Draft: Please do not quote without permission

The Kyoto Protocol and Russia
Oct 18, 2001
ASUKA-ZHANG Shouchuan (Jusen),Center for Northeast Asian Studies, Tohoku University, Japan
asuka@sal.tohoku.ac.jp
MORIOKA Yutaka
Far East Region Research Center, Toyama University, Japan

1.

Introduction
Russia has an important role in climate change issue. The reasons are because it is a"big country" as 1) one of major greenhouse gas emitting countries (world's third after US andChina), 2) the largest energy exporting nation (world's largest natural gas producer, and world's
number 1 in oil exports including oil products), 3) major energy-inefficient country (energy
consumption per GDP is about three-folds of that in US). In addition, the impacts of climatechange on Russian infrastructure and ecosystems (for example, melting of permafrost, increased arid
area, and sea-level rise) are likely to be significant.
Added to such situation, an international framework for global warming measures that
could be extremely beneficial to Russia (i.e. may bring the additional foreign currency revenue ofseveral hundred million dollars, at least), called Kyoto Protocol, was agreed upon in 1997. With the
USA President Bush's announcement in April 2001 to withdraw from the Kyoto Protocol, Russia
now has a casting vote in the entry into the force of the Kyoto Protocol. In other words, Russia
suddenly jumped up to the front stage of international politics and economics concerning global
warming issues.
However, the energy balance and greenhouse gas emission of Russia in the future will besignificantly affected by various factors in and out of Russia. Besides the global warming mitigation
measures, Russian Government has the urgent issues of building a lifeline that directly connects withcitizens' lives, such as electric power and hot water supply, restructuring the energy inefficientsociety, which is a factor hampering its economic growth, and implementing air pollution measures1

connected with power generation. Moreover, to optimally take advantage of the Kyoto Protocol, it
needs to balance stakeholders' interests and to adopt strategic diplomacy for environment and energy.
In this report, we shall first outline the Russian situation concerning energy and global
warming Issues. Next, we shall identify the international framework in global warming issues,
with a special focus on multitudes of relationships between Kyoto Protocol, Russia, and international
community, based on the agreement reached at the resumed session of the sixth Conference ofParties of the Framework Convention on Climate Change (resumed COP6) in July 2001. Lastly,
we will attempt to set forth some policy proposals for Russian Government and Japanese
Government in regards to the international cooperation for the Kyoto Protocol.

2. Russia and Global Warming
1) Awareness of Global Warming Issues in Russia
The Kyoto Protocol was adopted at the third Conference of Parties of the Framework
Convention on Climate Change (COP3) held in Kyoto in 1997. It stipulates the years 2008 to 2012
as the first Commitment Period, and identifies the quantifiable target (emission quota) of greenhousegas emissions, like carbon dioxide, for developed countries as a whole as 5.2% reduction from theemissions of year 1990, and requests Russia to control emissions at the level equivalent to 1990
emissions (i.e., minus 0%).
According to the survey conducted in Moscow by Prof. Yuzo Tanaka of Ryukoku
University of Japan in March 2000, which obtained responses from 301 people of "Russian
intelligentsia with the best knowledge of social problems," including social science researchers,
high-educated people, company executives, and the students at the Moscow University, 90% and up
responded that they "knew" or "heard" about global warming issues, but only 3% answered that they"knew well" about the Kyoto Protocol that determined the reduction targets of greenhouse gas,causing global warming.1
In general, there is no high interest about global warming issues in Russia, and several
reasons are conceivable for such disinterest. First, there are uncertainties in the potential effects ofglobal warming in Russia. Until 1990 or around, many researchers had opinions that the global
warming effects to Russia would be more beneficial, especially to their agriculture sector, thanadverse. Even today, there remain (although becoming minor among researchers) some theories
welcoming global warming.

1(Actually there are more than little adverse effects such as permafrost

Asahi Shimbun, April 8, 20002

melting and desertification.) Secondly, their economic structure highly depends on oil export.
Thirdly, they have many short to mid term problems that demand immediate attentions, such as
growing poverty and corruption, crime increases, unstable supplies of power and gas, and air
pollution. The fourth is the weakening of environmental administration, which essentially have had
to take leadership in this problem.

For the last several years, Russia lowered the status ofenvironmental administration section in overall administrative structure (dissolution of Ministry ofEnvironment and Natural Resources, and the establishment of the Committee for Environmental
Conservation, followed by the dissolution of the Committee for Environmental Conservation, andthe incorporation of such function to the Ministry of Natural Resource Utilization as a section of that
ministry), resulting in the significant reduction of environmental administration influences in thegovernment.

2) Russian Government's Position in International Negotiation2
In reflection of domestic unawareness, Russian Government's position in theinternational negotiation on global warming measures at the Conference of Parties (COP) of
Framework Convention on Climate Change was rather passive, and hardly put forward its presence
in meetings. Especially at the COP1 in 1995 and COP2 in 1996, Russian delegates were led by aresearcher who was skeptical on the global warming itself and viewed that the effects on Russia
would be more positive than negative.

At these meetings, Russia maintained a cooperative

relationship with the member countries of Organization of Petroleum Exporting Countries (OPEC),
such as Saudi Arabia, which shared same stakes as oil exporting country, and strongly resisted thebuilding of international framework that might lead to the reduction in fossil fuel demands.
Even at the COP3 in Kyoto in 1997, Russia took the negotiation position almost
synchronized with the JUSSCANZ group (Japan, USA, Canada, Australia, Norway, and New
Zealand), which was consisted of countries rather passive to global warming measures. During
COP3, Russia's presence was not too significant, but ended to earn, along with Ukraine, theextremely achievable quantitative target of minus 0% from 1990 for greenhouse gas emission
reduction. This fact made Russian role in the international framework for global warming measures
extremely significant in later dates. Moreover, from 1998, it started to actively voice the opposition2

For the history of Russian global warming measures, we referred to Arild Moe and Kristian Tangen, “The Kyoto

Mechanism and Russian Climate Politics”, The Royal Institute of International Affairs”, 2000, and Vladimir Kotof
and Elina Nikitina, “Russia: Formation and Implementation of Climate Policies”, Paper presented at the IGES
International CDM Workshop, Jan 26-27, 2000, Institute of Global Environmental Strategy, Hayama, Japan, etc.

3against the strengthening of compliance system under the protocol (for example, more strict penalty),
and instead the support for the optimum utilization of Kyoto Mechanisms, such as emission trading,as a member of the umbrella group (JUSSCANZ Group without Switzerland, and with newly joined
Russia, Ukraine, and Iceland).
During the resumed COP6 in July of 2001, Russia won considerable concession for their
many demands (e.g. lenient regulation on emission trading) to increase benefits by fully utilizing
their "ratification card" described later as Japan and Canada did, while, immediately prior to themeeting, Russian congress already suggested the possibility of ratification without USA at thehearings held on June 18.
It is not clear why Russia could win "soft" quantitative target at COP3 in 1997. Some
viewed3 that Russia, without any compromise, simply rejected to "increase reduction target," whileothers observed4 that it was due to USA's tough strategic intent to get "two birds by one stone" byproviding financial aids to former Soviet regime in post Cold War era, and reducing the compliancecost of Kyoto Protocol by emission trading with Russia.

3) Hot Air
Nonetheless, Russia became able not only to easily attain quantitative targets of reduction
obligation, but also to sell excess emission quota to other countries. This excess quota is named byenvironmental NGO as "Hot Air" from a slang for "boasting tale," and will be traded in the market
along with carbon credits generated by other two Kyoto Mechanisms of the Joint Implementation(JI) and the Clean Development Mechanism (CDM). This means the start of an "economic game"for the prices and quantity of carbon credits among three sides, that are developed countries as thefund suppliers (credit buyers), developing countries and other economies in transition that canbecome market competitors to Russia as credit sellers, and Russia.
In the international negotiation, how to respond to Hot Air (for example, by caps on
selling quantities or purchasing quantities) was one of the subjects under focus, because it has thepotential to delay developed countries' adoption of domestic measures, and lacks equity. At theresumed session of COP6, however, the Umbrella Group pressed for their demands as describedabove, and the Conference agreed on "no caps" to the Hot Air, resulting in the broadened concerns
especially among developing countries about Russian monopoly of carbon credit market, because of3

From the authors interview with COP3 negotiation personnel of Japanese Government.

4

Michael Grubb, Christiaan Vrolijk, Duncan Brack, “The Kyoto Protocol: A Guide and Assessment”, Royal Instituteof International Affairs, London, 1999.

4

the decrease of demand for carbon credits among developed countries following the withdrawal ofUSA, and the comparative scale and price of Hot Air from Russia.5

4) Ratification Card
Kyoto Protocol specifies the condition of its entry into force as "ratification by countries
that together cover 55% or more of emissions among developed countries (including economies intransition)." Therefore, at the present time when USA's withdrawal becomes apparent, it is no longer
possible for the Protocol to enter into force unless both Russia and Japan ratify the Protocol. In
other words, if Japan ratifies the protocol, whether Russia ratifies it or not determines the destiny of
the Kyoto Protocol. Presently, because of their Hot Air being able to bring economic benefits,
general view is that Russia will not be able to refuse the ratification However, one cannot deny thepossibility that Russia will use its own ratification as a diplomatic trump card in the future to win
over their limited struggles in regards to 1) the prices and tradable quantities of the Hot Air, and 2)
other "compensation" etc.

3. Current Situation of energy balance and Greenhouse Gas emissions
1) Energy Balance Situation
In Russia, 98% of anthropogenic carbon dioxide emission is from fossil fuel consumption,
which shares 77% of total greenhouse gas emissions. 6

Therefore, the trends of fossil fuelsconsumption and changes in energy mix (since natural gas emits less greenhouse gas per unit calorie
than oils or coals do) will significantly affect the future trends of greenhouse gas emissions.
Fig. 1 shows fossil fuels consumption and gross domestic product (GDP) from 1990,
which is a base year for the reduction target, till 1999. As known well, Russian economy continued
to be stagnant after 1990, then experienced currency crisis in 1998, and presently maintains a strong
economy.

Its GDP growth for 2000 is around upper 7% level, and their government projects for the

potential annual growth of around 5% from 2002 till 2010.7
Fig.1 Relationship between Gross Domestic Products (GDP)and Fossil Fuel Consumption in Russia

5Frank Jotzo and Olivia Tanujaya, “Hot Air vs. CDM: Limiting supply to make Kyoto work without the UnitedStates”, July 2001, Pelangi Indonesia.（download possible from http://www.pelangi.or.id/hotair-1.html）
6■Fossil fuel consumption

Ministry of Fuel and Energy of the Russian Federation Institute of Energy Strategy, “Kyoto Protocol and Russian

Energy”, 2nd edition, 1999, Moscow, p.3.
7

▲GDP

About the current situation of Russian economy, we referred to "Current situation of Russian economy and the

5

120

100

1990=100

80

60

40

20

0
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Reference: Alied Moe and Kristien Tangen, “The Kyoto Mechanism and Russian Climate Politics”, The RoyalInstitute of International Affairs, London, 2000, p.29.

However, their strong economy relies largely on the price hike of fossil fuels, so that it
may reverse the direction toward lower growth, depending on the government's handling of financial,monetary, and industrial policies. In regards to energy mix, as well, the domestic supply quantityof natural gas is unclear as stated later. Therefore, it is extremely difficult to forecast Russianenergy supply/demand for the next 10 years.

2) Situation of Greenhouse Gas Emission
Because of the difficulty in forecasting energy balance, it is also difficult to project theemissions of the most important greenhouse gas, carbon dioxide, from fossil fuels consumption.
Fig.-2 shows the projections of greenhouse gas emissions published in 1998 by the RussianFederation Institute of Energy Strategy under the Ministry of Fuel and Energy (renamed to the
Ministry of Energy from 2001), illustrating three projection scenarios.

economic strategy of Putin administration", by Koji Tsukide, "Russian Study" Vol. 32, April 2001, p. 25-26.

6

■ Base scenario based on data
until 1998
▲ Forecast by the Institute ofEnergy Strategy incorporating
condition changes after 1998
× Forecast by the Institute ofEnergy Strategy incorporating
the condition changes after 1998
and assuming the effectively
implementation of global
warming measures

Fig.2 Forecasts on Greenhouse Gas Emissions in Russia
Ref.: Ministry of Fuel and Energy of the Russian Federation Institute of Energy Strategy, “Kyoto Protocol andRussian Energy”, October 1998, Moscow, Fig. 2 of p.10 with some alterations by the authors

The first scenario, which is the base scenario from the second national report (submitted
to the Secretariat of Framework Convention on Climate Change in 1998) based on the data until
1998, indicates the emission quantity of 2010 almost equivalent to that of 1990. However, thesecond scenario newly revised by the Russian Federation Institute of Energy Strategy itself,
incorporating situation changes of 1998, indicates emissions of about 12% lower than the basescenario, and the third scenario assuming the addition of concrete global warming measures
forecasts the emissions of about 21% less. These scenarios, on the other hand, did not incorporate
today's strong economy. As far as the authors know, there have been various numbers presented as
forecasts and actual emission quantities, and the range of variation is extensive such as the actual
emission quantity of 2000 ranging from minus 10% to plus 30% while the projected emission
quantity of 2010 from minus 30% to plus 5%.8
These numbers largely depend on actual economic growth, energy policies,
environmental policies, and changes in industrial structure. Moreover, in case of the Russian
Government, they have targets to achieve for the economic growth, which may discourage the use of
numbers greatly dissociated from the number of such targets. In fact, governmental institutions

8

Refer to Anna Korppoo, Christiaan Vrolijk, Jonathan Stern, “Energy and Climate: Russian-European Partnership” ,Report on the Workshop held on May 14-15 at Moscow, p.4, (download available at
http://www.riia.org/Research/eep/russia.html)

7

often seem to underestimate Hot Air than private researchers in and out of Russia. Furthermore,
Russia has an incentive to proclaim for the larger number of emission quantity (that means Hot Air
being smaller) for the purpose of price manipulation through limiting Hot Air supply. Therefore,
some points out that who make numbers will be more important than what numbers.93) Reasons of Decreased Hot Air
Although there are uncertainties in a quantitative scale, it seems to be certain that Hot Air
is in decrease or has a potential to decrease. The reasons for this are 1) economic recovery, 2)delay in energy savings and other measures, 3) decline of domestic supply of natural gas, and 4)
possibility of numerical manipulation to raise carbon credit prices. Especially about the decline ofdomestic natural gas supply, at the background are social structural problem in Russia as listed below,
and the issue of international carbon leakage.
A series of problems regarding the decline of domestic natural gas supply began when
Gazprom (natural gas monopoly entity, owning about 25% of world's natural gas reserve, with mores
than 90% share of natural gas production in whole Russia. Former Russian Prime Minister
Chernomyrdin

was the president and its export amount about 10% of Russian exports in monetarybasis, bringing about 25% of Russian tax revenue.) proposed in August 1999 to reduce the share ofnatural gas in Russian energy mix as a whole from 51% to 40%. In December 1999, Gazprom
unilaterally notified to the Unified Energy System (Electric power monopoly entity that operates
about 350 thermal power plants and own every inter-regional high voltage power cable, and shares
about 70% of power generation in Russia as a whole. Current president is former vice premier ofRussia, Chubais. Hereinafter referred to as UES) that they were to reduce natural gas supply for
power generation use from 134 billion cubic meter per year of 1999 to 95 billion cubic meter per
year for 2001. (After 2002, reduction of 30 billion cubic meter every year.)10
The fact is that Gazprom has uncollected revenue of about 52.3 billion rouble for fuelcosts, which UES and other power sector entities are to pay (accumulation up to January 1999).
(For UES side, there are about 129.9 billion rouble of electricity fee unpaid by customers.)11 In
other words, UES continue to fail paying Gazprom for natural gas. Moreover, the natural gas
demand increase derived from the progress of global warming measures and air pollution measures9

Moe and Tangen, “The Kyoto Mechanism and Russian Climate Politics”, p.60-61., as indicated above

10

Description of conflict between UES and Gazprom is based on EKO, 2000, No.6. p.39-40, Energetik, 2000, No.6.

p.8., and others.
11

Elektricheskiy stantsii, 1999, No.5, p.3.

8

has brought the hike of international fuel prices, while the domestic prices are held down, resulting
in the international prices around six times higher than domestic prices.

On top of this, theproduction volume of natural gas hits the ceiling or tends to decline.12
Therefore, Gazprom claimed that "they will pay to power companies 500 million dollars
as the compensation for retrofitting power facilities from gas fueled to coal fueled, and, in return,they will reduce natural gas supply to power companies. By this, Russia can earn additional
revenues of 1.6 billion dollars per year in the increase of gas exports." UES, on the other hand,strongly opposed Gazprom's proposal by saying that "if such a thing happens, Russia will lose about
800 million dollars revenues expected for the sales of Hot Air. Moreover, Russia may need to
become emission permits buyer country. The compensation of 500 million dollars is less than one
third of required costs. Also the emissions of air polluting sulfur dioxide will be increased by
37%." (Table-1)

12

To project on natural gas production is difficult also.

Elina Nikitina of Russian Science Academy predicts,

however, that 1) at least the share of natural gas in national primary energy supply mix will decline, due to the risinginternational prices and exploitation costs; 2) production volume of Gazprom will decline (while those of other gas
companies will increase), and 3) there will be a shift of major gas mining sites from Siberia to Far East and Central
Asian countries. (In her letter of April 10, 2001).

Regarding the natural gas demand and supply balance in Russia,

referred to Isumi Sakaguchi, "Russian power sector at the crossroads: their demands and urgent issues","Russia-Eastern Europe Economic News", No.1162〜1164, by Russia-Eastern Europe Economic Research Institute,
2000.

9

Table-1 Confrontation between Gazprom and UES
Gazprom

UES

August, 1999
Proposed reduction of natural gas ratio in the Opposed the Gazprom's proposal as not feasibleenergy mix of the whole Russia from 51% to for the power sector, in which the natural gas
ratio reached 62% among power generation40%.
fuels.
End of 1999
1) Proposed to reduce gas supply for the power 1) Opposed to Gazprom's proposal that 500
sector by 12 billion cubic meters from themillion dollars offer would merely cover athird of investment amount required for fuelyear 2000.
switching.
2) Proposed the annual reduction of 30 billion
2) Argued that carbon dioxide emission increasecaused by coal usage would lead to 800
3) Proposed to the power sector that they are
million dollars loss in Hot Air revenue, andprepared to offer about 500 million dollars
increase the emissions of air pollutants suchfor the measures associated with fuelas sulfur dioxide.
switching.
cubic meters after the year 2000.

4) Claimed that by transferring the supply
reduced for the power sector to export, it
would be possible to add 1.6 billion dollars
revenue per year.
Reference: Prepared by authors in reference to EKO, 2000, No.6. p.39-40. And Energetik, 2000, No.6. p.8.

4) Response of Russian Government
According to Tass of December 13, 2000, Russian Government was to finalize thedecision on gas supply reduction issue by the end of 2000, and already some changes in energy mix
had started. (Power generation by natural gas and oil fueled power plants had declined in the period
from January to September, 2000, and the that by coal-fueled power plants had increased by 9%.)Moreover, on March 29, 2001, Tass reported that the natural gas supply quantity for UES for thesecond quarter of 2001 was tentatively determined as 25 billion cubic meters. At the government
level, it is expected that the review process is ongoing on measures to 1) avoid drastic supply cut(although certain degree of gradual reduction is inevitable), 2) implement natural gas import from
Turkmenistan as the substitute for natural gas reduction by Gazprom, 3) increase the output of
nuclear power plants, and 4) increase oil-fueled power generation, and others.13
Nonetheless, there has been few among Russian Hot Air estimates, as far as the authors
13

Aforementioned paper by Sakaguchi, "Russian power sector at the crossroads: their demands and urgent issues",

No. 1164, p.10-11

10know, that consider such situation (scenario of reduced natural gas dependency), or that address theconflict between UES and Gazprom in terms of global warming measures and Hot Air.

4.

Tasks of Energy Policies
In this section, we shall describe energy policies that have especially high significanceand affect global warming policies.

1) Determining the Best Energy Mix
In the first hand, Russia promotes gasification as their national policy since the era ofSoviet Union, and has proceeded with the gasification of power plants in the power sector. In otherwords, they have promoted the strengthening of natural gas production and the increase in gas
consumption at power plants, in view of both aspects of economy and environment, for almost 30
years under former Soviet and current Russian Governments.

Furthermore, as many prices ofgoods were liberated in Russia since its shift toward market economy, prices of electricity and gas
have been under national control and inevitably stayed at much lower level. Both sectors havebeen mandated to take a role of contributors for a society and an economy as a whole. Current
conflict between Gazprom and UES has started when the gas sector that have had a possible"solution" to increase foreign currency revenues by transferring domestic supply to exports has taken
the action first. Therefore, Russian energy policies need to realize the best mix in their energy mix
for national benefits, and for this purpose Russian Government must review alternatives anddetermine strategies for energy policies, as well as to take a strong leadership in implementing suchpolicies.

2) Promotion of Energy Savings
The most important measure in energy policies, and the one benefiting to the global
warming measures is energy savings, and, in Russia also, energy savings measures have been
implemented from 1980's as a pillar of its energy policies. However, due to higher priorities onenergy supply expansion and stable supplies in Russian energy policies, and the lack of financial
support, the actual effects of energy saving measures were not significant. In reality, the ratio ofenergy consumption reduction became less than the rate of lowering of economic growth rate in1990's. In other words, energy efficiency for the society as a whole was deteriorating. (It meansthat there are larger energy savings potential.)
Based on such experiences, Russian Government newly enacted in 1998 the energy

11

savings program for 1998 till 2005. 14

Target (potential) energy savings quantity under thisprogram is 460 to 540 million tons (coal equivalent), with the lower limit in case of using domestic
technologies, and upper limit in case of using the technologies of developed countries. Concretemeasures under the program include the strengthening of management and control system, researchand development in energy savings appliances, capital investment, introduction of regulation /market mechanism, reviews of subsidies / taxes, and the introduction of electric power trading
market.
However, the program's budget total is not sufficient (780 million dollars for capital
investment, and 100 million dollars for research and development investment), and the federal fund
for this program is only 3% of the total with the rest "self-procured" by local governments and in themarket.

In addition, the program involves only those projects with 1.5-2 years of investment

payback (for example, the projects for 1998 to 2000 involve mainly the improvement in electric andgas meters), and not the projects that may incur any economic burden.

3) Expansion of Capital Investment
During summertime in Russia, many roads are dug up to repair severely aging hot water
pipes, so that no hot water comes out from faucets. Such aging problems are commonly found in
Russia, and especially pose a big problem in electricity and gas sectors that directly associate withcitizens' daily lives.

For example, about half of power facilities are said to be in advanced stage of

aging and require retrofitting.15

By 2010, power facilities that exceed their lifetimes will reach theequivalent of 90 million kilo watt, and to renew such facilities require the introduction of 5 to 6
million kilo watt (until 2005) and 7 to 8 million kilo watt (after 2005) new facilities per year.
Current capital investment on new power facilities introduced is, however, only a fifth of therequired amount.16
If such situation continues in the future, Russian power supply will become criticalsituation by the mid-21st Century, with no "room" for the concern of environmental issues. Even if
power supply itself can be secured, as the ratio of aging facilities increase the adverse effects(emission increase of air pollutant materials, such as sulfur dioxide and nitrogen oxides) on
environment from power generation will grow.

14

Ministry of Fuel and Energy of the Russian Federation Institute of Energy Strategy, “Kyoto Protocol and Russian

Energy”, October 1998, Moscow, p.11.
15

Energeticheskaya bezopasnost, Rossii, 1998, p. 41.

16

Ibid., p.47.

124) Solution for the Structural Problems such as Failure of Fee Payments
As described above, the most serious problem in the management of power companies
and gas companies is the non-payment of fees. The amount of non-payment by consumers topower companies, for example, reaches 129.9 billion roubre (as of January 1, 1999).17

Needless tosay, unless such a problem resolves, there will not be any expansion of capital investment.
However, in case of power companies, the generation and consumption of their products, electric
power, occurs simultaneously, so it is difficult to take a defensive measure of delivering products in
exchange of cash.

Moreover, because of power companies' role in the society, To immediately shut

down power supply to non-payment customers is difficult to implement.

On the other hand, theproblem remains in the unbelievable situation that one of reasons for the non-payment by general
consumers is because of inability to confirm the consumption volume (because there is no meter!).18
Furthermore, even if the power companies are able to collect fees, the fees are not basedon the justifiable cost of power generation, because of the policies to product domestic industries,
and of social consideration for economically struggling citizens. (Today, electricity fee in Russia is
about 1 cent/kWh for industrial use, and about 0.5 cent/kWh for residential use, which are about
one-fifth and one-16th of fees in US, respectively.19 Another big problem is the low ratio of cash
payment.

In 1998, only 21% of payment were in cash or bill, and the settlement by offsets or barter

shared about 52% of the payment.20
Not only for the purpose of stabilizing company management, but also for the progress inenergy savings, it is necessary and essential to collect justifiable fees and to raise the ratio of cash
payment.

Therefore, it will eventually become necessary for Russia to thoroughly anddeterminedly implement fundamental reforms, including the measures to complete fee collection,
revise (raise) prices, and stop services of bankrupt companies.

5.

Tasks of Global Warming Policies
In this section, we shall describe policy tasks that are considered to have higher

importance for today's Russia among various global warming policies.
1) Expansion of Organization Responsible for Climate Change Issue and the Establishment of17

Elektricheskiy stantsii, 1999, No.5, p. 6.

18Above paper, Moe and Tangen, “The Kyoto Mechanism and Russian Climate Politics”, p.32.

19

Energetik, 2001, No.2, p.6.

20

Elektricheskiy stantsii, 1999, No.5, p. 6.

13

Decision-making Mechanism
As the governmental organization responsible for climate change issue, there wasInteragency Commission on Climate Change, established in 1994.

Commission members aregathered from various ministries and agencies, under the leadership of The Federal Service on
Hydrometeorology and Environmental Monitoring (Hydromet), which has long being responsible
for a hydrologic and climate observatory monitoring hydrologic environment. Since Hydromet is anagency mainly to monitor domestic climate and weather forecasting, they are not able to implement
actual measures and responses and have relatively small influential power in and out of the country.
By the adoption of "Program to prevent adverse effects of climate change" in 1996, climate change
policies grew out (at least on surface) being ancillary policy target, but the program budget issmall-scale, focuses mainly on energy savings and lacks any new measures.21
However, there is a sign of change in Russian Government's treatment of global warming
measures.

For example governmental negotiation delegates started to include relevant personnel ofministries related to energy 22 , and in 2000 First Vice Minister of the Ministry of Economic
Development and Trade, Tskanov, became the Co-Chair of Interagency Commission on Climate
Change. (The series of such actions mean that a political game of a struggle for leadership and for
securing own vested interests has started among The Federal Service on Hydrometeorology andEnvironmental Monitoring, Ministry of Energy, Ministry of Economic Growth and Trade, Ministryof Foreign Affairs, Ministry of Nuclear Indorse, Environmental Committee of Russian Congress,
Ministry of Natural Resource Use, and Interagency Commission on Climate Change.) In addition,
the discussion at the public hearing on Global Warming Issues held in Russian Congress in June
2001 indicated the presence and expansion of recognition of the Kyoto Protocol as a favorable one tobring economic benefits to Russia.23
Nonetheless, the lack of leadership and decision-making mechanism in Russian delegates,
and the "non-transparency" are big problems today. During the resumed COP6 meeting in July of
2001, for example, Russian delegates at one time agreed to the proposed number of forest sinks, andrejected it on the final day. (Some said that the delegates simply miscalculated "carbon dioxide" with"carbon," and one cannot predict how they will settle the matter at the coming COP7.) Also at theside event (voluntary workshop apart from the negotiation) related to Russia during the resumed
COP6 meetings, relevant people close to Russian Government started to read the "official position
21

Aforementioned paper, Moe and Tangen, “The Kyoto Mechanism and Russian Climate Politics”, p.19.

22

Ibid., p.61

23

Private letter by Elina Nikitina, a researcher of Russian Academy of Sciences (June 24, 2001)14

paper" of the Russian Government, which stated that Russian Government does not insist on theapproval of nuclear usage for JI/CDM, and a personnel of the Russian ministry of Nuclear Industry,
seated on the floor, asked for a permission to speak and commented that such was not the official
position of Russian Government.

Such incidents clearly expose the non-establishment ofdecision-making mechanism, in other words, insufficient communication between Russian delegatesand Moscow, and within delegates themselves, illustrating the enormity of stakes on Russia.

2) Capacity Building and System Design
To implement global warming measures require various capacity building, like emission
quantity monitoring. One focal point of forest sinks, which was the focus of attention at theresumed COP6 meeting, is the uncertainties in calculating forest sinks. The imperfect information
monitoring system of many countries (including developed countries) led to such uncertainties andRussia is no exception. As an example, to calculate forest sinks accurately is said to require highly
precise observation data by satellites and airplanes and human resources (in quality and numbers) to
conduct actual field survey. Yet, Russia has neither.24

The International Institute of Applied

System Analysis (IIASA), an international think-tank in Austria, pointed out that the range of error
in Russian calculation of forest sinks is like 129%, and any quantitative target of Kyoto Protocol
itself will fall within such error range.25

However, to build information monitoring system, forexample, is said to call for 10 million dollars investment per year for Russian Far East region only26,
and today Russia hardly has any hope in procuring necessary funds.
First of all, in order to conduct the actual international trade of carbon credits, themanagement of carbon credits within a country is required above all.

For this, greenhouse gas

emission inventories in company, local, and national level should be determined, and then suchinventories, in turn, must be allocated to each industry, entity, and local area. (Initial allocation)
Moreover, it requires a system to confirm legitimacy of carbon credits, to permit and approve trades,
and to manage the movement of carbon credits through automatic registration of every trading

24

From Nov. 27, 2000, interview of Alexey Kokolin in charge of climate change issue in WWF (World WildlifeFund） Russia
25

Sten Nilsson et al, “Full Carbon Account for Russia”, Interim Report IR-00-021, International Institute for Applied

Systems Analysis, 2000.
26(Unload possible from http://www.iiasa.ac.at/Admin/INF/PR/PR-00.08.25.html)

Alexander S. Sheingauz, “The Kyoto protocol and the Russian Far East: Possibilities of Cooperative Policies for

Sustainable Development”, Economic Research Institute Khabarovsk, Paper prepared for “ Sustainable Development
and Energy Security for Northeast Asia: Prospects for the International Cooperation” , June 26-28, 2001, theEconomic Research Institute for Northeast Asia , Niigata, Japan.

15

activity (Registry).

6. Russia's Strategies for the Future Use of the Kyoto Protocol
1) Russian Government's Priorities in COP6 Negotiation27
At the COP6 of November 2000 and at the resumed session of COP6 in July 2001,
Russian Government delegates put forth mainly the following demands.
First, that Russia opposes any attachment of limitation toward Hot Air usage that may
damage Russian economic interests.

Second, Russia requested the increase of calculated sinks inforest and others. Third is smooth transition from Activities Implemented Jointly (AIJ)28 to Joint
Implementation (JI), as well as the early start of JI.
Consequently, the resumed session of COP6 saw the progress in the discussion of earlystart of JI, and Japan, Canada and other countries earned the practical lowering of quantitative
targets through significant incorporation of forest and other sinks.

(In case of Russia, it isnecessary to renegotiate as mentioned above.) Also the resumed session determined that CDM forforest management projects in developing countries is not acceptable. On the other hand, the use of
nuclear power generation for JI/CDM became difficult despite strong demand by Russian Ministryof Nuclear Industries.

2）Hot Air Strategy
Russian Government needs to make judgement on the following issues in regards to thestrategic selling method of Hot Air to maximize own interests. (Table-2)
First about the balance between JI and selling of emission quota. Selling emission
quota may bring easy cash revenues but such revenues may not be used effectively.

(In the worst

case, it may become unaccounted for.) In case of JI, on the other hand, it may cost for transaction
but accompany actual technology transfer of greenhouse gas emission reduction technologies.
Second issue to address is the timing to sell the quota. According to the international

27

Referred to "Make-or-Break for the Kyoto Protocol: the Role of Russia", WWF Russia Media update, distributedat the COP6, Hague, 2000, and others.
28

Activities Implemented Jointly (AIJ) is the voluntary implementation of greenhouse gas emission reduction

projects by international cooperation with no carbon credits, adopted at the COP1 in 1995.

However, it had many

unclear points about the actual contracts with host side and investment side, and some of the contracts were said to beagreed on the condition of carbon credits acquisition. For note, to be recognized as AIJ requires the approval ofboth governments.

16rules based on the Kyoto Protocol, Russia is allowed an option of not to sell quota at presently and tomaintain emission quota in case Russia has given more strict reduction targets in the second
commitment period or later. (Banking)Third is the balance between the quantity and prices of Hot Air. That is whether to raise
prices by reducing the selling quantity of quota or to sell in large quantities at lower prices. Morepositive option will be to form a cartel in carbon credits among economies in transition or in
combination with developing countries.
Fourth is the relationship between local governments and companies. To be specific,
the issue is how much rights and decision powers, involving the initial allocation of emission
quantities to be designated to each company and local government.
Fifth is how to declare Hot Air.

That is whether to reduce incentives for developing

countries to enter into CDM projects by reporting the quantity of Hot Air in excess (signaling to themarkets for lower prices ahead) or not. (By limiting supply quantity after the entry into theCommitment Period, it becomes possible to completely monopolize market and manipulate prices.)
Sixth is the balance between the sales of natural gas in international market and the salesof Hot Air. For these issues, Russia needs to consider not only the scale comparison of cash
revenues but also the tax problems especially for companies. (In case of Russia, it is generally
easier to evade taxes for barter exchanges etc.29)
Seventh issue is the linkage between Hot Air and other issues.

It is possible toconsider about the exchange between debts and carbon credits as stated later, for example. (Every
possibility is there like linkage with other outstanding diplomatic issues.)
Eighth is the degree of enhancement in domestic regulations. In other words, whether
to sell carbon credits more or not, even by adopting measures such as carbon tax that may bringsome pain to general public.

29

Aforementioned paper of Moe and Tangen, “The Kyoto Mechanism and Russian Climate Politics”, p.103.

17

Table-2 Items Requiring Decisions in regards to the Policy-making of Hot Air Strategies

Items requiring decisions

Explanation

1

Ratio of emission quota sales and the JI Cash revenues earned (easily) by emission quota sales(How much should be done when)
may not be utilized effectively.

2

Timing of emission quota sales (when Possible to use quota for the second Commitment
Period when more strict reduction obligation isto sell)
expected for Russia (banking)3

Prices and quantity of credits to sell Ideally to realize prices and quantity that maximize(how many credits to sell at what price) benefits. Possible to form price cartel with othercountries.

4

Relationship between national
government, local government, andcompanies (revenues of the national
government, local governments, orcompanies)5

Declaration on the amount of Hot Air By providing a signal to the market now about the(How to announce what kind of prospect of lower carbon credit prices, prevent themarket entry of developing countries and others, whilenumbers?)
limit supply quantity once nearing the start of the firstcommitment Period, thereby realize the optimizationof benefits and monopoly of market.

6

Ratio of Hot Air sales and natural gas Ideally to realize the combination for benefit
sales (which is more beneficial for maximization. (Need to review tax measures for
Russia as a whole)companies.)

7

Linkage between Hot Air and other Various issue linkages are possible. (Ex. Redemption
issues. (Whether to exchange Hot Air of foreign debt by Hot Air)for cast or demand other forms ofre-compensation?)

8

Degree of enforcement for national
measures (what policy measures tointroduce?)

Certainly each party hopes that funds or technologies
will be transferred to own. Allocation of domestic
emission quota (initial allocation) will affect greatly.

It is possible to further increase carbon credits sales
quantity through appropriate policy measures.

Among them, the third issue of how to manipulate Hot Air prices and quantity tomaximize own benefits is extremely difficult to get the "proper" answer the issue involves many
elements.

However, at least the economic analysis of demand-supply curve and elasticity ofcarbon credits will be necessary, first of all. Also, it is fully possible for supply side to pursue theoptimum benefits by forming a cartel (of supply control) similar to OPEC's oil cartel. In fact, a18

think-tank in Indonesia has identified through quantitative analysis using the economic model
developed by itself that 1) it is possible for Russia to monopolize the market because of reduced
demand caused by USA's withdrawal, and 2) cartel formation by developing countries, Russia, andcentral and eastern European countries will provide economic merits to all of them.

(Table 3, and4)

Table-3 Effects of USA's Withdrawal and Russian Hot Air to Carbon Credit Demands

Model Name (Name of model developer)

PET

EPPA

Zhang

GTEM

Remained carbon credits demands after
USA's withdrawal and Russia selling out
their Hot Air (million tons Carbon/year)

0

417

95

123

Note: Above indicated the results of four economic models: PET is an economic model developed by Jotzo andTanujaya.

According to this table, PET model shows zero demand remained, and in cases of Zhang and GTEM

models, remnant demand is not too large and likely to be realized by the domestic measures of developed countries.
Therefore, it is at least certain that these events will provide significant effects on Hot Air market, although someuncertainties remain.
Reference: Frank Jotzo and Olivia Tanujaya, “Hot Air vs. CDM: Limiting supply to make Kyoto work without theUnited States”, July 2001, Pelangi Indonesia, p.3., (download possible at http://www.pelangi.or.id/hotair-1.html)

Table-4

Volume and Revenues of Carbon Credits when Russia, Eastern
European Countries and Developing Countries Form a Cartel

Sales volume and revenues of Russia
and Eastern European countries
Sales(million
C/Yr.)

volume Revenues
tons (million dollars)

Sales volume and revenues ofdeveloping countries
Sales(million
C/Yr.)

Prices of carbon
credits ($/ton-C)

volume Revenues
tons (million dollars)

150

455

112

339

3.03

100

1286

100

1286

12.86

75

1829

75

1829

24.39

50

2223

50

2223

44.46

25

1896

25

1896

75.84

Note* According to above model simulations, revenues of Russia, East European countries and developing countries
will get the maximum for each when they form a cartel to control their sales quantities less than 50 million tons C.
Reference: Above paper of Jotzo and Tanujaya “Hot Air vs. CDM: Limiting supply to make Kyoto work without theUnited States”, p.7.

19

At present no international mechanism to counter such price cartel exists under the trade
rules of WTO (World Trade Organization), etc.

Therefore, each country must respond by"ex-regional application of own laws on commercial competition (anti-trust law).

Only practicalcountermeasures adaptable will be to increase duties or to impose penalties, which will bringconsiderable damages to domestic consumers. Therefore, it is very difficult in practicality to preventthe formation of a cartel by supply side countries in carbon credits, as was difficult to stop the supply
control by OPEC countries.30

However, it is possible to consider negotiation with supply side bysuggesting a system to set a price cap or to introduce option trading for carbon credits ascountermeasures.31

3) Recent Moves for the Ratification of the Kyoto Protocol
In the Russian congress, ordinal legislation undergoes 1 to 2 year review while holding
public hearings for several times.

For Global Warming issue, public hearing have been held forseveral times already, and at the one held on June 18 immediately following the USA's withdrawal
declaration, the person responsible for UES's energy - Carbon Fund, described later, lectured. At
the public hearing, almost everyone, except Betridsky who is one of co-chair for Interagency
Commission on Climate Change, maintained the positions supporting the ratification of the Kyoto
Protocol32, and the following hearing document has been published.33(1) Hearing members of this public hearing meeting do not support USA's withdrawal(2) If EU and Japan ratify the Protocol, Russia may ratify also without USA. However, there
should not be any change to the Protocol itself, and the ratification must not invite any new
financial burden.

30

In case of oil exports, many countries are enabled to determine independently and flexibly own import duties as ameasure to counter a price cartel.

(In case of many other products, import duties are fixed.)

However, due toeffects upon domestic consumers, there has not been any situation that the import duties to synchronize with supply
quantity and prices.
31

Regarding the price cap setting, USA's think tank, Resource for the Future, and others actually made some

proposals. （Michael Toman, 2000, Moving ahead with climate policy, Climate Change Issues Brief 26, Oct.2000,
Resource for the Future, unloading available at http//:www.rff.org/issue_brief/PDF_files-ccbrf26_toman.pdf.）
32

According to the private letter of Elina Nikitina, researcher at Russian Academy of Sciences, who participated tothe hearing.

She suggested that a kind of political game between ministries and agencies may be behind the passivecomments of Hydromet's Betridsky.
33

Congress hearing documents "Legislation on Framework Convention on Climate Change and Kyoto Protocol,

June 18, 2001. Translated from the one obtained through congress personnel.

20

(3) Propose the President to proclaim the "President's ordinance to prepare for the implementationof international cooperation mechanism based on Framework Convention on Climate Change"(4) Propose that the federal government of Russia to fix the policy in regards to the timing andmethod of Kyoto Protocol ratification, and submit a concrete bill by the end of 2001
(5) Send the representative of Russian Congress to Interagency Commission on Climate Change
and raise the position of the representative(6) Send the personnel at the level of Vice chair of government as the leader Russian delegatesdispatched to the resumed session of COP6
(7) Include congress persons and experts to the Russian delegates sent to the resumed session of
COP6(8) Prepare and review the proposal for congress statement supporting the Kyoto Protocol(9) Consign to the enlarged Environmental Committee of the Russian Congress including themembers of other relevant committees to draw by September 15, 2001, the draft of bills toenable Russian participation in the Kyoto Protocol, involving the realization of Kyoto
mechanisms and the fund input to greenhouse gas emission reduction projects.
(10) The Congress shall start to draw relevant legislation led by "the law related to economic
foundation for realizing international cooperation based on Kyoto Protocol.

Above is to outline the major points of discussion at the public hearing of RussianCongress and is not legally binding. Yet, it seems certain that the interests among congresspersons
at least are deepened and the powers constructive toward the ratification are gaining more power.
In addition, some considers that, if the government moves positively toward the ratification, it may
be possible to earn the consent of congress by government's prepared simple ratification legislation,prior to the review and adoption of various detailed domestic laws required to comply with theprotocol upon its ratification.34
Nevertheless, the ratification of the protocol is largely dependent on how and when the
Russian Government, especially the Ministry of Economic Development and Trade recognize theenormity of economic benefits Russia is to earn from the ratification, and how the congress membersof Russian Congress fully appreciate them. (Fig. 3)

34

From the interview of Mr. Kosarikov, Vice Chair of environmental Committee of Russian Congress. (Sep. 4, 2001)

According to him, some of conservatives such as those in the Communist Party which considers utmost the interestsof Russia may oppose ratification, if they are not satisfied in the scale of economic benefits from the ratification.
However, he views that the Communist Party is unlikely to make the issue binding to party decision.

21Prime Minister
Kasyanov

Consul.
President Putin
Consul.

Consul.

Ministry of Energy
Submitbill

Minister of Ecn. Dev. &Trade,Gref
Consul.
Interagency Commission on
Climate Change

Consul.

Review at Russia
Congress Com. of
Diplomacy
Consul.

Co-Chair①
Betridsky（Hydromet）

Co-Chair②
Tskanov（V.ice Min.isterof MEDT）

Russia Cong.
Env. Com.

Min. of Natural
Resource Use

Review at Russia
Congress plenary

Ratification

Preparedomestic laws
neededforcompliance

Consul.= Consultation
Fig. 3 Flow Leading to Ratification and Major Relevant Parties in Russia

Note: Prepared from authors' interviews of relevant parties.

Please note that whether ratification first or the

preparation of concrete domestic laws for compliance first depends on the scale of economic benefits Russia is toearn and the judgement of government and congress concerning international situation.

4) Moves by Major Actors (UES and Gazprom)
In October of 2000, UES established a Company named Energy Carbon Fund, aiming tosell carbon credits generated by greenhouse gas emission projects related to UES.35

Since UES's

emission quantity shares about 25% of total carbon dioxide emission in Russia, they have the largest
quantitative potential of sellable carbon credits. (Fig. 4)

35

UES, “Energy Carbon Fund”, Information paper distributed at the COP6, Hague, 2000.

As of September, 2001,

changed the name to Energy Carbon Facility.

22Gazprom 20％

Metal
Chemicals
Transport

Oil 製油refinery 10%

Other power

Other

companies

UES

25%

industries

Fig. 4 Carbon Dioxide Emission per Industry in Russia
Reference: UES Energy Carbon Fund documents

Already, there is a "half-public and half-private" institution called Center for Preparation
and Implementation of International Projects on Technical Assistance (CPPI), related to the Russian
Ministry of Energy, that provides policy proposals related to Kyoto Mechanisms, and JI investment
consulting and other services to foreign companies as an window of Russian Government. By theway, the person in charge of practical businesses in Energy Carbon Fund is the former member of
CPPI. As a part of monopoly dissolution government is about to promote today, UES considers to
cut down inefficient and unprofitable power plants, and may conduct the sales of such plants "withcarbon credits" to foreign investment in the future.
Gazprom, which shares about 20% of carbon dioxide emissions of whole Russia,
currently implements AIJ project (repairs of natural gas pipeline) with German gas company ofRuhrgas36. From what the authors heard from CPPI personnel in charge, UES's Energy Carbon
Fund was originally to cover the whole Russia including Gazprom, but as Gazprom hesitated toparticipate, it ended up with UES only.

In the near future, however, Gazprom is highly likely toenter into carbon credits trade market in some forms such as to team up with UES.
Moreover, some works are underway diligently to determine the actual emission quantity(inventories) from each emission source, for power plants under UES, at present, and the movement
to raise awareness in local plants that will directly involve in actual projects is ongoing. Therefore,
the building of a system for carbon credit sales is certainly started, although still insufficiently,
36

Rufrgas and Gazprom are deepening mutual relationship in management as the president of Rufrgas becomes a

member of Gazprom's Management Council. (Aforementioned paper, Moe and Tangen, “The Kyoto Mechanism andRussian Climate Politics”, p. 88.

23

among Russian Government and companies.

7.

AIJ Projects in Russia

1) AIJ Projects between Russia and European Countries and USA
According to a think-tank collecting AIJ information, there are 11 AIJ project either
ongoing or planning in Russia as of July 2001.37 Projects involve methane gas recovery fromlandfill, repair of natural gas pipeline, improvement in regional centralized heating facilities, forestry
and agriculture projects, and in numbers the largest is the improvement of local district heating
system. (The improvement of regional centralized heating system is especially cost-effective in
Russia and central and east European countries for the stabilization of people's livelihood as well.)
As investors, USA has six projects, Netherlands three and Germany two, etc. with overall investment
amount exceeding 16 million dollars. 38

However, these numbers are mainly based on the

declaration by both parties, and not too few may be only a plan. In reality, some indicated thatabout a half of AIJ projects in Russia have not been executed with any projection for execution.39
One of most promising JI project candidates for the future in Russia is the repair ofnatural gas pipeline. Reality is that the aging of pipeline is extremely serious, and for methaneleakage at the Gazprom only reaches about 200 million tons (in carbon dioxide equivalent). (Thisis about 16% of Japan's annual emission quantity.)40 So, the Gazprom, together with a university, athink-tank, and a company of USA, has already registered to the Secretariat of Framework
Convention on Climate Change a project to prevent methane gas leakage from pipelines (Use sealant
to stop leakage at 190 valves in total installed in the compressors of two relay stations) as an AIJ
project.41
This AIJ project provides the cost of greenhouse gas emission reduction significantly
lower than other AIJ projects (Presently, carbon credits offered by the World Bank is about 5$/tCO2,
while the cost of greenhouse gas emission reduction in this project is 0.01$/tCO2, because 1)
methane gas has 21 times as much of greenhouse effect as carbon dioxide, 2) repair cost is relatively
lower (about 16 million dollars), and 3) longer project terms of 25 years. However, the fact that
Gazprom do not make any management decision to prevent methane leakage for 25 years long, or

37

Joint Implementation Network, Joint Implementation Quarterly, Vol.7-No.2, July 2001.

38

Cartinus Jepma and Maarten Eisma, “General Discussion of the AIJ Reporting System”, p.15.

39

From authors’ interview with Russian researchers and officials, Nov. 27, 2000

40

Aforementioned paper, Moe and Tangen, “The Kyoto Mechanism and Russian Climate Politics”, p. 84.

41

Regarding the problem of this project, detailed analysis is given in the aforementioned paper of Jepma and Eisma,24there exists the management environment that allows such inaction is, in itself, irrational
internationally, and the project environment is expected to change drastically depending on gas price
hike, dissolving of Gazprom, revision of laws, etc.
Less cost of emission reduction (cheap carbon credits) is not bad in itself, but, if the cost
is improperly down, it will give the same effect as the case of unlawful dumping, and may drive out
other types of projects. Therefore, it is necessary for the low cost pipeline repair projects to fully
examine the qualification of projects, a way to set baseline scenario, cost calculation andadditionality test.
Moreover, one of candidate project under the governmental carbon credits purchasetender started by Netherlands in 1999 (Emission Reduction Unit Purchase Tender: ERUPT) is a
project in Russia, and the negotiation for the transfer of credits is ongoing between Russian
Government and Dutch government.42

2) Feasibility Study of Greenhouse Gas Emission Reduction Projects by Japan
Currently in Japan, the Ministry of Economies, Trade and Industries (METI), theMinistry of Environment, Japan Export Trade Organization (JETRO), Japan International
Cooperation Agency（JICA）, and other ministries and agencies have a scheme to bear the cost to
support Feasibility Study of CDM candidate projects with budget under various nomenclature. The
first of such a scheme was "the basic survey to promote Joint Implementation" started in 1998 atthen the Ministry of International Trade and Industries, and for the first year about 40 projects
proposed (more than 100 projects applied) from Japanese companies (mainly from power sector,
iron and steel, metals, engineering, trading houses, etc.).
The breakdown by countries shows Russia had the largest number of projects at 20
projects (the rests are 11 projects for China, 8 projects for Central and Eastern European countries
and Central Asian countries, one project for Thailand, and one for Myanmar), and the types ofprojects included energy savings by facility improvement at power plants, iron foundry, oil refinery,etc., fuel switching (from coals and oil to natural gas), improvement in regional centralized heating
facility, facility improvement of power cables and pipelines. (Table-5)
At the back of Russian projects to share more than half was the atmosphere of elevated“General Discussion of the AIJ Reporting System”, p.15
42

From the presentation by Maurice Blanson Henkenmans of the Ministry of Economies in Netherlands at the

aforementioned (in footnote 8) workshop in Moscow.

(Also available at

http://www.riia.org/Research/eep/russia.html)

25

mutual friendship between Japan and Russia following then Prime Minister Hashimoto's visit toRussia. (In 1999, number of Russian projects declined to nine projects). Japanese government
actually treated Russian projects with higher priority and companies expected some support from thegovernment. Thereafter, however, there was no concrete governmental support, and no project has
been executed as AIJ with a prospect for fund procurement.43

In other words, there is almost no

project between Japan and Russia that has greenhouse gas emission reduction as its main goal.44

43

Many of companies involved in these projects expected some kind of low interest rate loan like Yen loan or fundgratis.
44

However, international cooperation for pipeline construction is about to be implemented. For example, bothgovernment of Japan and Russia agreed on April 25, 2001, to have Japanese Government provide fund gratis of 100
million yen as the cost of feasibility study for gas pipeline construction in three states of Khavarovsk region, Sakha
Republic, and Camtxakka in the far east region of Russia.

(April 25, 2001, by NHK)In addition, Sakhalin I

project to connect Russia and Japan by pipeline is moving forward.

26

Table-5 Summary of Russian Projects selected under MITI's Basic Survey to Promote Joint
Implementation for 1998

LocationContents

1

Unknown

Pipeline

2

Khabarovsk

Oil refinery

3

Sakhalin

Coal-fueled
power plant

4

Konakova

5

Siberia6

Khabarovsk

7

Khamchatzka

8

Irkutsk

9

Sverdorovsk

Coal-fueled
power plant
Coal-fueled
power plant
Coal-fueled
power plant
Regional
centralized
heating
Coal-fueled
power plant
Steel plant

10

Magnidogorsk

11

Nijegordo

12

Leningrad,
Puskov,
Olenburg

13

Krasnoyarsk

14

Khabarovsk

15

Kemerobo

16

Vladiostock

17

Thula

18

Liuzan19

Nijegordo

20

Samala(US dollars/ton CO2).
emission
Japan-side entities
Russian side
reduction
entities
cost
New Japan Steel, Japan Steel Gazprom
16.8
Pipe,
Sumitomo
Metals,Sumitomo Co., C. Itoh & Co.,
and Mitsui & Co.
Chiyoda Engineering
Khabarovsk Oil
11.9
Refinery
Mitsui & Co., Japan Steel Pipe, Sakhalinskaya
34.1
Kawasaki Heavy Ind., Unico Power Plant
International
KEPCO, Mitsubishi Shoji
UESPower Sources Development

UES

Sumitomo
Shoji,
Chubu Khabarovsk Oil
Electric Power Co.
RefineryJapan Heavy Chemical Ind.
Cityof
Khamchatzka

23.1

Nikki

27.2

Irkutsk ElectricPower Co.
PatecoSverdorovsk
Electric PowerCo.
Steel Plant
New Japan Steel
Magnidogorsk
Steel Co.
Coal-fueled Unico International, Toden Nijego Electric
power plant Design, Mitsui & Co.
Power Co.
natural gas Unico International, Toden Leningrad
power plant Design, Mitsui & Co.
Power
Co.,
Olenburg PowerCo.
Oil refinery Chiyoda Engineering Co.
AsunchikOil
RefineryCoal-fueled Mitsubishi Shoji
UES
power plant
Steel Plant
Mitsubishi Shoji
Gznetz
Steel
Plant
Coal-fueled Sumitomo & Co., IHI, Toshiba Dali
Electric
power plant
Power Co.
Coal-fueled Sumitomo & Co., TEPCO
UES
power plant
Coal-fueled Sumitomo & Co., Power Leiuzanskaya
power plant Resource Development
Power Plant
Regional
Mitsui&Co.,
Unico Stateofcentralized
International
Nijegordo
heating
Oil refinery Mitsubishi Shoji
Guyvishev Oil
Refinery, etc.

15.7

4.8
N/a
n/a
36.2

11.2
16.8
11.0
23.4
16.0
11.5
N/a
14.4

27

Note: Emission reduction costs are, in many cases, calculated by dividing capital investment by the volume ofgreenhouse gas emission reduction. (Unit is Dollars/ton Carbon Dioxide).

However the calculation of emission

volume and costs differ significantly from a company to another, so the cost comparison between projects needs
cautious approach.
Reference: Prepared by authors from New Energy Industrial Technology Development Institute, Mitsubishi ResearchInstitute, "Analysis of the result of basic study to promote Joint Implementation for the year 1998", 1999 Survey
Report NEDO-GET-9901.

8.

Future Tasks
In this section, we shall list up concrete examples of Kyoto Protocol system designing forwhich both Japan and Russia can contribute.

1) Earlier Start of Trading
For Russia, although there may be a limit in tradable quantity, it is favorable to earn cash
revenues by the earlier start of JI and emission permit trading (early trading), thereby become able toinvest on actual greenhouse gas emission reduction projects. Presently, within developed countries(or their companies, for example between Japanese company and Australian company) or between
developed countries and countries in central or eastern Europe or South America, some carbon
credits trade contracts have been already made. However, in case of Russia, reality is that theirrisks are too large to find a purchaser in Japanese trading market.45
The Russian Federation Institute of Energy Strategy of Ministry of Fuel and Energy
suggested concrete proposals on early trading, from a view that overselling risk is small when the
trading quantity is less than 1% of emission quantity.46

Such small trading certainly present merits

to both investor side and host side. For this, however, it is necessary for Russian side to establish
actual emission quantity (inventories) at major emission sources such as power plants. Next, it isessential to have organizational responses that can reduce various risks surrounding carbon credit
trading. Moreover, it will be necessary to fully persuade international society, which fears thediversion of cash revenues earned through early trading to application other than environmental
conservation (in the worst case, transformation to unaccounted-for expenditure, overselling of Hot
Air, and Russia's market monopoly, by clarifying the merits of early trading and the use of funds, tobe specific, by declaring the mandate for reinvestment of cash revenues to greenhouse gas emission

45

From authors' interview of carbon credit traders in Japan (July 19, 2001).

46

Aforementioned Ministry of Fuel and Energy of the Russian Federation Institute of Energy Strategy, “Kyoto

Protocol and Russian Energy”, p.15

28

reduction projects (Green Investment Scheme47).

2）Debt-Carbon Swap
A scheme to conduct a swap (exchange) between foreign debt and carbon credits, whichauthors and others have proposed as an effective use of public funds48 such as ODA of Japan.49
At present, Russia is not Japan's ODA subjected country, so that the loans provided byformer Export-Import Bank of Japan, or debts in the private sector can be the subject of a swap.
Actually, USA's think tank also proposed similar debt-carbon swap, and it was reviewed under the
Clinton administration as one of really effective options.50
Nonetheless, there are different moves ongoing in regards to the repayment of Russian
foreign

debt

today.

FinlandGovernment,

forexample,proposed to Russian side

"debt-transformation project" to exempt accumulated debt, on the conditions that Russia agrees tojointly build environmental cleaning (waste water treatment) plant near Sankt Petersburg. 51
German Government and Russian Government are also about to reach an agreement on the exchange
of Russian debt to Germany and the stocks of Russian power company.52

Furthermore, when

President Putin visited Korea at the end of February, 2001, Korean Government and Russian
Government agreed to exchange Russian debt to Korean Government with Russian armament.53 In
addition, recent (September 14, 2001) interview authors conducted in Moscow, the Vice Chairman ofEnvironmental Committee at the Russian Congress, Mr. Kosarikov stated that "Russia hopes toredeem about 60 billion dollars of its 165 billion dollars foreign debt by debt-environment (including
carbon) swap."
Japanese Government is undertaking the steps for practical debt cancellation for heavy
debt country in Africa, etc. (provision of fund gratis for debt repayment). Therefore, although someproblems such as financial additionality remain, barriers for the practical swap of debt and carbon
seem to be less than expected. Nonetheless, in regards to carbon credits, both host country and47

The idea to use revenues from emissions trading for development and implementation of energy efficiency

improvement projects in Russia has been developed over several years.
48

Under the rules of the Kyoto Protocol, public funds used to earn carbon credits should not be those diverted fromexisting ODA funds.
49 Refer to Ishii, Atsushi, Asuka-Zhang Shouchuan(Jusen), and Tomoyuki Tanabe, " Debt-carbon Swap : ODA's

options of global warming measures ", 2000 (Available at http://www2s.biglobe.ne.jp/~stars/)
50

Aforementioned paper of Moe and Tangen, “The Kyoto Mechanism and Russian Climate Politics”, p. 66.

51

Yomiuri Shimbun, May 12, 2001

52

Inter-fax Telecommunication, December 10, 2000

53

Asahi Newspaper, February 28, 2001

29

investor country need to adopt flexible and strategic thinking.

3) Jointly Building Information Monitoring System
Russia does not have full and required infrastructure in sciences, such as monitoring
system.

Therefore, in consideration of international cooperation on warming measures between

Japan and Russia especially the Russian Far East region, which has strong tie with Japan, it isfeasible to consider the joint construction of monitoring system such as for the information on forest
fire, which becomes significant problem in Russian Far East region. The greenhouse gas emission
from forest fire is a problem found in various parts of the world, and Russia is no exception.54

For

example, in Khabarovsk region, forest fires from 1990 till 2000 are 617 cases in annual average,
with the damaged area extended to 230,000 ha, releasing 64 million tons of carbon dioxide into theatmosphere. For the whole region of Russian Far East, some data showed the release of about 50
million tons/year of carbon dioxide from forest fire, which is equivalent to about one half ofenergy-related emission quantity in the region (about 4% of yearly emission quantity in Japan).
(Table-6)

Table-6 Carbon Dioxide Emission Quantities from Fossil Fuel Consumption
and Forest Fires in Russian Far East Region(million tons)
Emission sources of carbon
dioxideFossil fuel consumption
Forest fires

1999

2010 (forecasted)

102.6
50.4

94.9
50.4

Reference: Alexander S. Sheingauz, “The Kyoto protocol and the Russian Far East: Possibilities of Cooperative
Policies for Sustainable Development”, Economic Research Institute Khabarovsk, Paper prepared for “Sustainable
Development and Energy Security for Northeast Asia: Prospects for the International Cooperation”, June 26-28, 2001,
the Economic Research Institute for Northeast Asia, Niigata, Japan.

Monitoring of forest fires using high-resolution satellite images is fully available, andpresents considerable academic significance.

Although still in a smaller scale, National

Environmental Research Institute of Japan and several universities are already conducting image
processing of Russian regions using satellite data. Moreover, Japan's Ministry of Environment andthe Ministry of Economy, Trade, and Industries are about to actively promote the building of anenvironmental monitoring system in Asia, presently. Therefore, it may be possible to integrate such

54

Regarding forest fire problem in Russia, refer to the aforementioned paper, Sheingauz, “The Kyoto protocol andthe Russian Far East: Possibilities of Cooperative Policies for Sustainable Development”

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research works and system buildings, and incorporate database for monitoring forest fires in Russia
using satellite images.

9. Conclusion
In the international community (Japan, Russia, EU, and developing countries) concerning
Kyoto Protocol, the "wishes" of each national government can be summarized as follows:

Japan:
Wants to enact the Protocol. Wants to purchase Hot Air at lower cost. Wants tostrengthen energy security system (for example: building gas pipelines). It wants tohave a friendly relationship with Russia, but to solve diplomatic concerns such as
Northern Territory issue.
Russia:Wants to enact the Protocol. Wants to sell a large mass of Hot air at higher prices.
Wants to get technologies. Wants to win other different demands (if possible) by theratification card and Hot Air.
EU:
Wants to enact the Protocol. Do not want Russia sell too much of Hot Air. Yet wants
to purchase certain amount of Hot Air from Russia.
Developing countries:
Wants to enact the Protocol. Do not want to let Russia sell off too much Hot air.

On top of such intertwined relationships, there exists one uncertain element of "USA's
return to the Kyoto Protocol." Therefore, policy-makers of each country need to adopt strategic
thinking based on economic knowledge and accurate information. In addition, one of major issues
in the future international negotiation is the carbon credit price negotiation. Moreover, it is likelythat bilateral and multilateral "deal" with various issue linkage will be conducted openly and at thebackground of diplomacy and businesses, in association with price negotiation or as the one
accompanying carbon credits.
However, energy issues and global warming issues are primarily the issues to beaddressed in international society as a whole with long-term perspective, must not be abused bysome countries or by the talks of compliance costs of a private firm 10 years from now. The
enlargement of non-transparency not only is against the trend of pursuing accountability31

(responsibility to explain) of policy-making, but also may invite the international regime hollowed.
Furthermore, it is necessary for the world to start the discussion of reduction obligation for thesecond commitment period including developing countries, and, for this, developed countries must
set a clear example.
For the international cooperation with Russia, EU is a way ahead of Japan and USA
probably because of geographic, and historic factors. About 20% of natural gas and about 16% of
oil consumed in EU are imports from Russia, and EU is the largest export destination for Russia.
As shown in the agreement of "Energy Partnership Initiative by Europe and Russia" made by
President Putin and Proddi EU Committee Chairman in October of 2000, their cooperative
relationship is developing with active exchanges among researchers and companies.
However, the subject regions of EU cooperation tends to concentrate in the Northwesternpart of Russia closer to Europe.

Needless to say, the strengthening of relationship between Japanand Russia in the fields related to global warming and energy will contribute to the aspects of energy
security and Kyoto Protocol enactment, but moreover provide significant importance in terms of cost
reduction for Japan’s compliance with the Kyoto Protocol, under the current situation of hardly any
progress in designing Asian system (although a problem remains on whether to select Asia or Russia.
Nevertheless, in regards to the Kyoto Protocol, it is necessary, especially for Russia andJapan to reinforce domestic measures such as energy savings, and to address urgently the risks
related to carbon credits and the reduction of transaction costs. The most urgent matter is for bothpublic and private sectors to formulate a concrete system for each nation and for international
community. We only have 7 more years until 2008, when the first commitment period begins.

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