Money for Emissions — How to Implement the Potential of the Kyoto Protocol

Vladislav Zabrodin
Managing Partner
Capital Legal Services

The Kyoto Protocol and Russia — you could say their relations were sour from the start. It took five years from when the protocol was signed until it was ratified and another four years to create a system for implementing its mechanisms. Or, to be more accurate, the procedure for implementing the Kyoto mechanisms was approved just before the protocol took effect in 2007 and 2008, but as it turned out, in practice it did not work at all. Many asked what the point was in ratifying the protocol and thus giving it legal effect if in the end its potential remained unused. It seems the Russian government last year asked the same question and when it approved a new procedure for regulating the implementation of Kyoto projects in Russia.

So what is this protocol, what mechanisms does it provide for, what are the Kyoto projects and what is so valuable about this agreement that everyone is so enthusiastic about it? Most people have heard the name “Kyoto Protocol” and most know that it is something connected with ecology, the environment and … politics. The track record in Russia in respect to ecology and environmental protection is that these are either specific restrictions established by the government, which you must follow whether you like them or not, or political and philosophical thoughts about the planet’s ozone layer being destroyed and so on, which businesses do not perceive seriously.

Marina Tonkova
Capital Legal Services

This frivolous perception is actually 100 percent obvious and predictable and is generally inherent not just in Russian business, but any other businesses elsewhere as well, since business is first of all about deriving profit and not about fighting pollution of the natural environment. It is apparently the understanding of this simple truth that led to the Kyoto Protocol being signed and its mechanisms introduced, which, among other things, allow specific companies to reduce their greenhouse gas emissions and, as a matter of principal, to derive profit from that.

And so, the Kyoto Protocol, globally speaking and in its essence, is an international agreement aimed at reducing greenhouse gas emissions. The practical aspect for businesses is that this agreement allows private enterprises to participate in the process of redistributing greenhouse gas emissions, with the end goal being to reduce them. Such an “allowance” occurs specifically through the mentioned Kyoto mechanisms, or the “flexible mechanisms” as they are often called. To be more accurate, this is done through fulfilling the so-called joint implementation projects — the Kyoto projects.

The essence of such projects is that if a company has implemented a project on upgrading its manufacturing facilities and instilling new technology, and as a result the aggregate volume of greenhouse gas emissions at this enterprise has decreased, then the volume of reduced emissions can be registered and transferred over to another enterprise. Such a transfer is not done for free, but rather the enterprise can either attract investments in exchange or sell the volume of decreased emissions practically the same way as any other product.

But what exactly is this product? Within the Kyoto projects the product is the volume of greenhouse gas emissions measured in carbon dioxide equivalent. Such goods are measured in tons, with one ton on the European climate exchange presently costing approximately 10 euros. And so, for example, having reduced emissions by 100,000 tons you could sell them for 1,000,000 euros. Any volume of emissions may be sold if its reduction took place from 2008 through 2012.

And so a logical question arises: Why do foreign companies need to enter into such projects and why do they not implement them on their own; why spend such money?

The thing is that for foreign manufactures, as a rule, implementing such projects is either impossible or extremely expensive, and it is simply cheaper for companies to buy quotas in other countries.

If everything is that simple, then why are there so many arguments over the Kyoto Protocol and why is it that projects in Russia have not been implemented to the end, to the stage where carbon units are transferred? The problem occurred in the mandatory component of each Kyoto project: in the national regulation and in the registration of the reduced emissions, and it is particularly following such registration that these volumes of reduced emissions become a product. As we have already mentioned, a system for approving projects has existed in the past but it “didn’t work” for several reasons. The new system of regulations approved last year gives hope that Russian enterprises will be able to implement Kyoto projects.

Pursuant to this new procedure, which was introduced by Decree No. 843 on the means for implementing Article 6 of the Kyoto Protocol to the United Nations Frame Convention on Climate Change, dated Oct. 28, 2009, the process for approving a project and registering units/volumes of reduced emissions, although not including the preparation stage, is to go through several stages, starting with the Sberbank selection of applications and ending with such units/volumes being introduced into circulation. As a result, Sberbank, based on an application, a report or contract of the enterprise with a third party, transfers these units/volume to the relevant carbon accounts.

To finish off, we should add that at present there is already a developed market for the sale of reduced emissions, special carbon exchanges have been created, there are brokers on the market and companies rendering legal services and providing necessary support for projects, so it is a “well-traveled path.” This clearly speaks of the fact that the Kyoto Protocol is working and there are no complex or insurmountable problems with implementing Kyoto projects.