Carbon Credits Get Cool Reception

MTHigh electricity usage is a problem, as power stations like this one in Moscow emit more in order to produce more.
NARYAN-MAR, Nenets Autonomous District -- The streets of this sleepy Arctic town, 2,200 kilometers north of Moscow, are piled knee-high with snow, and locals still wear boots made of reindeer fur to navigate its icy roads.

Yet to a people used to winters when temperatures plunge regularly below minus 40 degrees Celsius, the past two winters have been disturbingly warm.

"It's been a mild winter," said Ivan Kanev, a nomad reindeer herder sporting a full beard and wearing fur boots that reach up to his thighs, during a recent journey through the region's tundra. "Lots of rivers are drying up. For us, it makes no difference -- it'd be better if it were even warmer. But it bothers the reindeer."

Despite evidence that the country's northernmost reaches are melting, threatening people and animals as well as its unique landscape, concern over global warming has yet to hit home for many Russians.

Indeed, environmental experts say melting icecaps have prompted Russia's push to reclaim part of the Arctic with showy submarine missions that would have been all but impossible just a few years ago.

And environmental issues make the front pages mainly when huge foreign-led oil and gas projects fall afoul of the Kremlin.

"The general impression is bad," said Greenpeace spokesman Ivan Blokov, speaking of the environmental situation in the country. "[President Vladimir] Putin's government does not think about the environment."

Russia's ratification of the Kyoto Protocol in 2004 put the United Nations treaty into force, binding member states to reduce their emissions of greenhouse gases.

Yet it was only this month, after more than a year of delays, that Russia opened the door for domestic and foreign investors to start trading carbon credits, as part of the treaty's joint implementation program.

The program allows developed countries to invest in reducing emissions in other developed countries, as a cheaper alternative to fulfilling Kyoto targets at home. Russia, Ukraine and Eastern Europe are key destinations.

"It's something we've been waiting for a very long time," said Steve Eaton, director of C6 Capital, an investor that focuses on carbon-credit trading in Russia and Ukraine. "Everyone expected Russia's procedures to come through, but it has taken a long time to get them in order."

Infighting among ministries over who would control the program prompted the delay, which has jeopardized or led to the cancellation of dozens of environmentally friendly projects, insiders say.

"This market will clearly provide a lot of value to both sides. It's about acting now. Time is really running out," said Ingo Ramming, the head of emissions trading at investment bank Dresdner Kleinwort.

Russia has capped its emissions trading at 300 million tons of carbon, an amount that could be worth up to $3 billion, bankers estimate.

"The price here should be much lower" than the European price, Ramming said. Each carbon credit, an allowance equivalent to one ton of carbon dioxide emissions, currently trades for 20 to 24 euros on the European market.

"If you are committing money without approval, this should be reflected in the price. There are different shades in the carbon market -- it's like venture capital versus a Dow Jones stock," he said.

While foreign investors remain optimistic on Russia's potential as a major carbon-trading market, officials here appear less enthusiastic.

"We want to establish efficient tools to support environmental responsibility projects," said Vsevolod Gavrilov, the government's point man on the Kyoto Protocol and deputy head of the Economic Development and Trade Ministry department overseeing resource price regulation.

"We received messages and signals from the business community that we should focus mostly on facilitating the carbon market, but the carbon market is not the aim," he said in an interview in his office at the ministry, which overlooks the thronging traffic on Tverskaya.

"The carbon market is an instrument that is used for achieving environmental goals and targets," he said.

Russia's main goal, like other Kyoto signatories, is to reduce emissions to 1990 levels. As Gavrilov noted, "Russia has completely fulfilled this obligation."

Yet this is the result of post-Soviet industrial collapse, rather than any attempt to improve the environmental situation in the country. And the revival of heavy industry on the back of an oil-fueled economic boom means that greenhouse gas emissions are only set to grow.

Carbon credits, in essence, put a monetary value on emissions. Since environmental damage is a global problem, it makes no difference where reductions are made. A European or Japanese firm obliged to cut emissions, therefore, can instead invest in environmentally friendly technology in a Russian firm, thus buying credits to fulfill their own reductions targets.

"Carbon credits are one means of providing a cash flow versus others, like oil, gas or electricity," Ramming said.

On March 10 the newly formed government commission overseeing carbon-credit trading began receiving applications for joint implementation projects, which range from investing in environmentally friendly technology to investment programs that improve efficiency.

The nine-member commission comes under the auspices of the Economic Development and Trade Ministry and includes representatives from ministries as varied as the Foreign Ministry and the Regional Development Ministry.

Foreign investors said they were not concerned that the deals could fall victim to the state's increasing push for control over certain economic sectors, even though most projects will target strategic industries like energy.

"You could point to another case where the Russians have tried to renegotiate very large and important strategic projects -- the oil and gas sector jumps to mind right away," said Kevin James, a vice president at London-based Climate Change Capital. "But I do not see the government approving a [joint implementation] project, negotiating terms with a Western European government and then a year later deciding that they do not want to do it, unless there is a very significant reason," he said.

Eaton, of C6, noted that under joint implementation projects, "by definition, you have to have a foreign investor involved in the project."

Yet some are playing it safe. Dresdner Kleinwort, for example, has formed Carbon Trade Finance, a 50-50 joint venture with Gazprombank, to carry out its carbon trading.

"We believe in local knowledge, especially in the carbon market," Ramming said. "It's important to know the local flavor, the local elite."

Gavrilov said the commission would decide within 2 1/2 months of receiving an application whether to approve or reject projects.

Potential investors are hopeful, but cautious.

"Let's see how it works -- in two years we can say if it's good or bad," said one banker involved in the sector, who asked not to be identified. "We hope [a decision on applications will be made by] the end of the year, and expect [one in] no less than four to six months," the banker said.

Eaton, of C6 Capital, said the commission's projections were "very optimistic."

"The approval process in other countries typically takes much longer than that," he said.

Investors have been chastened by experience. "When we arrived here in March 2006, we were really hoping that by that summer or shortly thereafter, by the end of the year at least, everything would be in order," Eaton said.

The Kyoto joint implementation program runs for a short period -- from 2008 through 2012.

"If our projects were implemented by Jan. 1, 2008, we already would be generating credits from them. Now it's already March and ... we're realistically going to miss out on at least six if not the first 12 months of this five-year period for many of our projects, therefore reducing [their] carbon credit generation by 10 percent or 20 percent," Eaton said.

Several investors have already abandoned projects, including electricity monopoly Unified Energy System, a firm in dire need of investment to boost capacity, increase efficiency and reduce environmentally harmful practices.

"Projects in the power sector are quite long term, and the construction time can be three to four years," said Oleg Pertsovsky, an adviser to UES deputy chief executive Yakov Urinson and a member of the board of Energy Carbon Fund, a wholly owned UES subsidiary set up to trade in carbon credits.

UES expects to put up to 30 projects in place, and hopes to trade in 40 million to 50 million tons of carbon before the 2012 deadline runs out, Pertsovsky said. "Before, two or three ago, we expected 80 to 100 million, but now we are trying to be a bit more conservative," he said.

"In the next few years, according to our projections, we are going to face a significant deficit of power and our primary goal is to solve this problem," Pertsovsky said. The looming crisis has prompted UES to bring in investors to help build new power stations using combined cycle technology, which can boost efficiency by up to 20 percent.

"Demand is growing and we need to do something," he said.

Gavrilov and Pertsovsky said they expected fully liberalized gas prices, scheduled to take effect by 2011, to encourage industrial and individual customers to reduce wasteful electricity use.

The UES privatization program, due to wrap up this summer, has also created stumbling blocks.

"From the long-term perspective, we think that the new private owners will pay more attention to these issues, especially if financial incentives like high gas prices are in place," Pertsovsky said. Yet, he added, "There can be some short-term problems due to changeover in ownership."

The past two winters in Moscow have been unseasonably warm. Yet, three winters ago, when temperatures dipped below minus 20 degrees, UES experienced a severe shortage, and blackouts were common, prompting a poster campaign urging electricity conservation.

Yet public concern over climate change remains low.

"There are too many other problems," said Blokov, the Greenpeace spokesman. "People think about health, their financial situation. The environment is at the lower level of the scale of priorities."

Not for most residents of Nenets.

Vera Letkova used to live in the Far North, near the Barents Sea coast, where she worked as a meteorologist before moving to the capital a decade ago. She still often visits the Arctic region.

"Of course you can see the effects of global warming," she said. Sheet ice that normally covers the waters of the Barents Sea is quickly starting to shift and disappear, she said.

"In recent years, you can't really see this permanent sea ice. It comes and goes. If the wind blows this way, it brings the ice to the coast. If it blows the other way, it floats away," she said.

That is threatening the Barents Sea's population of harp seals, the world's second largest, said Maria Vorontsova, head of the Russia office of the International Fund for Animal Welfare. Over 8,000 harp seals died last year, she said. "They were crushed or drowned, because the ice they depend on was crushed by tankers," which have found new routes thanks to the thinning ice, she said.

Blokov, of Greenpeace, said one of the largest threats came from the disappearing permafrost, which covers large chunks of Russia.

"It will disappear quite soon," he warned, and the effects won't only be environmental. "It will have a huge economic impact."