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Zokirjon Abdusattarov, LL.M.

Student, Institute for Law and Finance

The Kyoto Protocol and Russia

Introduction

The Kyoto Protocol is the international Framework Convention on the Climate Change which
aims to reduce emission of green house gases that are considered to be one of the main causes
of climate change. The Protocol was adopted on December 11, 1997 in Kyoto, Japan and
entered into force on February 16, 2005. As of November 2007, 175 countries have joined
the treaty.
The Protocol differentiates two types of members according to their level of economic
development: Annex I and Non-Annex I countries. Annex I is comprised of developed
countries which bear the obligation of reducing the emission of green house gases during
2008-2012 by certain percentage as to its level in 1990. Non-Annex I countries are developing
countries which do not have obligation to reduce the emission of green house gases but have
the obligation of monitoring and reporting of the green house gases emission within their
territory.
As the current level of green house emission vis-à-vis the level of emission in 1990 is
different from country to country, the levels of reduction of green house gases for developed
countries differ. The average targeted reduction for the entire Annex I countries is 5 %. For
EU countries it is about 8 percent on average. For Australia, however, the contrary is true, that
is, it can increase the emission by 8 percent.
If an Annex I country cannot reach the limits set by the protocol, economic penalties will
be imposed upon it, and therefore there is a strong incentive for them to meet their objectives.
They can reduce the emission of green house gases either by reducing their own gas emission
or by reducing the amount of green house gases in some other Member States by purchasing
green house gases emission reduction credits from them or implementing joint projects. The
Clean Development Mechanism (CDM) and Joint Implementation (JI) projects have been
developed for these purposes.
The CDM arranges green house gases reduction projects in Non-Annex I countries with
assistance of Annex I countries. The CDM produces trade-able Kyoto credits called Certified
Emission Reductions (CERs).
The JI implements projects between Annex I countries, including Eastern European
countries. The JI generates European Reduction Units (ERUs).
Similar to many other financial instruments, Kyoto credits are available on the financial
market and investors can trade with them, create different derivatives and enter into future
contracts. The Kyoto credit market has substantially been expanding since its creation in
2003. As of 2007, the volume of this market reached $ 60 billion1.
Russia is a key player in providing the underlying of this financial product since it
accounts for 17 % of the emission of green house gases in the world and it emitted only 68 %2
of green house gases as compared with its level in 1990. Russia can sell a large number of
quotas to Annex I countries either in the form of ‘hot air’ (out of the unused 32 % quotas) or
through implementation of green house reduction projects.
Russian observers have different opinion relating to the sale of Kyoto credits and its
impact on the fast growing Russian industry. In addition, legal regulation of implementing
green house gases reduction projects in Russia until recently remained not so much clear.

1
http://www.pointcarbon.com/
2
КИОТСКИЙ ПРОТОКОЛ: ВОЗМОЖНОСТИ ДЛЯ РОССИИ, Н. А. Пискулова, 2006. p. 32.

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Zokirjon Abdusattarov, LL.M. Student, Institute for Law and Finance

Problems and Perspectives for Russia

Both before and after the joining the Kyoto Protocol Russia was and has been skeptical
about the economic benefits arising from the treaty. However, it signed and ratified the
protocol, to all intents and purposes, because EU promised easing up the way to joining the
WTO afterwards and it hoped for gaining economic/environmental benefits through selling
quotas and implementing joint green projects.
Some Russian observers3 believe that ratification of the Protocol can bring Russia $ 10
billion in the next 10 years, half of it in the form of investment in clean environment projects
and reformation of energy sector, and the other half through trading Kyoto credits. The low
prices of the Russian Kyoto credits, which started from 3-4 euros per ton was very attractive
to foreign investors in 2005 when elsewhere they needed to spend 30 euros per ton (of course,
world market price of the Kyoto credit is very volatile: at the end of 2006, it cost only 2-3
euros, which was even lower than the prices in Russia and on March 5, 2008 EU Allowance
Unit cost 21.40 euros4). According to some evaluations, demand for the carbon quotas will be
in the neighborhood of 700-800 million green house gases from 2008 running through 2012.
And Russia has unused quotas for 1.3 billion tons of green house gases5. Russia may become
a big target for Annex I countries. Western experts in the area also assert that implementation
of the Kyoto Protocol will be profitable for the Russian economy.
Moreover, Russia will gain the opportunity of enhancement of efficient energy
consumption, reconstructing the old factories which have been inherited from the Soviet
Union. According to the observations of the International Institute for Management
Development, Russia has one of the highest energy consumption with proportion to GDP
amongst the developed countries. This is so due to worn out plants and factories6, which have
been inherited from the Soviet Union. Modernizing the Russian factories and plants for the
cost of foreign investors will be financial cushion for Russia.
However, some other observers believe that the costs for the Russian economy might be
dramatically high7. Pursuant to the calculation of some Russian experts based on the current
growth of the economy, emission of carbon gases in Russia exceeds the level that of 1990 by
the end of the first phase of the Kyoto Protocol. As a consequence, at the end of the first
phase, the financial losses will constitute tens of billions of dollars and in the following
phases, losses will rise up to hundreds of billions of dollars.
Even if carbon emission in Russia exceeds the level of 1990, it is alleged that there are
some other factors which jeopardize the financial situation of Russia. The main fear is the
possible lack of demand for Russian carbon credits. The main producers of green house gases,
the US, will not participate in this trade since it hasn’t joined the treaty. Canada also may
reconsider its plans about purchasing the Russian carbon credits. The EU countries might
invest in projects within EU or in Ukraine, abandoning Russia. The announcements of EU
member states about alleged substantial decrease in the emission in 2005 caused the prices for
the credits plummet to 2-3 euros per ton at the end of 2006. At the end of the day, Russia
cannot earn a penny on the carbon credit trading. And this is not at all the end of the story for
Russia. Since the demand for energy in EU will decrease due to the implementation of the
Kyoto Protocol and development of more efficient ways of using energy, Russia will earn less
money on its oil exports. What is more, Russia might have to cut the level of production and

3
Киотский протокол: Дым и обещания, Андрей Горьков, 2005, on
http://www.vedomosti.ru/newspaper/article.shtml?2005/09/13/96954
4
For more information see www.pointcarbon.com
5
See supra note 2.
6
See supra note 2.
7
На Киотском протоколе Россия потеряет 180 миллиардов долларов?, http://www.regnum.ru

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Zokirjon Abdusattarov, LL.M. Student, Institute for Law and Finance

export of aluminum and other relevant metals as this industry involves emission of substantial
amount of green house gases.

What’s up on the Current Russian Market?

According to the data provided by the consulting company PointCarbon, by the middle
of summer of 2007, 54 joint implementation projects were submitted to the Russian
supervisory authorities for approval. Since then discussions on dozens of projects have been
held. For instance, RAO UES of Russia, which accounts for 30 % of green house gases
emission in the Russian Federation, has completed the inventory of emissions and is
participating in on the development of renewable energy resources, namely, geothermal
energy8. On March 3, 2008 the UK-based Clean Planet Group has purchased 550,000 ERUs at
the auction held by RAO-UES9. The Finnish energy company Fortum and Dutch company on
Environment Protection have entered into agreement about joint implementation projects for
these purposes10.
The PointCarbon regularly publishes on its website about the joint implementation
projects. According to the information it provided:
- on February 20, 2008 Finnish utility Fortum announced that it has entered into a
contract about purchase of 5 million carbon credits from the Russian utility TGC-1;
- on February 1, 2008 BNP Paribas (a French bank) made an agreement with the
Russian bank Vnesheconombank to develop joint projects in Russia;
- on February 22, 2008 Marubeni Corp., a Japanese trading house, announced its
agreement with the Gazprom about purchase of several hundred thousand carbon
credits and discussion on possible joint implementation projects.

Unfortunately, the author couldn’t find information regarding the market for selling ‘hot
air’, i.e., the unused quotas of Russia. No data about purchase agreements on Russia’s alleged
30 % of unused quotas has been publicized. Instead, in Russia the emphasis is rather placed
on implementation of joint projects on the reduction of emission of green house gases.

Legal Regulation of Joint Implementation Projects and Carbon Trade

Despite the fact that a significant number of joint implementation projects have been
agreed upon between Russian companies and foreign counterparts, until recently necessary
legislation to regulate these projects didn’t exist. The first legislation act in this regard was
passed on May 28, 2007. The Regulation “On Approval and Examination of Realization of
Projects Carried out in accordance with Article 6 of the Kyoto Protocol to the UN Framework
Convention on the Climate Change”11 has set out detailed requirements as to application and
implementation of joint projects in the Russian Federation.
Pursuant to this Regulation, the Coordination Center for Preparation of Projects to
Approval (thereafter “Coordination Center”) will be set up. The Coordination Center receives

8
See supra note 2.
9
For more information see www.pointcarbon.com
10
For further information see http://www.fortum.com
11
Постановление от 28 мая 2007 г. N 332 О порядке утверждения и проверки хода реализации проектов,
осуществляемых в соответствии со статьей 6 Киотского протокола к Рамочной конвенции ООН об
изменении климата

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Zokirjon Abdusattarov, LL.M. Student, Institute for Law and Finance

complete package of applications12. Besides the information concerning the parties to the
project and the information relating the project itself, an opinion of accredited independent
expert is required. The list of accredited independent experts is supposed to be published on
the Coordination Center’s website. As of March 6, 2008 this website hasn’t been launched.
Upon checking the completeness of application documents, within ten days the
Coordination Center hands the copies of documents to the Commission on Considering
Applications on Approval of Projects carried out in accordance with Article 6 of the Kyoto
Protocol to the UN Framework Convention on Climate Change (thereafter “the
Commission”). The Commission was only formed in January 2008 after the Ministry of
Justice registered the Regulation on the Commission of the Ministry of Economic
Development and Trade of Russia.
The Commission considers the applications based on the following:
1. Expert opinion;
2. Feedback of responsible federal executive bodies on the project;
3. Information provided in the application.
The Commission rejects the application in the following cases:
1. Application was submitted with incomplete, unduly prepared or incorrect information;
2. Planned efficiency indicators are inconsistent with or lower than the minimum level of
the existing typical projects’ efficiency levels.
3. Absence of positive expert opinion.
The Commission may reject the application in the following cases:
1. Project cannot be implemented by 2012;
2. Negative feedback was received from one or several responsible federal executive
bodies;
3. The volume of planned reduction of green house gases in the project is above than
established limits for this sector of industry or agriculture by the legislation.
With the effect of the Decree13 of the Ministry of Economic Development and Trade of
Russia from December 21, 2008, the volume of targeted reduction of green house gases is 300
million tons. The Decree distributes this volume by sectors of sources in the following way:
a) The limit for reduction of emission of green house gases:
- energy sector – 205 million tons;
- industry – 25 million tons;
- using solvent and other products – 5 million tons;
- agriculture – 30 million tons;
- waste products – 15 million tons.
b) The limit for absorption of green house gases for the account of land-utilization,
improvement of land-utilization and forestry – 20 million tons.
In case there are fewer projects than expected, the above cited proportioned segmented
distribution might be reconsidered.

The above mentioned three legislative acts are the specific regulations passed so far. Apart
from that joint implementation projects and trade with quotes are subject to other legislative
acts, such as, the Civil Code, the Land Code, Tax Code and etc, which generally regulate the
matters concerned. How efficient the adopted regulations in this regard is not so much clear
yet.

12
The list of required application documents is provided in the concerned Regulation of May 28, 2007.
13
О комиссии по рассмотрению заявок об утверждении проектов, осуществляемых в соответствии со
статьей 6 Киотского протокола к рамочной конвенции ООН Об изменении климата, Приказ От 30 ноября
2007 г. N 424, Министерство экономического развития и торговли Российской Федерации