The Attraction of Regulatory Models and their Challenges Brainstorming from a German/Russian Practitioner

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The Attraction of Regulatory Models and their
ChallengesBrainstorming from a German/Russian
Practitioner

• Notes for a presentation that ended up not being
  held because of a timing conflict
•  
• Planned for Groningen
• 29. May 2013
•  
• Max Gutbrod

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• Kyoto 3
• Evaluation of General Experience 3
• Current Airline and Possible Future Transport
  Issues 4
• Global or Regional Carbon Tax 5
• Attention to Gas Flaring in General 6
• Auditing according to the Energy Efficiency Law 7
• Green Tariffs 8
• Equator Principles 9
• Global Corporate Procurement Rules 10
• Carbon Reporting 11
• Conclusions 12

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Kyoto

• Evaluation of General Experience
• The history of application of Kyoto-type
  mechanism, measured under the angle of
  governance, gives an interesting example in that
  the lack of success of Kyoto in Russia shows
  where the shortfalls in governance in general and
  in particular in terms of environmental
  protection in Russia are, namely
• The implementation of non discriminatory
  standards applicable to a larger number of
  privates was not even tried. There was no Russian
  reduction target, no distribution of reductions
  among the industry and no internal cap and trade
  system.
• In discussions on implementation, there was quite
  some lobbying for the implementation of an
  internal market as the attraction of having an
  infrastructure of its own seemed to be very
  substantial.
• A narrow view of the regulator on what was
  required for being recognized as a project host
  was a significant cause for the lack of
  sophistication of projects. For instance, there
  were no projects in transport or housing, and
  most projects were in the oil and gas area. A
  similar problem is likely to arise whenever
  environmental rules are devised whereas most
  Western jurisdictions will have an understanding
  of what the term enterprise is to mean, Russian
  law and practice lacks a similar definition
• The Russian legal system in practice surprisingly
  easily accommodated concepts typical for emission
  purchase agreements (ERPAs). The fact that it was
  not clear what the legal qualification of the
  object of sale remained under dispute did not
  really play a role in practice.
• Stability of decisions on allocations of ERUs was
  an issue often raised but not been tested in
  practice. The understanding of due process and
  rules as well as judicial protection in
  administrative procedures continues to be an
  issue.
• Infighting of state bodies delayed implementation
  substantially.
• Russias ability to deal with global markets and
  related risks was less than that of other
  countries.

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Current Airline and Possible Future Transport
Issues

• Russians positioning as opponent of the inclusion
  of the parts of the flights that take place on
  non European soil seems half hearted
• For the reasons mentioned above, it is unlikely
  that a functioning local market and/or a Russian
  or Eurasion cap-and-trade system can be built up
  any time soon
• It is to be assumed that a number of further ICAO
  member countries are taking a similar approach
  and facing similar issues (by way of comparison,
  the USA not only lost one of the very first WTO
  cases, but was sanctioned because the internal
  political process took more time than was awarded
  by the then panel)
• A system whereby the Russian state would receive
  a sum equivalent to the cost of the ERUs that
  would have to be released by the relevant
  EU-state should be acceptable
• The same applicable to other transport? Shipping?
  Would this become a foot in the door for further?

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Global or Regional Carbon Tax

• Would be likely to influence behavior only in a
  very indirect manner
• Example gas flaring
• Long investment cycles, accordingly stability ot
  taxation would be required to encourage
  investment required to create the preconditions
  for minimizing tax
• Taxation would typically be levied on those that
  operate oil extraction sites. This taxation might
  indirectly encourage investing into
  infrastructure (pipelines that transport gas or
  chemical plants) that is required to prevent gas
  flaring. It is however difficult if at all
  possible to predict how likely it is that
  taxation leads to such investment. Issues to be
  considered
• Frequent changes in taxation in Russia
• Excise taxes on the export of oil that
  substantially decrease the margins for export of
  oil
• Prices of gas may be subject to multiple
  regulatory influence (similar to tariff
  regulation)
• State monopoly on oil pipelines does not easily
  allow for privates to take part in investment
• Accordingly, even assuming criteria of the
  environmental tax would be very well defined,
  this tax would have a relatively indirect
  influence

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Attention to Gas Flaring in General

• Appears to have high degree of Russian and
  global attention
• Consistency of approaches of attention and
  reporting questionable see selection of topics
  in and promises in http//www.sustainableenergyfor
  all.org/tracking-progress
• Assume tackling gas flaring would be best done by
  a multi-billion investment which may raise
  politically sensitive issues but still be viable,
  is a comparably weak international institutions a
  worthwhile instrument to further development?

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Auditing according to the Energy Efficiency Law

• Audits in the West presumably are based on
  standards of professional liability that would be
  tested by those relying on audits
• Owners
• Lending banks
• Whilst similar standards of professional ethics
  would exist in Russia, their implementation
  seems, at best, patchy
• Also, standards of contracting in particular in
  what concerns construction are way behind the
  West the description of buildings required for
  turn-key contracts is not market standard
• The members of the more than 150 self regulating
  organizations that currently are registered
  therefore have a substantial potential for
  actually being a delaying factor

8
Green Tariffs

• Transparency of effects of electricity tariffs
  little
• Whilst a wealth of information on changing
  policies, prices and profitability of many market
  players in the electricity industry generally
  available, the consistency of discussion in
  particular of pricing issues and issues of
  allocation of revenue is questionable
• It is also questionable in how far the prices
  paid by end consumer are indeed tied to the
  amounts that are being consumed, and timing of
  consumption (smart grid) in this context
  appears to be a major challenge. In other words,
  many prices are being influenced by, for
  instance, tariff regulation in a manner that is
  not tied to consumption.
• Tariffs are changed yearly without changes being
  reliably predictible
• Effect of green tariff also questionable because
  of
• access issues
• unclear effects and lack of flexibility on
  pricing

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Equator Principles

• Were supposed to from a global standard of
  project financing that would eventually develop
  into a global standard of financing
• The number of banks that have committed to the
  Equator principles is not big
• Implementation of Equator Principles is not
  regulated. Currently, implementation is limited
  to the self imposed obligation of participating
  banks to comply with the Equator Principles
• Equator Principles appear to be in a process of
  soul searching and looking out for further
  options
• Accordingly, it is difficult to recommend
  expansion of the likes of Equator Principles

10
Global Corporate Procurement Rules that Further
Energy Efficiency

• Would require that a certain carbon element be
  present in purchases
• Look similarly attractive to international
  compliance programs or controlling ethical
  standards
• Imagine a procurement requirement that can only
  be fulfilled with difficulties. Examples Only
  prochases of local (Russian) apples of a high
  quality are allowed within a supermarket chain.
  When is the right time to allow for the purchase
  of imported (non Russian) apples? How are
  exemptions graded for internal or group-wide
  exception?

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Carbon Reporting

• see https//www.gov.uk/government/news/leading-bus
  inesses-to-disclose-greenhouse-gas-emissions
• would seem to provide for a uniform standard
  which seems to be interesting to investors
• would allow comparison on the way things are
  handled by companies

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Conclusions (1)

• Much of the global governance is driven by a
  intuitive assumption that we need some global
  government type institution. Accordingly, global
  governance is seen as having failed when no such
  global government emerges.
• In the environmental sphere it is particularly
  difficult for such a global government to emerge
  because
• There are many different standards by which
  environmental protection is assessed
• There are many different political priorities for
  environmental protection
• As a consequence, the assessments of what is good
  or necessary for the environment are likely to
  differ even assuming that all participants in
  international debates behave reasonable
• The difficulties in agreeing on a Kyoto-extension
  therefore suggest a systemic problem
• Complex mechanisms are likely to suffer
  particularly hard from them being used in a
  foreign policy negotiating context. The fate of
  Kyoto in Russia can be used as a paradigm for
  this Had it not been a tradeoff against the EU
  agreement to Russias accession to the WTO,
  implementation might have been more successful as
  commitment to making Kyoto a success in Russia
  would have been more general. This could in turn
  have increased the chances for Kyoto extension.
• An alternative approach the trying to form global
  governments and globally governed issues could be
  to try agreement on measuring techniques or
  standards as opposed to trying to agree to share
  the burden in reaching a result. In a sense, what
  would be global under the measuring approach
  would be the parameter, the point of comparison,
  and not the commitment to achieve something. The
  WTO in agreeing on trade to be free generally
  displays this measuring approach. Kyoto, in
  attempting to provide for a worldwide overall
  reduction, displays a more all encompassing
  approach which does not seem viable on a
  worldwide basis.

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Conclusions (2)

• European models continue to generally be
  attractive
• IFRS as compared to GAAP
• European capital markets
• Despite the doubts mentioned above, Kyoto-type
  mechanisms are useful in that they provide for
  standards
• Similarly, carbon report does provide for useful
  standards
• Energy Audits, Energy Savings Contracting,
  copying of green tariffs, influence on flaring
  are likely to provide for much less useful
  standards
• It will be key for any standard to be successful
  that it is used in the longer term and
  consistency be maintained. In that, regulatory
  approaches like the ban on the use of industrial
  gas credits for JI-projects are not overly
  helpful.

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Thank you!
Max Gutbrod Partner Baker McKenzie - CIS,
Limited Sadovaya Plaza 11th Floor 7
Dolgorukovskaya Street Moscow 127006 Russia ???
7 495 787 2700 ???? 7 495 787
2701 max.gutbrod_at_bakermckenzie.com
www.bakermckenzie.com