Carbon tax

At the SPIEF that was held in the June 2021 the President of Russia touched upon a topical issue of climate change and claimed intention to increase the share of low-carbon energy sources which includes atomic, hydrogen and electrical energy.

So why has the "carbon" issue agitated Russian politicians so much?

The answer is simple. The reason was the EU's intention to introduce a 'carbon tax'. В In April 2021, the EU countries completed negotiations on new EU climate legislation that calls for cutting greenhouse gas emissions by 55% by 2030 (compared to 1990 levels) and moving the EU towards full carbon neutrality by the middle of the 21st century. These internal EU climate goals have become a front-page news story. But how can EU climate policy affect markets and producers outside the EU? Let's sort it out.

EU climate policy is a core element of the EU's new development strategy - the European Green Deal (EGD). The main focus of the European Union development and "the main challenge of this generation" is declared to be the prevention of the effects of climate change and the preservation of the environment.

What is the fundamental difference between the EGD and its previous analogues? The EGD has become a complex strategy, an economic, social and trade development course responding new global challenges. It involves not only reducing emissions, but also improving the quality of life and creating new jobs. However, implementing such a policy is a costly undertaking. Funds for the implementation of the program are expected to be raised mainly from private businesses investing in "green" projects, and by divesting capital from obsolete "dirty" industries.

Moreover, the Green Deal proposes not just to reduce emissions, but also to restructure the economy in a "just transition" format. This means that the restructuring of the system will be phased in, with traditional sectors being replaced by new ones.

Interestingly, the EU's position on the global environmental scene is ambiguous. The point is that the EU, promoting green projects, imports resources and goods from other countries where environmental standards are less stringent. This means that EU does leave a huge ecological footprint, which contradicts their ideas. One of the tasks of the EGD is, therefore, to equalise the existing contradictions and environmental standards not only for European producers, but also for foreign ones.

This means that the environmental policy pursued by the EU will directly affect not only EU countries, but also those countries that have economic relations with them.

However, if the producing country does not have a greenhouse gas emission accounting system, the tax will be calculated at the maximum EU rate for such products. Poor countries may be exempted from the tax, as well as countries with comparable environmental policies in terms of fighting greenhouse gas emissions.

No doubt, analysing all these innovations of the EU, assessing the prospects of the introduction of a carbon tax, EU trade partners express discontent and concern.

However, it is clear that those who are willing to keep up trade relations with the EU will have to accept the new rules.

What do these novelties imply for Russian companies?

It is no secret that the EU is one of Russia's key trading partners. Experts estimate that the European market accounts for approximately 40% of all Russian exports. The carbon tax would primarily affect industries such as ferrous and non-ferrous metallurgy, coal and oil extraction, and partly the cement industry, which altogether account for about 75% of the value of Russian exports to the EU.

In 2019, Russia was the world's second-largest carbon-intensive exporter (after China). But the main difference between us and China is that China already has a stringent policy in place which aims to reduce its carbon emissions. And this policy is very close to the European one. This would give Chinese producers a clear competitive advantage with the introduction of the carbon tax. Meanwhile, in Russia, legislation in this area is only at the drafting stage. The RF's only advantage is the presence of vast forested areas that absorb CO2, albeit without considering their annual combustion.

According to KPMG analysts' estimates, Russian exporters to the EU could sustain a total loss of up to €4.8bn in the first period of the tax regime, which could rise to €8.2bn by 2030. The figures are quite substantial. There is a considerable risk of decreasing the competitiveness of Russian commodity exports.

So, what are the prospects for Russian producers?

Last year, the Ministry of Economic Development elaborated a Strategy of Long-Term Development of Russia until 2050, incorporating the Paris Agreement (an agreement under the UN Framework Convention on Climate Change). This strategy has four scenarios, two of which are primary: basic and intensive. There is every expectation that the base case scenario is not expected to be carbon neutral but is designed to reduce the carbon intensity of Russian GDP by 9% by 2030 and 48% by 2050 compared to 2020. The strategy also involves the creation of a legal framework and methodological basis for the technological transformation of the economy, the introduction of national regulation of greenhouse gas emissions and the establishment of a climate monitoring system.

In any case, we cannot change nothing. Russia is one of the most vulnerable to carbon regulations of the world's major economies. This is why there are so many proposals from various government institutions for introducing our own carbon regulation mechanism.

The mechanism is quite straightforward, and it has already been tested in other countries. The government sets a ceiling for greenhouse gas emissions, and each company is given a license to emit a certain amount of gases. If a company exceeds the allotted volume, it must buy an additional permit. If the company produces fewer emissions, it can sell its share. This is how the carbon market for emission permits works. If a company pays for an emission permit to the state, it already becomes, in effect, a carbon tax. But so far, the initiative to introduce such a mechanism remains an initiative.

However, it is safe to say the following: if Russian companies want to retain their share of European imports in the future, they will have to change and take the example of the world's biggest companies, such as BP, Total, Exxon Mobile, Shell, which have already started to move towards decarbonising their production facilities instead of waiting for government decrees.