Capitalizing on Russia's Forest Sequestration

Summary

Terrestrial carbon sequestration is advocated as an inexpensive mitigation option to the problem of global climate change.   The country with the largest forest resource in the world is Russia, perceived to have the potential to store vast amounts of carbon.  In a world constrained by the threat of climate change, this capacity could be enormously valuable.

Russia has millions of acres of standing forests, some 22 percent of the world total.  The potential to store carbon in newly-planted forests has been estimated at 140-240 million tons of carbon in the 2008-12 commitment period under the Kyoto Protocol, at a price of approximately $30/ton of Carbon (tC).  If this potential were realized, it would offset more than all of the EU-obligated target under Kyoto.

While these numbers are encouraging, they are offset by three factors that will make it very difficult for Russia to realize even a portion of this potential over the next two decades.

First, without US participation in the Kyoto Protocol, the market for carbon credit will remain depressed at least through 2012.  Carbon prices are likely to remain well below $10 per ton, which dramatically shrinks the potential for cost-effective carbon sequestration in Russia.

Second, at the Marrakech meeting in November 2001, the parties to the Kyoto Protocol changed the acceptable definition of carbon sequestration, but only for Russia.  Prior to the meeting, countries could only claim carbon sequestered in newly planted forests - since such forests would provide additional sequestration capacity and thus would sequester carbon that would not otherwise have been captured from the atmosphere.  At Marrakech, Russia was allowed to bank 33 million tons of carbon sequestered in existing forests for each of five years beginning in 2008.  While this option is much les expensive, it does not promote additional carbon sequestration.  It also makes it unlikely that Russia will invest in new forests when it can trade carbon permits obtained by simply managing and protecting existing forests.

This paper examines a third factor.  If the value of carbon permits was sufficient to make carbon sequestration economically attractive, would Russia have the institutional capacity to develop and implement sequestration projects?  Under either the option of planting new forests or managing existing forests, institutional disarray, insufficient legal and regulatory infrastructure and a lack of information and knowledge will impair any Russian effort and create measurable transaction costs and compliance uncertainty.  Admittedly, some of these same problems face any foreign investment in Russia, but they are particularly acute for new carbon trading, because a credible system that can verify credits for carbon sequestration is vital to the success of the transaction.

Several factors diminish Russia's credibility as a carbon trader.  To be acceptable to the international community, Russia must establish the means to measure and monitor its forests to assure investors that what it is selling is real.  Russian environmental enforcement is weak in status, budget, and legal mandate.  The country's Rosleskhoz, or Federal Forest Service (FFS), the main owner of exisiting and potential forest areas, has historically been self-enforcing with regard to any codes that relate to its forests and practices.  Second, the Federal Forest Service is a fragmented organization, and has difficulty enforcing existing laws.  Morever, it is not, as an institution, familiar with carbon-maximizing techniques or the administration of such projects.  Thus, without substantial increases in resources and trained personnel, it is unlikely that the Federal Forest Service will be able to administer such a program.  Third, property rights both to FFS lands and to lands potentially available for sequestering carbon are not well defined.  When carbon rights are allocatd, these uncertainties are likely to add more complications.  Finally, the existing tax code will tend to discourage investment, since in application, if not intent, it penalizes foreign investment.

To overcome these obstacles, Russia will need to:

• pass legislation to determine basic property rights and allocations of carbon within the forestry sector, as well as for the country as a whole;
• delineate the roles and responsibilities of pertinent Russian agencies at various levels of government; and
• allocate sufficient resources to regulate, monitor, measure, and enforce compliance so that the sequestration program proceeds in a clear, consistent manner that is credible to the international and domestic communities.

If "forest management" credits are allowed to meet standards that are more lax than those that would be reasonable to demand for new afforestation credits, it will greatly delay the implementation of a credible, sustainable system of new sequestration credit trading.  Once one looks at the cost of afforestation or reforestation, it is clear that few to no new projects are going to be completed in the first commitment period.  On the other hand, if the "forest management" projects must meet minimum standards of verification, then it will give impetus to fixing some of the factors the authors identify in this paper that will be faced by new sequestration projects.  If not, few carbon sequestration projects will be developed in Russia, and those that are developed will contribute very little to reducing carbon dioxide concentrations in the atmosphere.