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RIA Novosti
November 5, 2004
MOSCOW, November 5 (RIA Novosti's economic news analyst Nina Kulikova)

The Kyoto Protocol aimed at reducing industrial gas emissions into the atmosphere was ratified in Russia by the State Duma, endorsed by the Federation Council and signed by the Russian Federation's president on November 5.

Below, Vsevolod Gavrilov, deputy director of the economic development and trade ministry's (MERT's) department for property and land relations and the economics of nature management, explains Russia's position on the Kyoto Protocol.

Which are the terms for Russia's ratification of the Kyoto Protocol?

The Kyoto Protocol was signed in 1997. It provides for the need to work out more technical documents. The documents were drafted with a Russian delegation's active participation (Marrakesh Accords) and we managed to stand up for the positions acceptable to us on many issues governing the compliance mechanisms and commitments. This work was carried out from 2000 to 2003. No changes are to be made in the documents during the ratification of the Kyoto Protocol.

What does the Kyoto Protocol mean for the Russian economy?

Answer: Usually, this question implies one thing: whether it will do good or harm to the Russian economy. In my opinion, it will do no harm. It depends on us whether it will benefit Russia or not. The mandate of the Kyoto Protocol's ratification extends to the period until 2012. By all kinds of forecasts, till the end of that period, no harm will be done to the Russian economy in the form of limitations to economic growth. At the same time, there are some other commitments on the Kyoto Protocol and Russia has to meet them. With regard to Article 2, we must implement a national policy of measures aimed at reducing greenhouse gas emission in Russia. On Article 5, we must create a system of assessing greenhouse gas emissions and absorption. As regards Article 7, we must compile a cadastre of industrial enterprises. Surely, this will cost money, but the formation of these institutions and this potential will be useful for Russia.

Question: Will Russia become a party to the Kyoto Protocol after 2012?

Answer: So far, it has not yet been decided and it cannot be decided since there is no formula for determining commitments for the period after 2012. This will be a matter to be discussed at international negotiations. It depends on whether we shall manage to protect our interests or not. Then we shall think if it is worth while to join the next period.

Question: What is to be done to go over from a "no harm" to a "benefit" stage?

Answer: It depends on how we shall build out national policy and international negotiating processes. It also depends on whether the state will be able to maximise the potential advantages of Russia's accession to the Kyoto Protocol for promoting Russian economic interests. The main thing is to form our internal policy and make the Kyoto Protocol's mechanisms a natural continuation of the country's internal policy.

What is to be done to achieve this?

"Industrial countries that have committed themselves to the Kyoto Protocol have introduced restrictions on greenhouse gas emission. They have restricted the emission limits for their enterprises and are imposing heavy fines for non-compliance. Under the European Union regulations, till 2008 any enterprise will pay 40 Euros for each (metric) ton of carbon dioxide emitted beyond the individual quota. When you burn down about half a ton of coal, you produce one ton of carbon dioxide. In 2008-2010, the fine for non-compliance will rise to 100 Euros per ton. However, we cannot impose such fines in Russia."

"What are you proposing to do in this country?"

"We are proposing to make it in two stages: at the first stage, we will support those industry operators who will restrict their greenhouse gas emission limits on their own accord. We are considering, for example, an option of granting such businesses access to tenders for quotas that will enable them to develop projects eventually diminishing their greenhouse gas emission. To make these tenders as transparent as possible, we are going to qualify the applicants by a single quantitative criterion and make the tenders online and real-time. We do not plan to impose fines for abstention from the program.

"When the first option is fully exhausted - which will happen no one knows when, maybe in several years, maybe in many years - a decision will be made whether it is viable to make the obligations binding and compulsory. Having repeatedly discussed the issue with the entrepreneurial community, we can say that businesses' response has been ambivalent because the challenge is strong. What we will do some day is arrange Russian national procedures similar to those of the Kyoto Protocol - something the EU member states have already ventured to do, - but we will postpone decisions on such issues as obligations and liabilities. If we are successful enough in our foreign policies, we would be able to sell our quotas [abroad] at a good price to turn a "no-harm" agenda into a profit.

"You have mentioned that businesses' response to proposals on voluntary commitment to emission restrictions has been ambivalent. Energy operators have endorsed the move, while steelworks stood up to it, I guess?"

"It was not so well defined as you say. All businesses to my knowledge will endorse participation in Kyoto Protocol procedures, and so do the steelworks, if the state takes on a consistent policy. While the EU thinks that one can regulate businesses individually, imposing strict regulations, we have said and will further argue that for us such a move is not on the table so far. We will consider and discuss the necessity of emission restrictions and, accordingly, liabilities for non-compliance, only in close contact with businesses, without any state unilateralism. It is in this manner that we would like to launch a civilized national ecological policy. We are contacting with business people on a day-to-day basis, and, as far as I know, none of them has revealed any fierce opposition. Everyone is aware that this policy, if organized properly, is a friend, rather than a foe."

"Is this really the basic reason for such loyalty? Maybe many enterprises just have emission much lower than in 1990, which they are not likely to restore until 2012?"

"Russia is considering a reform of industrial infrastructure. On the whole, a more liberal energy market will be the primary factor of energy saving. In modern times, neglecting fuel saving is something not everyone can afford. This is right because fuel is a resource that should be spent wisely. Therefore, it would be incorrect to say that an enterprise that endorses the program today because its emission is lower than in 1990 will necessarily stand up to it if its emission will exceed the 1990 level in 2012. An enterprise pursuing a deliberate emission reduction policy, including new know-how and reduction of energy losses, can well be eligible for membership in all programs, irrespective of whether its actual emission is higher or lower than in 1990."

"What are the prospects of selling Russia's greenhouse gas emission quotas abroad?"

"We are developing relevant documents, so I cannot say what the exact procedure is going to be but I can outline how it is going to work. Basically, the Russian system of selling quotas for emission of industrial gas under the Kyoto Protocol has to be as transparent as possible, while the current quota trading market is largely speculative and its future is uncertain. There is a package of technological documents - the so-called "Marrakesh Agreements" - that are to come into force after the Kyoto Protocol is ratified. These Agreements stipulate how a normal liquid market is to be developed, and how the commodity to be bought and sold on this market is to be defined. The capacity of the market will depend on the behavior of the operators. Currently all countries seek to create it as a market of quotas secured by real reduction of greenhouse gas emission, rather than just a quota trading pad. Our stance is to pool our efforts with other countries to see to it that quotas sold in this market result in real reduction of greenhouse gas emission."

"Who will operate on the market?"

"The arrangement of the quota market is still underway. The market should include institutional investors who have invested in businesses related to energy saving, and specific enterprises where such projects are to be developed. The quota market should become affiliated with the current investment market. A combination of a traditional money market and a new carbon market might give a cumulative impact because the quota market will in effect sponsor energy-efficient and energy-saving projects, and stimulate the traditional investment market to engage in such projects."

"Where will the money for sold quotas go?"

"All this money should be transferred back to businesses - absolutely transparently if possible, via clear-cut procedures. At the same time, managing the money belonging to the Russian Federation, one should remember that all obligations are secured by the assets of the sovereign, which is the Russian federal budget. Accordingly, membership in quota trading programs will require guarantees to the Russian state that the projects would be implemented on specific terms. If we don't take security from the businesses, then the federal budget, that is, all taxpayers will be left liable for their compliance."

"Who will be in charge with inspecting businesses for compliance with these obligations?"

"All obligations are rather easy and simple to administer. Compliance with emission reduction regulations is easy to verify through fuel consumption records. To administer fuel consumption is piece of cake for environmental inspections, taxation authorities, and statistical bodies. The administration procedure is being developed by our counterparts in the Russian Natural Resources Ministry; they are supposed to come up with a suitable combination involving all the three competent authorities. We have a tall order to create a market with diminished risk of corruption and as little government leverage in distributing quotas and preferences as possible. A market is healthy only when officials have minimal leverage in it, while to make a transparent and effective market is what we are supposed to do."