Indufor’s Managing Director, Mr Jarno Seppälä spoke at the Saint Petersburg International Forestry Forum, held in St. Petersburg in September 2021.
Russia Responds to Climate Change by a New Climate Package – Carbon Neutrality by 2060
Regulations relating to climate change are tightening both globally and in Russia. In addition to the EU, both China and the US are tightening their carbon regulations, first by introducing national measures. In response to this development, Russia has created a national climate package including the country’s first greenhouse gas legislation and a carbon market system. In a speech held on 13th October, President Putin announced that the country is aiming towards carbon neutrality by the year 2060. The package includes mandatory carbon reporting and monitoring as well as voluntary climate projects for offsetting opportunities. The new law “on limiting greenhouse gas emissions” will enter into force on December 30, 2021. It introduces new concepts to the national regulation such as:
- Accounting of emissions and setting goals for their minimization
- Supporting emission reduction and increase in carbon sink
- Market for trading carbon units.
Russian companies will be required to monitor and report carbon emissions for their products. In the first stage of the new carbon regulation, from March 2023 onwards, companies who produce 150 000 tonnes of CO2 equivalent per year will have to report their emissions. From 2024 onwards, all companies producing 50 000 tonnes of CO2 equivalent per year have to report their emissions. It must be noted, however, that many Russian exporters are already implementing various GHG emission reduction programs. The new law also implies a reporting duty for large other greenhouse gas emitters.
The European “Carbon Border Tax” will have an Impact on Russian Exports
There are several EU policies on climate change, and the European Green Deal includes – in addition to measures concerning member states – a plan on the new Carbon Border Adjustment Mechanism (CBAM, a.k.a. the carbon border tax). The primary objectives of the CBAM are to:
- Support the reduction of EU carbon emissions by creating incentives for industrial activities, and
- Avoid the risk of carbon leakage, i.e., increase of emissions outside of the EU as a result of EU’s tight climate policies.
CBAM presents an import levy on carbon-heavy products imported to the EU. These initially involve electricity, cement, aluminium, fertilizer, iron and steel. The size of the levy will depend on the EU Emissions Trading System (ETS) price as if the product was produced within the EU. Any carbon price paid in the production country through an internationally accredited system will lower the CBAM levy – creating incentives to develop regional carbon taxation and markets. The CBAM is to take effect on January 2026, after a three-year adjustment period starting in 2023.
The current CBAM plan by the EU includes commodity groups, which are very relevant to Russian exports to the EU market. The GDP in Russia was ca. 1 480 billion US dollars in 2020. The majority of this amount was provided by services, manufacturing, mining and quarrying. In 2020, Russia exported goods worth EUR 113 billion to the EU, about one third (33.7%) of the total export value. According to current plans by the EU, the CBAM would be applied to about 7% of Russian exports to the EU, according to Russian Business Consulting. The total of levies is therefore estimated at EUR 7-10 billion annually. The manufacturing sector is expected to be affected by the CBAM the most. However, wood processing and the pulp & paper sectors, although comprising about 10% of the manufacturing sector, should not be affected.
The future of the CBAM and its potential impact on the Russian economy is still open. First of all, it has not yet been approved by the WTO. As planned now, oil, petroleum products and natural are exempted from the carbon border tax, all important export products from Russia to Europe. Potential products to be later included in CBAM are hydrogen, ammonia and oil refining products, which would considerably increase the CBAM’s overall effect on Russian imports to the EU.
The creation of the carbon market in Russia is expected to bring sustainable investments into the modernization of current production facilities and not just within the industrial sectors that have been included in the CBAM. At the same time, the demand is expected to rise for emission offsetting solutions by Russian companies with products within the scope of the CBAM.
Impact and Opportunities for the Russian Forestry
Russia has a lot of underutilized forest resources. About one-fifth of the world’s forest area is in the country; this represents the biggest share by any country in the world. It is also one of the top roundwood producing countries, in fifth place after the USA, India, China and Brazil. Most of Russia’s forests grow in harsh climate conditions, where the lack of infrastructure, together with the natural conditions, result in low productivity and fragmentation of the growing stock. The overall harvesting level is increasing – it is about 200 million m3 per year, which is still far from the sustainable annual harvesting levels of 700 million m3.
Russian Forestry has Significant Carbon Potential
The greatest potential in mitigation of climate change in Russia is believed to be within LULUCF and particularly in the forest sector. According to calculations by e.g. Romanovskaya et.al., the potential of additional GHG sequestration by forests in Russia is between 360-420 million t CO2 eq per year, which represents up to 50% of the sequestration potential of all types of climate projects in the country.
A recent article published in Nature (June 2021) indicates that Russia’s forests may have almost 40% higher total growing stock volume than reported previously. The article also states that the forest stock in Russia has grown substantially in the past decades, on the contrary to what has been thought before, and that the estimated growth since 1988 would be large enough to balance the forest stock loss in tropical countries during the same period. The forests of Russia would hence present both a carbon stock and a carbon sink of a massive scale, given that they are protected from extensive wildfires and illegal logging. This would put Russia in an even more important position in the global fight against climate change, generating unforeseen opportunities in the field of forestry.
In Russia, there are tens of millions of hectares of unused and naturally forested agricultural land which could be utilized for afforestation purposes and climate projects. However, these lands are not officially recognized as forest land, and legislative barriers currently limit their proper utilization through forestry. If these “illegal forests” would be officially recognized, it would be a big step towards private forest ownership in the country. It would also unlock a huge potential for increased income and environmental benefits through sustainable forestry and projects for offsetting carbon emissions in these lands.
Russian forests can provide a great opportunity to address both domestic and international offsetting requirements. It is expected that the non-forestry companies’ interest in investing in the forest sector will increase. Forest management practices must improve. These include forest protection, silvicultural activities, control of forest fires and illegal logging. An update of the forest lease allocation system would contribute to sustainable forest management practices; to whom, for how long and for what purpose the leases would be issued? Finally, the bioeconomy sector (biofuels, biochemicals, wooden construction, etc.) will have an important role in promoting carbon neutrality.