Russian carbon to the European market: only together with commitments

EU economic downturn has created an oversupply on the carbon market. Therefore, the European Commission restricts "free" reductions to maintain the market. According to experts, the demand for Russian potential emission reductions can be preserved only if Russia takes meaningful goals to reduce the impact on the climate and makes the carbon market regulations transparent. This is one of the main expectation form Russia at the COP-18 in Doha, Quatar.

Today, the EU market is the main potential source of demand for carbon reductions from Russia. EU economic downturn led to a sharp fall in prices for carbon dioxide emissions quotas. The European Commission informed that it was considering six different options to stabilize the situation, including the introduction of the policy-setting prices for the certificates. Meanwhile, the price for CO2 emission reductions continue to fall: over the last few months the price does not rise above 60 eurocents per ton (for comparison, four years ago the average price was 13 euros per ton). Such a situation on the market is not acceptable neither for European business, which hopes for further market incentives for investment in low carbon development, nor for the European climate policy in general. As a result, EU authorities decided to significantly restrict access to "free" reductions generated mainly on developing markets and markets in transition, to the EU carbon market.

The global carbon market began to take shape in 2005 with the entry into force of the Kyoto Protocol. The Protocol not only sets limits on greenhouse gas emissions for the most industrialized countries, but also provides economic mechanisms that allow countries to cooperate for mutual benefit in order to reduce emissions. Initially, the main aim of the carbon market was to provide the conditions under which emission reductions will be reached in the most cost-effective manner.

According to Petra Opitz, a representative of the German Institute for Economic Research, the EU does not manage fine-tuning of the market: excess emission allowances in the trading system were triggered by excessively generous emission of free emissions permits. Therefore, starting from 2013, the rules on the EU market will be toughened; first of all, they can affect the outside access of carbon reductions.

Another external "stimulus" for the European carbon market is an excess of carbon quotas, which is the "legacy" of Russia and other countries of Eastern Europe from the first period of the Kyoto Protocol. These are unused quotas which are the result of the drop in production in the 1990s. As a result, most of these countries not only met but also "exceeded" their commitments under the Kyoto Protocol without much effort. For example, the emissions in Russia in 2010 were more than by 33% lower than in 1990. These countries became the main suppliers of emission reductions for international buyers, including those in the ETS, putting pressure on prices.

Information about the possibility of the ban for Russian Joint Implementation (JI) Projects on the European market, which is the main source of demand for Russian ERUs, provoked a strong reaction in the Russian business community. Mikhail Yulkin, the Head of the Working Group on Climate with the Environmental Committee of the Russian Union of Industrialists and Entrepreneurs, has published a number of comments in a specialized European press, criticizing the EU's position that considers unilateral restrictive measures. According to Yulkin, prohibition for Russian emission reductions on the EU market very poorly coincides with the beginning of a possible revision of the Russian Federation position on non-participation in the Kyoto-2, as well as with fixing the national goal to reduce greenhouse gas emissions by the year 2020.

Meanwhile, dozens of European environmental organizations signed an open letter calling for the EU authorities not to allow automatic transfer of unused quotas from the first period of the Kyoto Protocol to the second one. Their position coincides with the proposal of the negotiating group of developing countries, G-77, on the prohibition of the quotas transfer made at the last round of negotiations held in Bangkok in September. Anya Kolmus, a CDM Watch expert, says: "If the developed countries, and, above all, the EU, do not agree to take on a more ambitious climate commitments, removing the trick in the form of "hot air", it will be hard to convince developing countries to join a post-Kyoto agreement with specific goals." It is difficult to expect a quick and unambiguous decision on this issue, even within the European Union itself: a group of countries from Eastern Europe, especially Poland, which also has significant reserves of the "hot air", are opponents to this decision.

Russian authorities continue to see the unspent national quota as a "safety cushion". Discussion about the future rules of participation in the carbon market does not stop on the eve of the International UN climate conference in Doha. However, according to most experts, the Russian desire to "supply the EU market with cheap Russian reductions" is hardly feasible. External demand for potential reductions from the Russian Federation may preserve only if the country formally adopts environmentally significant national goals to reduce climate impact and transparent regulation of the carbon market.