Russian Industry and the EU Carbon Border Management Mechanism

There is no need for Russia to copy the EU green policies regardless of whether these are economically feasible, efficient and fit for the domestic market and the country’s national goals. Massive subsidies for solar and wind might be less efficient both from the climate and economy point of view than simply improving energy efficiency and increasing usage of gas and hydrogen in power generation. Russian companies should not just “import” the EU approaches to carbon management – instead they should use diplomatic and public relation tools to get their concerns heard by the regulators in Beijing, Brussels and Washington, writes Valdai Club expert Danila Bochkarev.

It has become increasingly challenging for the Russian industries to ignore dramatic shifts reshaping the global energy landscape. The Green Deal proposed in December 2019 aims to turn Europe into the first “climate-neutral” continent by reducing Europe’s greenhouse gas (GHG) emissions to net zero by 2050. The Biden presidency put the climate change back on the federal agenda, more than ever. In September 2020, President Xi Jinping pledged that China would become carbon neutral by 2060.

These plans will not be limited to domestic politics only: “green” policies of the key global state actors are likely to have an external dimension as well.

For example, the EU – Russia’s largest trading partner – wants to put a carbon price on all energy-intensive imports including energy and raw materials via a Carbon Border Adjustment Mechanism (CBA). Most likely the CBA will be implemented via an extended EU Emissions Trading Scheme (ETS) and not via a tax which will reduce ability to challenge these policies at the WTO. In fact, the European Commission already confirmed that the CBA mechanism will be designed to take full consideration of the WTO rules and other international obligations of the EU. Considering the high carbon intensity of Russian exports to Europe, Russian companies are likely to be affected, especially considering that the prices for GHG emissions permits in Europe are setting records. On January 12, CO2 cost a record 35.42 euro/tonne and might reach 40 euro/tonne already in 2021. An energy pricing agency Argus forecast that the carbon cost might reach 65 euro/tonne. The calculations made by BCG evaluate the cost for the Russian exporters at US$3-US$4.8 billion per annum, while alternative estimates by KPMG assess the cost – depending on scenario – between 6 and 50.6 billion euro in 2022-2030. 

The regulatory challenge is aggravated by a tectonic shift happening in the financial world. Recently, ESG(Environmental, social and corporate governance)-related investments have outperformed “traditional” financing and the companies have to prove their “green” achievements to get investors on board. In 2020, ESG ETFs attracted $85 billion in the US and Europe. As of September 2020, assets held in sustainable funds reached $1.2 trillion and in late January 2021 Norway’s sovereign wealth fund sold all of its oil stocks.

In December 2020, Russian Railways (RZD) placed social (ESG) eurobonds to fund social projects in areas such as transport accessibility, healthcare, education and disaster relief. The company’s CEO Oleg Belozerov announced that PIMCO, a US$2 trillion investment fund refused, despite initial interest, to purchase RZD bonds because over 50% of the company’s freight turnover are carbon goods. Compliance with the ESG standards becomes therefore a new challenge for the Russian companies which attract international financing. 

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Moscow is often being accused of “climate inaction” and that is not entirely true. In addition to becoming a party to the Paris Agreement, Russia is taking some specific steps to improve environment and decrease GHG emissions. For example, the Government proposed to reduce the ability of Russian enterprises to pay the dividends in case their business practices are believed to be damaging for the environment. Furthermore, the Russian government has submitted to the State Duma a draft law on greenhouse gas emissions with a mandatory reporting on GHG emissions. There are plans to create a national emission trading system and tax incentives for the implementation of environmental projects. Last but not least: a court in Krasnoyarsk has imposed a record fine of 146.18 billion RUR (1.62 billion euro) on Nornikel – world’s largest nickel and palladium producer – setting a precedent for a state-led legal action against the companies damaging the environment. 

Russian industry has also already taken a number of steps to reduce its carbon footprint but unfortunately these measures are not well known to the general public, especially beyond Russia. Furthermore, Gazprom Group is the 5th company on the RAEX ESG Rating 2021 (category – “environment”), second only to LUKoil among Russia’s upstream energy companies. The company also managed to achieve nearly “zero” emissions of methane – a potent GHG – from its operations. Gazprom’s methane leakage amounted to 0.34 % of the volume of gas along the value chain. These numbers are comparable with Equinor’s results (0.3 %), a Norwegian company known for its high environmental standards, and well below 0.6% average for the gas distributed and consumed in Europe. Carbon footprint of Gazprom’s production (315 kg CO2e/boe) is one of the lowest among energy companies behind Chevron (358 kg CO2e/boe) or ExxonMobil (353 kg CO2e/boe). The company is also investing in production of low-carbon/zero carbon methane-hydrogen mix and “blue” hydrogen from natural gas.

Rosatom expands its joint-venture with Gazprombank to build up to 1 GW of wind power capacity. The company plans as well to launch hydrogen production plants and launch a hydrogen-power train as of 2024.

Aluminium producer Rusal offers products with a low carbon footprint (Allow) and has set the goal of at least 95 % of carbon-free electricity in aluminium production by 2025. 

Russian Railways (RZD) have reduced its carbon footprint by 85% since 2003. More than half of the rail network has now been electrified and electric trains transport 85% of all passenger, while 87% of the company’s freight is transported by electric traction. RZD also claims to be the world’s most efficient rail company. But let’s not forget that Russian Railways’ “green” achievements are legacy of the Soviet-era projects – massive railway electrification in 1970s and 1980s.

These achievements may not be as impressive as what has been already done in Europe but this should not preclude the development of Russia’s own carbon policy.

There is no need to copy the EU policies regardless of whether these are economically feasible, efficient and fit for the domestic market and the country’s national goals. European policies are too costly to be implemented in Russia. Massive subsidies for solar and wind might be less efficient both from the climate and economy point of view than simply improving energy efficiency and increasing usage of gas and hydrogen in power generation. Engagement with the ESG finance should be careful – “dot-com” era clean energy stock valuations bring “bubble” fears to ESG funds. 

Russian companies should not just “import” the EU approaches to carbon management – instead they should use diplomatic and public relation tools to get their concerns heard by the regulators in Beijing, Brussels and Washington. The first step has been done – Russian enterprises or business associations (Rusal, NLMK, Russian Steel Association) participated in the Public Consultation on Carbon Tax on Imports to the EU but this engagement should be broader and more proactive. Sustainable economy matters for Russia but over-investing in an inflated financial or regulatory “green” bubble would be counterintuitive.

The opinions expressed in this article solely reflect the views of the author, not of his organisation.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.