Russia clears way for carbon profits

MOSCOW Tue Jan 29, 2008 8:22am EST

Smoke billows from the chimneys of a power station that produces heat and electricity in southern Moscow in this December 19, 2006 file photo. REUTERS/Alexander Natruskin

Smoke billows from the chimneys of a power station that produces heat and electricity in southern Moscow in this December 19, 2006 file photo.

Credit: Reuters/Alexander Natruskin

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MOSCOW (Reuters) - Russia's government on Tuesday opened the door to applications from entrepreneurs and big polluters to profit from greenhouse gas emissions cuts by selling these to Western countries.

The U.N.'s Kyoto Protocol puts limits on greenhouse gases from 36 rich nations but softens the restrictions by allowing governments to fund emissions-cutting projects in poor and former communist countries and count the cuts as their own.

Legal doubts have paralyzed such sales of carbon offsets from Russia, which has the potential to account for about a tenth of total emissions cuts under carbon trading through 2012, estimated at roughly the annual emissions of Australia.

Western intermediaries and speculators have already ploughed millions into the Russian market -- five times more than Russian investors, say economy ministry officials -- in anticipation of a potential 3 billion euros ($4.4 billion) market.

On Tuesday the government said project developers could now submit applications, after the Justice Ministry passed the necessary procedures for the Economy Ministry to approve projects.

"In terms of documentation this is it, this opens the application window," said Morten Prehn Sorensen, a director at the Core Carbon Group, in which Merrill Lynch took a stake last year.

In the next step, a Russian judging panel will decide which entities can vet projects. Applications will also need approval by the Russian panel and a U.N. body, in a drawn out process.

READY TO GO

"Finally!" said Steve Eaton, a director at C6 Capital, which invests in carbon credit projects in Russia.

"Everything should be in order now. Project participants can be expected to start handing in applications almost immediately. There are a lot of them that are ready to go," said Eaton.

Russian industrial giants such as Gazprom, Unified Energy System and United Company RUSAL have all announced plans to cooperate on projects.

Rich countries face emissions limits from 2008-12, putting a 2012 deadline on definite demand for offsets.

Russia has already ratified the Kyoto Protocol and last year passed a decree giving the green light to carbon trading in principle. But businesses have had to wait for the government to draw up the necessary legal framework.

"The key reason is to attain ecological benefits both globally and locally here in Russia," said Vsevolod Gavrilov, deputy director at the natural resources department in the economy ministry, explaining the move to a briefing in Moscow.

In Kyoto carbon trading jargon, rich countries can either buy carbon offsets from developing countries under the clean development mechanism (CDM), or from former communist countries under join implementation (JI).

Russia is considered potentially a big seller under JI for two reasons. First, it can cut greenhouse gas emissions cheaply from its Soviet-built industry, for example by insulating pipes to reduce heat waste or plugging leaky gas pipes.

Second, it is well within its own Kyoto targets to limit greenhouse gas emissions, meaning it can sell any cuts it makes.

-- To see an interactive chart on the JI project pipeline or for additional analysis on the carbon markets, log on to www.reutersinteractive.com

(Reporting by Simon Shuster, additional reporting by Gerard Wynn and Michael Szabo in London, writing by James Kilner, editing by Anthony Barker)

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