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Maxim Reshetnikov: Nobody says CO2 must be fought against at any cost

Maxim Reshetnikov Sergei Karpukhin/TASS
Maxim Reshetnikov
© Sergei Karpukhin/TASS

The European Green Deal, which the European Commission is working on these days, will encompass many industries of the global economy. Russia will not be an exception: climate-related customs duties on the import of iron, steel, aluminum, cement, fertilizers and electricity to the European Union will be a great challenge that exporters will face. What can and must be done to balance national interests with the fight to save the environment, in addition to delving into the opportunites this new climate strategy can offer Russian companies, and detailing Russia's low carbon development strategy were among the issues Economic Development Minister Maxim Reshetnikov spoke about in an interview to TASS. 

— You took part in the G20 ministerial level meeting on climate in Naples. What do our foreign partners say about their new climate strategy and how does Russia feel about this rhetoric?

— The European Commission in July came up with 13 drafts of regulatory acts, which are part of Europe's Green Deal. They concern industry, energy and transportation. For example, there is a proposal for actually curtailing the production and import of internal combustion engines by 2035. The rules for the chemicals industry, such as pesticides and fertilizers, are to undergo a fundamental change. By 2030, the consumption of coal is to going to be slashed by more than 70% compared to the 2015 level. In the meantime, the European market consumes 21% of the coal we produce, or 41% percent of this fuel that we export. For our coalmining regions, such as Kuzbass, the loss of the Western market will be an enormous challenge.

For the time being, all this is nothing but bills, plans and strategies that are still under discussion. That being said, the EU’s Carbon Border Adjustment Mechanism (CBAM) is taking shape. In the CBAM's description there are still many gaps, but at present, a number of contradictions with the rules of the WTO and international climate change agreements are quite evident.

— What sort of danger will Russian exporters be facing from all of what you’ve just said and in what way does Russia plan to support individual companies and entire industries?

— [Our] EU partners have postponed the deadline for paying the carbon tax by three years. Mandatory accounting for companies will be effective starting from 2023, and mandatory payments, from 2026. The list of industries to which the CBAM applies has expanded. This will cover the production of iron and steel and products thereof, aluminum, mineral fertilizers, cement and the production of electricity. The volume of Russia's export to the EU that will fall under the Carbon Border Adjustment Mechanism is estimated at $7.6 billion a year. Let me explain why when evaluating the effects, we only take into account our export to the EU. The mechanism is designed in such a way that it pegs the carbon tax to the actual carbon intensity (CI) of the product in question. The greater the emission of carbon dioxide from the industrial plant that has manufactured a certain product, the more the importer will have to pay. Respectively, the tax will vary from company to company, and even from industrial facility to industrial facility, even if two companies supply equal amounts of goods to the EU.

In recent years, many companies have upgraded production and Russian companies' carbon footprint is competitive. It is crucial to ensure that it should be calculated impartially and manufacturers in the EU or other countries do not get unfounded advantages. The CBAM draft offers no answers to the questions of what projects the companies will be able to count and what means of interaction for third countries [our] European partners may offer, such as accounting, verification and so on and so forth.

If the CBAM's real purpose is not the creation of new barriers in trade, but rather fighting climate change, then the carbon reduction per one invested dollar should be the chief parameter. In this respect, it is important for Russia to have a mechanism that will enable enterprises to use the money to cut carbon emissions inside the country. This will be the most effective solution in the struggle against climate change and for the global agenda, too.

— How does Russia see this? As protectionism or real efforts towards fighting climate change?

For the time being, it looks like an invitation to negotiate. On the one hand, by proposing this green deal our partners seek to speed up the work towards the creation of real economic mechanisms for implementing the Paris Agreement. That's the climate aspect. But, on the other hand, our partners have run out of their own hydrocarbon resources. They have poured a lot of money into renewable sources of energy. Now they are trying to use the climate agenda to take advantage of their economic competitive edges and expertise.

Many experts believe that strict enforcement will rather perpetuate the gap between industrialized and developing nations. That is, those that have already achieved peak energy consumption and possess energy-effective technologies, and the others, which have not achieved this level yet.

— Which of the two groups would CIS nations belong to?

— Central Asia, India and some countries in the Asia-Pacific Region have not yet achieved the energy consumption peak and still need inexpensive energy. In other words, hydrocarbons. Any attempt to include carbon costs in the import price of electricity in the EU within the CBAM framework makes this gap insurmountable.

The current CBAM draft contains many indications this issue is being used to create barriers in trade and to economic development. If we do nothing real to reduce emissions or capture carbon dioxide, if we fail to show in practice that it is really our goal, protectionism will follow, along with closure of markets, and the inability to access technologies as well as segregation.

For this reason, it is important to implement several principles. One is that of technological neutrality. If everything that does not cause carbon dioxide emissions fits in with the low-carbon requirement, then the same applies to nuclear power, just like hydropower stations.

The other principle is that carbon neutrality must be achieved not by means of slashing emissions, but by means of capturing them. In the atmosphere, there is a large volume of carbon dioxide. Consequently, effective forest management and the absorption capabilities of other ecological systems, and their ability to capture carbon dioxide, as well as its pumping underground in the process of mineral resources extraction, should be taken into account. Carbon costs must include capital expenditures on these technologies. The current CBAM version rules out such an approach, which contradicts the WTO and does not address the issue comprehensively. For the time being, all this looks like protectionism rather than genuine concern about reducing emissions. We raised all these questions in Naples. Our counterparts listened to our concerns and are prepared for dialogue.

— Did they say something in reply or merely lend an attentive ear?

They said, "let's talk about it." We hope that key international agreements will be reached in Glasgow in November. They will serve as the foundation that a climate policy can rest upon. So far, it has stood on sand, and not a solid foundation.

Let me stress once again: hydrocarbon neutrality is one of the sustainable development objectives. All goals must be achieved in a balanced way, assessing how they affect national interests. Nobody says that CO2 must be fought against at any cost.

— Could you explain that in greater detail, please?

— First of all, one of the sustainable development goals is "affordable energy." Secondly, low carbon development as such will cost the world a lot. Ultimately, it is the end consumer who will have to pay the price. The population of any country is living through hard times these days in the post-pandemic world, struggling with the effects of soft monetary and credit policies, along with inflation pressures, which in the long term, will intensify due to the energy transition. Costs will be high.

There is the impression that many experts and climate agenda protagonists, in trying to persuade entire countries and their populations to sign up for this agenda, prefer to stay tight-lipped about the costs that will have to be borne. In the meantime, it is our duty to not just explain to the public how important it is to reduce carbon dioxide, but to let them know how much this will cost. 

Together with our colleagues in all agencies and businesses we are in the process of designing a strategy for Russia's low carbon development, and on how and where it will be most effective.

— When will it be finalized?

— Its coordination with other agencies is underway.

— Could you say a few words about the new strategy, please, if you don't mind?

— Currently we have four scenarios - conservative, basic, intensive and aggressive. We should gradually introduce to our documents an indicative price of carbon dioxide and distribute it among different industries. For this, carbon accounting as required by law must be launched as soon as possible.

The introduction of carbon costs, provided the regulations are competent enough, may accelerate many processes. For instance, the upgrading of small housing and utilities sector facilities, such as boilers in remote communities. Our country has done a great deal along these lines over the past ten years, and there is a solid basis from which to build on. Previously, energy effectiveness was the catch phrase of the day; now the reduction of carbon dioxide emissions tops the agenda, but basically, they are the same thing.

— In other words, you believe that the strategy of the past few years was effective enough, right?

I am pretty certain that they didn't catch us off guard. We need to reconsider some things and to reset some others, but there is surely no reason to sprinkle ashes on our heads in despair. For instance, the LNG development strategy till 2035, which was adopted in March this year, fits in well with the green agenda, just as the plans for developing hydrogen technologies.

To finalize our calculations regarding the transition to carbon neutrality, we need answers from our foreign counterparts. For instance, we have been discussing carbon pricing, but the question is what pricing is this? the average or the maximum? The Europeans have their system of trade in quotas. Many of its participants have an opportunity to pay nothing for these emissions - the quotas are granted for free. This concerns practically all industries, except for power production. To put it in a nutshell, the real financial pressure on them may be very different from the quotas for one tonne of carbon dioxide and eventually turn out to be way below the declared one. As a result, foreign manufacturers will find themselves in far less advantageous conditions, because they will have to pay the full tax. That being said, "this is a direct violation of WTO rules and what are you going to do about this?" However, that question is yet to be answered.

— And what does the WTO have to say about this? Does it have any supervisory and regulatory functions?

— We have repeatedly raised this question within the WTO’s working bodies and in bilateral contacts with the EU officials and other members of the organization over the past 18 months. We started doing so before the draft of the mechanism was published. Many countries share our concerns on this issue. In principle, if we take a close look at the WTO agreements, we will see that, according to our estimates, the EU's CBAM contradicts them, in particular, such basic principles as "national treatment" and "most-favored nation status," the introduction of import restrictions and many other things. In other words, we have solid grounds to put forward grievances. It is to be hoped that these disagreements will be settled and major disputes will be avoided.

— What countries share our concerns?

— All partners in the BRICS group (Brazil, China, India and South Africa) and in the Eurasian Economic Union (EAEU). Also, Saudi Arabia, the United Arab Emirates, Bahrain, Argentina, Paraguay, Australia, Japan, South Korea, the United States, Turkey and Taiwan.

— When will Russia be able to become a full-fledged participant in the quotas market?

— Right now, there is no global market of quotas. Common rules on the circulation of carbon units are yet to be agreed on. Here is an example: our companies export steel to Europe. The product has a certain carbon footprint that is to be compensated at some level or zero. Businesses are ready to implement absorption projects. It is essential to ensure such efforts and their effects should be recognized internationally, in accordance with a unified taxonomy system. All verification bodies must have an accreditation. Let me remind you, the ultimate goal is zero balance, and it cannot be achieved by means of reducing emissions only.

For our part, we are creating a Russian system of quotas. There is the Sakhalin experiment: the documents have been drafted and submitted to the government, and businesses are getting ready to launch projects. We hope that it will be accepted by the end of this year.

— What opportunities can the climate agenda offer Russia?

— It opens new markets. Russia should develop electricity-powered transport, given our climate, the current technologies and the country's size. The economy will become diversified and more complex technologically. We already have a road map for hydrogen and another one for electricity-powered transport, has been submitted to the government for consideration.

It is crucial to ensure that the steps to abide by the "Green Deal" should be balanced. We are currently working on this and scrutinizing the pros and cons.

Interview by Yelena Kudryavtseva