The Approval System for Joint Implementation Projects in Russia – Criteria and Organisation Institute of Energy Strategy, Moscow Institute of Global Problems of Energy Efficiency and Ecology, Moscow and Fridtjof Nansen Institute, Oslo FNI FNI Report 6/2001 June 2001 FRIDTJOF NANSENS INSTITUTT THE FRIDTJOF NANSEN INSTITUTE Tittel/Title Sider/Pages The Approval System for Joint Implementation Projects in Russia 39 – Criteria and Organisation Publikasjonstype/Publication Type Nummer/Number FNI report 6/2001 Forfatter(e)/Author(s) ISBN 82-7613-408-4 Program/Programme ISSN 0801-2431 Prosjekt/Project 0110 Sammendrag/Abstract The Kyoto mechanisms are truly market-based in the sense that there will be considerable competition between the receiving parties, i.e. the host countries. Joint implementation (JI) projects and projects under the Clean Development Mechanism (CDM) with foreign participation will in the future most likely be evaluated on the basis of costs per ton reduced emissions, as well as commercial criteria, and projects through these two mechanisms will compete with each other. The ‘system’ that has been in place in the AIJ phase until now, has not been efficient in attracting foreign investors, at the same time as it has been a barrier towards realisation of projects by Russian enterprises and regional authorities. The main explanation is that the structures in charge have lacked authority and have not been set up to deal with the economic and energy aspects of the climate problem. The general principles that should guide the design of the system are as follows: · Standardised procedures · A simple institutional setting with a national/regional focal point. · Clearly defined lines of authority · Transparency · Separation of project implementers from controllers Merknader/Comments This report has been written in cooperation between the Institute of Energy Strategy (Moscow), the Institute of Global Problems of Energy Efficiency and Ecology (Moscow) and the Fridtjof Nansen Institute. A Russian version is available from www.energystrategy.ru . Stikkord/Key Words Russia, climate policy, joint implementation, Kyoto mechanisms Bestilling til/Orders to: Fridtjof Nansen Institute, Postboks 326, N-1326 Lysaker, Norway. Tel: (47) 6711 1900 Fax: (47) 6711 1910 Email: [email protected] Table of contents FOREWORD ....................................................................................................... 1 List of contributors................................................................................................................... 3 1. INTRODUCTION.............................................................................................. 4 Executive summary .................................................................................................................. 4 The Kyoto Mechanisms ............................................................................................................ 4 The controversy over ‘excess quotas’ ..................................................................................... 5 The flexibility mechanisms and the potential for further emission reductions .................. 7 Requirements for an efficient project based system.............................................................. 7 2. JOINT IMPLEMENTATION (JI) AND EMISSIONS TRADING – STATUS............ 9 The Kyoto Protocol................................................................................................................... 9 Additionality ........................................................................................................................... 10 JI versus emissions trading.................................................................................................... 11 The risk component ................................................................................................................ 12 3. THE STRUCTURES THAT HAVE UNTIL NOW BEEN INVOLVED IN APPROVAL AND DEVELOPMENT OF JI (AIJ) PROJECTS IN RUSSIA.......... 14 The institutional structure of Russian climate politics........................................................ 14 The role of regional and local authorities ............................................................................ 18 Major challenges..................................................................................................................... 18 4. THE ORGANISATION OF JOINT IMPLEMENTATION PROJECTS.................. 19 Main issues.............................................................................................................................. 19 Phases and functions ............................................................................................................. 19 Top-down or bottom-up approach?....................................................................................... 20 Conflict of interest................................................................................................................. 21 Identification of projects........................................................................................................ 21 Development and implementation of projects..................................................................... 23 Approval of projects – establishment of baselines .............................................................. 24 Who should define the baselines?......................................................................................... 25 Responsibility for approval, verification, certification and reporting............................... 26 Application of the principles ................................................................................................. 28 5. CO-OPERATION AND DIVISION OF RISK BETWEEN RUSSIAN AND FOREIGN CONTRACT PARTIES ................................................................... 30 Risk sharing............................................................................................................................. 30 Russian state guarantees........................................................................................................ 31 6. RUSSIA AND NORWAY................................................................................. 32 The role of Norwegian and Russian authorities with regard to future ............................. 32 co-operation............................................................................................................................. 32 The role of Norwegian and Russian business – possible partnerships for financing and implementation of projects.................................................................................................... 33 AFTERWORD ................................................................................................... 35 Appendix 1: Example of risk calculation for a JI project .................................................. 36 Appendix 2: AIJ Projects in Russia ...................................................................................... 37 Implementation status of projects, Spring 2001.................................................................... 39 Foreword This work is the result of a joint effort by specialists from the Institute of Energy Strategy under the Russian Ministry of Energy, the Institute of Global Energy Efficiency and Ecology, and the Fridtjof Nansen Institute in Norway. The preparations for this project started before the first part of the sixth conference of the parties under the climate convention (COP 6), which took place in November 2000 in The Hague. At the time it was expected that the comprehensive preparatory work on the establishment of mechanisms to regulate co- operation, control and verification under emissions trading, joint implementation and clean development projects, would be concluded by adoption of documents mutually agreed upon. The fruitless conclusion of the first part of COP 6 was the result of serious disagreements and contradictions among the group of developing countries, the EU and the countries in the ’umbrella’ group about the implementation of the Kyoto Protocol. The disagreements in the world community were further increased by the new US President’s announcement of a negative attitude to the Kyoto protocol and the intention not to ratify it. This decision not only reduces the effect of implementation of the protocol; it also threatens implementation in itself. In the situation which has emerged, the search for a common language with the world community, which is very important for Russia, is not possible without the establishment of a shared understanding of Russia’s participation in UNFCCC. Disagreements persist also after the Russian government signed the Kyoto protocol. On the national level, the legal, financial, and technical conditions for a ’carbon market’ do not exist. Establishment of such conditions is an obligation of the Russian Government, but it is happening slowly. Without important changes, the absence of a unified authority and dedicated budget chapters, as well as differences in interests and approaches among government agencies, will not permit the government to create the necessary instruments to exploit the unique opportunity of attracting large investments to development of an energy-efficient economy. 1 On the background of this situation, the work presented here examines the problem of establishing a system for approval of Joint Implementation projects in Russia as a whole, and also draws attention to strong and weak