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30 I Companies & Markets bne February 2022
for their poor environmental, social and governance (ESG) scores. For example, the world’s biggest nickel producer, Norilsk Nickel, spent over $2bn on cleaning up its act but complained that the money spent “adds nothing at all to the bottom line. It's pure cost.”
VTB issued a report that looked at some of the cheaper
and easier things Russia can do to reduce its emissions and estimated they can be reduced by a quarter for a price tag of RUB43 trillion (the equivalent of 1.3% of GDP per annum), and 50% of them for RUB86.6 trillion (2.7% of GDP per annum).
“In comparison, cutting 100% of emissions would require an astronomical RUB479.8 trillion by 2060 (or 15% of GDP),” VTB Capital (VTBC) analysts Vladimir Sklyar and Anastasia Tikhonova said in a report “ESG & Decarbonisation.”
“The cheapest ways to achieve these targets include tackling waste disposal, reducing emissions, decarbonising the power sector and undertaking forestry projects. These account for 59% of total emissions in Russia and can be decarbonised for RUB102.7 trillion ($1.4 trillion), we estimate. That broadly matches MinEconomy’s RUB88.8 trillion 60% CO2 reduction programme. Transport remains the most expensive sector to decarbonise, followed by cement and iron ore & steel,” the analysts said.
As these investments are pure cost they will come with price rises to close the gap. The most substantial price hike to foot the CO2 removal bill is required in the power (28% end-user price increase) and cement (40%) sectors, says VTBC. Decarbonising the oil & gas and metals & mining sectors would have a minimal effect on product pricing, the bank adds.
“Full decarbonisation requires annual capex at 5x annual EBITDA for transport, 2-3x for cement/chemicals, 1-1.5x for the power sector and waste, and less than 1x for oil & gas and M&M, keeping the dividend prospects in these sectors the highest in the economy, which is going through a green transformation,” VTBC said.
One of the key issues is what price the cost of carbon is
set at, as this is the mechanism that has been adopted to price the cost of reduction and how to pass these costs on
to consumers and government. A market for carbon has emerged in Europe and it currently values the cost of carbon at $50 per tonne, but governments are still setting prices arbitrarily, with the Scandinavians putting the cost at over €100 per tonne but poor countries like Ukraine estimating the figure at under $1.
At the start of the year Russia launched an experiment on the island of Sakhalin where it introduced market mechanisms for costing carbon that put the price at around $25 per tonne. Putin said in a speech this week that the Kremlin was ready to expand the experiment to other regions in Russia. But Russia has yet to launch the all important carbon trading system, where the price of carbon is the keystone.
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“Our research indicates that Russia can halve its emissions using a carbon price of only $30/tonne. After the quick wins by 2030, the CO2 removal capex is set to rise as decarbonisation activities move away from methane and the power segments,” VTBC said.
During his speech at Russia Calling! Putin also said that he has ordered the Ministry of Finance and Central Bank of Russia (CBR) to work out tax credits, subsidies and guarantees for companies undertaking green projects also by March 1, 2022, when a register of climate projects will be finalised.
The cost of the programme means that MinFin and the CBR will play key roles, as the spending is bound to be inflationary at a time when Russia is already struggling to contain rising prices. “We think that 40-year decarbonisation could add as much as 12% to the real price increase (or a proportionate margin contraction),” the analysts at VTBC estimate.
Looking for cheap solutions
With its abundance of cheap fuels of all kinds and the wasteful habits of the Soviet era Russia is the third-biggest emitter of GHGs in history on a cumulative basis.
Russia’s officials are now looking for the cheapest ways they can find to decarbonise and adopting a “technology neutral” approach, where anything goes as long as it works.
Another factor going into the mix is some projects will actually make money, such as recycling projects or burning waste for fuel rather than dumping it in a methane-generating landfill, and these programmes can go ahead without the need for carbon pricing or a trading system.
“Russia is capable of delivering significant quick wins, even without decarbonisation capex rising significantly from
“Russia is capable of delivering significant quick wins, even without decarbonisation capex rising significantly from present levels”
present levels. Existing power sector investments planned until 2030 could lower the energy CO2 intensity 21% and waste management can be decarbonised with a negative cost, while oil & gas and coal companies can fit the CO2 reduction costs into their existing capex programmes (as regards methane emission reductions). Forestry projects also remain a competitive way of national decarbonisation,” VTBC said.