Russia seen losing out by trying to sell hot air
Date: 20-Sep-99
Country: RUSSIA
Author: Sebastian Alison
"There could be a very large volume of surplus credits from Russia for
sale or transfer," Michael Grubb, associate fellow of Britain's Royal
Institute for International Affairs, told a seminar on Russian energy,
emissions and climate change.
"The question is, could that volume of surplus undermine the price?
Could it undermine the whole credit mechanism?"
Emissions trading is a new concept which may become widespread following
the adoption of the Kyoto protocol on climate change in December 1997.
This stated, in simplified terms, that the world should limit emissions
of greenhouse gases to 1990 levels by 2010.
For economies where energy use is rising, this would mean either using
less fuel, or buying "credit" for unused emissions from countries where
fuel use is falling.
Chief among these is Russia. Because its economy has been in sharp
decline since the Soviet Union broke up at the end of 1991, its energy
use has fallen dramatically.
Jonathan Stern of the Royal Institute said total Russian energy use in
2010 would be around 20 percent below 1990 levels.
Since Russia has agreed merely to "limit" its 2010 emissions to 1990
levels, this means that it will then have exportable credits worth 20
percent of all its emissions.
HOW TO VALUE A NOTIONAL COMMODITY?
Valuing this is not easy, Grubb said, pointing out that "we're talking
about trade in a commodity which only exists because of international
agreements".
But he said Russian carbon dioxide emissions were around a billion
tonnes in 1990, so by 2010 credits for some 200 million tonnes could be
available for sale. At around $10 per tonne, this would be worth a
notional $2 billion per year, and Grubb agreed the value was "in the low
billions".
The problem is that this surplus is so high that, with credits from
Ukraine, whose economy has also shrunk, it could exceed global demand,
making the credits effectively worthless.
Stern explained this by saying Russia's limit was set too high
initially. In a shrinking economy, allowing 1990 emissions levels in
2010 meant a surplus was inevitable and had not been earned by any
environmental discipline.
Such a reduction in emissions, created not by any change in economic
behaviour but simply by economic decline, is known in the trade as "hot
air".
For Russia to benefit from emissions trading, Grubb argues, it should
stop trying to sell hot air and seek to sell genuinely earned credits
instead. There would be fewer of them, but they would be worth
something.
But this view does not find favour in Russia.
"What you call hot air is the national patrimony of Russia, and we must
preserve it," said Alexei Mastepanov, climate change specialist at the
Fuel and Energy Ministry.
"Russia has paid in full for the economic recession, not a single other
country has lost half its production and so reduced its greenhouse gas
emissions."
But by demanding full value for hot air, Russia may end up with nothing.
What it needs more than anything, Mastepanov said, is general economic
change.
"To effect normal credits and make normal payments one needs first a
normal economy. At present Russia does not have one."