The Dead Souls: Anna Korppoo, Thomas Spencer BRIEFING PAPER 39, 4 September 2009

Transcription

1 Th Dad Souls: 39 How to Dal with th Russian Surplus? Anna Korppoo, Thomas Spncr BRIEFING PAPER 39, 4 Sptmbr 2009

2 Th Dad Souls: How to Dal with th Russian Surplus? Anna Korppoo Snior Rsarchr Th Finnish Institut of Intrnational Affairs Brifing Papr 39 4 Sptmbr 2009 Thomas Spncr Advisor on Russia s climat policy Grmanwatch Th 10-15% rduction targt by 2020 announcd by Russia rflcts nithr th country s fficincy potntial, nor modld missions trnds. With mission rduction masurs, Russia could commit to a targt of ca. -30% by Transfrring th surplus mission allowancs Russia gaind undr th Kyoto Protocol du to th conomic rstructuring of th 1990s rprsnts an xtrm thrat to both th nvironmntal and markt intgrity of th Copnhagn agrmnt as it could b usd to offst ral domstic mission rduction masurs in othr countris. But it sms politically unlikly that Russia would join without transfrring th surplus undr th Copnhagn agrmnt. Countris should rcogniz th thrat posd by th surplus, and offr a cooprativ stratgy to dal with it. Howvr, pushing through a cancl or discount approach to th surplus problm by thr-quartr majority, which could b brought togthr without th co-opration of th surplus-holding countris, should b kpt as a rsrv stratgy. Mor ambitious targts byond th 25-40% suggstd by th IPCC - for th Annx I industrializd country group, spcially for th surplus holding countris including Russia, could absorb th transfrrd surplus. Howvr, givn th currnt low pldgs of Annx 1 countris, highr targts ar unlikly to absorb th whol surplus, and thrfor, a baskt of approachs should b applid. To gain crdibility on this issu of vis-à-vis Russia and to avoid Russia stting th ton, bfor Copnhagn th EU must adopt an intrnal solution to dal with th surplus of its nw mmbr stats. If xpcting to transfr th surpluss, th othr surplus holding countris including Russia could announc national surplus us plans prior to th Copnhagn climat talks. In ordr to minimiz a scnario of Russia blocking th Copnhagn procss in th final hours, ky countris should publically ngag Russia on climat and th Copnhagn talks. Important Annx I countris, spcially th US, should snd vry high-lvl rprsntativs to Moscow lik thy hav snt to China and India. Th Finnish Institut of Intrnational Affairs Intrnational Politics of Natural Rsourcs and th Environmnt Programm

3 1, Lvl Mt CO2 1,100 1, Innovation Innovation and Cap and Trad Inrtia Scnario Inrtia Scnario and Cap and Trad Economic Crisis Scnario Economic Crisis Scnario and Cap and Trad Figur 1: Effct of Th Crisis on Russian Emissions Projctions in th Enrgy Sctor Sourc: Prsntation by Gorg Safonov, Moscow High School of Economics, Sid Evnt at th UNFCCC Talks, Bonn, Jun Russia is th world s third largst mittr of grnhous gass, and an important xportr of fossil fuls. Howvr, in th intrnational climat ngotiations, th dialogu of th US with both China and India is sn as th ky to succss. Evn though this has sidlind Russia in comparison to its dcisiv position in bringing th Kyoto Protocol into forc, it will b difficult to com to an agrmnt in th Copnhagn climat talks without Russia. Th absnc of maningful participation by Russia could wakn th ambition of othr dvlopd countris, and possibly lad to mrging conomis rfusal to commit. Undr th Kyoto Protocol Russia and svral othr countris rcivd larg surpluss of missions allowancs, du to th collaps of thir missions following conomic rstructuring in th 1990s. Th highly politicizd issu of whthr ths surplus allowancs will b transfrrd to th subsqunt commitmnt priod is likly to b on of th crunch issus in Copnhagn. This papr outlins options how th surplus could b dalt with. During a TV intrviw in Jun 2009, Prsidnt Dmitry Mdvdv announcd that th Russian Fdration could limit its grnhous gas missions growth to -10 to -15% by 2020, compard to 1990 lvls. At th most rcnt UN climat ngotiations in Bonn in August 2009, th Russian dlgation confirmd this as Russia s mid-trm targt, which was havily criticizd, spcially by dvloping countris. At th G8 Summit in L Aquila, Russia signd on to an 80% missions cut for dvlopd countris by Howvr, shortly thraftr Russian Shrpa Dvorkovich calld this targt unaccptabl and likly unattainabl ; two days latr Prsidnt Mdvdv clarifid Russia s position by saying w ar rady to mak our contribution - at last 50% by 2050 in comparison with Economic Modling of Russia s Emissions Th Moscow Highr School of Economics runs a TIMES partial quilibrium modl, and uss th official conomic forcasts. Modling of th conomic ffct of th crisis suggsts a significant fall in missions du to th currnt conomic downturn (s Figur 1), forcasting that Russia s missions could b -30% compard to th 1990 lvl by Th Moscow Cntr for Enrgy Efficincy s ENERGYBAL-GEM-2050 modl outlins four scnarios for missions growth, thr ranging from highly unlikly, lss likly, and most likly, and on including a low-carbon Russia scnario with additional low-carbon policis and masurs. According to this scnario, Russia could rduc its missions to around 25% of 1990 lvls by 2020 (Moscow Cntr for Enrgy Efficincy, Low Carbon Russia). This modl dos not includ th ffcts of th conomic crisis. Th finnish institut of intrnational affairs 3

4 Economic Crisis and Surplus Th dramatic post-1990 rstructuring of th Russian conomy cam with conomic, social and political hardship and uphaval, which contributs to Russia s sns of ntitlmnt to conomic growth and rcovry; it also ld to a collaps in Russia s missions. In 2007, Russian grnhous gas missions wr 34% blow its missions in th Kyoto basyar, Th surplus missions allowancs, which wr allocatd undr th Kyoto Protocol to cap industrializd country missions, can ithr b sold on th intrnational carbon markt or potntially transfrrd to th nxt commitmnt priod of a post-2012 climat agrmnt. Clarly, for Russia th tratmnt of surplus missions allowancs (AAUs) is of crucial importanc in th climat talks. At th UN talks in Bonn in Jun 2009, Russia s had of dlgation statd that th fall of missions, to a significant xtnt compnsatd for th growth of grnhous gass of othr countris. Russia viws its AAUs surplus as a rightful and stratgic asst. Hnc, it sms unlikly that Russia would agr to a dal in Copnhagn, which compltly divstd it of its AAUs. Howvr, in th vnt that surplus AAUs ar usd to offst highr missions in othr Annx 1 countris, any historical nvironmntal bnfit from th missions collaps would b nullifid. Russia s 2020 missions targt unralistically implis an acclratd growth in annual missions from approximatly 1% btwn 1999 and 2007 to 2-2.5% btwn now and Th global conomic downturn, which took hold during th scond half of 2008, has continud to dcras Russian conomic activity in In a prliminary stimat by th Institut of Economy in Transition, GDP has falln by 10.2% ovr January-May Russian industrial production fll 17.6% in January-Jun 2009, in comparison to th corrsponding priod in This indicats that Russian missions hav most likly dclind sinc 2008, furthr xacrbating th siz of th surplus. Although vrifid data is not yt availabl, Russian xprts stimatd that Russian missions may hav falln to ca. -40% or mor, compard to 1990 lvls. Loos targts undr th Copnhagn climat agrmnt could thus prptuat th surplus problm. Whras in 2008, stimats of Russia s surplus of AAUs for th priod wr at th rang of 3,3-4 Gt 2, updatd 2009 figurs suggst a surplus of GtCO2. 3 This may vn b a consrvativ stimat, and crtainly furthr implis th xtnt of th fall in Russian missions. 1 Russian Economy: Trnds and Transitions, Institut of th Economy in Transition, Jun Laing, Tim; Junankar, Sudhir, Pollitt, Hctor and Grubb, Michal, Global Carbon Mchanisms Annx II: Emissions and dmand projctions to Climat Stratgis, March World Bank 2009, Quotd in Mark Larzarowicz, Global Carbon Trading: A framwork for rducing missions, Unitd Kingdom Dpartmnt of Climat Chang, Jun 2009, pp Total: 9 12 GtCO Potntial xcss supply Surplus AAUs: 7 10 GtCO 2 Surplus AAU uncrtainty Total: 1.6 GtCO 2 Othr: 0.04 GtCO Japan: 0.4 GtCO 2 2 EU: 1.2 GtCO 2 Dmand Potntial GIS 1GtCO 2 CDM/JI: 1.7 GtCO 2 Supply Figur 2: Potntial Siz of th AAU Surplus in Rlation to Dmand, for th Priod Sourc: World Bank (2009) and Point Carbon (2009) Th finnish institut of intrnational affairs 4

5 Tabl 1: Pros and Cons of Individual Stratgis to Dal with th Surplus Stratgy Advantag Disadvantag Allow transfr, but do nothing to addrss concrns Amnd Articl13.3 of th Kyoto Protocol to forbid th transfr Allow th transfr, but rquir highr Annx 1 targts, and proportionally highr targts for surplus countris Rstrict surplus for us for domstic complianc Stor and Sav - Allow transfr, but us only for domstic complianc byond 2020 Linking surplus sals in mission rduction projcts indpndntly or through an xtrnal oprator (Grn Invstmnt Schm) Montiz surplus to fulfill financing obligations of surplus holding countris Buy and cancl surplus Discount transfr Minimizs risk of Russian inducd political collaps in Copnhagn around this issu Strngthns nvironmntal and markt intgrity; Can b achivd with a thrquartr majority undr Articl 20 of th Kyoto Protocol, hnc lgally and politically possibl Strngthns nvironmntal and markt intgrity Potntially surplus would not ntr th markt Addrsss concrns in th short trm by putting surplus away; Givs surplus countris a long-trm buffr; Givs opportunity for strictr targts in th futur to absorb th surplus bit by bit Extrnal oprator addrsss transparncy problms grning has xprincd; Partly addrsss nvironmntal concrns Partly addrsss nvironmntal concrns if th grning ratio of rinvstmnts xcds 1:1; Dos not gnrat xtra AAUs undr th cap; Addrsss transparncy problms grning has xprincd Partly addrsss nvironmntal and markt concrns Dpnding on th discount rat, partly addrsss nvironmntal and markt concrns; Can b dcidd with thrquartrs majority of COP-MOP Potntially unaccptabl to dvloping countris, hnc collaps of Copnhagn dal; Potntial to collaps th carbon markt; Larg risks to nvironmntal intgrity Likly to b politically unaccptabl for Russia, and othr surplus countris, hnc lading to Russian non-participation Politically difficult givn currnt pldgs, spcially as a stand-alon option Dos not addrss nvironmntal concrns; In th cas of wak targts, vn largr surplus in th futur; Potntial that surplus could b laundrd through frsh AAUs Mrly puts off th problm of nvironmntal intgrity; Limits sovrign ownrship ovr th surplus Larg quantitis of grnd AAUs can ovrwhlm markt; Gnrats nw AAUs undr th cap Politically, using th procds of its own conomic collaps to financ dvloping countris may b impossibl for Russia to accpt; Could only addrss a small volum; Potntial markt risk Difficult for buyrs to accpt; Could probably only addrss a small volum Mayb politically unaccptabl for Russia, and othr surplus countris Th surplus is a significant potntial thrat to th nvironmntal intgrity of th post-2012 climat rgim. Worldwid, th World Bank stimats that th surplus of AAUs, mainly from Russia, Ukrain and th nw EU mmbr stats, could b as larg as 7-10 GtCO 2 for th priod If transfrrd, million AAUs would b availabl to rplac domstic mission rduction masurs in industrializd countris ach yar up to In total, this rprsnts ca. 4-6% of total Annx 1 missions in th bas yar, i.. ca. a sixth of a 30% Annx 1 targt or a third of th xisting 10 16% rductions pldgd by Annx 1 countris. 5 A 4-6% wakning of Annx 1 rduction targts for th priod would thratn th nvironmntal intgrity of th climat rgim. Morovr, th prsnc of such a surplus poss significant risks to th intgrity of th carbon markt. Finally, th surplus issu is 4 Basd on calculations of th EC, assuming that th surplus AAUs undr th Kyoto Protocol ar consumd for complianc purposs at a constant rat ovr th priod Jori Roglj, Halfway to Copnhagn, No Way to Two Dgrs, Natur Rports, Climat Chang, Vol. 3, July Th finnish institut of intrnational affairs 5

6 politically xtrmly snsitiv, and could potntially collaps th Copnhagn ngotiations. Th tabl on th prvious pag sts out th pros and cons of individual stratgis. Thr ar thr broad approachs to th surplus problm: a) ngotiat and co-oprat (scnario 1) b) cancl and discount (scnario 2 and scnario 3) ignor th problm and hop th surplus dos not ntr th markt (scnario 4). Scnario 1: Ngotiation and Coopration Countris should bgin with a cooprativ approach to solv th surplus issu. Th baskt of options listd blow could absorb th surplus out of th rgim. Futur work could sk to calculat th potntial contribution that could b mad by ach of th options listd blow. Dpr Targts - Annx 1 countris accpting dpr targts could absorb th surplus. As surplus-holding countris would also profit from th sal of th surplus, thy should strngthn thir targts mor than othr Annx 1 countris, and us part of th surplus to achiv ths targts. In th light of its missions trajctory discussd abov, and Russia s normous potntial for nrgy fficincy, conomically Russia would b abl to accpt a significantly dpr targt than -30% by 2020, compard to 1990, if it wr allowd to us th surplus. Stor and Sav byond 2020 Basd on th Russian govrnmnt s highst missions growth scnario, missions ar xpctd to rach ca lvl by Bcaus ths missions scnarios ar vry unlikly to b ralizd du to ovr-optimistic assumptions, Russia could possibly commit to storing th quivalnt amount of AAUs in a rsrv account: having a buffr in th longr trm may b an attractiv option for Russia. Likwis, AAU prics ar likly to b highr in th futur, and highr targts may also b mor ngotiabl for subsqunt commitmnt priods, which could addrss nvironmntal concrns. Discount surplus Any transfr of th surplus from th first commitmnt priod of th Kyoto Protocol should b discountd undr th Copnhagn agrmnt in ordr to limit concrns rlatd to nvironmntal intgrity. Likwis, transactions with th surplus could involv a discount factor from th dmand sid. Link sals to domstic mission rductions th original ida of a Grn Invstmnt Schm could b usd. In th cas of govrnmnts, which lack crdibility and capacity, an xtrnal oprator could b rquird to manag th grning activitis. This would at last nsur that th mony for AAUs is invstd in a climat-frindly way. Th problm of th nwly cratd AAUs gnratd by this approach could b limitd with a discounting approach. Financ dvloping country mitigation instad of allocating financial rsourcs for intrnational climat mitigation and adaptation, Russia could armark som of its surplus for this purpos and allow an xtrnal oprator to montiz it. Du to lowr marginal abatmnt costs in dvloping countris, this option could addrss issus of nvironmntal intgrity spcially if combind with a dmand-sid discount factor on AAU purchass. Buy and cancl - Purchasing and canclling th surplus in ordr to rmov it from th markt could b a last option. Various govrnmnts hav suggstd purchas-and-cancl schms, or canclld thir surplus allowancs unilatrally. Scnario 2: Cancl and Discount Th option to not allow th transfr of th surplus, or to havily discount it, offrs an opportunity to significantly strngthn th intgrity of th Copnhagn dal. Amnding th Kyoto Protocol to dal with th surplus would rquir a thr-quartr majority, which could b formd against th will of surplus holding countris. For Russia, which ss itslf as a grat powr, th thrat of marginalization from a major gopolitical issu would carry a crtain wight, particularly as high lvl forums such as th Major Economis Forum and G8 will continu to giv high priority to climat chang. Likwis, low carbon will b big businss in th futur, and transition conomis crtainly hav a larg potntial for abatmnt and fficincy, Th finnish institut of intrnational affairs 6

7 corrsponding to thir own domstic prioritis. Hr thr ar synrgis, and significant opportunitis, btwn domstic intrsts for ths countris and intrnational climat mitigation. Th significant risks of this stratgy should b acknowldgd. Thr is th risk that Russia could rfus nonthlss to participat in th agrmnt; in turn, it could b possibl that major mrging conomis would not accd to a maningful agrmnt, which did not includ th world s third largst mittr. Nonthlss, a Cancl and Discount approach should not b disrgardd, givn its potntial to strngthn at a strok th Copnhagn agrmnt. Furthr, givn th siz of th surplus and th risk of loos targts gnrating nw surplus, an agrmnt could b strongr nvironmntally if a long-trm, architctural solution could b found for transition conomis and thir surplus. Scnario 3: Abandoning th AAU-basd Systm Som countris ar currntly sking altrnativs to th AAU-basd systm to oprationaliz country targts. A futur rgim without AAUs would ipso facto rsolv th problm of surplus AAUs. Howvr, th Russian sns of ntitlmnt to th surplus is likly to rmain, and thus, quivalnt concssions may b sought. This should b considrd alongsid th issus of robustnss of global ambition and th complianc rgim, if partis choos to xplor this option furthr. Morovr, shifting from th AAU systm might hav implications for possibl financing mchanisms (auctioning AAUs) in th post-2012 rgim. Hnc this nxus of potntial risks and drawbacks must b wighd up alongsid th possibl advantags of this approach vis-à-vis th surplus of AAUs, and th chancs of US ratification. Scnario 4: Auto-Rgulation Currntly, littl intrst has bn shown in th Russian surplus, which would b availabl at last in thory in th intrnational carbon markt, if th Russian govrnmnt chos to sll it. Th fact that Russia has not sold any of its AAUs may b basd on four factors: first, th Russian budgt was awash with hydrocarbon rvnus, which rducd th nd to sll AAUs. Scond, th absnc of buyrs givn crdibility issus. Third, lgal difficultis in transfrring Russian stat assts. Fourth, Russian disdain for th Kyoto Protocol du to prcivd brokn promiss aftr th Russian ratification. Hnc, it could b argud that a possibl option to dal with th Russian surplus would b to allow th transfr, and assum that potntial buyrs and th Russian govrnmnt would continu to avoid surplus transactions for nvironmntal/political rasons. Svral strong rsrvations nd to b undrlind in this rgard. Firstly, thr is a risk that countris could buy surplus AAUs dspit th factors outlind abov. For xampl, 2009 has sn a significant incras in surplus transactions. Scondly, as shown abov, potntially wak targts, combind with lowr than projctd missions, could xacrbat th surplus problm in th futur. Thirdly, for moral and comptition rasons dvloping countris may not accpt th transfr of AAUs. Thrfor, it must b considrd whthr ignoring th surplus would b asir and safr than ngotiating a solution with surplus holding countris. Conclusion Russia is on of th potntial blockrs of a dal in Copnhagn. In ordr to minimiz a scnario of abstain and abduct, whrby Russia maintains a low profil and thn hijacks th Copnhagn procss in th final hours, ky countris should publicly ngag Russia on climat and th Copnhagn talks. This high-lvl stratgy can strngthn th importanc of th talks to th Russian govrnmnt whil dlivring analysis of th stratgis to minimiz th risk of last minut blocking. Th currnt mission trnds illustrat that th 10-15% rduction targt announcd by Russia is scintifically insufficint, and rflcts nithr th country s fficincy potntial, nor modld missions trnds. Th targt was also havily criticizd by dvloping country partis at th Bonn climat talks in August. Tchnically Russia could commit to a targt of at last -30% by 2020, without any surplus buffr. This may rquir additional climat policy masurs. Th AAU surplus rprsnts an xtrm thrat to both th nvironmntal and markt intgrity of th Th finnish institut of intrnational affairs 7

8 Copnhagn dal, if transfrrd. Thortically, thr ar thr broad approachs to dal with th surplus: a cooprativ approach (scnario 1), a Cancl and Discount approach (scnario 2 and scnario 3), or auto-rgulation (scnario 4) i.. ignoring th problm. Countris, spcially th US, should approach Russia with an offr to cooprativly dal with an issu, which prsnts ral nvironmntal and markt risks to th Copnhagn dal. A confrontational, tak it or lav it, approach to cancl or havily discount th surplus should b kpt in rsrv, but not discountd out of hand. Undr a cooprativ approach, th most practical mthod of daling with this transfr would b to accpt dpr targts in Annx I, with surplus holding countris accpting proportionally dpr targts. 10% of surplus-holding countris bas yar missions quat to roughly 0.5Gt. If all surplusholding countris targts wr st such that thy wr rquird to consum on avrag this amount ach yar, in total 2.5 Gt could b consumd in a fiv yar commitmnt priod, Likwis, if targts wr st such that th rmaining Annx 1 countris wr rquird on avrag to consum AAUs quivalnt to 5% of thir basyar missions, in total 3.3 Gt could thortically b consumd Gt would rmain of th initial surplus. Th starting point for rduction pathways (.g missions, Kyoto targt lvls or 2010, th midpoint of th Kyoto Protocol s first commitmnt priod) can contribut to th consumption of AAUs post 2012, or xacrbat th AAU problm in th cas of th transition conomis. As a stand-alon stratgy, this approach sms politically difficult givn th currnt unambitious pldgs of Annx 1 countris and th shar siz of th surplus. Thus, highr post-2012 targts ar unlikly to absorb th whol surplus in on go, and a baskt of approachs could b applid as outlind in scnario on abov. Abandoning th AAU systm has no prcdnc and ntails potntial, unknown risks to th post-2012 rgim. Concrning Russia, this scnario is tantamount to divsting Russia of its surplus and is hnc politically risky, unlss coupld with comparabl concssions. Ignoring th problm by rlying on auto-rgulation (scnario 4) should b avoidd. Du to th distrust amongst th formr Sovit bloc, it sms unlikly that Moscow would try to build a dirct coalition around th surplus issu to gain a bttr dal in Copnhagn. Also, givn th marginality of th issu of climat policy in Russian politics, such an approach sms far-ftchd. Howvr, smallr surplus-holding countris, spcially insid th EU, ar waiting for th Russian position on th surplus issu prior to announcing thir own position, as thy bliv that Russia s political wight in th climat ngotiations is likly to lad to a bttr dal for all of thm. Basd on this analysis, w rcommnd that: Countris, in particular th US, should rcogniz th thrat posd by th surplus, and offr a cooprativ stratgy to dal with it. A tak it or lav it approach should b kpt in rsrv. In ordr to facilitat th formation of th Russian position, important Annx I countris, spcially th US, should snd vry high-lvl rprsntativs to Moscow lik thy hav snt to China and India. To gain crdibility on this issu vis-à-vis Russia, bfor Copnhagn th EU must adopt an intrnal solution how to dal with th surplus of th nw mmbr stats. This could, for instanc, includ discounting and absorbing th transfrrd allowanc with dpr targts as discussd abov. This would lad to th EU stting th ton. Bfor th Copnhagn climat talks, th othr surplus-holding countris including Russia should announc national surplus us plans should thy push for transfrring th surplus. Anna Korppoo Snior Rsarchr Th Finnish Institut of Intrnational Affairs Thomas Spncr Advisor on Russia s climat policy Grmanwatch ISBN ISSN Covr photo: Alxi Druzhinin (AP / Lhtikuva) Layout: Mari Pakarinn/Juvns Print Th Finnish Institut of Intrnational Affairs Th finnish institut of intrnational affairs 8