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COP26: Russia's Green Finance Agenda

Prof. Olga Nickole Kuyan

11 Oct 2021

Russia, the world's fourth-largest emitter of greenhouse gases, has pledged to be carbon neutral by 2060

Putin expects hydrogen, ammonia and natural gas to play a larger role in the energy mix in the coming years and said Russia was ready for dialogue to seek ways to tackle climate change.
"The planet needs informed, responsible actions by all market participants — both producers and consumers — focused on the long-term, in the interests of the sustainable development of all our countries," - Putin said October 10, 2021.

"Russia in practice will strive for carbon neutrality of its economy," Putin said at an energy forum in Moscow.
"And we set a benchmark for this — no later than 2060."- Vl.Putin

Russia's aim to be carbon neutral by 2060 -- announced by President Putin in the run-up to the COP26 climate meeting -- will require a huge restructuring of its economy, which is today heavily dependent on oil and gas revenues.
It's a huge ambition and will require a vast amount of investment.
Major changes to energy strategy are expected, with the focus likely to be on increased nuclear and renewables power, implementing more carbon capture and storage, and developing significant hydrogen production and export projects.
Experts examine Russia's green agenda, the opening up of its financial markets and what this means for international businesses and opportunities.

Details about Russia’s plans for carbon neutrality were outlined in the country’s low-carbon development strategy, which envisages a baseline scenario of a 0.6 percent increase in emissions through 2030, and a fall of 79 percent from the current level (89 percent of the 1990 level) by 2050.
Notably, "the new targets represent a significant departure from Russia's existing plans, which would have seen emissions increase through 2050 and not drop to net-zero until as late as 80 years from now," said Katie Ross, an expert at the World Resources Institute.

The carbon neutrality pledge follows an earlier ambitious step in June, when Putin ordered his government to develop a plan to cut carbon emissions to below the level of the European Union by 2050. The government reportedly set-up a working group in June to look at ways of adjusting to the global energy transition and it was reported that Deputy Prime Minister Andrei Belousov would be in charge. Others involved in the issue included Sberbank head German Gref and 1990s privatisation tsar Anatoly Chubais, who is now Putin’s ‘representative for international relations in sustainable development’.
To achieve carbon neutrality, Russia will need to restructure every part of its economy, Chubais said the day after Putin announced the new target. According to Chubais, Russia will need to create up to a dozen new industries, including building a hydrogen industry from scratch.

The daily Kommersant newspaper reported earlier this month that the Russian government was preparing a new environmental strategy with stronger measures to reduce greenhouse gas emissions.

October 9, 2021, Russian Deputy Prime Minister Alexander Novak said it was impossible to "artificially get rid of traditional sources of energy."

Speaking about the world's future energy market, Putin added: "The role of oil and coal will decrease."
Russian oil and gas producers, mainstays of the country's economy, have signaled their willingness to change to some extent, with significantly increased cleaner energy targets. These include Rosneft's plan to cut upstream emissions intensity by 30% by 2035, as well as Lukoil's target of reducing greenhouse gas emissions by 20% by 2030, compared to 2017 levels.

On top of this, some still see opportunities for the country from warmer temperatures in terms of oil and gas development and exports in the Arctic region.
According to many scientists, Russia — especially its Siberian and Arctic regions — is among the countries most exposed to climate change.

Climate strategy
Following President Putin's announcement in mid-October that Russia is planning to be carbon neutral by 2060 -- the same target as its key energy allies China and Saudi Arabia -- the Russian government is set to adopt an energy transition action plan by the end of 2021.

Analysts expect that key features of the plan will be Russian forests' CO2 absorption capacity, increasing efficiency, and carbon capture and storage.

Putin’s new plan relies on the rising absorption capacity of forests and other ecosystems, but much less than before. Among new measures to reduce carbon emissions are carbon pricing (quota systems, regulations, incentives for low-carbon technologies, and tax adjustments for mineral extraction), green finance, support for energy origin certificates and the creation of a public reporting system.

For the first time, Russia’s climate strategy is being linked to economic growth. “We are factoring in global competitiveness and sustainable economic growth in Russia in the context of a global energy transition,” Economic Development Minister Maxim Reshetnikov told Kommersant. To implement the strategy, Russia will require cumulative investment in emissions reduction. Through 2030, this would run at 1 percent of GDP, rising to as much as 2 percent of GDP between 2031 and 2050.

"Other very likely elements are increasing renewables from below 1%, higher share of low-carbon nuclear (from about 20% now to about 25%), replacing coal with gas and cutting methane emissions," Elena Anankina, senior analytic director, Ratings and Infrastructure, S&P Global Ratings said.

Vladimir Drebentsov, chief advisor to the director general of the Russian Energy Agency (RosEnergo) said that EU approval of the green deal and CBAM "of course has raised a lot of concerns on the part of the Russian government and I think greatly accelerated progress that we've seen on this front."
The EU Green Deal covers the bloc's plan to be climate neutral by 2050, while the carbon border adjustment mechanism levies a price on goods with high emissions entering EU markets.

Transition risks
Russian officials continue to warn that underinvestment in traditional fuels, and the unpredictability of renewables, increases the risk of market volatility, seeing these as key factors underpinning the current European energy crisis.

Rosneft CEO Igor Sechin said Oct. 28 that globally the deficit in investment needed to meet oil demand may total $135 billion in 2021-2025.

"Only a reasonable balance between traditional and renewable energy can ensure sustainable long-term growth of the global economy," Sechin told the Eurasian Economic Forum.

European gas prices have surged to historic highs in recent months, while oil prices have also seen a steady rise as economies recover from the coronavirus pandemic and OPEC+ continues to gradually return barrels to market.

Hydrogen potential
One way that Russia is planning to protect against the economic impact of the declining use of fossil fuels is to develop a significant hydrogen industry, targeting 20% of global market share by 2030, according to a government roadmap.

Russia's export plans include shipments of 2 million mt/year by 2035, and 15-50 million mt/year by 2050.

Russia plans to spend over Rb9 billion, equivalent to around $127 million, on hydrogen projects over the next three years.

It plans to produce hydrogen from nuclear and renewable sources, but analysts expect natural gas to play the biggest role in production, due to Russia's vast gas reserves. Russia is targeting Europe and Asia as key export markets. It plans to create at least three hydrogen clusters -- in the northwest for European exports, the east for Asian supplies, and the Arctic for domestic consumption and potential exports.

Platts Analytics forecasts that Russian hydrogen production will amount to 3.4 million mt in ammonia and 2.7 million mt in refining in 2021. It expects these volumes to increase to 3.8 million mt and 3.1 million mt respectively in 2025.

There are concerns over whether the EU will accept the environmental credentials of Russian blue hydrogen.

To mitigate this risk, Russia is investing in ways to reduce the carbon impact of blue hydrogen, including the use of pyrolysis in production, as well as shipping gas for lower-carbon hydrogen production to facilities with good access to power generated from renewables.

The Russian energy ministry argues that with carbon capture, up to 90% of emissions from gas-based hydrogen can be eliminated.

Blue hydrogen production costs are currently significantly lower than for green hydrogen, according to S&P Global Platts assessments.

Platts assessed hydrogen Netherlands SMR with CCS (including capex and carbon) at Eur5.12/kg on Oct. 28, compared to Hydrogen Netherlands PEM electrolysis (including capex) at Eur13.35/kg.

Russia is in talks with foreign partners on hydrogen cooperation, including companies in Asia, Western Europe, the Middle East, and Australia. In recent months Russian officials have held talks with their counterparts from the UAE and Saudi Arabia on joint projects.

Japan has also announced that it will work with Russia 's Rosneft and Novatek on lower-carbon projects, including hydrogen and ammonia, as well as CCS. Western majors with a significant presence in Russia, BP and TotalEnergies, have also expressed interest in joining hydrogen projects in Russia.

Moscow has not signed on to the Global Methane Pledge,
a U.S.- and Europe-led initiative that aims to reduce methane emissions by nearly a third by 2030. Russia also raised objections to European Union proposals for a carbon border tax, which would impose a levy on imports of carbon-intensive steel, aluminum, cement, fertilizers and electricity. Putin has criticized it as an attempt to use “unfair means of competition.”
Putin criticized Europe’s energy transition, blaming the rise of renewables for the continent’s current energy problems.
“Systemic flaws have been gradually introduced in European energy over the past decade, which led to a major market crisis… Thankfully, problems of this kind have no place in Russia,” said Putin.

“Together, we need to find technological solutions to minimize methane leakages,” said Ruslan Edelgeriyev, Russia’s special envoy on climate issues and the country’s top climate negotiator. He added that he has had discussions with his U.S. counterpart, John F. Kerry, about joint satellite monitoring of emissions.
“On the contrary, many countries want to switch over to gas and you’re telling us to stop it,” Edelgeriyev said. “I don’t believe this is correct. Task number one is to step away from coal.”

To meet a Putin goal of reducing Russia’s carbon emissions to below the E.U.’s level by 2050, Russia’s Ministry of Economic Development outlined four strategies in a draft proposal. Three of the scenarios hinge on Russia’s ecosystems — forests, tundra, swamps and more — absorbing at least 1 billion tons of carbon dioxide in 30 years, double what they absorb now, according to most studies. Putin insists the number could be as high as 2.5 billion tons.
Anna Romanovskaya, a scientist and director of the government-organized Institute of Global Climate and Ecology, ­defended the figure as realistic — as long as there’s a commitment to reducing wildfires and increasing reforestation.
She also suggested that Russia could implement more fire protection measures on lands currently considered “unmanaged,” allowing them to eventually be counted as “managed” and further boosting the absorptive capacity.
“The potential is huge, but you need to know how to use it, and to do that, you need to work and not swing your hands in different directions,” she said. “We have really moved in the right direction this year.”

Alexey Kokorin, director of the Climate and Energy Program at WWF Russia, called Putin’s 2060 goal of carbon neutrality a “political declaration.”
“But it’s a good thing that this task is even on the agenda,” he said. “We can question some other aspects of this strategy, but so far this is a level of political declarations and concepts that is already a big step forward for Russia.”

Russia's new long-term plan is consequential for the world's efforts to rapidly cut emissions and avoid the worst consequences of climate change.

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