Article Russian Federation: Cap-and-Trade Program Initiated

On February 16, 2022, the State Duma of the Russian Federation (legislature) adopted the Law on Conducting the Experiment in Limiting the Emission of Greenhouse Gases in Selected Regions of the Russian Federation. The law defines the Sakhalin Province, which is a chain of islands to the north of Japan, as a region where a cap-and-trade initiative will start on September 1, 2022, and continue for the next six years. The law can be amended and other regions added to the program at any time later. Reportedly, four other regions, including the westernmost Kaliningrad Province, have expressed interest in joining the experiment. The goal of the experiment is to achieve carbon neutrality in the region by the end of 2025, and to establish mechanisms for implementing new emission-lowering technologies, create new verification methods, build the carbon absorption registration system, and start working on international recognition of the Russian approach to the problem. (Law on Conducting the Experiment art. 3.) This law appears to be in line with the Federal Law on Limiting Greenhouse Gas Emissions, which entered into force on December 30, 2021. The 2021 law defined basic principles for establishing quantitative requirements to decrease emissions and basic principles for registering emissions and reporting emission levels by regulated companies. It left to other legal acts the regulation of the manner in which these reports will be reviewed and what practical steps need to be taken locally. 

The Law on Conducting the Experiment states that regional executive authorities will draft the program of the project, conduct public discussions with the population, and define which companies and individual entrepreneurs will participate in the experiment. (Law on Conducting the Experiment arts. 5, 7.) Regional authorities will determine annual emission quotas for identified individual enterprises, taking into consideration the volume of investments they make in the environmental sector; revenues from the sale of goods, works, and services; and tax payments to the treasury generated by the enterprise. (Art. 8.)  The regional government  will identify a legal entity (operator) that will be authorized to maintain the carbon unit register and record any operations as prescribed by the government. (Art. 9.) Information on meeting the quotas must be reported to the operator by July of each following year. (Art. 10.) Carbon units will be added to the carbon credit account that must be established for each experiment’s participant on the basis of whether quotas for each regulated enterprise have been met. The creation of a regional market for carbon units and units for the exceeding of quotas is also prescribed by the law. (Art. 11.)

According to the project program prepared by the Sakhalin regional government, the payment will be comparable to the average world payments for the emission of carbon dioxide (CO₂) equivalent, which is approximately US$2 per ton. Prices for quotas will be on par with those established in the European Union. Reportedly, they are approximately 25 euros (about US$28.35) per ton of CO_2, equivalent.

A company that does not meet its emission quotas can reduce payments through participation in climate projects. (Art. 8.) According to federal legislation, these projects may include investments in reforestation, recycling, carbon capture, or other initiatives aimed at fighting climate change. (Law on Limiting Greenhouse Gas Emissions arts. 10, 11.)

Those who meet their quotas will be able to sell their carbon units in excess of the norms to other companies in the region. Regional authorities have the right to stimulate economic activities of enterprises participating in the experiment. These may include tax privileges and subsidies to compensate investments in new technologies needed to achieve carbon neutrality. (Art. 12.)

The law was criticized by the Russian Union of Industrialists and Entrepreneurs, the major association representing the interests of Russian business, especially for the establishment of the quota system. The union says that while this new system may work well in Sakhalin, which is almost carbon neutral and whose environmental situation is one of the best in the country, the expansion of the program to other regions may put additional financial pressure on businesses.  The union recommended limiting the experiment to one region until its impact on the economy has been thoroughly assessed.