Air Pollution Control Equipment Services, Emissions

Russia could earn $10bn from ratifying the Kyoto Protocol

9 July 2003 – A recent report by carbon market analysts Point Carbon suggests that Russia would be the main beneficiary from international emissions trading under the Kyoto Protocol, possibly earning more than $10bn in the period 2008-2012.

Ever since the US decided to abandon the Kyoto Protocol in March 2001, Russia has held the key to ensuring the entry into force of the Kyoto Protocol. That said, opposing signals from various government sources have left the fate of the Protocol in limbo. One of the key reasons is that the US repudiation considerably altered the stakes for Russia, since the US was expected to become the largest buyer of allowances.

Largely for these reasons, Russia has for some time studied its options, conducting assessments of economic and social consequences of ratifying the Kyoto Protocol. Key considerations in that regard are the potential income from sales of emission allowances and the development of the Russian economy in the long-term under what could be a progressively more stringent Protocol. According to media sources, Russia’s economy ministry recently stated that the Kyoto Protocol would not harm Russian interests, and that ratification was a political question awaiting a nod from the Kremlin

In a recent analysis, Point Carbon found that Russia’s income from sales of excess allowances in the period 2008-2012 could be higher in a ‘full-fledged Kyoto’ scenario compared to one with limited participation. As shown in the figure below, the group of dominant sellers, including Russia, Ukraine and countries in Central and Eastern Europe, (CEECs) could maximise their joint income from sales of excess allowances (Assigned Amount Units – AAUs) by restricting supply and transfer (bank) allowances into the post-20102 period. Assuming that joint income is distributed according to each country’s share of excess allowances, the analysis suggests that Russia would be the main beneficiary, possibly earning more than 10 billion USD. The carbon price in year 2010 would in this case be around 10 USD (2003 prices) per tonne of carbon dioxide equivalent emissions (USD/tCO2e).

Income from sales of excess allowances in the Kyoto period 2008-2012 and carbon prices in year 2010 as a function of banking (in per cent of total AAUs in Russia, Ukraine and CEECs)Quite interestingly, the analysis also shows that carbon prices will be roughly the same in a scenario where the EU emissions trading scheme operates in isolation from the Kyoto market compared to a scenario where all Annex I countries take part in a scheme for international emissions trading. The reason is, put simply, that potential supply of excess allowances from the EU candidates demand could just about meet the expected demand from the group of current EU Member States (EU15). Moreover, potentially large net-sellers of allowances like Russia will not be able to set prices at an arbitrary level, simply because the preference for domestic action increases with increasing carbon prices in countries like Japan and Canada, who are likely to become large net-buyers of compliance instruments.