11.2.2 Risk of movements in prices of carbon dioxide (CO2) emission allowances

Following the spin-off of an organised part of the enterprise from the Parent on November 2nd 2021 and the transfer of refining assets to the subsidiary LOTOS Asfalt Sp. z o.o., by operation of law the obligation to redeem CO2 emission allowances rested with LOTOS Asfalt Sp. z o.o. Based on the model for transferring costs of the subsidiary’s participation in the EU ETS provided for in the processing contract, the Parent continues to manage the risk of CO2 emission allowance prices at the Group.

In accordance with the assumptions of the CO2 emission allowance price risk management policy approved by the Management Board of Grupa LOTOS S.A., the Parent takes decisions as to the manner of balancing future shortage or surplus of CO2 emission allowances resulting from the processing contract, depending on the market situation and within set limits. The Parent enters into financial transactions for emission unit allowances (EUAs, one EUA representing the right to emit one tonne of CO2) within the framework of the approved Policy and the available limits.

As at December 31st 2021, the Parent’s deficit of allowances in the 2021–2025 trading period (Phase IV) was 1,566,818 tonnes. However, taking into account derivative transactions for a total of 1,746,000 tonnes, the Parent had surplus emission allowances for 179,182 tonnes, which were purchased in view of the market situation and the strategic nature of the emission allowances deficit expected in 2026–2030.

To manage the risk related to carbon dioxide emission allowances, the Group evaluates the risk of deficit of free emission allowances allocated. The total number of free CO2 emission allowances for 2021−2025 and total actual CO2 emissions is presented below:

As at December 31st 2021, considering the proposed amount of allowances to be allocated under the European Union Emissions Trading Scheme for 2021 and the actual volume of emissions, the Group reported a deficit of allocated CO2 emission allowances. Therefore, as at December 31st 2021, the Group recognised PLN 37.9m of these liabilities, disclosed in the statement of financial position under current liabilities as: Other liabilities and provisions (see Note 10.13). The effect of the provision on EBIT is presented under cost of sales.

As at December 31st 2020, liabilities recognised at the Group level in connection with the deficit in CO2 emission allowances were PLN 142.0m. Of the amount, PLN 133.6 m was used to purchase CO2 emission allowances for 2020. The PLN 8.4m effect of reversal of the remaining portion of the provision on EBIT is presented under cost of sales.

If required, futures contracts to purchase CO2 allowances open as at the last day of the reporting period are settled by the Parent through physical delivery to LOTOS Asfalt Sp. z o.o. for redemption to offset actual CO2 emissions.

The contract positions as at December 31st 2021 and 2020 are presented below.

Open emission allowances contracts as at December 31st 2021:

Open CO2 allowances contracts as at December 31st 2020: