Carbon Investment Shut Off in the Urals

23.10.2009 — Analysis

Trading in greenhouse gas emissions quotas in Russia turned out to be monopolized and virtually non-operational. In an interview to RusBusinessNews, Vladimir Chekashev, Chairman of Public Council on Global Warming (Ekaterinburg) and expert on the Kyoto Protocol, pointed out who this monopolist is.

- Mr Chekashev, what benefit can Russian business derive from using the Kyoto Protocol framework?

- In accordance with the Kyoto Protocol, which for our country came into force in February 2005, many developed countries and Russia have taken upon themselves obligations to limit the greenhouse gas emissions. To this end, each country makes an inventory of its respective emissions. The governments of the EU member states, based on the inventory data and obligations taken, have determined the limiting values of greenhouse gas emissions for big companies - the so-called emissions quotas. Greenhouse gas emissions that exceed the quotas are subject to substantial penalties.

However, any company needs to develop. Imagine, one of them is going to build a new production facility, the operations of which will emit into the atmosphere, say, 10,000 tons of carbon dioxide per year. To do so, it would either have to reduce emissions for this amount on its existing facilities or buy these quotas from abroad.

For the moment it is economically more advantageous for the developed countries to buy these quotas than to implement new technologies that reduce energy consumption, since all relatively inexpensive methods of reducing such consumption have been exhausted by now. Taking into account that reducing the emission by one ton of carbon dioxide in the US and the EU costs 60-200 dollars, in Japan - 100-300 dollars, and in Russia - only 1-20 dollars, then the ecological business can turn out to be one of the most profitable and prospective for us.

- How can this be put into practice?

- If a Russian business implements a project to upgrade its fixed assets and at the same time reduces greenhouse gas emissions, then it becomes possible to attract foreign investment in exchange for greenhouse gas emission quotas that appear as a result of implementing these projects.

Such a carbon investor can be an international company which needs quotas to reduce emissions by 10,000 tons of carbon dioxide. If this company is to conduct appropriate ecological activities on its facilities, it would have to pay about 2 million dollars, and if it is done on the Russian facilities, then only about 1 million dollars. The difference is significant.

From the Kyoto Protocol perspective, conversion of boiler houses running on fuel oil (of which we in the Urals have many) to raw wood is a promising exercise. As a result, the region would get a virtually free boiler house, whilst the investor obtains quotas for greenhouse gas emissions needed to develop his production.

- Does this structure work in real life? Today, metal works in the Urals Federal District are upgrading their production, thus reducing greenhouse gas emissions, whilst oil companies have finally commenced the utilization of associated gas. Has anyone of them used the opportunity to sell their quotas?

- I haven't heard of a single case like that. The reason is that the Kyoto Protocol framework has not yet been launched in Russia. We have not completed the inventory of greenhouse gas emissions and have not established the limiting values of emissions for our companies.

Certain moves have been made in this direction, though. Thus, Russia and Japan are implementing 5 joint projects in Irkutsk, Khabarovsk, and Surgut as part of the Kyoto Protocol. In Volodga, one of the district forestries plants trees under a contract with Denmark. However, these are singular examples.

For the overwhelming majority of big and small businesses in Russia, the Kyoto Protocol remains something distant and vague so far. It is very rarely that some publication, explanation or appeal emerge at the government level. This is deliberate silencing.

- Why?

- This is the case of monopolization of whole industries in the national economy by both the state and certain individuals. When Anatoly Chubais was involved in Russian power industry, it was clear from his actions that he wants to move in on carbon investment and sale of emissions quotas. That meant that specific projects had to go through him only; thus, a monopoly has been established. It has become both troublesome and unprofitable for business to go through all these bureaucratic procedures. Thus at the present moment Russian business cannot directly negotiate with international carbon investors.

- How, in this case, Russia is going to fulfil its obligations under the Kyoto Protocol to reduce greenhouse gas emissions?

- The Kyoto Protocol stipulates obligations to limit emissions in relation to 1990 emission levels. Due to a drastic drop of Russian industrial output in the 1990's and the current economic crisis with a respective reduction of greenhouse gas emissions, we can report that we have completed the tasks within the framework of the Kyoto Protocol implementation. However, this is nonsense in terms of environmental protection and prospects for economic development!

The example of the Sverdlovsk Oblast is quite demonstrative: according to a research conducted in 1997, the Oblast ranked first among all subjects of the Russian Federation in terms of the volumes of greenhouse gas emissions (main greenhouse gas). Due to the reduction of industrial output driven by the structural changes in the economy, the greenhouse gas emissions in the Sverdlovsk Oblast in 2000 were 67.7% to 1990 level. The subsequent economic growth had led to the growth of emissions, which in 2006 were 72.4% to 1990 level. However, the world crisis currently affects the Oblast's industry, and the economy is declining. Greenhouse gas emissions will be reduced respectively. Thus, the Sverdlovsk Oblast, as well as actually the rest of Russia, need not worry - all formalities of the Kyoto Protocol will be observed, unfortunately not due to environment-friendly activities.

Meanwhile, the negotiations on the so-called "Post-Kyoto Period" (the Kyoto Protocol terminates in 2012) are in progress. They are designed to enhance the level of the obligations for reduction of greenhouse gas emissions. Even if the level of obligations will be -10% in relation to 1990 level, it is very likely that Russia will not be able to fulfil these obligations within existing development scenarios. Moreover, there is a number of unaccounted risks that may get our country into a trap.

- What are these risks?

- Our economy is now at such a low level of development that in case we sign another international protocol it would "put a lid" on the development of our energy capacities. The economy cannot be revived without the development of power industry. However, if Russia starts to develop power generation, it would inflict upon itself huge penalties for the increase of greenhouse gas emissions. So far this penalty mechanism has not been in operation but it will be definitely launched. If we do not sign another protocol, we will be labelled by the world community and turn into world's outcasts.

China and India have done wisely. They openly declared themselves as countries with a low quality of living, and stated that they have to substantially build up power facilities and revive power industry before accessing the Kyoto Protocol. But we are proud and would rather eat our tie than admit that we are a developing country, which in fact we are.

I would also note that neither the Kyoto Protocol nor a new instrument that is designed to substitute it take into account our country's specifics. For instance, the fact that we have a huge Siberian taiga that absorbs substantial amounts of carbon dioxide and emits oxygen. Along with this advantage we have a potential problem, though. Nowadays, the climate on the planet is becoming warmer, and wildfires in the taiga are increasing both in number and in size. Even compared to the automotive transport, the wildfires emit much more carbon dioxide. In the nearest future the world community will inevitably raise a claim against Russia: if, because of wildfires in taiga, youк carbon dioxide emissions increase, then in order to offset this you will have to reduce industrial emissions and phase out your production.

In the current situation there is only one hope. Crisis deprived many Russian enterprises of available funds. In these conditions they will start to search for other ways to upgrade their production, apart from bank loans. The use of the Kyoto Protocol framework is one of such ways.

The interview has been prepared by Pavel Kober