RUSSIA LAUNCHES KYOTO PROTOCOL JOINT IMPLEMENTATION PROGRAM

UNCLAS SECTION 01 OF 03 MOSCOW 000767 SIPDIS STATE FOR OES/EGC, EUR/RUS CEQ FOR CONNAUGHTON Sensitive, SIPDIS E.O. 12958: N/A TAGS: SENV ENRG KGHG RS SUBJECT: RUSSIA LAUNCHES KYOTO PROTOCOL JOINT IMPLEMENTATION PROGRAM Sensitive but unclassified, not for internet distribution. -------------- Summary -------------- 1.(SBU) On March 10, Russia's Ministry of Economic Development and Trade (MEDT) began accepting approval applications from companies wishing to undertake joint implementation (JI) projects under the Kyoto Protocol. The move was the result of several years of work by MEDT to put the required legal and administrative framework into place. European companies in need of Russia's excess carbon credits have been eagerly awaiting this step, which came eighteen months later than originally planned. There are already 60 projects under development, most in the energy sector. Since it ratified the Kyoto Protocol in 2004, Russia's cash windfall from rising oil prices has reduced its interest in pursuing revenue through Kyoto's flexibility mechanisms. It has maintained an interest in JI, however, due to its potential for technology transfer in the areas of energy efficiency and cleaner production. End Summary. -------------- Background -------------- 2.(U) Russia is currently the world's third largest emitter of greenhouse gases (GHGs) after the U.S. and China. It ratified the Kyoto Protocol on November 4, 2004, and has been assigned an annual cap on GHG emissions for 2008 - 2012 of 16.1 billion tons of CO2 equivalent. Despite Russia's booming economy and reliance on extractive industries, the near-collapse of its economy in the 1990s has left it with lower emissions today than the 1990 Kyoto baseline. According to its Fourth National Report to the United Nations Framework Convention on Climate Change (UNFCCC),Russia is currently emitting about two-thirds of its 1990 levels. Russia joined Kyoto as a "country in transition" under Annex I, allowing it to serve as a "host" of Joint implementation (JI) projects. Kyoto countries that expect to exceed their GHG caps can earn extra emission credits through projects that reduce emissions in Russia. -------------- GOR PREFERS JI -------------- ¶3. (SBU) Russia has chosen to focus on JI over the other two Kyoto flexibility mechanisms - Clean Development Mechanism (CDM) and International Emissions Trading (IET). Russia is considered the Annex I country with the largest potential for JI projects, and has often publicly cited JI as one of the benefits of joining Kyoto. Russia sees JI as an opportunity for technology transfer in the areas of energy efficiency and cleaner production. The GOR has long acknowledged that its energy sector, still heavily reliant on Soviet-era infrastructure, is outdated and hugely inefficient. The GOR has been less enthusiastic about IET, which it sees primarily as a cash transfer. Flush with oil and gas profits, the GOR prefers to preserve most of its carbon credits for later bargaining or use. The Ministry of Economic Development and Trade (MEDT) told us that although they would like to develop a CDM, it is more complicated legally, and would require significant amendment of current Russian law. -------------- System in Place -------------- ¶4. (SBU) The GOR, with MEDT in the lead, has been working the past several years to put the necessary legal and administrative elements for the JI program into place. Key steps have included establishment of an interagency commission charged with overseeing JI implementation, creation of a National Registry of Carbon Units, elaboration of a National GHG Inventory System, adopting a national procedure for the approval of JI projects, and passage on May 28, 2007, of Government Decree 322. ¶5. (SBU) Government Decree 322 was the key piece of legislation MOSCOW 00000767 002 OF 003 needed to establish Russia's JI program. It officially named MEDT the "national focal point" responsible for JI investment projects. As such, the Ministry was given authority to receive JI proposals, post them on a web-site for public comment, include them in a national registry system, clear them through other relevant GOR Ministries and Agencies, submit monitoring and implementation reports for GOR approval and organize and chair the Interagency Commission. ¶6. (SBU) MEDT completed the final legal hurdles to implement Russia's JI program in late January, 2008, and began accepting JI applications on March 10. The date was nearly eighteen months later than originally envisioned. However, World Wildlife Federation (WWF) Russia's climate expert, Aleksey Kokorin, told us that the delays were "not a failure, but a result of good, strict provisions being put into place." WWF is supportive of the GOR's JI program, and played an advisory role in its development. ¶7. (SBU) According to MEDT's Oleg Pluzhnikov, the GOR has made 300 million tons of GHG equivalent available for JI projects through 2012, which represents about ten percent of Russia's total anticipated excess of three billion tons. MEDT has indicated that this level could increase if demand warrants. The price per ton is expected to be six to eight euros (significantly below prices in the EU). Pluzhnikov predicted that proposals, once submitted to MEDT, will take 10 - 12 weeks to process. Sixty projects are already under development, and those are expected to make up most of the first group of applications. ¶8. (SBU) The GOR has allotted two-thirds of the JI quota to the energy sector. The remaining 100 tons are allocated to the agriculture, manufacturing, forestry, waste disposal/ processing and chemicals industries. Unified Energy Systems, which owns 93% of Russia's electricity grid, is expected to be the largest Russian partner for JI projects. It is reported to already have 40 projects under development, delivering 35 million tons of emissions reductions, mostly through switching away from the use of coal. Industry giants Gazprom, Severstal (steel) and RUSAL (aluminum) have also announced plans to participate. -------------- Some Investors Wary -------------- ¶9. (SBU) In a March 13 press conference to announce MEDT's acceptance of JI proposals, MEDT's Vsevolod Gavrilov warned that MEDT would be very strict in its review of projects. "Unfortunately, not all investors are taking this opportunity the right way, seeing it as a way to get a freebie without doing any work. We want to avoid these speculative projects." Off-putting statements such as this, combined with uncertainties in interpretation of the new regulations, have dampened enthusiasm for JI projects among some potential investors. ¶10. (SBU) As an example, British Petroleum's (BP's) chief environment lawyer in Moscow explained that BP has not seriously considered JI projects for two reasons. First, MEDT has not clarified how it would credit projects that reduce gas flaring, a significant contributor to Russia's emissions. Second, the construction of facilities to capture and transport flared gas is slow and expensive. Because only reductions achieved through 2012 can be counted, and a post-2012 regime has not been agreed, at this point there would be insufficient time to achieve enough reductions to justify the cost. ¶11. (SBU) Given concerns about the timeframe and treatment of large-scale projects, observers predict that most JI proposals will be smaller-scale, focused on replacing inefficient power generators and staunching energy loss in the transmission of communal heat and electricity. -------------- Comment -------------- ¶12. (SBU) The GOR's ambivalent approach to JI reflects its attitude to Kyoto membership overall. The GOR's Kyoto policy is not driven MOSCOW 00000767 003 OF 003 by concern about global warming. Russia joined Kyoto to close its bilateral WTO deal with the EU and for the revenue potential of its excess GHG quotas. Russia's oil and gas windfall has significantly diminished its interest in the relatively small sums to be gained through flexibility mechanisms. Meanwhile, some Kyoto members are relying on Russia's credits to meet their own targets. Germany, Denmark, Belgium, Sweden and Japan are all looking to earn credits from Russia, and have been actively pushing the GOR to get the mechanisms up and running. Despite EU and member state pressure on the GOR to follow Europe's lead on climate policy, Russia is likely to continue to make decisions based primarily on its economic interests. BURNS