By Anton Galenovich, executive director of the joint working group on carbon emission regulation issues from Russia’s Ministry of Economic Development and Delovaya Rossiya business association

The regulation of greenhouse gas emissions in Russia, and the introduction of market-based approaches to environmental issues in general, is still at the embryonic stage of development. Experience suggests there is a high probability of a slow-moving path: from setting up a mandatory MRV system, to imposing emission targets on sectoral basis, progressing to command-and-control enforcement of the targets in parallel with government subsidies for individual emission reduction projects.

On the part of business, the view on these solutions is limited by traditional command-and-control approaches, where companies make the assumption that GHG emissions are just another subset of pollutants for which companies would have to pay fines and fees to the state.

There is still no sign of a possible move towards emission market mechanisms either in practice or in the creation of the necessary institutional capacity and concepts. This means that for the moment the opportunity to create a state carbon emissions regulation model, based not on paternalistic command-and-control but on market principles, is yet to emerge.

The development of a technical regulation model based on best available technology (BAT) principles seems the most probable way forward.

Within the command-and-control model, BAT becomes the goal instead of the means, and rather than regulating environmental protection at the least cost, the goal is to create the best possible environmental protection with the preselected ‘best technology’. BAT also creates economic rents at the expense of economy-wide, cost-effective solutions.

Alternatively, within the context of quantified commitment-based approaches, the BAT concept could create a practical tool for assessing the strength of emission pledges and for the long-term technologically-sound budgeting of emissions.

GOVERNMENT PLANS

According to Russia’s Governmental Plan of Actions to implement the Presidential Decree “On GHG Emissions Reduction”, a concept model for carbon emissions regulation should be created by Sep. 2017, and there are three fundamentally different approaches:

1. Command-and-control regulation.
2. Tax (fixed price-based)
3. Market (quantity-based) regulation.

To ensure an efficient choice of concept model, it is necessary to establish a link between the regulation elements (MRV, sectoral targets, BAT principles or enforcement and support mechanisms, etc.) and one of the three principal approaches, and to provide for the clear and constructive positioning of stakeholders on which approach they want to support.

It would seem feasible for the supporters of market approaches to focus on opportunities derived from the development of a “quantified greenhouse gas emission limitation and reduction commitment” concept-based model. The concept is an internationally-recognised and critical element of UNFCCC/Kyoto Protocol regime and fundamental for environmentally-sound climate policy.

There is an assumption by many in Russia that rationing of CO2 emissions undermines the demand for fossil fuels, and thus the revenues of the suppliers. On the other hand, the academic study ‘Resource Rents’ by Eisenack et al. finds that the use of quantity rationing to achieve climate protection generates substantial rents for resource owners.

The long-term budgeting of annual emissions, along with addressing climate change issues, allows for viable planning of the exploration, extraction and supply of fossil fuels, adding up resource and climate rent, avoiding billions in losses from investment blunders.

New legislation due in early 2016 gives the Russian government the authority to limit carbon emissions, which affords business community leaders the opportunity to create a market. It is up to business leaders to develop market institutions, including basic contracts and instruments. The efficiency of the market in performing its basic function of reducing transaction costs depends on the success of these efforts.

If 50% of Russian emissions (of around 750 million tonnes) were covered and priced at just $10/tonne, the market’s initial traded volume would be at least 1.5 billion tonnes, worth $15 billion.

REQUIRED STEPS

Quantified greenhouse gas emission limitation and reduction commitment-based schemes, systems and programs require:

1. Establishment of emission sources to be covered
2. Limitation and reduction relative to de-facto emissions of those sources
3. Defined time period
4. MRV foundation
5. Sufficient security, ie. either enforcement of pledges or provision to ensure performance.

Comprehensive climate policy would imply that only quantified commitment-based compliance units, quotas or credits may be accepted and are fundamental for state support policies.

For a long time, producers and consumers of fossil fuel energy enjoyed unrestricted access to the resource and unrestricted exploitation of the rights to emit CO2. It is only due to the newly-discovered exhaustion of adaptive capacity of the global climate system that necessitates limiting the rights to use the remaining resources.

Under these circumstances, it would be justified to allocate emission rights to the producers, owners and operators of the sources, conditional upon their quantified commitments to limit and reduce the volume of emissions. If the owners and operators directly or implicitly refuse to accept adequate commitments, related rights eventually would be possessed by those who are willing to accept liability, or by the state.

BUSINESS MUST LEAD

These assumptions and concepts are a premise for:

• An alliance of entrepreneurs, owners and operators of carbon emission sources, other business entities and individuals, that favour the acceptance of quantified emission limitation and reduction commitments and rights to control, manage, dispose of relevant compliance units.
• The introduction of a quantified commitment-based carbon emissions control program, including a declaration-based registration and accounting of commitments and compliance units subject to independent verification.

This alliance would then target the development and introduction of a pilot carbon emissions control program in Russia, with the primary task of achieving recognition of the right to register these commitments and relevant compliance units by the government.

This recognition would allow:

• The minimisation of institutional costs of developing emissions regulation
• Clarification and development of the MRV system
• Establishment of sound sectoral targets and mechanisms to ensure these targets
• Prevention of command-and-control or carbon tax-based interference
• The possibility for market interactions with actors in similar programs outside Russia
• An improved prognosis for Russian climate action

We may propose three stages for the registration of commitments and the rights and issuance of compliance units:

1. Application/declaration of claims for the rights to emit
2. Registration of verified commitments and rights to emit
3. Issuance of quantified commitments –based compliance units.

Quantified commitments of individual business entities may affect their competitiveness in relation to those not burdened by similar limitations and costs. However, those unburdened businesses face growing risks of the introduction of command-and-control or carbon tax-based regulations and interference. Claiming for and ensuring an adequate amount of rights to emit GHGs is the most effective, proactive position for businesses.

Working towards a self-sufficient management of carbon emissions is a convincing motive to build support for quantified commitment-based market models as opposed to the paternalistic development of command-and-control or carbon tax-based models.

This comment article is a shortened, edited version of a concept paper developed by Galenovich.