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Cablegate: Russia Launches Kyoto Protocol Joint Implementation Program

VZCZCXRO0487
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHMO #0767/01 0801447
ZNR UUUUU ZZH
R 201447Z MAR 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 7224
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHKO/AMEMBASSY TOKYO 4174
RUEHOT/AMEMBASSY OTTAWA 2089
RUEHNE/AMEMBASSY NEW DELHI 1148
RUEHBR/AMEMBASSY BRASILIA 0319
RUEHUL/AMEMBASSY SEOUL 2730
RUEHJA/AMEMBASSY JAKARTA 0182
RUEHSA/AMEMBASSY PRETORIA 0292
RUEHBR/AMEMBASSY BRASILIA 0320
RUEHBY/AMEMBASSY CANBERRA 0699
RUCNDT/USMISSION USUN NEW YORK 0402
RUEAEPA/HQ EPA WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 03 MOSCOW 000767

SIPDIS

STATE FOR OES/EGC, EUR/RUS
CEQ FOR CONNAUGHTON

Sensitive, SIPDIS

E.O. 12958: N/A
TAGS: SENV ENRG KGHG RS
SUBJECT: RUSSIA LAUNCHES KYOTO PROTOCOL JOINT IMPLEMENTATION PROGRAM

Sensitive but unclassified, not for internet distribution.

-------
Summary
-------

1.(SBU) On March 10, Russia's Ministry of Economic Development and
Trade (MEDT) began accepting approval applications from companies
wishing to undertake joint implementation (JI) projects under the
Kyoto Protocol. The move was the result of several years of work by
MEDT to put the required legal and administrative framework into
place. European companies in need of Russia's excess carbon credits
have been eagerly awaiting this step, which came eighteen months
later than originally planned. There are already 60 projects under
development, most in the energy sector. Since it ratified the Kyoto
Protocol in 2004, Russia's cash windfall from rising oil prices has
reduced its interest in pursuing revenue through Kyoto's flexibility
mechanisms. It has maintained an interest in JI, however, due to
its potential for technology transfer in the areas of energy
efficiency and cleaner production.
End Summary.

----------
Background
----------

2.(U) Russia is currently the world's third largest emitter of
greenhouse gases (GHGs) after the U.S. and China. It ratified the
Kyoto Protocol on November 4, 2004, and has been assigned an annual
cap on GHG emissions for 2008 - 2012 of 16.1 billion tons of CO2
equivalent. Despite Russia's booming economy and reliance on
extractive industries, the near-collapse of its economy in the 1990s
has left it with lower emissions today than the 1990 Kyoto baseline.
According to its Fourth National Report to the United Nations
Framework Convention on Climate Change (UNFCCC), Russia is currently
emitting about two-thirds of its 1990 levels. Russia joined Kyoto
as a "country in transition" under Annex I, allowing it to serve as
a "host" of Joint implementation (JI) projects. Kyoto countries
that expect to exceed their GHG caps can earn extra emission credits
through projects that reduce emissions in Russia.

--------------
GOR PREFERS JI
--------------

3. (SBU) Russia has chosen to focus on JI over the other two Kyoto
flexibility mechanisms - Clean Development Mechanism (CDM) and
International Emissions Trading (IET). Russia is considered the
Annex I country with the largest potential for JI projects, and has
often publicly cited JI as one of the benefits of joining Kyoto.
Russia sees JI as an opportunity for technology transfer in the
areas of energy efficiency and cleaner production. The GOR has long
acknowledged that its energy sector, still heavily reliant on
Soviet-era infrastructure, is outdated and hugely inefficient. The
GOR has been less enthusiastic about IET, which it sees primarily as
a cash transfer. Flush with oil and gas profits, the GOR prefers to
preserve most of its carbon credits for later bargaining or use.
The Ministry of Economic Development and Trade (MEDT) told us that
although they would like to develop a CDM, it is more complicated
legally, and would require significant amendment of current Russian
law.

---------------
System in Place
---------------

4. (SBU) The GOR, with MEDT in the lead, has been working the past
several years to put the necessary legal and administrative elements
for the JI program into place. Key steps have included
establishment of an interagency commission charged with overseeing
JI implementation, creation of a National Registry of Carbon Units,
elaboration of a National GHG Inventory System, adopting a national
procedure for the approval of JI projects, and passage on May 28,
2007, of Government Decree 322.

5. (SBU) Government Decree 322 was the key piece of legislation

MOSCOW 00000767 002 OF 003


needed to establish Russia's JI program. It officially named MEDT
the "national focal point" responsible for JI investment projects.
As such, the Ministry was given authority to receive JI proposals,
post them on a web-site for public comment, include them in a
national registry system, clear them through other relevant GOR
Ministries and Agencies, submit monitoring and implementation
reports for GOR approval and organize and chair the Interagency
Commission.

6. (SBU) MEDT completed the final legal hurdles to implement
Russia's JI program in late January, 2008, and began accepting JI
applications on March 10. The date was nearly eighteen months later
than originally envisioned. However, World Wildlife Federation
(WWF) Russia's climate expert, Aleksey Kokorin, told us that the
delays were "not a failure, but a result of good, strict provisions
being put into place." WWF is supportive of the GOR's JI program,
and played an advisory role in its development.

7. (SBU) According to MEDT's Oleg Pluzhnikov, the GOR has made 300
million tons of GHG equivalent available for JI projects through
2012, which represents about ten percent of Russia's total
anticipated excess of three billion tons. MEDT has indicated that
this level could increase if demand warrants. The price per ton is
expected to be six to eight euros (significantly below prices in the
EU). Pluzhnikov predicted that proposals, once submitted to MEDT,
will take 10 - 12 weeks to process. Sixty projects are already
under development, and those are expected to make up most of the
first group of applications.

8. (SBU) The GOR has allotted two-thirds of the JI quota to the
energy sector. The remaining 100 tons are allocated to the
agriculture, manufacturing, forestry, waste disposal/ processing and
chemicals industries. Unified Energy Systems, which owns 93% of
Russia's electricity grid, is expected to be the largest Russian
partner for JI projects. It is reported to already have 40 projects
under development, delivering 35 million tons of emissions
reductions, mostly through switching away from the use of coal.
Industry giants Gazprom, Severstal (steel) and RUSAL (aluminum) have
also announced plans to participate.

-------------------
Some Investors Wary
-------------------

9. (SBU) In a March 13 press conference to announce MEDT's
acceptance of JI proposals, MEDT's Vsevolod Gavrilov warned that
MEDT would be very strict in its review of projects.
"Unfortunately, not all investors are taking this opportunity the
right way, seeing it as a way to get a freebie without doing any
work. We want to avoid these speculative projects." Off-putting
statements such as this, combined with uncertainties in
interpretation of the new regulations, have dampened enthusiasm for
JI projects among some potential investors.

10. (SBU) As an example, British Petroleum's (BP's) chief
environment lawyer in Moscow explained that BP has not seriously
considered JI projects for two reasons. First, MEDT has not
clarified how it would credit projects that reduce gas flaring, a
significant contributor to Russia's emissions. Second, the
construction of facilities to capture and transport flared gas is
slow and expensive. Because only reductions achieved through 2012
can be counted, and a post-2012 regime has not been agreed, at this
point there would be insufficient time to achieve enough reductions
to justify the cost.

11. (SBU) Given concerns about the timeframe and treatment of
large-scale projects, observers predict that most JI proposals will
be smaller-scale, focused on replacing inefficient power generators
and staunching energy loss in the transmission of communal heat and
electricity.

-------
Comment
-------

12. (SBU) The GOR's ambivalent approach to JI reflects its attitude
to Kyoto membership overall. The GOR's Kyoto policy is not driven

MOSCOW 00000767 003 OF 003


by concern about global warming. Russia joined Kyoto to close its
bilateral WTO deal with the EU and for the revenue potential of its
excess GHG quotas. Russia's oil and gas windfall has significantly
diminished its interest in the relatively small sums to be gained
through flexibility mechanisms. Meanwhile, some Kyoto members are
relying on Russia's credits to meet their own targets. Germany,
Denmark, Belgium, Sweden and Japan are all looking to earn credits
from Russia, and have been actively pushing the GOR to get the
mechanisms up and running. Despite EU and member state pressure on
the GOR to follow Europe's lead on climate policy, Russia is likely
to continue to make decisions based primarily on its economic
interests.

BURNS

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