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Olga Gassan-zade                                                                              

 Making Flexibility Mechanisms Work for the Countries of the Former Soviet Union: A Handbook of Practical Solutions

 Project Background: Climate Policy in the FSU countries

 The Kyoto Protocol flexibility mechanisms offer great opportunities to attract new investment to energy and environment projects in Eastern Europe. Firstly, the targets of the economies in transition (EITs) in the first commitment period do not require actual reductions in greenhouse gas emissions, only a freeze of 1990 emission levels. Because of the economic contraction in the post-Soviet years, EITs possess considerable headroom of emission allowances that can be traded under International Emissions Trading (IET) mechanism. According to recent estimates, Russia and Ukraine alone can supply enough allowances to meet carbon market demand in the first commitment period. Secondly, the cost of implementing climate change mitigation projects in the EITs is significantly lower than in the rest of the developed world, which makes these countries attractive hosts for projects under Joint Implementation (JI) mechanism.

However, the ability of the EITs to benefit from the Kyoto Protocol mechanisms is contingent on two vital preconditions: their compliance with the provisions of the treaty, and establishment of credible and reliable domestic structures to regulate the use of flexible mechanisms in each country. Meeting these preconditions has proven problematic to lesser or greater degree in all EIT countries. Central European states, due to their overall oval more positive investment climate and the proximity to the EU, have been more successful in gaining the trust of international community with their climate policies; whereas in Former Soviet Union (FSU) countries, such as Ukraine and Russia, climate policy-making process has been marred by a number of serious setbacks.

In Russia, there is a protracted institutional struggle to reach a power-sharing agreement in domestic climate leadership. As a result, the nine pilot projects completed in Russia under AIJ phase have suffered from a lack of transparency and uncertain government commitment. In Ukraine, where government climate leadership is virtually non-existent, not a single AIJ project has been completed, despite several attempts to do so by a number of donor governments. Not surprisingly, carbon investors and donors have become very reluctant to engage in the FSU countries. The volume of donor support in both Russia and Ukraine has significantly receded and many individual investors have left to pursue other opportunities. Unless a clearer policy framework for the flexibility mechanisms is created, the vast carbon offsets potential of these countries might never be realized.

Given the negative track records of the FSU governments, carbon investors are likely to continue to exercise cautious approached, even if certain political progress is achieved in these countries. It is a well-known fact that corruption persists at all levels both in Ukraine and in Russia,[[1] which gives rise to legitimate concerns that IET/JI can be high-jacked for wrong purposes and might not lead to actual greenhouse gas reductions. Other reasons that are commonly turning away large investors from the FSU, such as unpredictability of rules and policies, weakness of the rule of law, and pervasive bureaucratic red tape also contribute to diminishing investor confidence in the FSU carbon markets. Moreover, a unique factor associated with carbon investment, i.e. the crucial role played by the government in performing the transfer of allowances, adds another degree of risk to investing in climate mitigation in the FSU. In order to match host country momentum with renewed investor interest in climate mitigation opportunities in the region, new efforts need to be made to reassure potential investors and donor governments that successful investment in the FSU countries is feasible.

Project Goal

The goal of the project will be to advance the knowledge of carbon marker in the FSU countries by exposing the risks associated with carbon-financed projects in the region and developing a system of checks and balances to ensure transparency and effectiveness in implementing such projects. The project thus will serve to raise investor confidence in the FSU and promote establishment of sound institutional frameworks in the region.

Project Objectives

The objective of this project would be to find and define a policy framework within which the Kyoto Protocol flexibility mechanisms can operate smoothly in the FSU countries. The main focus f the study will be on Ukraine, Russia, and Kazakhstan, although other FSU countries will be also considered in the context of the CDM dialogue. The project report containing the results of the study and the thinking that lead to the creation of the framework will be prepared in a form of a handbook that can be used by potential carbon investors and interested donor governments as a guide to investing into carbon offsets projects or developing bilateral programs and policies in the FSU countries. At the core of the attention of the handbook will be analysis of current political, economic, and institutional conditions affecting implementation of carbon-financed projects in the region. The analysis will serve as a basis for developing a system of checks and balances that international community can impose on the FSU countries to ensure successful and effective implementation of climate change mitigation projects.