Carbon units market growth prerequisites in Russia

Economic sanctions are the right method of fighting for cleanliness of the environment. At least, the majority of economically developed countries think so. Russia and the European Union continue to work with the Paris Agreement – the main UN climate doctrine, adopted in 2015. However, “carbon” fines can become extremely high for a number of industries – domestic enterprises turn out to be under attack.

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Impact of European carbon regulation

European “green” novelty – cross-border carbon regulation, or CCR – has become a nightmare for foreign importers. Companies are required to pay Brussels for exceeding the norm of emissions generated during the production of goods. The most modest forecasts of Boston Consulting Group promised our country additional losses in the amount of $10 billion to $30 billion by 2030. Russia has prepared response measures that stimulate the decarbonization of domestic enterprises, however geopolitics made adjustments to the green regulations duel.

CCR in the era of sanctions

Experts assessed the consequences of the sanctions “packages” in different ways. Radical skeptics betting on the departure of the green agenda from Russia received crushing blow – the launch of the carbon unit exchange became the main confirmation of the domestic course towards sustainable development. Other experts stressed the preservation of the ecological vector. Moreover, the reduction of economic ties with the West made it possible to turn a blind eye to the once frightening CCR and develop our own initiatives without apocalyptic deadlines. The argument for the departure of the CCR from the agenda was silence of analysts: post-sanctions adjusted forecasts did not appear during the whole year 2022.

The first to break the silence was Sber, announcing in December the data on “carbon” payments taking into account recent events. New estimate – $14.7 billion – caused no less shock than the values ​ ​ of a year ago, due to reduction of export supply margin. Second crushing blow by skeptics – it became clear that the government, which has maintained a course towards decarbonization, did everything right.

Countermeasures: Federal law 296-FZ is just right

Internal carbon regulation, or ICR, is “popular” name for set of measures taken under Federal Law No. 296-FZ “On emission limitation of greenhouse gases”. Since 2023, the largest CO2 issuers are required to conduct inventory of emissions, after which they have to send data to a single register.

The next step is to implement measures to reduce the carbon footprint. Business targets are calculated as part of special experiments conducted in a number of Russian cities. Enterprises exceeding the established standards are obliged to pay a fine.

CCR and ICR work on similar mechanisms, but each mechanic works for the benefit of its own jurisdictions. Russian enterprises receive a double economic incentive to decarbonization by investing in green projects – our country gets new jobs and infrastructure, keeping business money within national borders. In addition, the addressee of the first receipts from penalties payments is domestic budget. Only secondarily – Brussels. However, no one will want to pay twice: it is much easier to invest finances in new projects, equipment and technologies.

Carbon units register

Demand gives rise to supply, and supply gives rise to infrastructure: a consequence of ICR was the emergence of the Carbon Units Register. Carbon unit is emission reduction measure equal to one ton of CO2 equivalent, as decarbonization result. The nearest way to reduce emissions – that is, to obtain carbon units – is the implementation of climate projects. Many initiatives are suitable for this definition, but the most common are introduction of renewable generation sources, sequestration of CO2 by forest development and improvement of energy efficiency.

The company can initiate such projects independently, transferring the project documentation to the Register and confirming the results of the ready-made measures to the verifier, or maybe refer to other decisions contained in the Register under authorship of third-party organizations. It is customary to call trading system for the results of green projects, providing the business with carbon units, the carbon exchange.

Green certificates

But in the world there are also more exotic, at first glance, methods of decarbonization. One of them are green certificates. It’s an established term, indicating documents for the purchase of electricity from renewable sources. Such certificates are traded by intermediary organizations associated with objects of solar, wind or hydrogenation. Buyer can “rent” a generator for a certain period and receive carbon units for each 1 MW • h of energy. At the moment, only international certifying bodies – such as IAEC, I-REC and several lesser-known organizations – are suitable. Their registries included many Russian power plants as of 2021.

Prerequisites for the creation of Russian green certificates

Facing the sanctions policy of the West in 2022, the Russian market was abandoned by British I-REC, which includes more than 40 countries in its track record. In Russia it  was represented by the association “Goal number seven,” whose license has now been cancelled. The company’s register contained 86 Russian energy stations, among which were En +, Rosatom, RusHydro, Hevel, Enel Russia, Solar Systems and others.

The official cost of registering a generator for 5 years was 75 thousand RUB, and the price of issuing the certificate is 2 rubles per 1 MW • h. Payment was made when the certificate was opened and redeemed. According to the Interfax IG, from December 2020 to March 2022, 3.725 million certificates were issued in Russia, 73% of them have already been repaid. However, the remaining 27% can be closed through foreign representative offices of the buying company only.

The largest customers of green certificates were Transcontainer, Fosagro, IKEA, Polyus and Sber, which was preparing to conduct via blockchain I-REC green certificate transactions. Departure of foreign certification bodies can become a good base for creating a domestic certification system and authorized organizations. Decarbonization based on green certificates entered the normal practice of the largest Russian companies.

Maintaining the impact of CCR, developing the carbon unit market and increasing government efforts to implement our country’s climate commitments are direct evidences of conservation of green agenda in Russia in spite of geopolitical transformation.

By Andrey Khoroshilov, General Director and Founder of Environmental service Save the Forest, member of the Skolkovo Foundation

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