July 21, 2021

Europe

RUSSIA: Taking first steps towards carbon accounting and regulation

BY Andrius Tursa

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( 4 mins)
  • While a new greenhouse gas emissions law marks a first step towards creating a national emissions accounting and regulating framework, nascent climate policies leave a lot of uncertainty for businesses.
  • Russia’s heavy industry companies – which have most at stake under the new climate laws – are launching their own decarbonization strategies.
  • The EU’s recently proposed carbon border adjustment mechanism could result in substantial costs for Russian exporters.

In early July, Russian President Vladimir Putin signed into law a bill on limiting greenhouse gas (GHG) emissions. The legislation contains provisions regarding measuring, reporting, and limiting GHG emissions in Russia – the world’s fourth-largest carbon polluter. The new bill also obliges private enterprises with GHG emissions of at least 150,000 tons per annum (tpa) to start reporting their annual emissions from January 2023. Companies with emissions reaching 50,000tpa will have the same obligation starting January 2025.

The new legislation is one of the few nascent steps undertaken by the Russian authorities towards carbon accounting and regulation in recent years. Along with the state development corporation VEB, the government is also developing national taxonomy and verification criteria for sustainable financing. Moreover, the country’s eastern Sakhalin region – which aims to achieve net- zero-emission status by 2025 – is set to launch the country’s first emissions trading scheme by July 2022. Other regions, such as Kaliningrad, are looking into pilot decarbonization programs as well.

By the end of this year, the government is expected to adopt a final version of its emissions reduction strategy by 2050. However, the draft version of the document presented by the Ministry of Economic Development in 2020 lacked ambition. Its baseline scenario targeted a 36% reduction in GHG emissions until 2050 (compared to 1990 levels), which Russia can achieve with little additional action. One reason for this is that emissions are benchmarked against the 1990 levels, which were substantially higher before the dissolution of the Soviet Union; in addition, Russia’s own national accounts make generous allowances for emissions absorption by forests.

On the corporate side, many of the companies that will be required to report emissions under the terms of the new law have begun launching their own decarbonization strategies. For example, as part of its plans to fully electrify the rail network (run on green energy), the state-owned Russian Railways issued its first-ever green bond in 2019; major mining entities Alrosa (diamonds) and Polyus (gold) have committed to powering their mining operations with directly-sourced hydropower. This has also been a favored strategy in the oil and gas sector, with the massive Rosneft-led Vostok Oil already committing to mitigating its environmental footprint by investing in wind energy to source local power needs. Moreover, many of the planned growth projects in Russia’s oil sector feature extremely light condensates that can be processed into chemicals and classified as carbon neutral.

Inevitably, Russia’s heavy industry companies will have most at stake under the new climate laws. For example, the EU’s recently unveiled carbon border adjustment mechanism (CBAM) could cost Russian exporters (primarily of metals, cement, and fertilizer) around USD 7.6bn per annum, according to government estimates. At the same time, CBAM foresees a possibility for importers to reduce their import levies by the amount of carbon payments made at home. This could encourage the development of carbon regulation in Russia.

For now, the nascent emissions and ESG policies leave a lot of uncertainty for investors. For example, it remains unclear how the government will react to companies opting to spin off their emitting assets into new entities to comply with GHG reduction targets. The divestment by Rusal from its high carbon aluminum smelters and rebranding as AL+ requires regulatory approval and a full accounting of creditor risk. Similarly, many high-profile ESG investments into the oil and gas sector by foreign companies may be discounted depending on the carbon accounting framework. BP’s partnership with Rosneft depends on the approval of negative carbon accounting via investments into afforestation in Russia. But there are discrepancies between Russia’s own GHG accounting system and international standards. Finally, it cannot be ruled out that the Russian government will pursue tighter climate-related regulation in projects/companies with significant foreign participation, particularly in the oil sector.

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