuclear 2020 2025 2030 2035 2040 2045 2050

8 8 Interconnectors 0 -1 -13 Power to gas -40 0 -52

1990 2017 2030 2050 Potential additional investment needed € billion Main decarbonization levers 80 76 MtCO2e or 63 64 Renewable energy and CCUS €380 bn 59 380 156 1–2% GDP p.a. 42

Years 202125 202630 203135 203640 204145 204650

Heat electrication, energy eciency, and CCUS 88 Potential decarbonization benets

5 Executive summary

When the Paris Agreement went 9 percent of emissions, Poland could into force in 2016, countries around reach carbon neutrality by 2050. the world signed on to reduce their Five sectors—industry, transport, greenhouse gas (GHG) emissions by buildings (predominantly heating), 2050 to help limit global warming to agriculture, and power—are primarily 2°C, with the aspiration of slowing its responsible for greenhouse gas growth even more, to 1.5°C. As such, the emissions in Poland, and most of European Union has begun exploring these sectors use coal as the primary the necessary actions to significantly fuel. Employing energy efficiency and reduce emissions by 2030 and to switching from carbon-based fuels achieve carbon neutrality by 2050. to zero-emissions energy sources Poland’s GHG emissions have drop (including electric power, hydrogen,

ped from 447 MtCO2e (megatons and ammonia) across all sectors of carbon dioxide equivalent)4 will be needed to achieve carbon

in 1990 to 380 MtCO2e in 2017. neutrality by 2050. A decarbonized This decline was possible due to economy would require much more a shift from an industrial planned green power and therefore in this economy to a more service-focused report we define a potential power economy, improved industrial energy mix to supply the required energy. efficiency, a reduction in the use of In this report we take a through-cycle, coal and lignite, and a rising share of long-term perspective on Poland’s renewable energy sources (RES). economy, without the effects of Despite this progress, in 2017 Poland various short-term shocks that are remained the European Union’s third- bound to occur in the upcoming 30 most carbon-intensive economy, years. At the time of writing, the

emitting more than 800g of CO2e per countries around the world, including euro of GDP. In total, Poland produced Poland, are focused on containing the

414 MtCO2e in 2017, of which 34 spread of COVID-19 and safeguarding

MtCO2e was offset by carbon sinks their economies against the slowdown in forests from the land use, land-use caused by the outbreak. However, change, and forestry (LULUCF) sector. the available decarbonization options and therefore the solutions space is Decarbonizing the economy not expected to change significantly.

While there are multiple paths to Addressing climate change MtCO e achieving carbon neutrality by 2 in a post-pandemic world 380 2050, this report lays out a possible Poland’s GHG emissions cost-effective economic pathway As a result the COVID-19 pandemic, in 2017 that Poland could adopt to reach resident movement is restricted, this goal. This economically driven economic activity is curtailed decarbonization scenario is for the and governments are putting in time period from 2020 to 2050, a place extraordinary measures. period relevant for current invest Given the scope and magnitude of this ment decisions and staying on track global crisis, and the longest-term to meet the Paris Agreement targets. impact, many are asking if the world We assume that by cutting GHG can afford to pay attention to climate emissions levels by 91 percent change and the broader sustainability from 2017 to 2050 and increasing agenda at this time? As we laid out carbon sinks to abate the remaining in an article “Addressing climate

6 Carbon-neutral Poland 2050 change in a post-pandemic world,” infectious, mosquito-borne diseases, the evidence is compelling that we such as malaria and dengue fever, simply cannot afford to do otherwise.5 while disappearing habitats may force Not only does climate action remain various animal species to migrate, important over the next decade, increasing the chances of spill over but investments in climate-resilient pathogens between them. Conversely, infrastructure and the transition to a the same factors that mitigate lower-carbon future are likely to drive environmental risks—reducing the significant near-term job creation demands we place on nature by while increasing economic and optimizing consumption, shortening environmental resilience. and localizing supply chains, adding plant proteins to our diets and Climate change—a risk multiplier—can decreasing pollution—are likely to contribute to pandemics, according help mitigate the risk of pandemics. to researchers at Stanford University and other recognized research The COVID-19 pandemic transformed organizations.6 For example, rising the way we live and interact but also temperatures can create favorable offered us an opportunity to find a conditions for the spread of certain balance between what worked before

Carbon-neutral Poland 2050 7 and what needs to happen in the next implementing several decarbonization normal. Some new practices will likely levers: improvements in energy endure long after the lockdown ends. efficiency, electrification of heat, Among factors that could support and carbon capture, utilization, and and accelerate climate action are storage (CCUS) technology. teleworking and greater reliance Transport on digital channels that may help to In 2017, Poland’s transport sector reduce transportation demand and emitted 63 MtCO e and was res emissions. Second, supply chains 2 ponsible for 15 percent of Poland’s may be repatriated to increase supply emissions. Road transportation security, reducing some emissions. represented 98 percent of emissions, Moreover, lower interest rates may while rail and domestic aviation help accelerate the deployment of together accounted for 2 percent. Our new sustainable infrastructure, as well analysis suggests that the transport as the adaptation and resilience of sector would need to almost fully infrastructure—investments that would decarbonize (with a 99 percent support near-term job creation. reduction, or 62 Mt of CO2e) by 2050 for Poland to achieve climate neutrality.

Decarbonization pathways Technology options for moving for each sector the transport sector toward car bon neutrality require replacing Industry internal-combustion-engine (ICE) In 2017, the industry sector was vehicles across road-transportation responsible for 22 percent of Poland’s subsegments with battery electric emissions (91 MtCO e), primarily 2 vehicles (BEVs) and—in the case of concentrated in fuel production, trucks and buses—hydrogen-based cement, chemicals, and steel. alternatives such as fuel-cell electric According to our analysis, from 2017 vehicles (FCEVs). A further reduction to 2050, Polish industry growth of transportation demand might result is expected to drive a 19 percent from behavioral changes and the emissions increase if no action is rise of new modes of transport, such taken. This industrial expansion can as electric scooters, which were not be used as an opportunity install considered in this report. lower-emissions equipment in greenfield facilities. Buildings Our analysis shows that the In 2017, buildings accounted for 11 industry sector could potentially percent of Poland’s emissions (46

reduce emissions by 97 percent. MtCO2e), of which 84 percent came This reduction can be achieved by from the residential sector and 16

Decarbonization of the entire Polish economy within 30 years is an ambitious and highly complex endeavor

8 Carbon-neutral Poland 2050 percent from the commercial sector. equipment, contributes the remaining Efforts to decrease emissions in 25 percent. Decarbonization options buildings fall into two main catego for the agricultural sector include ries. First, the energy efficiency of low-emissions land management (for structures could be improved by example, optimizing fertilization and actions such as retrofitting buildings reducing tillage), switching to low- with better insulation to reduce energy carbon fuels (mostly ammonia) for consumption for both heating and farm equipment, and reducing enteric cooling. Second, high-emitting fuel fermentation (for instance, by optimizing sources could be reduced by replacing feed and improving animal health and boilers and stoves that currently use breeding). coal, natural gas, and oil with lower- Power carbon alternatives. Switching power-generation tech Agriculture nology from fossil fuels to renewable In 2017, agriculture accounted for 11 energy will be a major challenge for percent of the country’s emissions Poland. Currently, coal dominates

(44 MtCO2e). Methane and nitrous Poland’s power sector (with a 77 oxide generated 75 percent of this percent share in electricity production total, primarily from the application in 2018), where it is the largest source of inorganic fertilizers to land, the of GHG emissions. Gas accounted for cultivation of organic soils, and enteric 7 percent of energy production; wind, fermentation from dairy and beef solar and other RES accounted for 13 cattle. Carbon dioxide, mainly caused percent; and the remaining sources for by the fuel consumption of agricultural approximately 3 percent.7

Carbon-neutral Poland 2050 9 Moreover, according to our analysis, total power supply in 2050. Onshore electricity demand is expected to power could grow to 35 gigawatts (GW) grow by more than 50 percent by by 2050 and contribute 20 percent 2050 because of increased economic of the total power supply. And by activity, mainly GDP growth. The 2050, solar power could account for electrification of processes (such as approximately 6 percent of total supply. the rapid adoption of electric vehicles, Our economically driven decarboniza heat pumps in buildings, and electric tion scenario assumes the commission furnaces in industry) adds another ing of nuclear capacity in line with the 50 percent to this growth. Therefore, latest Energy Policy of Poland, with 6 compared with today, electricity to 9 GW of nuclear-power capacity to demand in our decarbonization be constructed from 2033 to 2043.8 scenario is expected to double. This capacity could supply about 14 Poland’s power-generation stock is percent of the power demand by 2050. aging: about two-thirds of Poland’s Biomass and hydropower sources, as installed coal capacity is older than well as coal-fired plants retrofitted 30 years. With a possible life span with CCUS, could largely supply the of up to 60 years, these assets remaining generation in 2050. would need to be replaced by 2050. Moreover, investment in new power- Decarbonization’s cost and generation capacity is urgently needed impact to meet the expected increase in electricity consumption. This creates Decarbonizing Poland’s economy an opportunity to replace fossil-based could potentially have profound effects power generation with zero-emissions on the country’s economic structure. generation capacity. In this report, we outline three main macroeconomic implications of our Three fundamental changes will likely decarbonization scenario. be necessary to move toward full decarbonization of the power supply Increased capital expenditures ~75% by 2050. First, coal-fired generation We estimate that in a business- would have to decrease by almost 95 as-usual (BAU) scenario (with no of total power supply potentially will percent from 2020 to 2050 (with a decarbonization measures), Poland come from wind by 2050 corresponding 80 percent reduction would need to spend €1,200 billion of capacity). Second, renewable to €1,300 billion for the five sectors generation would have to feature more in our analysis (power, buildings, heavily in Poland’s power mix, with transport, industry, and agriculture) wind and solar accounting for about to replace infrastructure and add 80 percent of the total power supply in new assets. Full decarbonization will 2050. Third, gas would need to play a require additional capital expenditures prominent role in the transition period, for mobility transformation and covering up to 20 to 25 percent of upgrading energy infrastructure and the demand from 2025 to 2030 and building stock. To achieve it, total playing an important system-balancing investments in the Polish economy role thereafter. from 2020 to 2050 would need to increase by €380 billion, an average of Our detailed analysis of renewable around €13 billion a year. At the same power generation’s potential suggests time, operational costs are expected that wind power could become the to decrease by €75 billion. single largest power source after 2030 and account for about 75 These additional annual investments percent of the total power supply by equal roughly 1-2 percent of Polish 2050. Offshore wind capacity could GDP and 10 to 12 percent of Poland’s potentially increase to 45 GW and current annual investments in could provide around 53 percent of the the economy. Such an increase in

10 Carbon-neutral Poland 2050 spending would bring Poland in line industrial-scale production of electric with the EU average for investments of heat pumps, electrified agriculture- around 22 percent of GDP.9 equipment manufacturing, and Improved trade balance R&D and deployment of (BE)CCUS The Polish trade balance is expected technology. The combination of these to structurally improve as the country activities could boost Poland’s GDP by reduces its imports of fossil fuels by 1 to 2 percent and create 250,000 to €15 billion each year. This pattern 300,000 jobs. would likely decrease the country’s It is possible because the slowdown import balance, as virtually all other started while the pandemic was still economic activities retain more going on, governments and citizens domestic value. will reprioritize climate change behind Higher economic growth the pressing needs of economic Our analysis indicates that a portfolio recovery. This could set back planned of five low-carbon economic activities investments, previous commitments, can bring economic benefits to and regulatory approaches. the country. Such a portfolio could Investments in carbon-neutral involve developing a set of industries: infrastructure could drive significant BEV-components manufacturing, job creation and accelerate the Baltic offshore wind development, rebuilding of the economy.

Carbon-neutral Poland 2050 11 A pathway forward industry toward hydrogen power and biogas. To close the gap to full To transition to a carbon-neutral decarbonization in 2050, action will economy, a wide set of activities must also be needed in the hardest-to- occur in a coordinated fashion. Across abate economic activities. Examples most of the sectors in this report, include deployment of carbon capture, technology is available to launch the utilization, and storage (CCUS) across transition and start renewing stock in the industry sector at scale or green the early 2020s as well as to enable district heating in Poland. full decarbonization by 2050. The only exception is the industry sector, as Potential actions to enable the the CCUS technologies required for decarbonization transition Include: decarbonization are not yet available — Laying out a comprehensive for industry-wide deployment. road map to guide industries in By 2030, decarbonization efforts the transition as well as to give would need to be well under way in investors confidence and thus sectors with available cost-effective, unlock capital for the required low-carbon technologies, such investments. as building-insulation upgrades, — Developing financing frameworks electrified urban transport, and to ensure sufficient capital avail offshore wind. ability. The required financing could From 2030 to 2040, our road map be provided by energy companies, assumes scaling up of the already- industrials, the agriculture sector, launched initiatives and adopting consumers, and the state govern additional low-carbon technologies— ment. In certain sectors of the for example, the introduction of economy (such as renewable negative emissions through bioenergy generation), private investors carbon capture, utilization, and storage could be attracted with the right (BE)CCUS, and fueling switches in regulatory initiatives.

Infrastructural investments and the transition to lower- carbon solutions will likely drive job creation and boost economic growth

12 Carbon-neutral Poland 2050 — Existing infrastructure would need Decarbonization of the entire Polish to be strengthened, expanded, and economy within 30 years is an built to enable certain technology ambitious and highly complex endeavor. switches. A transformation of this scale would — Regulatory and other interventions require consideration of any regulatory, aimed at reducing any transition environmental, and supply-chain barriers (such as ensuring a constraints. The global COVID-19 crisis sufficiently qualified labor force could make this more challenging. and support for technology At the same time, decarbonization development and deployment) could create opportunities for the could help keep decarbonization development of new industries in plans on track. These efforts could Poland and for building a knowledge- be put in place while ensuring a based and forward-looking economy supportive business environment. for future generations.

Carbon-neutral Poland 2050 13

Chapter 1 Defining the decarbonization challenge

In Poland and around the world, there is Poland ratified the agreement in October an increased understanding that action 2016.11 But the window is closing if the to prevent further climate change is world wants to meet the 2°C target. Due needed. More and more, businesses to the time sensitivity,12 the European are considering sustainability when Union—including Poland—has begun making decisions and pursuing long- exploring the actions necessary to term growth. In addition, investors significantly reduce GHG emissions by and financial institutions have begun 2030 and to achieve carbon neutrality accounting for climate risks in decision on the European continent by 2050. making, and many are taking steps to Carbon neutrality (or net-zero emissions) reduce the carbon intensity of their refers to an economy that, within national portfolios. Awareness is also growing borders, does not emit more GHGs at the consumer level: more than two- than are captured. In practice, carbon thirds of Polish consumers consider neutrality means that any remaining sustainability when making purchasing emissions are offset by negative decisions.10 emissions—for example, by forests

The Paris Agreement was adopted in extracting CO2 from the atmosphere. December 2015 to reduce greenhouse New investments, technologies, and gas (GHG) emissions by 2050 and help changes in the energy mix could help EU limit global warming to a maximum of countries reach their goals. However, 2°C with the ambition to limit it to 1.5°C. each country faces challenges and

Carbon-neutral Poland 2050 15 Exhibit 1 Poland’s emissions levels and targets

MtCO2e

-0.6% a year -2.6% a year -5.4 to -11.8% a year

500 447

400 380 -15% 2030 target to limit emissions 300 271

200 2050 Paris Agreement target 100 89 (80%)

Carbon-neutral pathway 22 (95%) 0 0 (100%) 1990 2000 2010 2017 2020 2030 2040 2050

Source: GUS; KASHUE; Eurostat; EIU; UNFCCC 2019 National Inventory Report; IOŚ-PIB, Climate for Poland, Poland for Climate

opportunities unique to its historical, Despite this progress, in 2017 Poland economic, and social contexts. remained the European Union’s third- most carbon-intensive economy, Poland embarked on its free-market emitting more than 800g of CO e journey 30 years ago, and since that 2 per euro of GDP. Economic activity in time its GDP has almost tripled.13 Poland produced 414 MtCO e in 2017, Modernization has occurred by shifting 2 of which 34 MtCO e was offset by from an industrial planned economy to 2 negative emissions in land use, land- a service economy. At the same time, use change, and forestry (LULUCF) and the country experienced improved carbon sinks (Exhibit 2). Five sectors— industrial energy efficiency, higher power and heat, industry, transport, consumption of petroleum-based fuels, buildings, and agriculture—contribute a reduction in the use of coal and lignite, the most emissions in Poland, and a and a rising share of renewable energy substantial number of them use a lot of sources (RES). These developments fossil fuels. led to a decrease in GHG emissions from 447 MtCO2e (megatons of carbon To achieve net-zero emissions by 2050, dioxide equivalent) in 1990 to 380 Poland’s rate of decarbonization should 14 MtCO2e in 2017 (Exhibit 1). accelerate by a factor of four over the

16 Carbon-neutral Poland 2050 Exhibit 2 Profile of Polish GHG emissions in 2017

MtCO2e

Non-CO2 Combustion-related CO2 Non-combustion-related CO2

Negative Emissions emissions 414 -34

1% 31% 1% 7% 73% 95% 77

Net 99% 43% 99% 93% emissions 380

25% 312

26% 2% 5% 25

156 91 63 46 44 14 -34 38% 22% 15% 11% 11% 3%

Power and heat Industry Transport

Power and heat account for 38% Industry accounts for 22% (91 MtCO2e) of Transport accounts for 15% (63 MtCO2e) of (156 MtCO2e) of total emissions—primarily total emissions—subsectors contributing total emissions—54% driven by passenger driven by coal- and lignite-fired electricity most emissions are fuel manufacturing cars, 44% by trucks and buses, remaining generation (~82%) and coal-fired CHP (36%), non-metallic minerals (22%), 2% by aviation, marine, and rails plants chemicals (13%), and steel (9%)

Buildings Agriculture Negative emissions

Buildings account for 11% (46 MtCO2e) Agriculture accounts for 11% (44 MtCO2e) Poland has negative emissions of of total emissions—coming from coal- of total emissions—45% from non-CO2, -34 MtCO2e; most carbon removal in the and natural gas–based space and water mainly from enteric fermentation and Polish LULUCF sector comes from biomass heating in residential and commercial manure management; 25% of energy- growth in existing forests (-33.6 MtCO2e) buildings related CO2 emissions from diesel; and and from an increase in forest coverage 30% related to liming and urea application (-3.3 MtCO2e)

Not considered for abatement potential:

Waste and others Waste and other categories account for

3% (14 MtCO2e) of total emissions

Carbon-neutral Poland 2050 17 next decade compared with the past to provide data for discussions on the three decades. From 2030 to 2050, possibilities for the decarbonization of efforts would need to escalate by at the Polish economy. least an additional factor of two. In some ways, Poland is well positioned to Our scenario focuses primarily on 2020 tackle GHG emissions. For example, a to 2050, a period relevant for current significant part of the existing energy investment decisions and for working infrastructure, regardless of climate toward the targets set out in the Paris change, will need to be renewed in the Agreement. We identify plausible next 20 to 30 years. More than 50% changes for the short, medium, and of the capacity of centrally dispatched long term and discuss the costs and generation units will most likely be benefits of these changes. Our analysis decommissioned by 2035.15 At the approaches Poland as a stand-alone same time, more than three quarters entity, although we recognize that, in of the aerial high- and medium- practice, solutions need to be optimized voltage lines that form the basis of and embedded internationally. For the transmission system are now over simplicity, we consider only those 25 years old.16 This reality provides technologies that are currently proven an opportunity to design and build or are likely to become workable in with a zero-carbon mindset instead the near term. And, while we take of retrofitting or prematurely shutting feasibility constrained—for example, down existing assets. In addition, stock-turnover times—into account, Poland, with its large forest area, has a following the economically driven decarbonization scenario would also net carbon sink (capturing 34 MtCO2e in 2017)17 that the country could use to entail overcoming many practical and offset emissions from hard-to-abate societal barriers. economic activities such as agriculture. First, we define a plausible pathway, Poland has multiple paths it can highlighting potential changes for each take to achieve carbon neutrality of the five sectors. Next, we interpret by 2050. This report lays out an the implications of such changes on the economically driven decarbonization energy system and infrastructure. Then pathway, focused on five sectors, we discuss the necessary investments that Poland could adopt to reach its and resulting impact on the entire decarbonization goal (see sidebar economy as well as on specific sectors. “About the research”). The pathway, We conclude by outlining a high-level however, should not be misconstrued as road map with midterm, necessary a policy recommendation. Instead, this moves and initiatives that can help report examines different trade-offs create longer-term socioeconomic value.

Carbon neutrality, or net- zero emissions, refers to an economy where, within the national borders, no more GHGs are emitted than captured

18 Carbon-neutral Poland 2050 About the research

This report seeks to offer a plausible All major economic activities are pathway for Poland to achieve carbon included in our model, from passen neutrality18 by 2050, while minimizing ger transport and cement production the total cost of the country’s transition to power generation and building to a low-carbon economy. Our model insulation. The model also assumes assumes agents are rational economic existing behavioral patterns. Further decision makers and will switch to cultural changes related to prefer lower-carbon technologies when red transport modes (for example, the total cost of ownership (TCO) a growing preference for public is lower than status-quo solutions. transport) or demand reduction Noneconomic switches are made as late (such as in a circular economy) could as possible when realistically working to help further reduce the costs of the meet emissions reduction targets. economically driven decarbonization The proposed solutions are tailored to scenario. Poland. The model adheres to existing Finally, we used our best available cost programs and set targets as well as outlook. However, we are aware that constraints in business (for example, results may slightly differ in the future scaling up supply chains), physical as costs evolve. inputs (such as resource availability), and technology (for example, cost of For more on the report’s methodology, solutions). see Appendix B.

Carbon-neutral Poland 2050 19

Chapter 2 Decarbonizing the economy: A pathway to net-zero emissions in Poland

Reaching carbon neutrality in Poland by — From 2017 to 2030, the transport 2050 will be a substantial undertaking. It sector will likely lead emissions will require all major economic activities reductions (39 MtCO2e, or a 61 to decarbonize significantly (reducing 40 percent decrease from 2017 to 100 percent of emissions compared levels), followed by the power and with 1990 levels) as well as move toward heat sector (39 MtCO2e, or 25 negative emissions to offset some of the percent). remaining, hardest-to-abate activities. — From 2030 to 2040, the decar bonization of the power and heat Summary of sector sector could decrease emissions contributions by an additional 88 MtCO2e (75 percent), and industry Our economically driven decarbonization decarbonization could gain scenario includes levers that would momentum with a 15 MtCO e, or 20 achieve continual emissions reduction 2 percent, reduction across sectors (Exhibit 3). All sectors are expected to substantially contribute — From 2040 to 2050, all sectors— to decarbonization, and approximately except for agriculture—could 70 percent of measures are expected close the gap to carbon neutrality. to be cost effective by 2050. However, Negative emissions would be the timing of contributions by sector is required to offset the remaining expected to vary: 37 MtCO2e in 2050

Carbon-neutral Poland 2050 21 Exhibit 3 Poland’s emissions-reduction trajectory in our economically driven decarbonization scenario

Power and heat Buildings Agriculture Transport Industry Waste and others

Net emissions 447 380 271 120 0

474 Emissions 414 -25% -61% 297a -117 (-28%) -75% -91%

-20% 152 -145 -100% (-49%) 37 (9%) -115 (-76%)

Negative b emissions 27 34 26 32 37

1990 2017 2030 2040 2050

Power and heat Industry Transport Power sector could decarbonize Industry sector could decarbonize Transport could decarbonize relatively continuously over the next 3 decades relatively late and by using alternative early through BEVs as TCO parity to by developing renewables (e.g., on- fuels and feedstocks (e.g., hydrogen, ICE vehicles is reached for most or offshore wind, solar), nuclear biomass, electricity) and deploying vehicle types within the next decade energy, and (BE)CCUS CCUS

Buildings Agriculture Negative emissions Buildings could decarbonize Agriculture could decarbonize by Negative emissions can be reached relatively late. There are 3 main switching from fossil fuel to low- in 2 ways: by increasing carbon- levers: insulation, switching from carbon farm equipment and reducing absorption efficiency and by devoting coal to low-carbon energy as enteric fermentation emissions more land (e.g., afforestation, heating source, and reducing though using different animal feeds; agroforestry) emissions in district however, there is no established technology to eliminate all negative emissions in sector a. This emissions reduction is in line with the 2030 EU emissions-reduction target. b. Land use, land-use change, and forestry. LULUCF carbon sink initially decreases (as in with business-as-usual case); however, after 2030 we assume linear increase in total sink potential thanks to additional measures that will be introduced in the economically driven decarbonization scenario. Source: UNFCCC 2019 National Inventory Reports; Decarbonization Pathway Optimizer McKinsey & Company

22 Carbon-neutral Poland 2050 By cutting GHG emissions levels by neutrality by 2050. In this report, we 91 percent from 2017 to 2050 and consider ten main decarbonization increasing carbon sinks to abate the levers categorized by four themes that remaining 9 percent of emissions, could be implemented to bring down Poland could reach carbon neutrality emissions (Exhibit 4). by 2050. Changing how we fuel and power Decarbonization options our lives Our analysis indicates that by Electrification: Switching from tech 2050, more than 70 percent of nology and fossil energy-based to decarbonization can be done with electricity-based processes—for levers that will be cost neutral, 20 example, by transitioning from percent will be economically viable internal-combustion engines (ICEs) to

when CO2 is priced at €100 per ton, battery electric vehicles (BEVs) and and the remaining 10 percent will from gas-based mid-temperature

cost an average of €150 per ton CO2 heating to electric heating using (Exhibit 5).19 industrial-scale heat pumps.

Significant action across all sectors Zero-emissions power: Switching will be needed to achieve carbon power-generation technology from fossil

Exhibit 4

A potential portfolio of abatement measures required to reduce CO2 emissions

Abatement potential, MtCO2e >100 50–100 11–50 <10 Negligible

Power Industry Transport Buildings Agriculture Total

Reducing demand Energy efficiency 15

Changing how we Electrification 165 fuel and power our lives Zero-emissions power 364

Emissions-free hydrogen 28

Sustainably produced bioenergy 13

Scaling up carbon CCUS 38 management Deforestation avoidance <1

Carbon dioxide removal markets 16

Tackling other Agriculture and food systems 12 GHG emissions Fugitive methane emissions n/a

Abatement potential 379 45 108 106 13 651

Note: (BE)CCUS in industry is included in CCUS category. Source: Decarbonization Pathway Optimizer McKinsey & Company

Carbon-neutral Poland 2050 23 fuels to renewables (for example, on- further usage20 (for example, cap and offshore wind and large-scale and tured CO2 as an input for methanol rooftop solar photovoltaics) and nuclear. production) or storage.

Emissions-free hydrogen: Replacing Deforestation avoidance: Imple the production of hydrogen from menting regulation and enforcement natural gas by electrolysis powered by to avoid loss of forest coverage and renewable power (“green hydrogen”) or preserve forests’ emissions-mitigating production of hydrogen in combination function. Additional actions include with CCUS (“blue hydrogen”). These afforesting marginal agricultural land to alternatives can replace existing appli create further negative emissions. cations of hydrogen as fuel or feed stock (such as ammonia production) and Carbon dioxide removal markets: open new applications of hydrogen—for Fostering markets to match providers and buyers of CO removal (for example, as an alternative fuel for long- 2 distance trucks. example, providers of sequestration options with industrial emitters of CO2). Sustainably produced bioenergy: Switching from fossil-based fuels Tackling other GHG emissions to zero-emissions bioenergy and Agriculture and food systems: Moving feedstocks (for example, biomass as agriculture operations to low-carbon fuel for cement kilns and bio-based alternatives (such as low-tillage crop plastics production). production and low-emissions animal feed). Scaling up carbon management Carbon capture, utilization, and Fugitive methane emissions: storage (CCUS): Implementing Minimizing or eliminating coal-bed carbon-capture technologies to avoid methane extraction emissions, which emissions from selected economic are 25 times21 more potent than carbon activities for which fossil fuels remain dioxide, and capturing the emissions critical is necessary. These integrated and using them for power generation technologies capture emissions for would be beneficial.

All sector s are expected to substantially contribute to decarbonization. About 70% of the measures will be cost effective by 2050

24 Carbon-neutral Poland 2050 Reducing energy demand based on recycled products generally Energy efficiency: Promoting energy- consumes less energy and feedstock efficiency efforts, such as building than the production of virgin materials insulation and the installation of more (for example, increased recycling will efficient equipment, can help reduce reduce demand for iron ore). Circular- energy demand. economy levers are not assessed in this report, though we recognize they Circular economy: Using the same could make a significant contribution. resources more efficiently through Estimates suggest that in the EU, a asset sharing, reusing, refurbishing more circular economy could reduce and remanufacturing, cascading in GHG emissions from four industries other value chains, and recycling can (plastics, steel, aluminum, and cement) reduce demand. Producing materials by as much as 56 percent.22

Carbon-neutral Poland 2050 25 Exhibit 5 Marginal abatement cost curve (MACC) for Poland (for detailed assumptions, see Appendix B)

Transport Power and heat Other sectors

Passenger cars Trucks District heating Industry Agriculture Buses/coaches Vans Power Buildings

Average abatement cost to 2050a

€/tCO2e Switch to A2A (air-to-air) heat pumps in residentials Grow with gas CCUS instead of coal Switch to ammonia in 300 agricultural equipment

CCUS retrofit Switch to geothermal heat for coal plants pumps in district heating 200 Grow with G2W (ground-to- Switch to FC Switch to used BEV in Switch to biomass in water) heat pump instead of in LDT Urban C/D passenger cars district heating coal boiler in residentials

100 Switch from Grow with BEV in Switch to FC Switch from lignite to wind Grow with gas Light insulation C/D passenger cars in coaches coal to solar offshore instead of coal residentials

Switch to low Switch from coal boiler Switch to tillage in crop to A2W (air-to-water) CCUS in -100 production heat pump in residentials petroleum refining Switch from Grow with wind Switch from Grow with Grow with nuclear gas to wind offshore instead of coal to wind wind onshore instead of coal Switch to SMR Grow with DRI-EAF -200 offshore coal offshore furnace with CCUS in (H2) instead of BF-OF ammonia production in steel production Grow with BEV in Grow with BEV A/B passenger in J passenger cars cars -300 Switch to A2W (air-to-water) Switch to full suite Switch from coal to heat pump in commercials in diary (enteric (BE)CCUS in Switch to BEV Switch to BEV fermentation) cement production in LDT in J passenger -400 Regional cars

b -500 650 MtCO2e

increase emissions in the business-as-usual case from the current 474 MtCO2e to 650 MtCO2e by 2050. For full decarbonization, the current and expected growth of emissions needs to be mitigated. Source: Decarbonization Pathway Optimizer McKinsey & Company; Global Energy Perspective; Sustainability Practice McKinsey & Company

26 Carbon-neutral Poland 2050

McKinsey & Company 1 Transport Power and heat Other sectors

Passenger cars Trucks District heating Industry Agriculture Buses/coaches Vans Power Buildings

Average abatement cost to 2050a

€/tCO2e Switch to A2A (air-to-air) heat pumps in residentials Grow with gas CCUS instead of coal Switch to ammonia in 300 agricultural equipment

100 Switch from Grow with BEV in Switch to FC Switch from lignite to wind Grow with gas Light insulation C/D passenger cars in coaches coal to solar offshore instead of coal residentials

b -500 650 MtCO2e

Abatement potential in 2050 Note: The horizontal axis shows the abatement potential of the technology switches. The vertical axis displays the average abatement cost as €/tCO2e for each switch. a. Measures considered exclude LULUCF and biofuels use in energy/heat production. MACC does not include cost of enabling infrastructure (e.g., EV charging network, transmission, and distribution network upgrade). b. According to our macroeconomic modeling of the Polish economy, economic activity is expected to increase and thereby increase emissions in the business-as-usual case from the current 474 MtCO2e to 650 MtCO2e by 2050. For full decarbonization, the current and expected growth of emissions needs to be mitigated. Source: Decarbonization Pathway Optimizer McKinsey & Company; Global Energy Perspective; Sustainability Practice McKinsey & Company

Carbon-neutral Poland 2050 27

McKinsey & Company 1 Behavioral changes and demand23

The decarbonization scenario gases as a vegan. According to the described in this report assumes Food and Agriculture Organization a number of technological and of the United Nations (FAO), animal business changes leading to a husbandry accounts for 18 percent reduction in emissions. A similar or of global GHG emissions.24 By even greater impact on the reduction contrast, plant production causes of emissions may also result from 20 to 30 times fewer emissions than changes in consumers’ lifestyles meat and dairy products and behavior, or the development — Food production and logistics: of the circular economy. When assessing the environmental Long-term climate strategies should impact of the food products chosen also take into account the potential by consumers, the entire chain for behavioral change in areas with should be taken into account— a strong impact on the environment plant and animal production, and energy consumption: transportation, processing — Transportation: A reduction in the and storage of products, and carbon footprint can be achieved delivery to wholesalers and retail by stopping or reducing vehicle stores, shopping by consumers, usage, developing public transit transportation to their homes, (railroads, urban transportation), processing and storage at home, increased popularization of cycling, and food-related waste products. widespread use of electric personal Food wastage is also important, transportation devices (for example, both at a production and at a electric scooters), carpooling and consumption level. According to the ride-sharing, increased investment FAO, around 1.3 billion tons of food in low-carbon infrastructure (e.g., are thrown away each year, or one- more cycle paths, development third of all food produced for human of urban transportation), and consumption.25 Poland ranks fifth in introduction of congestion charges Europe the amount of food wastage and tolls to enter city centers — Goods and services: Other important — Diet: The prevailing diet in a society factors in climate protection has a strong environmental impact. are reducing the use of plastic, A person whose diet is dominated regulating for the circular economy by meat contributes more than and zero waste, reducing demand for twice the quantity of greenhouse new products, and using previously

28 Carbon-neutral Poland 2050 owned items such as apparel, ele — Housing: Where we live, what ctronics, books, toys, and even household appliances we own, furniture. At present, 38 percent of how we use electricity and water people in Poland admit that they buy at home, and how we heat our more than they need. A significant homes also influence environmental section of society says that instead impact. For details, please refer of buying new products they to the section on buildings in in repair old ones (45 percent), rent Chapter 3 products (34 percent), or exchange The fashion for sustainable consum products with others (32 percent). ption and respect for natural resour However, only one-quarter of the ces could reverse the trends in population sees the need to limit consumerism. This mainly relates to consumption. When buying food growing environmental awareness and or cosmetics, price is the deciding a whole range of increasingly popular factor, overshadowing environmental behavior patterns, such as preferring impact. The key reason for not local, regional and seasonal products, buying “green” products is price limiting consumption, and stressing (72 percent of respondents)26 corporate social responsibility.

Table Three types of Polish consumers27 and their impact on the global climate28

Area of assessment Non-green person Average green person Proactively green person

Housing29 Poor insulation; 100 m2 housing Average insulation; 80 m2 housing Excellent insulation; 60 m2 housing space; 3-person household; space; 3-person household; heating space; 3-person household; heating to 25oC; no effort to save to 23oC; frequent ventilation; 0% heating to 19oC; careful and quick power; prolonged ventilation; 0% renewable energy ventilation; 20% renewable energy renewable energy

Hot water30, air 7 showers/week; 5 baths/week; air 5 showers/week; 2 baths/week; 7 showers/week; air conditioning conditioning conditioning used continuously in air conditioning used in very hot on in exceptional circumstances; summer to reach 25oC weather, in the evening, at night, and only in the evening and at night to on weekends to reach 25oC reach 27oC

Private Large SUV running on diesel Medium-sized vehicle running on Bicycle transportation (200 km/week); very occasionally gasoline (150 km/week); sometimes used by 2-persons or more; air used by 2-persons or more; air conditioning used conditioning used

Public Taxi used 4 times/week; business- City bus 100 km/week; streetcar/ City bus 30 km/week; intercity transportation class flights: short-haul 30 hours/ subway 50 km/week; taxi used 2 bus 5 km/week; streetcar/subway year; long-haul 40 hours/year times/week; economy-class flights: 30 km/ week; suburban rail 20 short-haul 18 hours/year; long-haul km/week; long-distance rail 10 20 hours/year km/week; economy-class flights: short-haul 6 hours/year

Food Very large quantities; exotic and Average quantities; does not pay Rather small quantities; local; non-seasonal products; meat every attention to where produce is from seasonal produce; no meat; frozen day; frozen food 2–3 times/week; and whether it is in season or not; food once a week; highly energy- refrigerator efficiency class A; meat 3–6 times/week; frozen efficient refrigerator separate freezer food 2–3 times/week; refrigerator efficiency class A

Other consumption No recycling; new, fashionable Some trash recycled; some Most items recycled; mainly apparel; beautifully packaged new clothes if old are worn out; secondhand clothes; minimal products; new, fashionable packaging unimportant; only some packaging; generally secondhand possessions; tech-based leisure possessions new; leisure activities possessions; outdoor leisure activities (e.g.; quads); power usage such as movie theater and bars/ activities; reduced energy use; not considered; use of clothes dryer; restaurants; use of clothes dryer; 20% renewable energy 0% renewable energy tries not to waste electricity; 0% renewable energy

Carbon footprint 57.2 tons of CO2 per year 22.6 tons of CO2 per year 8.0 tons of CO2 per year

Carbon-neutral Poland 2050 29

Chapter 3 Plausible decarbonization pathways for each sector

This chapter looks closely at what The commodities produced in these decarbonization would mean for all industries—cement, steel, ammonia, major sectors of Poland’s economy, and ethylene—generate 26 percent highlighting the challenges and of GHG emissions through the opportunities. Decarbonization of the processing of feedstocks. Heat power and heating sector is addressed generation is responsible for the separately in the next chapter, as it remaining emissions across three plays an enabling role in the transition temperatures: low (less than 100°C), of the sectors described here. medium (100–500°C), and high (more than 500°C). In some industries, such Industry as cement, iron, and steel production, high-temperature needs can repre The challenge sent over 80 percent of energy In 2017, the industry sector was consumption.31 responsible for 22 percent of total Four technical reasons inhibit the economy emissions (91 MtCO e). Of 2 reduction of GHG emissions in the those, fuel production contributed 36 industry sector. percent, cement 22 percent, chemicals 13 percent, and steel 9 percent, — First, reducing emissions from while other industries including food feedstocks typically requires production totaled 20 percent. changing production processes

Carbon-neutral Poland 2050 31 rather than simply lowering the — Fourth, hydrogen produced carbon content of fuels. from zero-carbon electricity could replace hydrogen from — Second, the technology for steam methane reforming (SMR) emissions-free high-temperature and open the door to new steel heat is, in some cases, not yet production processes using direct commercially available. For reduced iron (DRI) coupled with example, in cement production electric arc furnaces (EAF). where kilns operate above approximately 1,400°C, their — Fifth, liquid or solid biomass such electric counterparts are not (yet) as bionaphtha could replace fuel available at scale. and feedstock.

— Third, processes can rarely be — Sixth, and finally, CCUS could changed in isolation, as industrial capture and productively reuse processes are deeply integrated. emissions at industrial facilities.

— Fourth, few natural opportunities A plausible decarbonization pathway exist for large capital-intensive Determining which decarbonization rebuilds or retrofits, as asset solution is most suitable for each plant lifetimes often exceed 50 years depends largely on local conditions with regular maintenance. such as the availability of infrastructure Economic factors may compound for storage capacity and affordable, inhibitions. Adopting costly low- carbon-free electricity and hydrogen. carbon processes may be seen by In general, our current technology industrial producers as a compe cost projections suggest industry’s titive disadvantage if others do decarbonization pathway will likely not implement similar changes. require the development of alternative Furthermore, many manufacturing fuels (hydrogen, biomass, and electricity) products in Poland are commodities and CSS (as a last-resort option) at competing for price in an international scale. Overall, this combination of market, where increased production measures could bring industry emissions costs are absorbed by the business down 97 percent by abating a total of

and not passed onto customers. 88.4 MtCO2e, with negative emissions from LULUCF compensating for the Decarbonization options remaining 2.6 MtCO e. According to our Six decarbonization levers could 2 estimates, the cost of decarbonization be applied to the industry sector to options would reach an average of €85 reduce emissions over the next 30 per tCO e. 97% years in Poland. 2 of emissions can be reduced — In cement and lime production, in industry; CCUS technology — First, demand-side measures advances in bioenergy carbon plays a major role in securing could prevent emissions for indu capture, utilization, and storage this emissions reduction strial commodities. For example, would have to facilitate the shift construction recycling and light away from coal, thereby abating weighting can reduce steel con approximately 24.8 MtCO e per sumption, and wood alternatives 2 year. These measures could average could replace cement. €85 per tCO2e. — Second, energy-efficiency impro — In the steel sector, the total redu vements, such as lower-energy ction and sequestration potential of appliances, could help decrease decarbonization options by 2050 fuel consumption by as much as could exceed 15.6 MtCO e per year, 20 percent. 2 coming from alternative fuels such — Third, electrification of heat could be as electrification and the switch to introduced by switching to electric hydrogen-based steelmaking (DRI furnaces, boilers, and heat pumps + EAF) and CCUS. These measures

32 Carbon-neutral Poland 2050 — In the chemicals sector, the emis demand of oil and oil products. sions reduction potential would These emissions would decline

have to reach 6.2 MtCO2e by significantly if production were 2050. In total, 27 percent of these scaled down when demand reductions could originate from develops in line with net-zero ethylene production, where CCUS scenarios across Europe and the would be implemented at steam world. The remaining emissions crackers in the late 2030s while reductions would be achieved also continuously pushing energy through continuous efficiency efficiency to the limits. The other improvements and changes 73 percent could be achieved from to technology processes (for decarbonizing ammonia production example, electrification of heat through CCUS with current and or biomass and other alternative future SMR capacity as well as zero- feedstocks). To abate the remain emissions hydrogen feedstock. ing emissions, CCUS would need Of this portion, 22 percent of this to be introduced in the late 2030s. ammonia would be used for urea These measures could average

production, which suggests biogas €90 per tCO2e. may be a viable alternative for — Reduction across other industry natural gas. These measures could subsectors would need to reach average €70 per tCO2e. 39.1 MtCO2e by 2050. The main — Refineries would have to abate sources would be decreased coal-

direct emissions by 5.2 Mt of CO2e mining emissions due to lower by 2050 under a BAU case for demand and energy efficiency and

Carbon-neutral Poland 2050 33 the decarbonization of low- and of trucks and buses—hydrogen- medium-temperature heat. based alternatives such as fuel-cell electric vehicles (FCEVs). In addition, Implications for the energy system alternatives for the “classic” passenger To support the implementation of car model (including car sharing and industrial decarbonization solutions, modal shifts to electric scooters, parti existing infrastructure must be cularly in urban areas) may continue to extended or enhanced and new gain popularity. infrastructure should be developed. The enabling infrastructure could A plausible decarbonization pathway help ensure access to sustainably Our analysis suggests the transport produced biomass and energy, waste, sector would need to almost fully decarbonized hydrogen, natural gas, decarbonize (with a 99 percent and power. For CCUS, carbon dioxide reduction, or 62 MtCO2e) by 2050 for transmission (for example, via pipelines Poland to achieve climate neutrality. or shipping) and storage solutions Though the reduction is substantial, need to be piloted, tested, and built, current cost estimates suggest this potentially harnessing Poland’s reduction can be reached at a net geological conditions (Exhibit 6). savings from an individual user point of view; the average savings for the measures is €180 per tCO e. Transport 2 The uptake of BEVs will likely acce The challenge lerate when cost parity with ICE In 2017, Poland’s transport sector vehicles is achieved, with large-scale emitted 63 MtCO e. Road transportation 2 adoption beginning in 2020 until 2030 represented 98 percent of emissions, depending on the car type, starting while rail and domestic aviation together with small passenger vehicles. By contributed 2 percent. Passenger 2037, BEVs would need to represent vehicles alone generate 53 percent of 100 percent of passenger cars transport emissions, and heavy- and for Poland to reach its emissions- light-duty trucks produce 35 and 10 32 reduction goals. percent of CO2 emissions, respectively. Adoption of BEVs could be enabled by The Polish vehicle fleet consists almost a decline in battery cost, as projected entirely of internal-combustion-engine in our analysis, to less than €50/ (ICE) vehicles. Based on the number of kWh by 2050. However, the initial registered vehicles, Poland is one of the capital investments remain relatively most motorized countries in Europe: its high, as they increase the cost of population of 38 million has nearly 30 renewing the vehicle fleet. At current million registered ICE vehicles. Over cost projections, passenger BEVs two-thirds of new vehicle registrations could become more affordable than in Poland are pre-owned, making ICE alternatives between 2022 and the country the largest secondhand 2024 on a TCO basis. However, the vehicle importer in Europe.33 Providing higher relative cost for new BEVs may owners of secondhand cars with an prevent customers from switching. We affordable, cleaner alternative to meet estimate that a similar dynamic would their transportation needs is a primary hold true for the secondhand market. challenge to decarbonizing the Polish Pre-owned BEVs may see a price transportation system. premium of €5,000 or more compared Decarbonization options with ICE vehicles, resulting mostly from Technology options for transitioning battery replacement or refurbishment the transport sector toward carbon costs. Typically, this investment has neutrality require replacing ICE a payback time of less than ten years vehicles across road transportation due to operational cost savings (per subsegments with battery electric kilometer, electricity costs are three to vehicles (BEVs) and—in the case four times lower than gasoline).

34 Carbon-neutral Poland 2050 Exhibit 6 Opportunities for carbon storage in Poland

` Emission point sources <100 kt 100–2,500 kt

2,500–12,500 kt

<12,500 kt

Storage Geological formations Hydrocarbon fields Coal fields

Transmission system LNG terminal Transit gas pipeline system Gas pipeline system

Poland’s estimated storage potential is 15 Gt of CO2: Estimate storage capacity is 14.3 Gt storage in geological formations 1.0 Gt storage in hydrocarbon fields enough to store 600 years of 0.1 Gt storage in old coal fields emissions at post-2050 levels

Source: Adapted from Państwowy Instytut Geologiczny (Polish Geological Institute),

“Interactive atlas presenting possibilities of CO2 geological storage in Poland”

In trucking, hydrogen is predicted public areas, businesses, and homes to eventually become more cost needs to be rolled out. Second, the effective for long-distance transport electrification of transport would than battery electric trucks. Long- increase electricity demand by 68 haul hydrogen trucks could enter the TWh a year by 2050. The viability market before the second half of this of BEVs as a low-carbon alternative century. FCEVs would need to mitigate to ICE vehicles is contingent on

26 MtCO2e emissions in the trucks decreasing the emissions of the segment by 2050. Polish power mix while adding more low-carbon capacity to accommodate Implications for the energy system rising demand. Third, to facilitate Three enablers would need to be the required adoption of hydrogen- in place to achieve the desired based transport, the supporting transport abatement opportunity. hydrogen value chain would need to First, EV charging infrastructure in be established. Demand for hydrogen

Carbon-neutral Poland 2050 35 in the transport sector could rise by the most inefficient housing segments 2.1 Mt a year —a sizeable amount (for example, buildings with heating compared with the current annual demand above 200 kWh per square production of the approximately one meter, per year) and address the least- million tons used in industry.34 In insulated element of a given building addition, the supporting hydrogen- (such as its attic, walls, windows, and distribution infrastructure would need floor). to be developed, including pipelines Second, high-emitting fuel sources and a sufficiently dense network of could be reduced by replacing the fuel fueling stations. for boilers and stoves currently fueled Buildings by coal, natural gas, and oil with lower- carbon alternative fuels. Some viable, 80% The challenge affordable solutions may include: In 2017, buildings accounted for 70 of houses would need to have Sustainably produced biomass. This MtCO e of emissions, of which 84 been retrofitted to reduce energy 2 can function as fuel for boilers. Wood percent came from the residential demand and make them suited for pellets, for example, are particularly sector and 16 percent from the zero-carbon heating technology suited to houses where larger units and commercial sector. Two-thirds (66 space allow for wood-based boilers. percent, or 46 MtCO2e) of emissions were generated by space and water Electrification of heating. Electrifying heating for 13 million households heating through several technologies and 400 million square meters of such as electric resistance (or boilers) commercial space. Of these emissions, and various types of heat pumps 61 percent originate from coal-fired can be a viable emissions-reducing stoves, common in Polish houses.35 measure.

The remaining one-third of emissions The most appropriate technology will (accounted for in the power and heat largely depend on the building type bucket) was generated by district (such as apartments and stand-alone heating (24 Mt): Poland operates one houses), density of neighborhoods, of the largest district-heating networks in-house space constraints for installing in the world, with more than 20,000 equipment, distance to and suitability of kilometers of district heating pipes. natural-gas and power infrastructure, Coal contributes 35 percent of district- the owner’s willingness to retrofit, and heating emissions through combined the current energy efficiency of the heat and power (CHP) coal-fired plants. structure. Most district heating is consumed in A plausible decarbonization pathway apartments and commercial buildings, Our current estimates suggest the while houses often rely on coal and building sector would have to abate natural-gas boilers.36 46 MtCO2e by 2050 and hit a target of Poland’s building stock varies in energy about half (53 percent) before 2040. efficiency: half of all buildings were built This path would cost an average of €70

before 1970 that have a relatively high per Mt of CO2e. Although upgrading final-energy demand of 270 kWh per the building stock will take a while, square meter, per year.37 By contrast, progress can be made over the next newly built facilities are three times few years by focusing action on both more efficient. energy-efficiency retrofits and efforts to replace retiring CHPs with lower- Decarbonization options carbon options. Efforts to decrease emissions in buildings fall into two main categories. To meet Poland’s emissions goals by First, the energy efficiency of 2050, 80 percent of houses would structures could be improved through need to have been retrofitted to actions such as retrofitting buildings reduce energy demand and make with better insulation in order to reduce them suited for zero-carbon heating fuel consumption. Solutions can target technology. Light (25 percent energy

36 Carbon-neutral Poland 2050 reduction) and deep (50 percent energy of CHP would need to be replaced by reduction) insulation would have to be alternative power generation. Second, implemented in the near term across to accommodate these changes, commercial buildings, houses, and additional low-carbon power would apartments. need to be generated, coupled with grid expansion and improved power Replacing coal and gas as fuel infrastructure in buildings. sources could materially contribute to decarbonizing the building sector Rapidly deploying decarbonization by both building heating systems and retrofits and equipment installations district heating. In heating systems for requires further developing the nece houses, pellet stoves may be installed ssary value chain—including equipment in the near term as an interim solution suppliers, installers, and transportation while converting to heat pumps. For and logistics—to support this initiative. heating systems in both houses and The scaling of biomass-based commercial buildings, the 2030s would solutions, such as wood pellets and need to see the adoption of air-to-water biogas boilers, is contingent on heat pumps and, by the late 2040s, the availability of biomass, storage the complete phase-out of natural-gas facilities, and distribution infrastructure boilers. Current cost outlooks suggest as well as on the logistics of reusing coal stoves and boilers will likely remain waste as fuel in existing CHP. cost-competitive, thereby creating disincentives for homeowners to Agriculture transition to lower-carbon alternatives. The challenge District heating would need to be In 2017, agriculture accounted for decarbonized through a mix of two- 44 MtCO e emissions from several thirds biomass and waste CHP and 2 sources. Methane and nitrous oxide one-third geothermal heat pumps. generated 75 percent of this total, In addition, low-temperature (50°C primarily from the application of or less) district heating could also be inorganic fertilizers to land, the explored as energy demand per square cultivation of organic soils, and meter of building stock gradually enteric fermentation from dairy and decreases. beef cattle. CO2, mainly caused by Our analysis suggests multiple types the fuel consumption of agricultural of heat pumps can contribute to equipment, contributed the remaining decarbonizing the buildings sector. 25 percent.38 In general, the suitability of heat Implementing emissions-reduction pumps as a solution will vary by solutions at scale is complicated by the building, as conditions such as heat fact that Poland’s agriculture sector demand, existing insulation levels, is highly fragmented. About 750,000 existing natural-gas and electricity farms—53 percent of total farms—are infrastructure, and access to fuel smaller than five hectares.39 sources must be met. Decarbonization options Implications for the energy system Decarbonization options for the agri Improving insulation, installing heat culture sector fall into three categories. pumps, and scaling biomass have further implications for the energy Adopt low-emissions land system. While total energy demand management. Reducing emissions in for buildings will likely decrease land management can be achieved by substantially, the demand for electricity optimizing fertilization and reducing in buildings is likely to increase for two tillage. In the first category, traditional reasons. First, the electrification of synthetic fertilizers could be traded for heat in buildings and the conversion low-emissions fertilizers (for example, of CHP to biomass and heat pumps slow- or controlled-release fertilizers) means the power-producing capacity or nitrogen stabilizers (for example,

Carbon-neutral Poland 2050 37 nitrification inhibitors). Making this emissions directly. Another solution switch decreases nitrous oxide being explored is to introduce GHG- emissions, as it lowers the required focused breeding and selection, amount of nitrogen. as well as to improve animal health monitoring.40 More research is needed Switch to low-carbon fuels for farm in this area, including any effects on equipment. Using lower-carbon animals. fuels for existing farm equipment— for example, by blending ammonia A plausible decarbonization pathway into diesel—as well as employing Emissions from agricultural production electrification could reduce emissions are expected to fall 5 percent (from from farm equipment. 44 MtCO2e to 42 MtCO2e) from 2017 Reduce enteric fermentation. to 2050 because of a decline in both Enteric fermentation is a natural part dairy production and the total area of ruminant animals’ (such as cows) of cultivated land. An additional 39 digestive processes that results in percent reduction of agricultural methane emissions. Currently, few emissions would be required for Poland technology options exist to address to meet its decarbonization target. these emissions, and technologies in This reduction could be achieved by development may only reduce a small implementing low-emissions land portion of the impact. For example, management (24 percent reduction), one potential solution involves switching fuels for farm equipment introducing animal feed additives and (10 percent reduction) and reducing promoting feed changes that improve enteric fermentation (5 percent digestibility and decrease methane reduction).

38 Carbon-neutral Poland 2050 However, even when all decar technologies is substantial, the actual bonization levers are pulled, the achievable carbon sink is uncertain, agriculture sector’s emissions as no current models can accurately would still not be reduced to predict the development of these

zero: in our scenario, 25 MtCO2e complex ecosystems. would still be emitted in 2050. Decarbonization options Two primary trends (in addition to Negative emissions include nature- the aforementioned actions) could based and technology-based solutions. further reduce agricultural emissions To ensure that carbon sinks achieve ~40% in 2050. The first is a shift in consumer the actual additional required carbon of agricultural emissions will diets away from animal to plant- abatement, explicit targets should be need to be eliminated by 2050 based proteins, which could result in set and coupled with incentives. reduced meat production and reduce Nature-based solutions the emissions associated with meat Each of the following measures differs production. The second is negative in its carbon sink intensity (how much emissions—capturing emissions on carbon can be absorbed per hectare) behalf of the agriculture sector (for and the amount of land required (size of example, through (BE)CCUS in industry the area where activities are applied). and power and heat) and using nature- Among the natural solutions, there are based solutions such as carbon sinks four measures. to reduce emissions. Extend forest-management practices Implications for the energy system throughout the country. This strategy An agricultural knowledge network is could potentially be applied to up to one needed to promote the productivity and million hectares by 2050. benefits of operational expenditure for specific decarbonization methods. Afforest 600,000 hectares of low- quality agricultural land (category Transitioning from fossil fuels to low- V and VI).42 Incentives could be carbon alternatives would require considered for private landowners capital investment in new equipment would be needed to take up or support and accelerating the development and new afforestation. availability of alternative fuel sources, with a focus on electrification and the Introduce land-use-management use of ammonia as fuel blended into systems based on a combination of diesel. agriculture and forestry (agroforestry). This strategy involves integrating Negative emissions trees into croplands at levels that do not reduce crop yields (for example, The challenge through windbreaks, alley cropping, and GHG emissions mitigation is the main farmer-managed natural regeneration). action that countries plan to take to The total land area in Poland that reduce global warming. In addition, has faced different environmental negative emissions that offset the challenges (such as soil erosion and hardest-to-abate emissions would poor water quality), which is estimated have to play a meaningful role in order to be 129,600 hectares, could benefit to achieve carbon neutrality. Poland’s from agroforestry. current negative emissions from carbon Restore the wetlands that have been sinks are estimated at 34 MtCO e.41 2 drained for farmland, estimated to However, these are expected to decline be 132,000 hectares. Enabling this to 10 MtCO e by 2050 due to aging 2 restoration process would require forests (see sidebar “Carbon sinks and both financing and legislation; what their potential for Poland”). was once a single wetland might now While the theoretical potential be multiple small farms with several of different negative emissions owners.

Carbon-neutral Poland 2050 39 Technology-based solutions The expected decarbonization pathway The following technology-based solutions can be pursued to augment In Poland, our analysis suggests the nature-based solutions and increase remaining 37 MtCO2e emissions in the capacity of carbon sinks. 2050 would need to be compen sated by at least an equal amount Implement bioenergy carbon cap of negative emissions. ture, utilization, and storage. (BE) CCUS captures the carbon released Current cost projections suggest from biomass energy production that nature-based solutions could (for example, in cement and lime contribute to the reductions of 23 production) and buries it underground MtCO2e in 2050 to close the gap. At instead of releasing it into the air. least 10 MtCO2e could be derived from forests in existence today. Technology- Convert biomass and waste through based solutions would need to address pyrolysis into stable biochar products. the remaining 14 MtCO e in 2050. Biochar is a lever with the highest theo 2 retical carbon-storage potential—it Implications for Poland’s can be applied to all croplands. Biochar energy system products can be plowed on agricultural Technology-based solutions are land to enhance its fertility and stability typically power intensive. As such, and to store CO2. the implementation of solutions such as (BE)CCUS and DAC will Deploy direct-air capture (DAC) at require increased low-carbon power the current state of development. generation to deploy at scale. As CO2 in the atmosphere is present at a much lower concentration than In addition, the scaling of (BE)CCUS is in flue gases in the industry or power contingent on an established bioenergy and heat sectors, the DAC process is supply chain including the availability usually energy-intensive and expensive. of biomass, storage facilities, and Therefore, this likely would be one of distribution infrastructure. CCUS the last steps to offset the most difficult infrastructure and technology emissions required to be reduced to would also need to be developed achieve net-zero emissions. for this solution to be successful.

GHG emissions mitigation is the main action that countries plan to take to reduce global warming

40 Carbon-neutral Poland 2050 Carbon sinks and their potential for Poland

A carbon sink is any environment (such Poland has the conditions in place to emissions required, this area could offset as forest or ocean) or technology that increase the required biomass and store residual emissions for well more than a can absorb CO2 from the atmosphere CO2 to offset emissions. Over the next century. and store it permanently. In simple 30 years, advancements in managing Poland has a huge potential for carbon terms, the sink is a difference between carbon sinks and increasing their capacity sinks because of its large surface biomass growth and biomass loss. As could help unlock the country’s massive area (Exhibit 7). The regions with the trees reach maturity, for example, their potential. highest carbon-absorption potential growth slows, resulting in lower CO 2 Consider that in 2017 Poland had 9.2 are Pomeranian, Greater Poland, Lower absorption every year. million45 hectares of forest, which could Silesian, Silesian, Świętokrzyskie, and

In 2017, Poland had a net carbon store 4.4 GtCO2e in standing biomass Masovian Voivodeships. sink of 34 MtCO e, mostly from its above and below ground. An additional 2 To generate at least 23 Mt of carbon storage forests43. 23.4 GtCO e is stored in organic soil— 2 in terrestrial ecosystems, Poland has a for example, in agricultural fields and Poland’s carbon sink is expected to variety of options; however most require wetlands. contract by 2050, as its forests are either sizeable land areas or significant already relatively mature: 40 percent Beyond existing agricultural lands and effort. To maximize the feasibility of creating of the forests are older than 60 years. urban areas, Poland has the potential to a sufficiently large carbon sink, the least

Planned growth of forest areas (as a increase the amount of CO2 stored on land difficult, lowest-cost methods should percentage of Poland’s area) by three in woody biomass by 0.9 Gt. In addition, be identified. However, assessing these percentage points (from 30 percent Poland has significant CO2 storage options is relatively challenging, as these in 2019 to 33 percent in 2050)44 is potential in low-carbon-density land that decarbonization levers are characterized not enough to make up for the forest could further develop biomass. Together by diseconomies of scale. For example, absorption rate loss. As a result, the these lands have the capacity to absorb the larger the area for reforestation, the total carbon sink is expected to be 1.8 GtCO2e from the atmosphere. With harder it is to secure. This is due to the land approximately 10 MtCO2e in 2050. an estimated 20 Mt a year in negative acquisition cost curve increasing.

Exhibit 7 Current and potential aboveground carbon sinks

Current aboveground Potential aboveground Unrealized potential carbon density (ca. 2016) carbon density aboveground carbon density

0 25 50 75 ≥100 Mg C ha-1 0 25 50 75 ≥100 Mg C ha-1 0 20 40 60 ≥80 Mg C ha-1

Source: Woods Hole Research Center and The Nature Conservancy, 2019

Carbon-neutral Poland 2050 41

Chapter 4 Transitioning the energy system

As outlined in the previous chapter, such as solar and wind is intermittent, decarbonizing the four sectors of we also explore the stability of the the economy could rely mainly on system and the sources of flexibility, electrification and changes to the focusing on storage and power-to-X fuel mix, with the remaining emissions technologies (methods for converting to be captured or offset. As a result, electrical energy into liquid or the current energy mix in Poland’s gaseous energy sources through economy of coal, oil, natural gas, and electrolysis and further synthesizing other energy sources would change, processes such as power to hydrogen with the demand for electric power and power to heat). rising significantly. Even without the added effort In this chapter, we explore a possible of decarbonization, the Polish low-carbon mix for power generation transmission and distribution that could meet both existing and infrastructure is aging and will new demand of the Polish economy. require significant investments in the For the other sectors, we explore a next 30 years. Additional demand lowest-cost pathway based on our and increased renewable energy current understanding of technology generation can create new challenges development and cost outlooks. As to be factored into the build-out of the energy from renewable sources energy infrastructure.

Carbon-neutral Poland 2050 43 Energy-mix changes generation of coal-fired power plants. However, it would begin declining In the economically driven decarbo after 2030, for two reasons. First, nization scenario, primary energy natural-gas power generation would be demand for coal, oil, and natural gas replaced by renewables as they become would fall substantially in the long term. more cost competitive. Second, natural According to our analysis, coal demand gas–based heating in buildings would be would decrease by 94 percent from replaced by heat pumps after 2040 for 2020 to 2050, with about 73 percent of economic reasons. As a result, by 2050 this reduction caused by declining coal demand for natural gas would decrease use in the power sector. The buildings by approximately 74 percent from 2020 sector accounts for an additional levels. 18 percent of coal demand decline, due to the replacement of coal-fired From 2020 to 2050, electrification heating with alternative technologies across all sectors would increase (including heat pumps and electric demand for low-carbon power sources, space heating). Coal demand in the including renewables, nuclear, and industry sector would decline mainly others (mainly bioenergy). The use of due to fuel switches in cement and bioenergy is expected to increase in the steel production (for example, biomass, short term due to the rise of biomass- with potential CCUS and electric arc based heating, which could be replaced furnaces). by electric heating in the long term (Exhibit 8). Oil demand would drop 88 percent by 2050 compared with 2020 Electrification of Poland’s economy levels, as the transport sector would increases power demand switch predominantly to electricity in When we model Poland’s energy sys passenger cars, hydrogen in heavy tem without decarbonization, electricity vehicles, and ammonia blended into demand is expected to grow by more fuels in agriculture vehicles. than 50 percent by 2050 because of increased economic activity. According to our analysis, demand for natural gas would increase by 33 The economically driven decarboni percent from 2020 to 2030, as natural- zation scenario results in the increased gas power generation is the most cost- electrification of all sectors, which efficient technology to offset the falling boosts demand growth by an additional

Changes in the energy system would be profound. The transition away from fossil fuels would increase power demand by a factor of 2.4

44 Carbon-neutral Poland 2050 Exhibit 8 Poland’s evolving energy inputs and outputs PJ

2020

Coal 1,765 788 Industry

Oil 1,270 920 Transport Gas 422

Renewables 76 Power 890 Buildings and Nuclear heat

Hydrogen 88 Agriculture Other 119

Note: Actual energy flows in Poland in 2020 might look different from to the outlook due to the COVID-19 outbreak’s impact on the economy.

2030 Industry Coal 1,444 860

Oil 475 414 Transport Gas 560

Renewables 319 Power 704 Buildings and Nuclear heat

Hydrogen 87 86 Agriculture Other 230

2050 736 Industry Coal 108

Oil 157 372 Transport Gas 112

Renewables 1,314

Power 714 Buildings Nuclear 594 and heat Hydrogen 375 46 Agriculture Other 189 P2x

Source: Decarbonization Pathway Optimizer McKinsey & Company; Global Energy Perspective; Sustainability Practice McKinsey & Company

Carbon-neutral Poland 2050 45 Exhibit 9 A potential increase in electricity demand for the next 30 years %, annually

Start BEV uptake Start BEV uptake Increasing use of electric Electric space- in city buses in passenger cars furnaces in industry heating uptake

400 +3% p.a. 360

320 +2% p.a. Decarbonization 1.5x 280 2.4x 240 +4% p.a.

200 Business as usual 1.6x

160

120 2020 22 24 26 28 30 32 34 36 38 40 42 44 46 48 2050

Actual energy demand in the 2020‒22 period might differ from the forecast as a result of the coronavirus pandemic and its economic consequences

Source: Decarbonization Pathway Optimizer McKinsey & Company; Global Energy Perspective Reference Scenario; Sustainability Practice McKinsey & Company, McKinsey Energy Insights.

50 percent compared with the BAU the national total in 2050 (compared case (Exhibit 9). Therefore, compared with about 45 percent today). with today, electricity demand in our In our economically driven decarbo decarbonization scenario is expected to nization scenario, electricity demand grow by a factor of 2.4. grows at different rates over time, as The transport and buildings sectors each sector has its own electrification make up 80 percent of this total, starting point. From now until 2030, while electrification in other sectors, the growth rate will likely be fast (4 such as industry, adds 20 percentage percent each year), mainly spurred by points. As a result, in 2050, transport’s the rapid adoption of EVs in transport share of electricity demand will (city buses and passenger cars) after likely increase to roughly 25 percent 2022. The rate slows slightly after (compared with the current 2.4 2030, but acceleration (3 percent percent). However, industry’s share will each year) is expected from 2040 decrease to less than 30 percent of onward. The latter would occur

46 Carbon-neutral Poland 2050 as electric industrial and building supply by 2050. The expansion of solutions—for example, electric renewable power is largely enabled furnaces in industry and heat pumps in by the declining capital costs of buildings—are implemented at scale. technologies and the expected CO2 prices from the EU Emissions Trading The increase in power demand could be System (ETS), assumed at €29 to €34 met with a sustainable supply of low- per tCO emissions from 2020 to 2050. emissions energy. Carefully planning 2 Our analysis shows that onshore wind capacity additions would be necessary power is expected to reach cost parity to enable progressive electrification with existing coal generation before without negative external side effects, 2025, followed by offshore wind power such as price increases or the greater before 2030 and solar power before risk of grid instability. 2035.

There is potential for a power-supply The shift away from coal would likely evolution have profound implications for the Two fundamental changes would country. Historically, Poland’s economy be necessary to move toward fully has relied heavily on coal: approximately decarbonizing the power supply by 80 percent of its power is currently 2050. First, coal-fired generation generated by coal-fired power stations. would need to decrease by almost 95 In addition, about 90,000 people are percent from 2020 to 2050 (with a employed in the coal industry, with corresponding reduction of capacity by sources quoting a similar quantity in 80 percent). More than 85 percent of adjacent industries.47 The coal industry existing coal-fired capacity is currently is an important social and economic expected to reach the end of its lifespan topic in Poland, making the transition during this window.46 to RES an important issue for all stakeholders (see sidebar “Poland’s Second, renewable generation is history with coal”). expected to increase in Poland’s power mix, with wind and solar accounting for These shifts—perhaps surprisingly— about 80 percent of the total power would likely have a limited impact on

Carbon-neutral Poland 2050 47 current employees, at least initially, total natural-gas supply needed for but may require reskilling efforts in peak power generation is expected to the long term. Production from coal- increase to about 9 billion cubic meters fired power stations is expected (bcm) in 2030. Poland should be able to to decrease by approximately 20 import and transmit this volume given percentage points by 2030 under the its recent and planned expansions most recent government plans.48 In of natural-gas infrastructure. In the the same time period, a similarly large economically driven decarbonization portion of employees (according to scenario, 5 GW of natural-gas power our analysis, approximately 40,000 stations would be decommissioned employees, or 45 percent)49 is expected after 2040. Their lifetime can be to retire for age reasons. Considering extended to provide additional that employment in coal mines is balancing capacity in the system, as largely fixed and Poland imported detailed in the following part of this approximately 10 to 15 percent of its chapter. Increased demand would coal consumption in 2017 and 2018,50 also require a strong infrastructure for the reduction in coal demand would natural-gas transmission, storage, and likely not be matched by a proportional importation. For the latter, one option reduction in labor. The industry would is to expand Poland’s current liquefied likely have to hire new workers by natural gas (LNG) infrastructure. 2030 to at least partially cover the retirement gap (in both the business- Zero-carbon power sources as-usual case and the economically The transition to zero-carbon driven decarbonization scenario), but power depends on accelerating the the absolute number of employees may installation of RES to meet electricity be decreased due to automation and demand. increased mining efficiency. Planning In our economically driven ahead with reskilling programs to ease decarbonization scenario, wind power the movement of these workers to low- becomes the single largest power carbon industries after 2030 would be source after 2030 and accounts for beneficial for the workforce in Poland. approximately 50 percent of the total More information on that topic can be power capacity by 2050. Offshore found in Chapter 5. wind increases to 45 GW, or about 30 Achieving an optimal, cost-effective percent of the total power capacity in mix of energy sources to meet Poland’s 2050 (see sidebar “Offshore wind’s power demand with low-carbon potential”). Onshore power would grow generation through 2050 would to 35 GW by 2050 and contribute 21 require additional natural-gas and wind percent of the total power capacity that capacity (Exhibit 10). These two energy year. A construction program of this sources account for approximately scale would require solving regulatory, 15 percent of total power generation environmental, and supply-chain in 2020, a share that would rise to constraints. However, it could also approximately 75 percent by 2050. The create opportunities to develop new remaining generation in 2050 could industries in Poland. be largely supplied by nuclear, solar, Additional solar-power capacity biomass, and hydropower sources, as is assumed to grow at a relatively well as coal-fired plants retrofitted with constant rate and will benefit from CCUS. ongoing decreases in technology Natural-gas-power capacity could costs and associated expenditures. increase to 18 GW by 2030, which could By 2050, solar power would account offset almost all decreases in supply for approximately 13 percent of total from existing coal power plants. The capacity.

48 Carbon-neutral Poland 2050 Exhibit 10 Poland’s potential energy mix

% Wind and solar Solar Battery storage Biomass Lignite Hydro share in % Wind offshore Power to gas Gas with CCS Coal with CCS Nuclear Wind onshore Interconnector Gas Coal

458 Generation 429 27 TWh/year 32

354 19 243 282 210 12 244 153 7 208 78 35 179 1 10 1 29 43 16 5 44 5 1 1 5 14 43 1 6 80 90 90 36 61 48 6 37 6 6 1 2 15 25 23 14 34 4 2 1 5 4 7 103 46 25 4 9 79 4 53 4 50 66 27 37 4 4 3

8 8 -1 8 8 -4 -9 -1 -32 -48 -13 -8 -40 -4 -52

10% 20% 35% 48% 71% 77% 79%

165 Capacity GW installed 148 21

118 45 15 34 91 29 78 13 35 8 16 35 8 28 54 14 42 3 18 18 7 11 1 1 4 4 8 1 4 4 4 1 4 4 7 3 1 1 1 1 1 1 1 1 3 9 17 6 18 18 17 18 6 1 1 1 6 2 6 4 1 19 15 9 8 2 2 10 2 2 10 2 2 2 4 6 8

19% 32% 47% 56% 66% 71% 73%

2020 2025 2030 2035 2040 2045 2050

Source: McKinsey Flexibility Power Model, October 2019

Carbon-neutral Poland 2050 49 Poland’s history with coal

Before Poland’s transition to a few factors are expected to lead to market-based economy in 1989, further reductions. First, production coal was its primary source of costs are expected to increase as electricity, accounting for almost easy-to-exploit deposits run out, 100 percent of the electricity and Polish labor costs are predicted supply. As a result of its reliance to rise. Second, decreasing costs on coal, Poland was among the of renewable energy sources top five global coal producers at provide a viable alternative to the time. Production peaked in coal power. Third, coal-fired 1979 but decreased subsequently power generation would become because of falling efficiency in coal increasingly expensive if zero- mines and a lack of access to global emissions targets are introduced markets. Similarly, the coal mining (accompanied by increasing carbon sector’s contribution to Poland’s taxes, for instance). Finally, the economy fell by more than half availability and cost of financing during the past two decades—from new carbon investments such as 3.7 percent of GDP in 1995 to 1.8 coal mines and power stations percent in 2015. Employment have been decreasing over the declined from 400,000 people in past several years, with both 1990 to fewer than 90,000 in 2018. commercial and development banks Coal is still integral to the country’s introducing negative screening total primary energy demand, but a for high-emissions technologies.

50 Carbon-neutral Poland 2050 Our scenario assumes the commission the government plan will be justified, ing of nuclear capacity in line with the for 10 GW in total. If the efficiency latest Energy Policy of Poland by the promise on the nuclear technology is Polish Ministry of Energy, with 6 to 9 not realized, the additional dispatchable GW of nuclear-power planning to be power could be contributed by gas- constructed from 2033 to 2043.51 This fired power stations equipped with capacity can supply about 6 percent of CCUS technology, for example. the power demand by 2050. Nuclear Power-system flexibility and projects are typically beset by time resilience and budget challenges, including Integration of more than 80 percent site selection, start preparation, and of intermittent renewable power securing of the supplier contracts. generation into the grid would require Poland would have to address these new zero-carbon flexibility solutions hurdles in the near term to deliver the (flexibility solutions provide additional first unit according to the plan. power-balancing capacity and power Assuming that plans are realized, quality services). These solutions would nuclear would become relatively provide additional intraday backup with attractive in our decarbonization storage, power curtailment for periods scenario. First, capital expenditures of high renewable-energy production, for subsequent nuclear plants are and resilience against extreme weather expected to be lower than for the first events, such as prolonged periods of units, as certification, design, and overcast skies and no wind.52 construction experience accrues, The following solutions can help reducing the levelized cost of energy. Poland meet its GHG-reduction goals, Moreover, coal or natural-gas gene according to our scenario. ration gets more costly because of the purchase of EU ETS credits and — First, Power-to-X technology CCUS. Assuming already-planned (such as renewable electricity- investments, our modeling of Poland’s powered electrolyzers) can be power mix suggests that 1 GW of used to produce hydrogen, making additional nuclear capacity beyond hydrogen an increasingly important

In our economically driven decarbonization scenario, wind power could become the single largest power source after 2030 and could account for around 50 percent of total power supply by 2050

Carbon-neutral Poland 2050 51 energy carrier in heavy-duty tran approximately €75 billion will likely be sport and industry. Our scenario needed for electricity-grid replacement assumes 8 GW of Power-to-X capa in Poland. The economically driven €75bn city will be used to absorb excessive decarbonization scenario would potential investment needed renewable generation (especially add €30 billion to €35 billion for its for electricity-grid replacement offshore wind in northern Poland) extension and enhancement. in Poland regardless of and feed it back into the power From 2020 to 2050, we estimate that decarbonization by 2050 system as needed. under the BAU case the transmission — Second, battery storage would grid would require investments of increase to 14 GW, mainly serving approximately €25 billion. To facilitate as intraday backup. The deployment decarbonization, an additional €20 of new storage would be enabled billion to €25 billion may be required by decreases in the costs of tech to reinforce and upgrade transmission nology, which are assumed to drop grids to accommodate the growth of from about €260 per kWh in 2019 power capacity and demand. About to approximately €50 per kWh in half of this additional investment would 2050.53 be allocated to increasing the power — Third, coal-fired power stations with capacity. Significant upgrades would a generation capacity of 4 GW could be necessary to take offshore wind be retrofitted with CCUS technology power from the Baltic Sea to the south and co-fired with biomass by 2050 of the country (where large coal and to provide additional zero-carbon lignite plant retirements will occur). balancing capacity. The remaining investment would be allocated to accommodate peak load — Last, our scenario estimates a growth. limited contribution from cross- border transmission lines in energy From 2020 to 2050, our modeling production, mainly because most shows that the distribution grid neighboring countries have would require additional investments renewable supply-and-demand of approximately €50 billion in the profiles similar to Poland’s. These BAU case, as current infrastructure transmission lines will still play an requires end-of-life replacement important role for system balancing, and electricity demand grows. An however. additional investment of approximately €10 billion for distribution grids would There are additional opportunities to be needed to accommodate the further increase the power system’s economically driven decarbonization resilience. For instance, the introduction scenario. The main investment drivers of demand response and distributed are the electrification of demand (such generation could provide even more as electric-powered heat pumps and opportunities for peak load reduction. EV charging) and consumer trends (For more details, see Appendix C). (such as rooftop solar), which account A reinforced electricity transmission for approximately 80 percent of and distribution grid the incremental investments in the According to our analysis, over the distribution grid, as well as onshore next three decades—regardless of wind, which makes up the remaining decarbonization—a total investment of 20 percent of investments.

52 Carbon-neutral Poland 2050 Offshore wind’s potential

In our economically driven decarbo available area. Assigning an additional nization scenario, offshore wind 15 percent of the available sea area plays an important role in providing would be sufficient to host a total of low-carbon electricity. From 2020 to 45 GW (Exhibit 11). More details can be 2040, up to 30 GW of offshore wind found in Appendix C. power could be constructed. Over the subsequent ten years, an additional The Polish Baltic Sea offers very good 15 GW could come online, bringing the conditions for offshore wind. It is not total to 45 GW. This figure is higher only quite shallow (with an average that of other market perspectives. depth of less than 50 meters) but also Our analysis, based on the availability has strong winds. Average wind speeds of unassigned offshore territories, are more than 8 meters per second, and suggests that the potential 30 GW of offshore wind projects are potentially offshore wind generation would require viable with wind speeds exceed 7 approximately 25 to 30 percent of the meters per second.54

Exhibit 11 Offshore wind development potential in Poland's exclusive economic zone in the Baltic Sea

Poland

70 km

Potential for offshore wind development Wind speed m/s Renewable-energy acquisition 6.5 8.0 9.9

Source: Maritime Office in Gdynia (2018); National Marine Fisheries Research Institute (2018); Bulletin of the Polish Academy of Sciences (2018)

Carbon-neutral Poland 2050 53

Chapter 5 Decarbonization’s costs and impact

Decarbonizing Poland’s economy (under current commodity prices). In could have profound implications on addition, a decarbonized economy the country’s economic structure. has structurally different economic In this chapter, we outline the three activities and could thus benefit from main macroeconomic implications of tailored taxation redesign. We have our scenario. First, decarbonization performed an illustrative analysis of the would require additional initial capital role of taxation in transport to outline expenditure—for example, to enable the the role to understand the potential mobility transformation and the upgrade tax implications of a transition to a low- of energy infrastructure and building carbon economy. stock. This increase in capital outlays Last, the decarbonization pathway could would be partially offset by operational present opportunities that can help savings, such as from better-insulated Poland boost economic growth. Our homes or more efficient transport. analysis indicates that a portfolio of five Second, our analysis suggests two low-carbon economic activities could fundamental, second-order effects bring economic benefits to the country: from the decarbonization pathway. BEV components manufacturing, The Polish trade balance is expected Baltic Sea offshore wind development, to structurally improve as the country industrial-scale production of electric reduces its fossil fuel imports by heat pumps, electrified agriculture approximately €15 billion each year equipment manufacturing, and R&D and

Carbon-neutral Poland 2050 55 Exhibit 12 Financial impact assessment for our decarbonization scenario € billion, 5-year averages

Capex Opex Total

Economically driven decarbonization -45 -47 -56 -55 -56 scenario -59 -63 -62 -64 -65 -73 -73 -70 -66

-112 -119 -129 -126 -126 -118 -127

Business as usual -37 -40 -43 -47 -43 -47 -45 -65 -65 -65 -74 -74 -75 -71 -108 -111 -114 -118 -119 -112 -109

0 1 5 5 3 1 Decarbonization -2 0 -7 -3 -8 -15 -13 -12 -13 -16 -8 -14 -8 -10 -15

’25 ’30 ’35 ’40 ’45 ’50 ’50+ ’25 ’30 ’35 ’40 ’45 ’50 ’50+ ’25 ’30 ’35 ’40 ’45 ’50 ’50+

Note: Assuming a 4% WACC. For cash-flow assessment beyond 2050, 2050 run rate opex is assumed and capex is based on replacement capex as decarbonization-driven technology switches are assumed to have happened during the 2030–50 time frame. Source: Sustainability Practice McKinsey & Company

deployment of (BE)CCUS technology. Decarbonization’s investment and current annual investments in the eco These activities combined could stru return profile nomy. Such an increase in spending cturally increase Poland’s GDP by 1 Our analysis suggests that to achieve would bring Poland in line with the EU to 2 percent and create 250,000 to full decarbonization, Poland would average for investments, around 300,000 jobs. need to increase capital expenditures 21–22 percent of GDP.55 by an average of €13 billion each year through 2050. Almost half of these Investment and return profile by The economics of our additional investments would need sector decarbonization pathway to be made over the next 15 years, The top-line numbers for decarbo mainly focused on switching to BEVs nization only tell part of the story. Over the next 30 years, decarbonizing and upgrading energy and buildings Individual sectors exhibit different Poland’s economy would require infrastructure. In most situations, underlying financial profiles and additional investments that could pay economic actors are expected to trajectories (Exhibit 13). off in reduced operational costs. In our recoup their decarbonization invest decarbonization pathway scenario, Investments in decarbonization are ments through operational savings total investments in the Polish economy characterized not only by their net (Exhibit 12). from 2020 until 2050 would need to financial impact but also by other increase by €380 billion. At the same These additional annual investments factors, such as to whom any benefits time, operational costs are expected to equal roughly 1-2 percent of Polish would accrue (see sidebar “Four decrease by €75 billion. GDP and 10 to 12 percent of Poland’s decarbonization lever archetypes”).

56 Carbon-neutral Poland 2050 Exhibit 13 Financial impact by industry for our decarbonization scenario € billion, 5-year averages per annum

Power and heat Industry Transport Buildings Agriculture 1 2 Capex 0 0 0 0 0 0 0

-1 -1 -1 -1 -1 -1 -1 -1 -2 -2 -2 -2 -2 -3 -3 -3 -3 -4 -4 -5 -5 -6 -6 -6 -7

-10

-100 -30 -190 -60 -12

6 6 5 4 3 3 1 1 1 1 1 Opex 0 0 0 0 0 0 0 0 0 0 0 0 0 0

-1 -1 -1 -1 -1 -1 -1 -2 -2 -3

-20 -10 120 -20 6

1 1 1 Total 0 0 0 0 0 0 0 0 0 0 0

-1 -1 -1 -2 -2 -2 -2 -2 -2 -2 -2 -2 -3 -4 -4 -5 -5 -5 -5 -6 -7

-120 -40 -70 -80 -6

’25 ’30 ’35 ’40 ’45 ’50’50+ ’25 ’30 ’35 ’40 ’45 ’50’50+ ’25 ’30 ’35 ’40 ’45 ’50’50+ ’25 ’30 ’35 ’40 ’45 ’50’50+ ’25 ’30 ’35 ’40 ’45 ’50’50+

Total 2020-2055

Increasing power Cash flow in industry Cash flow in transport Cash flow in buildings Decarbonizing agri- generation by a factor would be positive in next would be net positive would be net negative culture would have of 1.5 compared to 15 years when energy and would be mainly due to the additional modest financial BAU would require efficiency measures driven by substantial capex required in impact. Higher capex additional investments yield returns. In 2035 opex savings from insulation and heating would be mainly (capex) in power to 2050 time frame, lower electricity prices technology. Moreover, driven by a switch generation and will capital expenditures compared with fossil heating technology to low-carbon fuels need higher opex, would increase beyond fuels investments typically do (e.g., ammonia) in driven by gas business-as-usual case; not result in opex agricultural generation additionally, while savings, as current fuels equipment looking beyond 2040, have low price points opex would increase to cap industrial emissions Note: Assuming a 4% WACC. For cash-flow assessment beyond 2050, 2050 run rate opex is assumed and capex is based on replacement capex as decarbonization-driven technology switches are assumed to have happened during the 2030–50 time frame. Source: Decarbonization Pathway Optimizer McKinsey & Company

Carbon-neutral Poland 2050 57 PRE-PUBLICATION VERSION. DO NOT SHARE

Four decarbonization lever archetypes

Each sector and decarbonization lever Decarbonization levers with economic In addition to these decarbonization has different underlying dynamics. We rationale but agent issues. Investments levers’ financial characteristics, more have identified four decarbonization in these levers yield positive returns, but relevant elements could make climate lever archetypes based on the return the profits accrue to different actors, action complex. For instance, even and payback profile of individual thus impeding action. with a sound economic rationale, initiatives (Exhibit 14). Decarbonization levers with limited a broad variety of barriers can Decarbonization levers with stand- financial incentives. With low absolute limit progress, including political alone economic rationale. These returns and IRRs, these factors disco considerations (such as taxpayers’ levers have attractive payback urage agents from acting. perspective), the regulatory landscape, periods, sufficiently high internal rates Decarbonization levers with no stand- infrastructure, supply chain, of returns (IRRs), or both. As such, alone economic rationale. These levers technology, and opposing business they motivate profit-seeking economic do not create any savings and thus give interests (for example, incumbents agents to act. agents no economic incentive to act. versus new industry).

Exhibit 14 Four decarbonization archetypes in our scenario

Change in capexa Change in opexa 1 2 3 4 Levers with stand- Levers with economic Levers with limited Levers with no stand- alone economic rationale but agent financial incentives alone economic rationale issues rationale

Illustrative cash flow Agent 2 financially benefits (opex)

Agent 1 invests (capex)

Logic Economic agent would Economic agent doesn’t Economic agent would not Economic agent would of agent invest in decarbonization invest in decarbonization invest in decarbonization not invest in decarboni- lever because it results in lever because benefits lever because economic zation as there are no opex savings with a are harvested by other incentive is limited in savings sufficiently short payback economic agent absolute terms and/or IRR period/high IRR is too low Climate Promote/stimulate Stimulate cross-agent Promote/stimulate Develop framework to action agents to act faster on collaboration (e.g., benefits agents to act on support decarbonization strategy decarbonization sharing) and promote faster decarbonization and seek for hard-to-abate/ decarbonization ways to reduce efforts expensive activities with a level (international) playing field Illustrative BEVs have higher upfront Rental building insulation Heating technology fuel Industrial CCUS requires example capital need but yield requires upfront investment switch requires relatively both upfront investments operational cost savings by owner while tenant limited investments with and ongoing operational benefits from reduced costs some ongoing operational expenditures costsb a. Change in capex and opex vs business-as-usual technologies. b. Electric-based heating in Poland is typically more expensive than coal- or waste-based heating. Source: Sustainability Practice McKinsey & Company

58 Carbon-neutral Poland 2050 The effects of decarbonization power, and hydrogen) with the on trade and taxation right incentives for low-emissions fuels adoption or transitioning to a Decarbonization will also affect other model based on paying for access to stakeholders beyond Polish businesses infrastructure. and individuals. Our analysis examines changes in the trade balance, largely resulting from moving to different Decarbonization could spur energy carriers and changes to economic growth taxation. In the context of the EU’s decarbo Impact on trade balance nization journey, Poland could further The decarbonization transition increase employment and prosperity would likely help improve Poland’s by investing early in certain industries. trade balance by reducing reliance To capitalize on its strengths and on fossil fuel imports. According pursue additional economic growth, to our analysis, Poland currently the country could develop a portfolio of has a negative trade balance of decarbonization-enabling industries. A approximately €15 billion56 a year variety of factors should be considered (Exhibit 15). In a carbon-neutral when designing such a portfolio: scenario, this total could be reduced — Industry relevance in enabling a to about €3 billion a year by 2050. decarbonization transition The increased domestic spending and focus on decarbonization could — Socioeconomic attractiveness (for positively affect employment, since example, the size of the domestic the macroeconomic multiplier on and EU markets as well as growth virtually all other economic activities rate, quality, and quantity of could generate more GDP and jobs possible job creation) domestically than fossil-fuel imports. — Industry fit with Poland’s Impact on taxation characteristics—its capabilities, As decarbonization alters the way infrastructure, and comparative businesses operate and use products advantages compared with other and services, it would likely affect countries the government’s tax revenues if we assume the same system remains in Growing GDP and creating jobs place. During the long run, changes Building a portfolio of decarbonization- to tax policy and structures could enabling industries could structurally be made, and the transport sector improve the country’s GDP and help illustrates the potential impact. Poland create more jobs in high-growth industries. Typically, transport infrastructure is financed by government taxes on By attracting and stimulating new fossil-fuel consumption (see sidebar economic activity in low-carbon “Taxation in transport”). Thus, the sectors, Poland could add €10 billion transition to zero-carbon transport to €12 billion to its GDP by 2030 (1 would fundamentally change the to 2 percent of additional GDP). This infrastructure financing stream, increase would mostly come from and, if the gap is not covered, it developing the offshore wind industry could potentially hinder government (€4 billion to €5 billion), with the investment including the development production of industry-scale electric and maintenance of crucial infra heat pumps and BEV components structure. Possible solutions for secu adding €2 billion to €3 billion each. ring future financing could include Poland would further benefit as a redesign of the taxation scheme consumers from growing industries across all types of fuels (including would have more to spend in the diesel, gasoline, natural gas, electric economy’s other sectors.57

Carbon-neutral Poland 2050 59 Exhibit 15 Poland’s 2018 energy commodities trade balance

Trade deficit Balance of trade Trade surplus -40 -10 -0.1 +0.1 3 8

Balance Value Coal Gas Crude oila Electricity PJ € bn

Russia -1,289 -10.6

Kazakhstan -177 -1.8

Saudi Arabia -84 -1.0

US -77 -0.6

Australia -43 -0.3

Colombia -43 -0.1

Norway -35 -0.4

UK -28 -0.3

Iraq -22 -0.2

Nigeria -21 -0.2

Mozambique -16 -0.1

Lithuania -11 -0.1

Sweden -2 -0.1

Hungary 9 0.1

Ukraine 10 0.0

Germany 17 -0.1

Slovakia 27 0.3

Austria 30 0.1

Czech Rep. 58 0.4

Other -31 -0.3

-433 -99 -1,196 0 -1,728 -15.3 a. Petroleum oils and oils obtained from bituminous minerals; crude. Source: Comtrade Database 2018

60 Carbon-neutral Poland 2050 PRE-PUBLICATION VERSION. DO NOT SHARE

Taxation in transport

In 2018, Poland collected €16 billion Theoretically, in our economically from taxes on the consumption of fossil driven decarbonization scenario, the fuels in transport.58 Electrification introduction of a tax on electricity efforts under the economically driven would increase transport operational decarbonization scenario would mean expenditures by 38 percent. However, that annual tax revenue in 2050 would when compared with the BAU case, full drop by €13 billion compared with decarbonization scenarios still yield base year. Under the BAU case, the operational-expenditure savings. Total erosion of tax revenue would be slower, net cash flow including taxes would approximately €4.5 billion by 2050 be negative until 2030 and become (Exhibit 16). roughly neutral afterward.

Exhibit 16 Tax implication of decarbonization

Capex Opex Cash flow

Economically driven scenario

-27 -30 -30 -30 -33 -33 -33 -32 -31 -32 -34 -34 -33 -32

-62 -62 -61 -62 -67 -66 -64

Business as usual -22 -23 -26 -27 -27 -28 -29 -32 -32 -36 -37 -33 -39 -41

-58 -62 -59 -61 -61 -66 -63

5 8 5 2 3 2 2 0 0 Decarbonization -1 -1 -5 -6 -5 -3 -3 -4 -5 -3 -10 -7

’25 ’30 ’35 ’40 ’45 ’50 ’50+ ’25 ’30 ’35 ’40 ’45 ’50 ’50+ ’25 ’30 ’35 ’40 ’45 ’50 ’50+

Tax revenue from liquid fuels

Carbon-neutral Poland 2050 61 Our analysis suggests that pursuing Silesia district. It plans to expand its the macroeconomic opportunities production capacity more than three outlined below could generate more times by 2022. In addition, at the time than 250,000 to 300,000 additional of publication, three other battery jobs in industries such as advanced companies—Shenzen Capchem manufacturing, research and deve Technology,63 Zhangjiagang Guotai lopment, and construction. At the same Huarong Chemical New Material,64 time, Poland’s population is expected and SK Innovation65—have announced to decline, and we estimated that by production plans in Poland. 2030 the labor force will shrink by 8 In 2030, total BEV battery production in percent.59 A significant reskilling effort Europe is estimated to be €22 billion.66 would be needed to help workers If Poland captures 20 percent of the transition to jobs in these industries. market, it could attract €2.2 billion in A reskilled workforce could then be foreign direct investments and add €2 employed in less physically intensive, billion to €3 billion a year to its GDP. healthier, and higher-paying jobs that create more value. For Poland to be competitive in this industry, the country could facilitate Any stimulus created by decarboniza carbon-free production of components. tion could be especially important to This factor is increasingly important recovery from the economic slowdown in the supplier selection process: caused by the COVID-19 outbreak. various automotive original-equipment Five opportunities manufacturers are making reducing Five areas, from the shortest to the their GHG footprint an integral part of longest expected time to materializa procurement decisions. tion, present promising opportunities. Baltic offshore wind developer BEV component specialist Built-in advantages could enable Poland is well positioned to become Poland to become a leading offshore Europe’s major supplier of EV com wind developer.67 The Baltic Sea has ponents for three reasons. First, the good natural conditions: strong and country has access to a well-educated stable winds and relatively shallow labor force60 with relevant skills—more waters—about half of the Polish 5 than 70,00061 students graduated with Exclusive Economic Zone in the Baltic areas present promising GDP engineering degrees in 2016. Second, Sea has an average depth of less than growth and job-creation Poland has already established strong 50 meters.68 This combination makes opportunities relationships with the German and the cost of wind deployment and use wider European automotive industries, competitive, with a levelized cost of exporting €8.2 billion worth of auto energy of approximately €40 per MWh components in 2018.62 Third, Poland in 2035 compared with the country’s has an advantageous geographical weighted average cost of €44 per MWh. location, with easy access and Several investors have already obtained proximity to major European permits to build artificial islands, automotive factories. and two have signed agreements to The country’s location is particularly connect total wind-farm generation important for battery production of 2.2 GW to the power grid.69 The and assembly because of high tran expected 8 GW of offshore wind sport costs. In fact, Poland has generation could contribute an already attracted several Asian additional €4 billion to €5 billion70 in battery manufacturers. In 2018, LG GDP a year and create 120,000 to Chem opened a 20-GWh facility— 130,000 jobs in 2030. In addition, the world’s second-largest battery Poland could position itself as a leading production facility—in Poland’s Lower producer and exporter of offshore wind

62 Carbon-neutral Poland 2050 equipment by taking advantage of its In 2018, European capital spending on established engineering industry and agricultural equipment was €49 billion, existing relationships with international with approximately 0.4 percent spent companies, which have production on electric tractors and low-carbon plants in Poland. motorvehicles.74 Ongoing structural changes in agriculture—such as Industrial-scale electric heat pumps efficiency improvements that free up producer land to grow forests for biomass—or Poland has the potential to specialize other sustainability policies (for in the production of industrial-scale example, animal welfare) will likely low- and mid-temperature electric heat boost demand for new categories pumps that could be deployed in heating of equipment both domestically and networks and in industry to supply low- within Europe. By 2030, total European grade heat. Poland’s domestic market expenditures in this category are for heat pumps is estimated to reach expected to reach €15 billion to €20 €0.5 billion by 2030.71 Since Poland billion.75 If Poland could gain 10 percent has one of the largest district heating of the market, it could add up to €1 networks in the EU, it requires more billion a year to its GDP. extensive modernization. Bioenergy carbon capture, utilization, In addition, Poland could harness its and storage (BECCUS) research, and existing advantages, including access development and deployment to engineers and training centers and Poland could develop CCUS techno proximity to consumers. If Poland logy and equipment and take a leading develops its industrial-scale heat pump position in the negative emissions industry before 2022, it could be a top and bioenergy markets. Utilizing its exporter of electric heat pumps within favorable geological conditions— Europe, where the market is expected including the proximity of industrial to grow significantly. If the country sites and locations favorable for were to supply 10 percent of European carbon storage—and sizeable natural heat pumps and half of Poland’s storage, Poland is well positioned domestic heat pumps by 2030, it to conduct R&D and deployment for could generate €4 billion to €5 billion large-scale (BE)CCUS technology. in revenue, increase GDP by €2 billion Both Poland and Europe need to to €3 billion, and create approximately create substantial negative emissions 50,000 jobs. to offset hard-to-abate industrial Electrified agriculture supplier and agricultural emissions. For The development, production, and Poland alone, the need for negative export of innovative electric or emissions is 37 MtCO2e in 2050. In ammonia-fueled agriculture equip the country, CO2 storage systems, ment offer another opportunity. close to industrial sources, may be Poland has an annual agricultural developed in order to significantly goods output of €24 billion72 and reduce the costs of its transport. At uses agriculture equipment worth the same time, thanks to the extensive €34 billion.73 Since the country’s geological structures in the country, agriculture sector is fragmented and capable of storing 15 Gt of CO2, it will largely relies on existing carbon-heavy be possible to store CO2 captured equipment, electric and low-carbon by CCUS systems for the next few farm equipment could help the sector hundred years. Poland could become dramatically reduce emissions while a significant producer of bioenergy increasing productivity and value by using this natural advantage and creation. investing in R&D.

Carbon-neutral Poland 2050 63

Chapter 6 Charting a way forward

Decarbonizing Poland’s economy within From the long list of interventions, 30 years is an ambitious and highly com we select the areas that are already plex endeavor. We have detailed the economically viable—those no-regret potential transitions that may need to moves that the country could look to occur and outlined the possible costs introduce regardless of the pathway it and benefits. While the detailed planning selects in the future. We note that some of the larger decarbonization transition technologies are not yet available for is beyond the scope of this report, in mass adoption and would likely require this chapter we aim to address what a ten to fifteen years of R&D before transition road map could look like. they could be introduced at scale. This creates investment opportunities for To do so, we organize all the Poland to consider planning for where necessary interventions into a sample it can benefit from a carbon-neutral transition road map that matches our future. economically driven decarbonization scenario’s impact and timing. We also provide a list of the decarbonization Creating a comprehensive elements that would be critical for transition road map enacting this road map. To transition the economy, a wide In addition, in this chapter we highlight set of coordinated activities are two areas of potential focus for Poland. recommended to be implemented. A

Carbon-neutral Poland 2050 65 master plan that defines sector-by- Examples include deployment of CCUS sector activities is required to facilitate across the industry sector at scale and the transition. The timing of individual green district heating in Poland. activities would be determined by teach of their business cases. Our Launching a successful economically driven decarbonization transition scenario assumes faster adoption To enable the decarbonization tran of the technologies with more sition, several action areas need to viable business cases, followed by be addressed. First, a comprehensive technologies that would require more road map should be laid out to guide time to reach maturity and therefore industries in the transition as well as have a higher per-unit abatement cost. to give investors confidence, thus Across most sectors, technology is unlocking capital for the required available to launch the transition and investments. Further, financing fra start renewing stock in the early 2020s meworks may need to be developed as well as enable full decarbonization to ensure enough capital availability. by 2050 (Exhibit 17). The only exception Regulatory and other interventions is the industry sector, as the CCUS aimed at removing transition barriers technologies required to decarbonize (such as ensuring a sufficiently qualified it are not yet available. Our scenario labor force and support for technology assumes that sustained R&D would development and deployment) could be be required to improve CCUS’s considered. These efforts would align affordability and availability while with ensuring a supportive business addressing legal and social issues environment. Last, Poland could con related to storage. sider strengthening, expanding, and building new infrastructure to enable By 2030, decarbonization efforts would certain technology switches. need to be well under way in sectors with available cost-effective, low- Develop smart financing frameworks carbon technologies, such as upgrading To ensure sufficient capital for low- building insulation, electrifying urban carbon options, Poland could take two transport (for example, through electric key actions. city buses), and rolling out 8 GW of — Make prefinancing available for offshore wind. At the same time, the private individuals. Given the country would benefit from preparing high up-front costs related to for the transition in other areas of the decarbonization-friendly initiatives economy. Examples include planning an for consumers (for example, at-scale rollout of BEV passenger cars, switching to BEVs and reinsulating switching fuels for agricultural vehicles, buildings owned by private and transitioning to low-carbon district individuals) and the average Polish heating. household’s relatively low savings From 2030 to 2040, our road map (18 percent of the EU average),76 assumes the scaling of already- developing prefinancing solutions launched initiatives and the adoption is crucial. of additional low-carbon technologies. — Establish a stable regulatory envi Examples of the latter include the ronment to attract foreign direct introduction of negative emissions investment. This environment could (through BECCUS) in the cement and be supported, for instance, through lime industry, fuel switches in industry a commitment to developing certain toward hydrogen and biogas, and emerging industries by setting the replacement of some fossil-fuel targets and investing in necessary generation with nuclear power. infrastructure. In addition, providing To close the gap to full decarbonization a stable regulatory environment and in 2050, action would also be needed in good conditions for investments the hardest-to-abate economic areas. could reduce the risk and costs

66 Carbon-neutral Poland 2050 Exhibit 17 A potenial decarbonization road map for Polish economy

First uptake Speed up development Large-scale adoption (more than 50%) (>90% adoption)

2020 2030 2040 2050

Power and Solar power heat Onshore wind power

Offshore wind power

Nuclear energy

Industry (BE)CCUS in lime plants

(BE)CCUS in cement plants

CCUS in ethylene plants

CCUS in oil refineries

Alternative steel production

Transport BEV city buses

BEV trucksa LDT MDT HDT

BEV passenger cars

FC coaches

FC trucksa HDT MDT LDT

Buildings Insulation

Heat pump (air to water, air to air, ground to water)

Green district heating (biomass/geothermal)

Agriculture GHG-focused breeding and animal feed additives

Ammonia-fueled tractors

a. LDT stands for low-duty trucks, MDT stands for medium-duty trucks, and HDT stands for heavy-duty trucks.

Carbon-neutral Poland 2050 67 associated with the low-carbon — Create incentives for universities to economy. One example could be collaborate with the private sector promoting investments in BEV and promote fields of education and through subsidies and tax relief. research that are critical for high- growth, low-carbon industries. Support scalable technology deve lopment and innovation — Adjust curricula to develop skill sets Several efforts could position Poland that suit the needs of the emerging as a hub for innovation in low-carbon low-carbon job market. industries. — Up- and reskill the labor force to — Establish Poland as a European ensure job mobility—for example, tech and entrepreneurial hub by providing incentives for both through the development of busin employers and employees to ess incubators and R&D centers in encourage continuous professional close collaboration with universities. development. This effort can, for instance, be accomplished through incentives Create a supportive business envi (such as R&D subsidies) to private- ronment sector entities to devote resources Targeted policies can foster the deve and capital to innovation. lopment of low-carbon industries and create a critical mass for further — Attract foreign innovative, high-tech investment. Some initiatives to businesses to establish or expand consider: their presence in Poland and create jobs in high-growth sectors—for — Define, clearly communicate, example, through dedicated eco and deliver a long-term, stable nomic zones. government vision for policies and incentives that promote low-carbon — Create and support the domestic activities. market for low-carbon, high-value- added products and services (for — Encourage cross-industry know instance, by developing standards ledge sharing and cooperation to for maximum emissions). develop efficient and competitive supply chains and industry clusters. Develop a qualified and sufficient labor force Put decarbonization-critical infra A large pool of skilled talent could structure in place give Poland a competitive advantage Targeted investments in infrastructure in attracting low-carbon businesses can facilitate the construction of low- and economic development. Potential carbon assets. Potential investments actions to consider: could include:

To close the gap to full decarbonization in 2050, action would also be needed in the hardest-to- abate economic areas

68 Carbon-neutral Poland 2050 — Expand electricity grids by rein A future-based outlook forcing the existing network, Many activities must occur in the authorizing new power lines, and proper order to transition Poland’s investing in new interconnectors. entire economy to carbon neutrality. These efforts will improve the Some activities are viable under current technical resilience of electricity conditions and could be launched grids and the security of the energy soon—others could materialize in supply. 2035 to 2040 but would require — Enhance infrastructure (including R&D investments right now. These road, rail, and energy networks) initiatives also represent opportunities to facilitate connection with other to achieve technology leadership in the European countries. decarbonized world. Consider no-regrets decarbonization — Develop a BEV and FCEV char actions ging infrastructure to meet anti Adopting these actions could help cipated consumer demand, boost reduce primary demand by switching the electric-vehicle market, to low-carbon products and promoting and encourage investments in the circular economy. Intensifying asset commercial electric fleets. usage through connected business

— Build CO2 pipelines and reuse exi models such as shared passenger sting natural-gas infrastructure in cars—shared EVs emit about 40 strategically placed corridors to percent less carbon per passenger- enable the deployment of CCUS kilometer over their lifetime than

technology and the utilization of CO2 unshared ICE vehicles and can save in industrial production processes. about 15 to 20 percent per kilometer in

Carbon-neutral Poland 2050 69 TCO. Further, identifying and ensuring low-carbon, future-proof mobility. uses for end-of-life products (such as Accelerating the expansion of an diverting organic waste streams away EV-charging infrastructure could from landfills to anaerobic digesters for reduce road transport emissions by biomethane production, which could replacing about 10 percent of vehicles reduce emissions by a factor of five) with BEVs by 2025. or remanufacturing valuable products Improve the energy efficiency of (such as machinery and consumer industrial processes and buildings and electronics) could recover value and cut develop targeted business cases for emissions. technology switches. This goal could Add renewables to the power mix to be achieved in the industry sector by meet electric power demand growth. introducing alternative fuels (such as By 2025, Poland’s power mix could hydrogen, biomass, and electricity) to include about 30 percent renewables replace the current reliance on coal. and 20 percent low-carbon energy In the buildings sector, codes for new carriers (such as natural gas) to reduce construction could be updated and the reliance on high-emissions coal existing poorly insulated buildings and lower electricity cost. Supporting with the highest energy demand RES policies and legal frameworks could be retrofitted to current building would enable this transition. In addition, standards. In addition, the usage of retired capacity could be replaced with low-quality solid fuels (such as waste) renewables at a lower levelized cost. could be eliminated, and coal-based heating solutions (such as stoves) could Provide infrastructure for transport be switched to carbon-free alternatives electrification to create seamless, (for example, electric heat pumps).

70 Carbon-neutral Poland 2050 Investing in the future aviation, and plant-based proteins to Longer-term investments could replace meats. maintain flexibility for multiple options, Prepare to scale CCUS through R&D including decarbonization. These and deployment and piloting. Support outlays are typically low but could R&D for CCUS, including developing yield potentially high returns if the CO -based products, such as synthetic technology can be deployed at scale in 2 fuels, in collaboration with other Euro the future. pean countries. Moreover, CCUS pilots Upgrade and extend power could be facilitated to develop CCUS infrastructure to allow for zero technology, gain experience, and emissions in the power and heat systematically reduce costs. and transport sectors. Stakeholders Nurture and expand sources of could consider the future energy mix nature-based negative emissions. when planning investments in power The hardest-to-abate segments transmission and distribution to could be offset by improving forest facilitate higher shares of renewable management practices to increase electricity and enable the electrifica the carbon-sink potential of forests tion of energy demand. and preserve biodiversity, supporting Reduce manufacturing emissions of agroforestry (particularly in areas such raw materials and products. This can as reducing soil erosion and increasing be achieved by offering attractive low- soil biodiversity, where it would have carbon alternatives such as carbon- broader environmental benefits), and free and negative-carbon cement, continuing afforestation on lands with bio and synthetic fuels for marine and the lowest agricultural potential.

***

Decarbonizing the economy by Our hope is that this report, by presenting 2050 is a significant undertaking. If the evidence in an orderly fashion, will Poland sets off down this road, the help raise awareness about the potential full engagement of the public sector, for decarbonization in Poland. We have businesses and society as a whole will laid out the facts concerning the current be required. Decarbonization would situation, estimated costs, possible affect many areas of life – and five trade-offs and likely benefits right across specific branches of the economy. But the value chain. In a dynamically changing the estimates in this report show that world, we believe that our analyses can achieving climate neutrality lies within help you make the right decisions – and Poland's grasp. start taking the right action.

Carbon-neutral Poland 2050 71 Appendix A: Glossary of abbreviations BAU Business-as-usual scenario (BE)CCUS Bioenergy carbon capture, utilization, and storage BEV Battery electric vehicle BF—BOF Blast furnace—basic oxygen furnace CCUS Carbon capture , utilization, and storage CHP plant Combined heat and power plant (cogeneration plant)

CO2 Carbon dioxide

CO2e Carbon dioxide equivalent DAC Direct air capture DPO Decarbonization pathway optimizer DRI–EAF Direct reduced iron—electric arc furnace EEF Enhanced-efficiency fertilizer EU ETS European Union Emissions Trading System (refers to price of European emissions allowances) FC Fuell cell FCEV Fuel-cell electric vehicle GHG Greenhouse gas GJ Gigajoule (1,000,000 joules) GW Gigawatt (1,000 MW) GWh Gigawatt hour (1,000 MWh)

H2 Hydrogen HDT Heavy-duty truck (greater than 15 tons) HEV Hybrid electric vehicle ICE vehicle internal-combustion-engine vehicle J Joule kWh Kilowatt hour LDT Light-duty truck (less than 5 tons) LNG Liquefied natural gas LULUCF Land use, land-use change, and forestry MACC Marginal Abatement Cost Curve MDT Medium-duty truck (greater than 5 tons, less than 15 tons) Mt Megaton (1,000,000 tons) MW Megawatt (1,000 kW) MWh Megawatt hour (1,000 kWh)

N2O Nitrous oxide O&M Operations and maintenance PHEV Plug-in hybrid electric vehicle PJ Petajoule (0.278 TWh) RES Renewable energy sources SMR Steam methane reformer SRF/CRF Slow/controlled-release fertilizers TCO Total cost of ownership t Ton (1,000 kg) TWh Terawatt hour (1,000 GWh) WACC Weighted average cost of capital

72 Carbon-neutral Poland 2050 Appendix B: Methodology

Scope of the report Model is a capacity-expansion In this report, we developed an model optimizing for the lowest-cost economic-activity outlook based investments and operations over on expected and forecasted a defined investment period with developments. Where possible, we technology and policy constraints. It have based this outlook on reputable, can help answer important questions publicly available sources (for example, such as: What is the impact of the Statistics Poland Databases and energy transition, including policies, perspectives of the government mandates, costs, and technologies, on of Poland and representatives of the evolution of the grid? And what are the largest Polish companies and the roles of flexible solutions, including nongovernmental organizations hydropower, battery storage, hydrogen, related to the energy sector). We and power-to-gas (P2G) dispatch? complemented these sources with The marginal abatement cost curve proprietary perspectives, including (MACC) McKinsey’s Global Energy Perspective. One of the outputs of the DPO is We neither aim to provide nor advocate the Marginal Abatement Cost Curve a specific solution but instead examine (MACC). The MACC is a standard tool the implications of a set of design used to illustrate the supply side of choices regarding decarbonization. abatement initiatives aimed at reducing Accordingly, this report does not intend pollutant emissions, such as GHGs. to provide a McKinsey forecast or policy Moreover, the MACC visualizes the recommendation. selected abatement technologies and fuels. Models used Each column represents a specific For this analysis, we used our technology or fuel switch that reduces proprietary decarbonization emissions. The curve shows how modeling tool—the Decarbonization much abatement can be realized at a Pathway Optimizer. The DPO offers a given cost. The width of each column standardized approach to industry and represents the realized reduction of country decarbonization strategies and annual CO emissions associated with has already been deployed in a wide 2 the measure by 2050 when compared range of McKinsey studies.77 The model with 2017, and the height of each helps answer two important questions: column represents the average cost of How can Poland decarbonize in the abating one ton of CO . The columns are most cost-effective way? And what is 2 organized from the most economical the cost for Poland to decarbonize? to the most expensive measures,

Another tool we used was our Grid expressed in euros per ton of CO2 Flexibility Model. The Grid Flexibility abatement.

Carbon-neutral Poland 2050 73 Appendix C: Key assumptions by industry

This appendix describes the key — CO2 target constraints: 100 percent modeling assumptions. Most of the decarbonization by 2050; and raw data we used came from public 45 percent reduction by 2030 sources. For our analyses, we used a compared with 1990 set of assumptions assessing how the — A minimum buildup of technology mix by industry changes nuclear capacity aligned with over time. These constraints are the government target of explained for each industry below. approximately six units from 2033 to 2050 Power and heat For our analytical modeling, we used Industry the following constraints (Exhibit 18): For our analysis, we used the following assumptions: — A maximum offshore wind capacity of 45 GW by 2050 — Not all machines and processes can be decarbonized through — A maximum onshore wind capacity electrification (for example, of 100 GW by 2050 cement kilns need to heat up — Renewable share of generation of above 1,400°C, which is beyond 21 percent by 203078 electrification feasibility)

Exhibit 18 Several assumptions inform our decarbonization models

Capex Fixed O&M cost Fuel price k €/MW installed €/MW installed/year €/GJ

Life Energy sources Years 2020 2035 2050 2020 2035 2050 2020 2035 2050

Solar 25 900 300 200 7,400 6,000 5,100

Offshore 25 2,500 1,600 1.400 73,000 55,000 50,000 wind

Onshore 25 1,200 1,000 900 25,000 21,000 20,000 wind

Nuclear 50 6,000 5,700 5,100 38,000 38,000 38,000 0.5 0.5 0.5

Biomass 20 2,400 2,000 1,800 83,000 71,000 65,000 15 15 15

CCGT (combined cycle 25 900 900 900 18,000 18,000 18,000 7 7 5 gas turbine)

Lignite 35 1,600 1,600 1,600 30,000 30,000 30,000 2 2 1

Coal 35 1,400 1,400 1,400 31,000 31,000 31,000 3 3 2

74 Carbon-neutral Poland 2050 — Electricity prices are expected to be Transport in the range of €30 to €50 per MWh For our analysis, we used the following from 2030 to 2050 assumptions:

— The amount of CO2 from ammonia — Each passenger car will need its production used for urea will remain battery replaced once in its lifetime at 2019 levels — Import of secondhand cars will stay — Externally purchased clean at the 2019 level (with a gradual shift hydrogen is limited to 5 percent of to BEVs) total production needs — Average age of imported BEVs — Naphtha will remain the main will be about seven to eight years, feedstock in ethylene, as a switch to just before expected battery ethane will reduce the production of replacement other high-value chemicals — Imported BEVs will receive a battery — Direct separation technology in replacement in Poland cement is not considered (this — At least 5 percent of internal- means that CCUS must cover combustion-engine trucks will still energy and process emissions be on the road in 2050 together)

Exhibit 19 Detailed assumptions for the transport sector Lifetime of each vehicle type, in years

Lifetime Type of vehicle Years

Passenger cars 14

Low-duty trucks Long haul 7

Regional 9

Urban 11

Medium-duty trucks Urban 11

Regional 9

Long haul 7

Heavy-duty trucks Urban 8

Regional 7

Long haul 6

Carbon-neutral Poland 2050 75 Exhibit 20 Detailed assumptions for the transport sector Example: Passenger cars, gasoline, BEV, and FC

Capex Opex k € /vehicle € /km

Type of fuel 2020 2035 2050 2020 2035 2050

Gasoline A/B 13.4 13.5 13.5 0.1 0.1 0.1

Gasoline C/D 22.1 23.8 23.8 0.1 0.1 0.1

Gasoline E/F 55.7 59.4 59.4 0.1 0.1 0.1

Gasoline J 31.0 33.3 33.3 0.2 0.2 0.1

BEV A/B 16.4 13.4 13.4 0.0 0.0 0.0

BEV C/D 29.2 23.8 23.8 0.0 0.0 0.0

BEV E/F 68.8 62.5 62.5 0.0 0.0 0.0

BEV J 46.6 37.5 37.5 0.0 0.0 0.0

FC A/B 33.4 26.6 26.6 0.3 0.1 0.1

FC C/D 54.5 43.4 43.4 0.3 0.1 0.1

FC E/F 134.3 107.1 107.1 0.4 0.2 0.2

FC J 59.7 47.5 47.5 0.4 0.2 0.2

Diesel A/B 14.3 15.8 15.8 0.1 0.1 0.1

Diesel C/D 24.7 27.1 27.1 0.1 0.1 0.1

Diesel E/F 59.3 64.4 64.4 0.1 0.1 0.1

Diesel J 34.1 37.3 37.3 0.1 0.1 0.1

Buildings Agriculture For our analytical modeling, we used For our analysis, we used the following the following assumptions: assumptions:

— Biomass can replace up to 66 — A maximum of 54 percent of farmers percent of CHP plant capacity can adopt all enteric fermentation decarbonization technologies — Light insulation costs €3,600 for apartments and €7,200 for houses, — For agricultural equipment, maximum with 25 percent heat demand of ammonia blend is 60 percent in reduction that can be applied 2050 to a maximum of 40 percent of — Electric agricultural equipment has a buildings higher TCO than equipment that runs — Deep insulation costs €9,000 on an ammonia blend for apartments and €18,000 for — Low-tillage methods offer a 43 houses, with 50 percent heat percent emissions reduction demand reduction that can be compared with conventional tillage applied to a maximum of 40 percent of buildings — Optimized fertilization offers a 33 percent emission reduction compared — A maximum of 20 percent of with conventional fertilization practices apartments are suitable for an air- to-air heat pump switch — There is no established technology to eliminate direct emissions

76 Carbon-neutral Poland 2050 Appendix D: Bibliography ArcelorMittal, ArcelorMittal Poland Sustainability Report 2016, August 16, 2017, Poland.arcelormittal.com. Bain, S. et al., Global peatland restoration demonstrating success, IUCN National Committee United Kingdom, March 2014, iucn-uk-peatlandprogramme.org. Chorzelski, M. et al., “Chances for Polish district heating systems,” Energy Procedia, Volume 116, June 2017, pp. 106–18, sciencedirect.com. Curry, Claire, Lithium-ion battery costs and market, Bloomberg New Energy Finance, July 5, 2017, data.bloomberglp.com. Dorociak, Michał, and Maciej Tomecki, Hydrogen alternative, 2019, static.300gospodarka.pl/media/2019/04/alternatywa_wodorowa_raport. pdf300gospodarka.pl. Energy Forum, Energy Transformation in Poland, 2019, forum-energii.eu/pl/ analizy/transformacja-2019. Energy Market Agency, Quarterly Bulletin (No.4/105), 2019, Bulletin of Power Industry, are.waw.pl. European Automobile Manufacturers Association, Vehicles in use: Europe 2017, accessed March 18, 2020, acea.be. Europejski Instytut Miedzi, “Stan i potrzeby rozwojowe sieci elektroenergetycznych w procesie transformacji niskoemisyjnej w Polsce,” 2017, leonardo-energy.pl/ wp-content/uplwoads/2017/03/EIM6106-Stani-potreby-rozwojowe-sieci- elektroenergetycznychw-procesie-transformacji-niskoemisyjnej-w-Polsce.pdf Eurostat, “Real GDP growth rate—volume,” accessed March 18, 2020, ec.europa.eu. Extension, “Biochar: Prospects of commercialization,” April 3, 2019, farm-energy. extension.org. Foundation for Sustainable Energy, “Programme for the development of offshore energy and maritime industry in Poland,” 2018, beif.pl. IBS, Coal transition in Poland, 2018, iddri.org/sites/default/files/PDF/ Publications/Catalogue%20Iddri/Rapport/201706-iddri-climatestrategies- reportcoal_pl.pdf. Institute of Environmental Protection National Research Institute, Climate for Poland: Poland for climate, accessed March 28, 2020, ios.edu.pl. Institute of Environmental Protection National Research Institute, Poland’s national inventory report 2019, the National Centre for Emissions Management (KOBiZE), 2019, kobize.pl. Instytut Transportu Samochodowego, Zakład Badań Ekonomicznych, “Prognozy eksperckie zmian aktywności sektora transportu drogowego (w kontekście ustawy o systemie zarządzania emisjami gazów cieplarnianych i innych substancji),” 2017, gov.pl/web/infrastruktura/opracowania-eksperckie. International Institute for Sustainable Development, The transformation of the Polish coal sector, 2018, iisd.org. Joint Research Centre (JRC) and the European Commission’s Science and Knowledge Service, Wind potentials for EU and neighbouring countries, 2018, publications.jrc.ec.europa.eu. Kay, Sonja et al., “Agroforestry creates carbon sinks whilst enhancing the environment in agricultural landscapes in Europe,” Land Use Policy, Volume 83, April 2019, pp. 581–93, sciencedirect.org.

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Carbon-neutral Poland 2050 77 Ministry of Energy, updated draft of Energy Policy of Poland until 2040, November 2019, gov.pl/web/aktywa-panstwowe/zaktualizowany-projekt-polityki- energetycznej-polski-do-2040-r. Ministry of Energy, “National energy and climate plan for the years 2021–2030,” January 4, 2019, ec.europa.eu. Ministry of Energy, “Program for the lignite mining sector in Poland,” 2018, gov. pl/web/aktywa-panstwowe/rada-ministrow-przyjela-program-dla-sektora- gornictwa-wegla-brunatnego-w-polsce. Ministry of Science and Higher Education, “Scientists from the Polish Academy of Sciences forecast: in a few dozen years, 75 percent of trees may disappear from Polish forests,” April 9, 2019, gov.pl. Oclifescience, “Is biochar a carbon sink as effective as it is said?,” accessed March 18, 2020, pl.oclifescience.com. Polish Alternative Fuels Association, V2G Vehicle to Grid Report, 2018, pspa.com.pl. The Polish Organization of Heat Pump Technology Development, Heat pump market in Poland in 2010-2018: Prospects for development of the heat pump market until 2030, May 2019, portpc.pl. Polskie Sieci Elektroenergetyczne, KSE 2018 report, accessed March 18, 2020, pse.pl. Poore, J. et al., “Reducing food’s environmental impacts through producers and consumers,” Science, Volume 360, Number 6392, June 1, 2018, pp. 987–92, sciencemag.org. PZPM, PZPM Automotive Industry report 2017/20, July 18, 2017, pzpm.org.pl. Statistics Poland, “Consumption of fuels and energy carriers,” 2018, stat.gov.pl/en/ topics/environment-energy/energy/consumption-of-fuels-and-energy-carriers- in-2018,8,13.html. Statistics Poland, “Energy,” 2019, stat.gov.pl/en/topics/environment-energy/ energy/energy-2019,1,7.html. Statistics Poland, “Energy consumption in households,” 2015, stat.gov.pl/obszary- tematyczne/srodowisko-energia/energia/zuzycie-energii-w-gospodarstwach- domowych-w-2015-r-,2,3.html. Statistics Poland, “Land use and sown area 2018,” stat.gov.pl/en/topics/ agriculture-forestry/agriculture/land-use-and-sown-area-in-2018,7,14.html. Statistics Poland, “Road transport in Poland in the years 2016 and 2017,” stat. gov.pl/en/topics/transport-and-communications/transport/road-transport-in- poland-in-the-years-2016-and-2017,5,5.html. Statistics Poland, “Statistical Yearbook of Agriculture,” 2018, stat.gov.pl/en/ topics/statistical-yearbooks/statistical-yearbooks/statistical-yearbook-of- agriculture-2018,6,13.html. Statistics Poland, “Statistical Yearbook of Forestry,” 2018, stat.gov.pl/en/ topics/statistical-yearbooks/statistical-yearbooks/statistical-yearbook-of- forestry-2018,12,1.html. Statistics Poland, “Transport—activity results,” 2018, stat.gov.pl/en/topics/transport- and-communications/transport/transport-activity-results-in-2018,6,14.html Transport & Environment, “Electric surge: Carmaker’s electric car plans across Europe 2019–2025,” July 2019, transportenvironment.org. Urząd Regulacji Energetyki, “Licensed enterprises,” 2017, ure.gov.pl. Werner, Sven, “International review of district heating and cooling,” Energy, Volume 137, October 15, 2017, pp. 617–31, sciencedirect.com. Wind Europe, “Offshore Wind in Europe: Key trends and statistics”, accessed March 18, 2020, windeurope.org. The World Bank, GDP (current US$), data.worldbank.org.

78 Carbon-neutral Poland 2050 Endnotes

1 Word Bank database, GDP in constant 2015, accessed 2019, https://data.worldbank.org/ indicator/NY.GDP.MKTP.KD. 2 McKinsey analysis based on KOBiZE (National Centre for Emission Management ), Poland’s National Inventory Report 2019; submission under the UN Framework Convention on Climate change and Eurostat data. 3 PGIE Polish Environmental Investments Group, Nasłonecznienie, accessed 2020 http:// www.pgie.pl/naslonecznienie.

4 Carbon dioxide equivalent (CO2e) is a quantity describing emissions of a greenhouse gas (or

mixture of gases) expressed as the amount of CO2 that would have the same global warming potential (for example, 1t of methane has the same global warming potential as 28 tons of

CO2). 5 McKinsey & Company, “Addressing climate change in a post-pandemic world,” 2020, www. mckinsey.com/business-functions/sustainability/our-insights/addressing-climate-change- in-a-post-pandemic-world. 6 Andrew Winston, “Is the COVID-19 outbreak a black swan or the new normal?”, MIT Sloan Management Review, 2020; and Rob Jordan, “How does climate change affect disease?" Stanford Earth, School of Earth, Energy & Environment, 2019. 7 PSE, KSE 2018 report, accessed March 24, 2020, pse.pl; ARE S.A., Statystyka elektroenergetyki polskiej 2018; and GUS, Gospodarka paliwowo-energetyczna w latach 2017 i 2018, Warsaw 2019, stat.gov.pl/obszary-tematyczne/srodowisko-energia/energia/ gospodarka-paliwowo-energetyczna-w-latach-2017-i-2018,4,14.html, p.27 8 Ministry of Energy, updated draft of The Energy Policy of Poland until 2040, Warsaw 2019, www.gov.pl/web/aktywa-panstwowe/zaktualizowany-projekt-polityki-energetycznej- polski-do-2040-r. 9 CEIC, Poland Investment: % of GDP, London 2020, ceicdata.com. 10 Stooq, DS Smith, “Environmental protection affects the consumption behavior of 67% of Poles,” 2019, stooq.pl. 11 United Nations, Paris Agreement; United Nations Treaty Collection, Paris 2015, treaties. un.org. 12 In order to achieve the target of the Paris Agreement, only a certain amount of additional GHGs can be emitted (the so-called “carbon budget”). At current rates of emissions, the 2°C carbon budget would be exhausted in approximately 25 years, and the 1.5°C carbon budget in only 7 years, and hence a material reduction in emissions already in the near-term would be required to achieve the goal of the Paris Agreement, www.mcc-berlin.net/en/research/CO2- budget.html. 13 World Bank database, accessed 2019, data.worldbank.org/indicator/NY.GDP.MKTP.KD. 14 The National Centre for Emissions Management, Poland’s National Inventory Report 2019, Greenhouse Gas Inventory for 1988-2017, Warsaw 2019, kobize.pl 15 Ministry of Energy, Sprawozdanie z wyników monitorowania bezpieczeństwa dostaw energii elektrycznej za okres od dnia 1 stycznia 2017 r. do dnia 31 grudnia 2018 r, Warsaw 2019, www. gov.pl/web/aktywa-panstwowe/sprawozdania-z-wynikow-monitorowania-bezpieczenstwa- dostaw-energii-elektrycznej. 16 PTPiREE, “Energetyka: Dystrybucja i przesył”, Poznań 2019, www.ptpiree.pl/_examples/ raport_2018/raport_ptpiree.pdf. 17 The National Centre for Emissions Management, Poland’s National Inventory Report 2019, Greenhouse Gas Inventory for 1988-2017, Warsaw 2019, kobize.pl. 18 Ministry of Energy, updated draft of The Energy Policy of Poland until 2040”, Warsaw 2019, www.gov.pl/web/aktywa-panstwowe/zaktualizowany-projekt-polityki-energetycznej- polski-do-2040-r. 19 In 2012, McKinsey published a decarbonization cost curve for Poland. A comparison of these analyses can be found in the appendix. 20 Regulation, (EU) 2018/2066; current ETS regulations do not include reduction of emissions

through inserting CO2 into products. 21 Global warming potential (GWP) for greenhouse gases in this report is assumed as in 4th IPCC Report (AR4). 22 Energy Transitions Commission, Mission impossible: Reaching net-zero carbon emissions from harder-to-abate sectors by mid-century, 2018, energy-transitions.org. 23 Based on Andrzej Kassenberg, “Zmiany zachowań a neutralność klimatyczna”, chronmyklimat.pl, 2020, http://www.chronmyklimat.pl/wiadomosci/zmiany-zachowan-a- neutralnosc-klimatyczna. 24 FAO, Livestock's Long Shadow, 2006.

Carbon-neutral Poland 2050 79 25 FAO, Food Wastage Footprint—Impact of Natural Resources, 2013. 26 Forum Odpowiedzialnego Biznesu (Responsible Business Forum), Konsumenci a gospodarka obiegu zamkniętego (“Consumers and the circular economy”), 2019. 27 For all three types: income three times the national average. 28 Based on Andrzej Kassenberg, “Zmiany zachowań a neutralność klimatyczna”, chronmyklimat.pl, 2020, http://www.chronmyklimat.pl/wiadomosci/zmiany-zachowan-a- neutralnosc-klimatyczna. 29 For all three types: townhouse, concrete/plasterboard. 30 For all three types: central heating. 31 McKinsey analysis based on U.S. Energy Information Administration (EIA) Manufacturing Energy Consumption Survey (MECS). 32 The National Centre for Emissions Management, Poland’s National Inventory Report 2019, Greenhouse Gas Inventory for 1988-2017, Warsaw 2019, kobize.pl 33 The actual number of vehicles in use is likely to be between 75 to 80 percent of this total due to limited incentives for owners to unregister unused vehicles. 34 300 Gospodarka, Alternatywa wodorowa, 2019, p. 24, http://static.300gospodarka.pl/ media/2019/04/alternatywa_wodorowa_raport.pdf. 35 The National Centre for Emissions Management, Poland’s National Inventory Report 2019, Greenhouse Gas Inventory for 1988–2017, Warsaw 2019, kobize.pl. 36 Statistics Poland, Energy Consumption in Households, Warsaw 2015, https://stat.gov.pl/ obszary-tematyczne/srodowisko-energia/energia/zuzycie-energii-w-gospodarstwach- domowych-w-2015-r-,2,3.html. 37 Statistics Poland, Energy Consumption in Households, Warsaw 2015, https://stat.gov.pl/ obszary-tematyczne/srodowisko-energia/energia/zuzycie-energii-w-gospodarstwach- domowych-w-2015-r-,2,3.html. 38 The National Centre for Emissions Management, Poland’s National Inventory Report 2019, Greenhouse Gas Inventory for 1988-2017, Warsaw 2019, kobize.pl. 39 Statistics Poland, Agriculture in 2018, Warsaw 2019, https://stat.gov.pl/obszary- tematyczne/rolnictwo-lesnictwo/rolnictwo/rolnictwo-w-2018-roku,3,15.html. 40 Wageningen University & Research, The contribution of breeding to reducing environmental impact of animal production, Wageningen 2019, wur.nl. 41 The National Centre for Emissions Management, Poland’s National Inventory Report 2019, Greenhouse Gas Inventory for 1988–2017, Warsaw 2019, kobize.pl. 42 Classification of agricultural lands in Poland. Category V and category VI consist of poorly fertile and unreliable soils. 43 The National Centre for Emissions Management, Poland’s National Inventory Report 2019, Greenhouse Gas Inventory for 1988–2017, Warsaw 2019, kobize.pl. 44 Ministry of the Environment, Natural Resources and Forestry, Polityka leśna państwa, Warszawa 1997, https://www.katowice.lasy.gov.pl/c/document_library/get_ file?uuid=506deebb-988d-4665-bcd9-148fcf66ee02&groupId=26676. 45 The National Centre for Emissions Management, Poland’s National Inventory Report 2019, Greenhouse Gas Inventory for 1988-2017, Warsaw 2019, kobize.pl. 46 The standard lifetime of a coal-fired power station is 40 years, after which it can be extended twice by ten years with major rebuilds, for a total of 60 years. Each rebuild requires a business decision and an associated investment. 47 Biznes Alert, “Over time, the number of jobs in the Polish mining will decrease", accessed December 4, 2019, biznesalert.pl. 48 Ministry of Energy, updated draft of The Energy Policy of Poland until 2040, Warsaw 2019, https://www.gov.pl/web/aktywa-panstwowe/zaktualizowany-projekt-polityki- energetycznej-polski-do-2040-r. 49 Jan Baran et al., “Coal transition in Poland: Options for a fair and feasible transition for the Polish coal sector”, Institute for Sustainable Development and International Relations, 2018, iddri.org. 50 Statistics Poland, Energy, Warsaw 2019. 51 Ministry of Energy, Updated draft of The Energy Policy of Poland until 2040, Warsaw 2019, https://www.gov.pl/web/aktywa-panstwowe/zaktualizowany-projekt-polityki- energetycznej-polski-do-2040-r. 52 Based on 12 years of historic weather data to test resilience against extreme weather events. 53 According to power model with the E2P 1 and 4 batteries. Analysis assumes that the cost for the E2P – 4 drops from ~250$/KWh in 2020 to ~71$/kWh in 2050. Analysis does not vary storage cost across sectors due to the battery costs varying among different applications. 54 World Bank Group, Expanding Offshore Wind to Emerging Markets, Washington DC 2019, worldbank.org. 55 CEIC, Poland Investment: % of GDP, London 2020, ceicdata.com. 56 United Nations, UN Comtrade 2018 database, accessed 2020.

80 Carbon-neutral Poland 2050 57 These figures are based on the non-induced multipliers (excluding induced effects such as spending by employees employed directly and indirectly by the sector and its suppliers). 58 Polish Automotive Industry Association, Automotive Industry Yearbook 2019/2020, Warsaw 2020, https://www.pzpm.org.pl/Rynek-motoryzacyjny/Roczniki-i-raporty/Raport-branzy- motoryzacyjnej-2019-2020. 59 Calculations based on European Commission Representation in Poland, Population Ageing, Labour Market And Public Finance in Poland, 2017 https://ibs.org.pl/app/uploads/2017/03/ Population-ageing-labour-market-and-public-finance-in-Poland.pdf and Statistics Poland data https://stat.gov.pl/obszary-tematyczne/rynek-pracy/pracujacy-bezrobotni-bierni- zawodowo-wg-bael/informacja-o-rynku-pracy-w-drugim-kwartale-2019-roku-dane- wstepne,12,38.html. 60 James Eddy, Alexander Pfeiffer, and Jasper van de Staai, “Recharging economies: The EV-battery manufacturing outlook for Europe,” London 2019, McKinsey.com. 61 Eurostat, “Number of tertiary education graduates by field,” 2016, https://ec.europa.eu/ eurostat/statistics-explained/index.php?title=File:Number_of_tertiary_education_ graduates_by_field,_2016_(thousands)_ET18.png. 62 Statistics Poland, SWAiD database, accessed 2020, http://swaid.stat.gov.pl/HandelZagraniczny_ dashboards/Raporty_konstruowane/RAP_SWAID_HZ_3_2.aspx. 63 Bankier.pl, “Chińczycy zainwestują w Polsce w fabrykę komponentów baterii litowo- jonowych,” published 2018, https://www.bankier.pl/wiadomosc/Chinczycy-zainwestuja-w- Polsce-w-fabryke-komponentow-baterii-litowo-jonowych-4093470.html. 64 “Chiński producent części do aut elektrycznych wybuduje fabrykę za 45 mln dolarów,” Gazeta Wyborcza, May 30, 2018, https://wroclaw.wyborcza.pl/wroclaw/7,35771,23474714,chinski- producent-czesci-do-aut-elektrycznych-wybuduje-fabryke.html?disableRedirects=trueS. 65 “SK Innovation: Nasza ekspansja na Europę zaczyna się w Dąbrowie Górniczej,” Gazeta Wyborcza, June 25, 2019, https://sosnowiec.wyborcza.pl/sosnowiec/7,93867,24932017,sk- innovation-nasza-ekspansja-na-europe-zaczyna-sie-w-dabrowie.html. 66 McKinsey analysis based on data from Transport Environment, https://www. transportenvironment.org/sites/te/files/publications/2019_07_TE_electric_cars_report_ final.pdf and Bloomberg, https://data.bloomberglp.com/bnef/sites/14/2017/07/BNEF- Lithium-ion-battery-costs-and-market.pdf. 67 Tomasz Marciniak, Marcin Purta, Kacper Rozenbaum, Developing offshore wind power in Poland, Warsaw 2016, McKinsey.com. 68 McKinsey analysis on the basis of the bathymetry map; Geologia 2013, Problemy geologiczno-inżynierskie w posadawianiu obiektów budowlanych na obszarach morskich RP, http://geoportal.pgi.gov.pl/css/powiaty/prezentacje/targi2013/frankowski_werno.pdf. 69 Foundation for Sustainable Energy, Programme for the development of offshore energy and maritime industry in Poland, 2018. 70 In direct impact from investments. 71 McKinsey analysis based on data from PORT PC, 2019, Muratordom, 2018, http://portpc.pl/ pdf/raporty/Raport_PORTPC_wersja_final_2019.pdf, https://muratordom.pl/instalacje/ pompy-ciepla/ile-kosztuje-pompa-ciepla-jakie-sa-koszty-ogrzewania-domu-pompa- gruntowa-i-powietrzna-aa-FtRX-mFKW-WvK6.html. 72 European Commission, Statistical Factsheet Poland, 2019, https://ec.europa.eu/info/sites/ info/files/food-farming-fisheries/farming/documents/agri-statistical-factsheet-pl_en.pdf. 73 McKinsey calculations based on data from GUS, 2018, and Warsaw University of Natural Sciences (SGGW), 2018, https://www.farmer.pl/finanse/podatki-rachunkowosc/w- polsce-rosnie-liczba-gospodarstw,85385.html, http://sj.wne.sggw.pl/pdf/PEFIM_2018_ n69_s83.pdf. 74 McKinsey calculations based on data fromMATEC Web of Conferences, 2018 and Eurostat, 2018, https://ec.europa.eu/eurostat/tgm/table. do?tab=table&init=1&language=en&pcode=tec00115&plugin=1. 75 McKinsey calculations based on data fromMATEC Web of Conferences, 2018 and Eurostat, 2018, https://ec.europa.eu/eurostat/tgm/table. do?tab=table&init=1&language=en&pcode=tec00115&plugin=1. 76 Eurostat, “Instutional Sector Accounts,” accessed 2019, https://ec.europa.eu/eurostat/ web/sector-accounts/data/key-indicators. 77 Publicly available examples include: Accelerating the energy transition: cost or opportunity?, McKinsey Global Institute, September 2016, McKinsey.com; Cost-efficient emission reduction pathway to 2030 for Finland, Sitra, McKinsey & Company, 2018, sitra.fi. 78 Ministry of Energy, updated draft of The Energy Policy of Poland until 2040, Warsaw 2019, https://www.gov.pl/web/aktywa-panstwowe/zaktualizowany-projekt-polityki- energetycznej-polski-do-2040-r.

Carbon-neutral Poland 2050 81 About the authors

Marcin Purta is a managing partner in the Warsaw office. An expert with nearly 20 years of experience in strategic consulting, he is the coauthor of several McKinsey reports, including Assessment of greenhouse gas emissions abatement potential in Poland by 2030, Developing offshore wind power in Poland, and Poland 2030: A chance to join the economic big league.

Gustaw Szarek is an associate partner in the Warsaw office. He supports clients in the industry and energy sectors in energy transition and digital technologies. He is the coauthor of a McKinsey report titled The AI revolution: How artificial intelligence will change business in Poland.

Hauke Engel is a partner in the Frankfurt office and McKinsey's sustainability practice. He leads work on climate risk globally and has been responsible for a broad range of client projects pertaining to technology transitions and decarbonization. He is the coauthor of several McKinsey reports on building an integrated energy demand model and forecasting

CO2-emissions pathways.

Eveline Speelman is an expert associate Partner at Energy Insights in the Amsterdam office. An expert on energy transition, decarbonization, and the circular economy, she has authored publications including Decarbonization of industrial sectors: the next frontier and Energy transition industry: Mission (im)possible?

Pol van der Pluijm is a project manager in McKinsey’s sustainability practice based in Amsterdam. He supports corporate and investor clients on growth and sustainability topics and is the coauthor of several publications on sustainability topics, including Artificial Intelligence for the circular economy.

Core analysis for this report were performed by a dedicated working team comprising Jakub Czugała, Marcin Hajłasz, Agnieszka Machoń, Ying Li, Wouter Vink, and Olga Wołowiec. Significant contributions of sectoral knowledge were made by Mladen Fruk, Elisabeth Harnmeijer, Viktor Hanzlík, Tomas Naucler, Jesse Noffsinger, Jurica Novak, Occo Roelofsen, and Matt Rogers. Many other individuals contributed to this report. They include, in alphabetical order: Joanna Iszkowska, Kristen Jennings, Natalia Sobczak, Tomasz Jurkanis, Tomasz Karpiński, Gosia Leśniewska, Milena Malinowska, Tomasz Marciniak, Wiktor Namysł, Katarzyna Tłuścik, and Bartek Walentyński. The authors wish to thank them for their contributions .

82 Carbon-neutral Poland 2050