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. Last Updated: 07/27/2016

Bureaucracy Puts Kyoto Cash Out of Reach

The Arkhangelsk paper mill, one of the biggest in the country, raised about 1.5 million euros ($2.1 million) over six years by voluntarily cutting its carbon dioxide emissions.

Then Russia signed up to the Kyoto Protocol to reduce greenhouse gas emissions. The rules changed, and the paper mill hasn't been rewarded with even a euro for its efforts to reduce pollution since 2007.

The company is one of 38 that are waiting for the government to approve projects that would reduce carbon dioxide emissions by about 1 million tons a year and raise some 1.5 billion euros ($2.1 billion) on the international carbon market.

"We are ready to sell more, but everything has been put on hold," said Milena Alada, a spokeswoman for the Arkhangelsk paper mill. "The money would be extremely useful to refinance our debt during the crisis."

Under the Kyoto Protocol, a Russian company that cuts its greenhouse gas emissions by improving efficiency can sell emission reduction units -- one unit equals one ton of carbon dioxide -- to buyers in other countries.

The Arkhangelsk mill, which has installed efficient equipment to produce heat from the combustion of its biomass waste, earned 1.5 million euros from 2001 to 2007 by selling emission reduction units on the carbon market outside of the Kyoto procedure. The mill estimates that it could earn an additional 12 million euros from 2008 to 2012, when the Kyoto Protocol ends.

One ton of carbon dioxide is currently worth about 15 euros, according to Pointcarbon.com, a carbon market monitoring web site.

The technical parameters for Russia's participation are in place, but the program appears to be stuck in the pipeline of the Economic Development Ministry, the government body designated with overseeing implementation. The planned buyer of the Arkhangelsk mill's reductions backed out this spring after waiting for more than a year.

Market players said the Russian market, which has a potential of about $100 billion per year, will be dead on arrival if the government waits another six months. Out of the 30-odd companies that sprang up to work on the local carbon market in 2008, only few are left, and there is a risk that they may leave Russia if there is further delay with the approval process, said Yevgeny Sokolov, director of CTF Consulting, the Moscow-based consulting arm of Carbon Trade and Finance.

Not one of the companies on the market has yet received any carbon credits from their Russian partners. One of those partners is the state-control oil giant Rosneft, which is also waiting for the government to approve its projects in order to sell credits.

Rosneft, which signed a contract with CTF earlier this year, is investing 5 billion rubles ($162 million) into a project to capture associated gas at its Kharampurskoye and Khasyreiskoye oil fields.

Selling credits for an estimated 6.8 million tons of carbon dioxide would offset some of the costs and make the project more financially attractive, Sokolov said.

A similar gas capturing project with the World Bank on the Komsomolskoye field would allow Rosneft to register 6.65 million tons of emission reductions, generating about $83.5 million, which would cover almost half of the investment costs, according a description of the project on the World Bank's web site.

Despite its inability to sell the credits, Rosneft is still going ahead with the projects, spokesman Nikolai Mangelov said.

Although some efficiency projects may be finished without official approval to sell carbon credits, the government's silence is sending the wrong message to business, Sokolov said.

"Approving a first set of projects would send a good signal, and other companies would start developing their own," he said, adding that many market participants were keeping a close eye on the issue.

"When they see that even Rosneft cannot get approval, many don't even bother," Sokolov said. "Starting up the process would send money into the real economy right away."

Economic Development Ministry spokeswoman Svetlana Suleimanova declined to comment on the matter. The section on the ministry's web site dedicated to Kyoto implementation has not been updated since August 2008, when the head of the ministry's energy efficiency department, Oleg Pluzhnikov, told RIA-Novosti that the first set of projects would be approved in October.

The commission responsible for reviewing and approving the projects, headed by Deputy Minister Stanislav Voskresensky, has met only once since last August, in November, according to the web site.

The 38 projects waiting for the commission's approval offer a combined reduction of 100 million tons of carbon dioxide in oil, mining, metals, housing and other sectors where Russia lags behind the developed world in energy efficiency standards.

"It's a strange position to bar Russian business from a market and to block projects that fit all of the criteria for strategic development," said Mikhail Yulkin, head of Environmental Investment Center and a longtime specialist on the issue.

What surprises carbon market participants the most is that Russia eagerly took all the steps needed to join the Kyoto Protocol, including a presidential decree in the spring of 2007 that set the stage for the now-stalled program and the creation of the relevant state agencies to work with Kyoto in Russia.

Stopping when industries are of actually on the verge of receiving cash from foreign investors makes little sense, Yulkin said.

"This behavior sends a bad signal to the international community," he said. "We look like an unreliable partner that is not playing the role that it promised to play."