The cost of carbon in Russia, braced to implement the Paris Accord

The cost of carbon in Russia, braced to implement the Paris Accord
The cost of carbon in Russia, braced to implement the Paris Accord
By Ben Aris in Berlin September 26, 2019

Russia ratified the Paris Climate Accord on September 23, committing itself to reducing CO2 emissions to 70% of the 1990 levels. But that is an easy goal as Russia’s CO2 emissions peaked in the last year of the Soviet Union and the following year emissions collapsed along with the Soviet economy. Russia’s commitment means it can actually increase its emissions from the current 1.8Gt of CO2 emissions a year and still meet its commitments to the accord.

Thanks to the legacy of central planning it is also one of the biggest polluters in the world. With a territory that stretches half way around the globe, the Soviet government acted as if Russia’s ecology was an infinite resource. But global warming has caught up even with Russia, which has suffered from extreme storms and raging forest fires across a territory larger than Europe each summer in recent years.

More frightening, the vast tracts of permafrost territory have been warming up. The ground is slowly melting with soil temperatures rising by about 1C per decade. Currently the frozen taiga is at -3C but when it melts completely in about 30 years there will be a one time release of millions of tonnes of CO2 trapped in the ground since prehistoric times. Although it is not clear what will happen, the irreversible release of so much CO2 into the atmosphere overnight could have a cataclysmic effect on the environment.

In the meantime the retreat of the icecaps has already opened up the northern route shipping route across the top of the country, cutting weeks off the transit time between Europe and Asia, as well as exposing land in the Artic that hasn't seen the light of day in millennia and is now being explored for oil deposits.

Cleaning up Russia’s act

The Kremlin has effectively done an about face on climate change. Up until recently President Vladimir Putin had pooh-poohed the idea and the government did little to deal with its CO2 problem. However, more recently the Kremlin has changed its mind for two reasons.

The first is that environmental issues, in particular the total lack of waste management, have led to large protests in Russia’s far-flung regions.

Secondly, with climate politics creeping up the global agenda, and as Russia is such a large player in geographical terms, the Kremlin has seen an opening to increase its international clout on the world stage. (The fact that the US has put itself on the wrong side of this story by withdrawing from the Paris Accord probably helped.)

At the same time there is a fundamental change in thinking amongst Russia biggest and dirtiest companies. As bne IntelliNews reported in a cover story, the rise of environmental, social and governance (ESG) rankings is starting to hit companies in the pocket. Some of Russia’s largest raw material producers reported that they have lost up to a third of their equity investors in the last year as fund managers are now demanding not only that a company produce strong profits but that it also have a sustainable business model that includes the three ESG factors. While funds are currently imposing ESG rules on a voluntary basis, many fund managers assume these rules will become mandatory before too long and so are adjusting their portfolios early to avoid being forced to sell and take big losses when the rules do eventually come in. In Moscow there is currently a noticeable scramble going on amongst the bluechip companies to bring their ESG up to par – and that often means literally cleaning up their act and reducing emissions.

Changing the rules

The ratification of the Paris Accord is only the first step in a legislative process that should fundamentally transform Russia’s attitudes to the environment as well as change the economy.

Under discussion is the new Federal Law on Emissions that will set the landscape for CO2 quotas and carbon pricing. Then there is the National Climate Change Plan to establish a legal target for the reduction of CO2 emissions in Russia as well as a Federal Fund to support emissions reductions. It is probable that climate change investments will also be used as another tool for regional development and the building of more growth-boosting infrastructure.

“At this moment in time, all of these initiatives are at the discussion phase and so have not been included into our models. However, the key takeaway from this movement is clear: the cost of emissions in Russia is set to rise and it is only the pace of the rise that has yet to be defined,” Vladimir Sklyar and Anastasia Tikhonova, analysts at VTB Capital (VTBC), said in a report on the Paris Accord changes.

The draft law currently under discussion and introduced by the Ministry for Economic Development sets out two phases for its implementation. The first, within 180 days of its adoption, introduces mandatory CO2 emission reporting for entities with more than 150,000 tonnes of CO2 emissions per annum (so-called regulated entities), government monitoring of emissions in detail by sector and company, the publication of such data for public access, and mandatory auditing of any carbon footprint reports by authorised agents, reports VTBC.

The second phase, to be carried out within five years of the law being adopted, envisages the introduction of CO2 quotas and targets for regulated entities, support and verification of the CO2 reduction investment projects, which would be awarded carbon quotas for resale, a system of carbon quota trading, and penalties for exceeding emission quotas. The introduction of such measures would be regulated by a separate government decree.

At the corporate level change could come even faster as portfolio investors selling off their shares have already burnt companies. Norilsk Nickel has already spent $2bn on its emissions clean-up programme, despite the fact that spending adds nothing to the company’s profitability.

National Climate Plan

The details of just how Russia will reduce emissions will be the substance of its National Climate Plan (NCP), which is due to be published sometime in October and will set the targets that can then be detailed in law and regional strategies.

The key detail – just how much Russia will reduce CO2 – remains a matter of debate. The Paris Accords suggest that countries cut CO2 emissions by 30% from the levels of 2005. In Russia's case it was emitting 1,734mn tonnes of CO2 emissions per year (mtCO2/yr) in 2005, however, the Kremlin has set 1990 as the base when it was emitting 2,397 mtCO2/yr -- a much higher bar and way above what Russia is emitting today. 

A 30% reduction from the 1990 level would allow Russia to produce 1,678 mtCO2/yr, which is only slightly less than the 1,765 mtCO2/yr it was producing in 2017. However, if 2005 is set as the benchmark year then Russia would have to reduce its CO2 emissions by a third from the current levels, or by a hefty 550 mtCO2/yr.

However, Russia’s forests offset the CO2 emissions as forests absorb approximately 635 mtCO2/yr. Russia accounts for 70% of the world’s boreal forests and 25% of the world's entire forest resources. Just how this offset will be used in the calculations to determine Russia emission reduction goals remains the subject of the current debate.

“Russia is the world’s fourth largest polluter, contributing as much as 1.8Gt of CO2 annually,” VTBC said in its report. “Although this is a significant, 26% reduction from the 1990 peak, it is a level that has shown resilience over the last 15 years, and is still above the self-imposed target of a 30% reduction from the 1990 peak. Russia currently emits 74% of the 1990 level and 101% of the 2005 level; the Paris Agreement specifically targets the latter.”

And while CO2 gets the most attention, the Paris Accords actually covers a family of gases that are emitted that produce a “greenhouse” effect on the plant. Collectively known as the Greenhouse Gases (GHGs) these include Methane (СН4), Nitrous oxide (N2O), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs), Sulfur hexafluoride (SF6) and Nitrous trifluoride (NF3) amongst others.

This list will hit several important Russian industries in addition to those simply burning fossil fuels to produce power. The oil and metals industries produce a lot of sulphur, whereas animal husbandry is a huge producer of methane (cows eating grass produce meat and methane) and Russia is trying to become self sufficient in beef.

According to Russian statistics, the country’s total net greenhouse gas emissions, in CO2 equivalent, were 2,009mn tonnes in 2016: gross emissions of 2,644mn tonnes were offset by a 635mn tonne intake from forests and land use. Of those, 53% came from burning fuel, 27% from the leakage and evaporation of oil and gas, 5% from agriculture and 4% each from waste and metallurgy.

 

Russia has not been sitting on its hands, but already has fairly extensive, if somewhat ad hoc, legislation to regulate environmental issues, mainly legally-binding instruments aimed at limiting GHG emissions to at most 75% of 1990 levels by the year 2020, which was enacted by presidential decree in September 2013 and another act of the government of the Russian Federation passed in April 2014. These two acts provide, inter alia, for organisation of GHG emissions forecasting at the economy-wide scale and for each individual sector. But the existing legislation needs to be fleshed out and expanded into an economy-wide body of law if it is to have any real impact on emissions.

What is remarkable is that so far Russia has enjoyed very rapid growth without a corresponding growth in GHG production. During the boom years of 2000 to 2012 the economy increased in size by 173%, but the emissions of GHGs only increased by 112%.

Russia’s forests give it a huge advantage in hitting emissions targets and Russia has to do little beyond manage its forests properly, reduce energy intensity in industry and increase the use of renewables in the energy mix to continue this record of strong economic growth with minimal increases in GHG emissions.

Who’s to blame?

Russia should be a boon to the climate thanks to its forests, but it is a problem thanks to the massive city-sized companies the Soviets set up to exploit the country's abundant natural resources.

From all the sectors utilities are single biggest emitter, accounting for just under half (47%) of all emissions, against the global average of 37%, according to VTBC. That’s partly due to Russia’s abundant supplies of natural gas, which is burnt to produce electricity.

Here too there has been progress, albeit driven by desire to reduce costs rather than fix the environment, as CO2 emissions are actually down by a third (30%) in the power sector from its 1970 levels, VTBC reports.

Another two big sources of emissions are buildings (10%) and transport (14%). Buildings are especially bad in Russia as a large part of the housing stock was built following the destruction of WWII and thanks to the cold weather these houses have centrally organised central heating where residents have no control over the heat. The first snows just fell in Moscow early and social media is currently full of Moscow residents calling on the city government to turn the heating on early too.

But here too there have been improvements as residential real estate development has boomed in recent years and the new modern buildings going up are much more efficient than the old Soviet blocks. Emissions from housing have also fallen by 56% from their 1970 levels and analysts expect this figure to continue to improve, quite apart from the Paris Accords, as the Soviet housing stock continues to be replaced.

 

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