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Russian Carbon Credits: The Goldrush Comes A Little Nearer
11 July 2007
Russian Carbon Credits: The Goldrush Comes A Little Nearer

Russian Carbon Credits: The Goldrush Comes A Little Nearer
LeBoeuf, Lamb, Greene & MacRae LLP
June 2007

On 28 May 2007, the Russian government published Decree No. 332 in relation to the procedure for approval and verification of Russia-based Joint Implementation (JI) carbon reduction projects under the Kyoto Protocol.[1] But have the many legal and practical barriers to successful JI investment in Russia now been removed or just increased?

Introduction

JI is one of the two project-based mechanisms of the Kyoto Protocol that may be used by Annex I (developed) countries[2] to fulfil their emissions reduction targets. The other mechanism is the Clean Development Mechanism (CDM). The Kyoto Protocol sets a cap on greenhouse gas (GHG) emissions that each industrialized country is allowed to emit in the period 2008-2012. JI and CDM are intended to allow the promotion of GHG emission reduction projects in another country. JI projects are located in Annex I countries, whereas CDM projects are located in developing countries without a reduction commitment.

Projects can comprise either:

(i)   emissions reduction projects (such as switching from a high carbon-emitting boiler to a lower carbon-emitting boiler); or

(ii)  projects that enhance carbon removal by means of carbon sinks (such as CO2 storage and sequestration and forestry projects).

Joint Implementation in Russia

The base year of the Kyoto Protocol is 1990 and Russia negotiated an emission reduction target for itself of zero percent against 1990 levels. After the collapse of the Soviet Union in 1991, the GHG emissions in Russia went down considerably and as a consequence Russia is expected to be comfortably below the Kyoto cap of 500 - 700 million tonnes of CO2 per annum in the period 2008-2012. For Russia, like many other Central and Eastern European countries, meeting its Kyoto obligations will not, therefore, be a problem. Russia is viewed as the largest potential host for JI projects in the world and the state views the potential for generation of carbon credits in Russia as a precious national resource to be exploited.

Though a number of JI projects are well under way in Russia, including some that have entered the installation stage, no Russian JI projects have yet been formally approved, as the Russian national legal and practical framework supporting them is not yet in place. However, it has been reported that according to one Russian official following the publication of the Decree, the JI approval process could begin as soon as July 2007.[3]

The Recent Decree

The Decree has clarified a number of important areas for investors in JI projects in Russia but left many other key issues unresolved. It is important to realise, in particular, that the Decree only addresses administrative issues relating to applications for approval of JI projects in Russia and verification of emissions reductions.

Crucially, the Decree does not address some of the outstanding fundamental issues for potential investors in Russian JI projects surrounding ownership and passing of title to Russian JI credits, issuance and delivery of those credits, and appropriate contractual and payment mechanisms. For example, it seems clear that the Russian Federation regards JI credits (Emissions Reduction Units or ERUs) generated by projects based in Russia to be a state asset, only capable of being transferred between states. It is not clear whether foreign investors will be able to receive ERUs directly from Russian companies by means of opening accounts within the Russian Register of Carbon Units (see further below) or even directly from the Russian government. If this is not possible, investors will need to agree a mechanism for delivery of ERUs to them by their own state upon transfer of the ERUs from the Russian national register to the JI investors state register. This in turn raises tricky issues regarding payment for such credits and means that it will in practice not be sufficient just to enter into standard Emissions Reduction Purchase Agreements (ERPAs) for the direct acquisition of Russian ERUs.

These issues should be resolved by the adoption of procedures for creating a Russian National Register of Carbon Units. In February 2006, the Russian government issued a special act instructing the Ministry of Natural Resources and the Ministry for Economic Development and Trade (MEDT) to develop and approve procedures for establishing and keeping such register by 1 June 2006.[4]  These procedures are still not in place, which has caused concern. However, the entity that will be the administrator of the register, the Federal Centre of Geoecological Systems, has now been established under the umbrella of the Ministry of Natural Resources.

Dispite these outstanding issues, the Decree does at least, albeit 2 years late, advance our understanding of how some aspects of the Russian JI process will work in practice. Some of its key elements are set out below:

    • Application request

The formal project application must include the following:

    Details of identity of applicant

    Project Documentation (see below)

    Expert Opinion (see below)

    Project Passport (see below)

    Copies of constitutional documents of applicant

    Copy of the certificate of state registration of the applicant if he or she is an individual entrepreneur, their registration as an individual entrepreneur

    Copy of the identification document of the applicant if he or she is a private individual

    A copy of the certificate of tax registration of the applicant in the country of incorporation

    Documents evidencing that the applicant has sufficient funds

    Certificate of timely tax payments for applicants incorporated in Russia

    Proof of consent to project from project facility owner

    Details of proposed project managers

    Detailed project implementation plan, including schedule for purchases and installation of equipment

    • Coordinating Centre

The application must be sent to the JI Coordinating Centre for the Preparation and Approval of Projects (the Coordinating Centre). The Coordinating Centre is based at the MEDT. However, federal executive authorities (the Federal Authorities) will also review the Project Documentation within their relevant sphere of authority and monitor the status of projects.

    • Commission

A commission (the Commission) is to be created by the Coordinating Centre, with participation of authorized representatives of the Federal Authorities. The Commission will take the final decision to approve a project.

    • Project Documentation

The Project Documentation to be submitted with the application request includes the following:

    The name of the project, its objectives, targets and the implementation period

    The type of project (reducing emissions or enhancing removal by carbon sink)

    The category of sector, source and/or carbon sink

    Characteristics of the project allowing allocation of the source to a specific sector or source category and location of source, or identify the relevant carbon sink

    The project baseline for the entire project term

    The target level of emissions reductions and/or removal by carbon sink for the entire project term

    Description of measures to ensure that targets are met

    Description of the technology, products and activities envisaged by the project

    Summary of the projects environmental impacts

    Description of the potential risks related to the project and risk mitigation measures

    Methodology and the plan for monitoring emissions reductions and/or removal by way of carbon sink

    • Expert Opinion

An Expert Opinion for the project must be prepared by an independent expert chosen by the applicant from a list of eligible experts approved by the Coordinating Centre and selected by the Commission. The list of independent experts will be published on the Coordinating Centres website.

    • Project Passport

A separate Project Passport must also accompany the application for project approval. In addition to the information set out in the first four bullets of Project Documentation, the Project Passport must also contain:

    The Project Performance Indicators (PPIs) and a comparison with the standard PPIs and their threshold values, as approved by the Coordinating Centre, subject to consent of the relevant competent Federal Authorities, and published on the Coordinating Centre website

    The target level of emissions reduction and/or removal by way of carbon sink resulting from the project during its entire term

    The name, form of incorporation and location of the entity for Russian and non-Russian legal entities

    The full name and place of residence of individuals and individual entrepreneurs

Documentary formalities

The Project Application, the Project Documentation and the Project Passport must be signed by the applicant or its authorized representative and three copies of each document must be submitted to the Coordinating Centre. If copies of the required documents have not been notarized, they must be accompanied by the corresponding original documents.

Any foreign applicant shall provide the documents in the official language of the country of incorporation of such entity accompanied by certified Russian translations. Applicants are not required to provide any documents not specified in the Decree.

    • Outstanding issues

Despite the provisions set out above, there are a number of important questions that remain to be addressed. This has caused disappointment among potential project developers who have been waiting for firm guidance so that they can put definitive plans into action. Some of the key remaining uncertainties are:

    • Capping of allocation of allowances

The Decree states that an application may be rejected where a project would cause the emission reductions quota for a particular sector, source category or carbon sink, as set annually by the Coordinating Centre, to be exceeded. The intended goal and precise quotas in respect of this provision are not set out and information will need to be made available in advance in order that potential applicants are able to take account of this restriction, if indeed it is to be imposed at all.

    • Absence of international agreement

The Decree states that the METD will agree a draft standard treaty to be entered into between the Russian government and foreign governments in respect of the implementation of JI projects by 1 September 2007. Though not a requirement of Russian law, this may be required by non-Russian governments and in practice the existence of a bilateral agreement is also desirable for project investors. It is to be hoped that negotiations between the relevant government departments to put this in place do not lead to further delays.

    • Need to form a Commission

The Commission has not yet been formed. Though this is not likely to take a substantial amount of time, this will need to be done before substantial progress can be made in respect of JI projects in Russia.

    • Role of Federal Authorities

The Decree states that the federal executive authorities shall review the project documentation within their authority and monitor the status of the projects in accordance with the provisions approved by this Decree. The relevant Federal Authorities have not yet been identified but have an important role in the decision making process (see below). Uncertainty in relation to the role of different Federal Authorities may lead to further negotiations as to who should be involved in the decision making process and at what point, causing further delays.

    • Uncertainty as to the decision making process

Lack of expert list:  The Commissions review will be based on, among other things, the Expert Opinion and the response to the application by the Federal Authorities. However, the list of experts has yet to be determined and no timeframe has been set out for the list to be made available.

Political risk:  The Decree lists a number of grounds upon which the Russian government, acting in accordance with a request by the Coordinating Centre, may exclude a project from the list of approved projects, even after it has been approved. These are:

    The project investor fails to submit project status reports more than 30 days after their due date on more than one occasion

    The project investor fails to comply with the PPIs during implementation of the project

    The project is not approved by the investor-side government within 12 months of the project being approved by the Russian government

    The investor-side government revokes its approval of the project

    The project investor is wound up, becomes insolvent or dies

Finally, the project may be excluded in other instances where a decision of the government of the Russian Federation may be required. This  gives the Russian authorities a very wide discretion to disallow any application or subsequently disqualify a project, which project developers will find very unsettling.

    • Passport and Efficiency Standards

The form of the Passport is to be specified by the Coordinating Centre, but this has not yet been determined. Further, the efficiency standards referred to in Project Passport (see above) have not yet been defined and are still being prepared by MEDT.

    • Indeterminate timescale

The Coordinating Centre must register the project and forward documentation to relevant Federal Authorities for review within 10 days of delivery of the Project Documentation. Federal Authorities will review the Project Documentation and deliver a reasoned response accepting or rejecting the project within 30 days of receiving the Project Documentation. The Commission will decide the outcome of an application no more than every quarter. Formal approval of the project will be granted by the Russian government. Beyond these guidelines, there is little indication in the Decree of the total timescale for approval of a project.

Conclusions

Despite the demand for JI projects in Russia and the additional information provided by the Decree, a number of crucial areas remain either unaddressed or uncertain. Though the Decree represents a positive step in the right direction, a number of its provisions are unsettling for potential investors and further work will be required to address unresolved matters in order to allow JI projects to flourish in Russia.

Lawyers in LeBoeuf Lambs global multidisciplinary Climate Change Group are actively engaged in relation to GHG emissions reductions projects around the world, including in Russia.

For further information, please contact Nicholas Rock at +44 20 7459 5212 or nicholas.rock@llgm.com, John Bowman at +44 20 7459 5209 or john.bowman@llgm.com, Ilia Miniaev at +7 495 737 5126 or iminiaev@llgm.com, or Olga A. Ponomarenko at +7 495 737 5000 or oponomar@llgm.com.

2007 LeBoeuf, Lamb, Greene & MacRae LLP. All rights reserved. Republished with permission.

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[1].  Decree No. 332, dated 28 May 2007, Procedure For Approval And Verification of Status of Projects Carried Out In Accordance With Article 6 Of The Kyoto Protocol to The United Nations Framework Convention On Climate Change

[2].  Industrialised countries with a reduction commitment under the Kyoto Protocol

[3].  PointCarbon CDM & JI Monitor, 13 June 2007, page 6, Recent JI developments

[4].     RF government Executive Order No. 215-r of February 20, 2006.

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