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Monday, June 09, 2008

Russia: Carbon King

The Moscow News reports:

Selling mortgages to people who can't pay them back turned out to be a bad way of doing business in the long run. But inflated credit rates are nothing compared to the droughts, plagues, floods, forest fires and general death and destruction which may be the long-term effects of companies churning out carbon emissions with no thought to their long-term impact on the environment. This lack of foresight could lead to the most wide-ranging market failure ever according to Lord Nicholas Stern, author of an influential economic report on global warming, who will be speaking at this year's Forum. And while Russia's emissions are lower than Kyoto treaty targets, Russia remains one of the least energy efficient economies in the world. Worse still there is evidence that Russia is bearing the brunt of global climate change.

Stern's review provides an apocalyptic account of the dangers of global warming; asserting that governments and businesses must act now to combat climate change or face devastating economic consequences. The report predicts that a rise of five degrees Celsius in the average global temperature could result in a loss of up to 10 percent of global output while the extreme weather patterns associated with such a rise could cost up to 1 percent of GDP.

This rise could happen within the next few decades according to a recent assessment made by the Intergovernmental Panel on Climate Change which predicts a warming of about 0.2°C per decade for next two decades. Eleven of the last twelve years (1995-2006) rank among the twelve warmest years since records began in 1850.

There is evidence that Russia is already suffering from the changing global climate; the annual number of natural disasters, such as floods and forest fires, in the country has doubled since the mid 1990s leading to an annual loss of between 2 and 4 percent of GDP.

In 2004 the Russian government formally recognized the growing problem of climate change by signing up to the Kyoto treaty, which aims to reduce global greenhouse gas emissions from industrialized countries to 5.2 percent below what they were in 1990. Russia's current emission levels are well below the quota set for the country under the treaty. However this apparent success disguises the fact that Russia remains the third biggest air in the world polluter after China and the U.S.

The main reason why Russia has been able to keep to emissions targets is because the collapse of the economy in the 1990s led to a massive decline in industry and therefore carbon emissions and the country is only beginning to catch up:

"Russia has 27 percent less emissions than it had in 1990s," Vladimir Chuprov, head of the energy department of Greenpeace, told The Mos­cow News.

"But it is predicted to produce 2.4 billion tons of CO2 emissions by 2025 which means that Russia will not decrease its emissions but just use the quota it received after the collapse of the Soviet Union."

Swamped with natural oil and gas resources, it is understandable why energy efficiency has not been high on the agenda for Russia. But as the country's domestic fuel consumption steadily increases in step with the rise in GDP, action will need to be taken in the Russian energy sector in order to meet both its domestic needs and its export obligations.

Director Jeroen Ketting, director of Lighthouse Energy Investments, a group which carries out energy efficiency, heat and power generation projects in Russia, told The Moscow News:

"Russia uses three to four times more energy per produced dollar of GDP than other industrialized countries, and industrial production and thus energy consumption is increasing. But 50 percent of industrial equipment installed is old and inefficient and the energy infrastructure is deteriorating. Moreover, Russia has a lot of gas and oil reserves but its capacity to produce and to transport oil and gas are limited. With increasing domestic and international demand and with existing export commitments Russia's energy household is stretched to its very limits."

There is a worry that Russia will try to fill this energy shortfall in the same way that China has; by increasing the use of coal in the energy mix. This would come as a blow to environmentalists as burning coal seriously affects both the climate and human health. Just one 150-megawatt coal-fired power plant produces more than one million tons of greenhouse gas emissions per year; the amount that 300,000 cars would produce. The large quantities of sulfur dioxide, nitrogen oxides and particulate matter that these plants produce have also been shown to cause respiratory problems and even premature death.

Russia is currently planning to triple the share of coal in the energy mix so that the amount of coal burnt will grow to between 150 million and 290 million tons of coal per year by 2020. This switch to coal to meet domestic energy demands is expected to boost the Russian economy by 30 percent but could lead to serious problems for the Russian population:

"The new coal-fired power plants will be constructed near consumers, near big cities, and some scientists are forecasting a dramatic growth in extra mortality rates. There is currently no real strategy for avoiding the growth of sulfuric and nitrous pollutants that will be emitted from these plants," said Chuprov.

However, as Europe has demonstrated, there is a way for economic growth to go hand in hand with a decline in greenhouse emissions if significant energy saving policies are introduced. CO2 emissions in Central Europe fell by over 43 percent in relation to GDP between 1990 and 2002 through implementing such measures, according to figures from the U.S. Energy Information Administration. The Russian government has calculated that the country could save up to 40 percent of its current annual energy consumption through improved efficiency.

Converting to energy efficient technology can be costly but fortunately Russia can receive financial help to cover these costs under the Kyoto agreement. This allows countries to lower the costs of meeting their own emissions targets by investing in greenhouse gas reductions in other countries where reductions are cheaper through Joint Implementation (J.I.) projects.

Russia has the largest potential for generating carbon credits through of all Kyoto signatories, according to IFC international, a company which provides energy consulting to governments.

"In principle the potential for J.I. projects in Russia is huge," explained Morten Prehn, Director of Core Car­bon Group which currently leads the supply of Russian emission reductions to the international market.

"We support the type of investments that have good long-term benefits for Russia and we are also willing to take a risk in providing the capital for implementing some of these projects," said Prehn.

Several J.I. projects are already successfully underway in Russia including a project supported by the Russian Carbon Fund (an investment company backed by Merrill Lynch & Co.) to cut greenhouse-gas emissions at a plant owned by Russia's biggest producer of phosphate fertilizer. But according to the Stern report one percent of GDP needs to be invested annually in order to avoid the worst effects of climate change and so far Russia is still a long way from reaching this figure:

"Formally the government recognizes the need for enhancing energy efficiency but in practice very little effective action is undertaken," Ketting said.

"Also among big business the need for energy efficiency is not sufficiently recognized. In a country where money is easily made selling off national assets on the cheap the understanding that a ruble saved is a ruble earned is still far away."

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