16.5.1.2. Risk of changes in CO2 emission allowances prices (CO₂)

PKN ORLEN is centrally managing risk related to settlement cost of CO₂ emission in the Group in line with the assumptions set forth in the adopted Market Risk Hedging Policy approved by the PKN ORLEN Management Board. Under realized strategy PKN ORLEN purchases allowances for its own needs as well as in order to secure estimated volume and costs of purchase of CO₂ emission rights for Group companies. Deficit of CO₂ allowances is estimated on the basis of, among others, current balance of possessed emission allowances, executed transactions for purchase of emission allowances with future delivery, realized and estimated emission in future periods from particular installations in ORLEN Group and forecasts of free emission allowances allocation.

Historically, all of futures contracts for the purchase of CO₂ emission allowances concluded by the Group were settled through physical delivery at their maturity date and used for the need of fulfillment of Group's redemption obligation or resold to Group entities for their redemption purposes, and therefore as excluded from the scope of IFRS 9 Financial Instruments were not measured at fair value.

In the 4th quarter of 2020, taking into account the economic situation related to COVID-19 and the macroeconomic forecasts, despite the Group's stable financial and liquidity situation, a decision was made to postpone the execution date of the purchase of CO₂ emission allowances, which were to be delivered in December 2020, to March 2021 and December 2021. As a consequence, the Group resold the forward position held on the stock exchange with a delivery date in December 2020 (by entering into opposite transactions) and entered into new stock exchange contracts for the purchase of the same volume of CO₂ emission allowances for later dates. The decision made by the Group to change its strategy with respect to the purchased contracts with a delivery date in December 2020 was incidental and was a reaction to the events that the Group was not able to predict at the moment of concluding the contracts.

As a result of the settlement of the original contracts (buy) and the counter- transaction (sell), the Group recognized PLN 382 million in Other operating income under Settlement and measurement of derivative financial instruments relating to operating exposure.

Considering the decision made at the end of 2020 to postpone the execution date of purchase of CO₂ emission allowances, assumptions of new strategy of ORLEN Group until 2030 which also impact the strategy of hedging the risk of CO₂ emission settlement cost as well as the Group's liquidity risk management activities focused on optimizing cash flows and debt levels and requirements of IFRS regarding the recognition and valuation of financial instruments, the Group made a decision to separate two portfolios under concluded contracts for purchase of CO₂ emission allowances:

• ­ CO₂ "own-use" portfolio - concerning contracts which will be used for the purpose of fulfillment of the redemption obligation by PKN ORLEN and Group entities - these contracts will not be measured at fair value, in accordance with the exemption included in IFRS 9.
• ­ CO₂ "transaction" portfolio - concerning contracts which, in accordance with executed new strategy of hedging the risk of CO2 emission costs, will be subject to settlement in cash or by exchanging financial instrument at later dates, and therefore will be recognized as derivatives not designated for hedge accounting purposes and classified as financial assets/liabilities measured at fair value through profit or loss in accordance with IFRS 9.

The effect of the valuation of CO₂ futures contracts was recognized in Other Operating Income in position Settlement and valuation of derivative financial instruments.