What is a carbon unit?
A carbon unit is a unit of carbon dioxide equivalent emissions reduction or removal. In this article, it talks about purchasing carbon units issued by climate projects under Russian climate regulation according to Federal Law No. 296-FZ dated July 2, 2021, “On Limiting Greenhouse Gas Emissions.”
The carbon unit registry started operating on September 1, 2022. In the same month, LLC “Dalenegroinvest” registered the first climate project and concluded the first two deals for 10 carbon units each. Since then, the registry has been enriched with 18 climate projects, with 93,951 carbon units in circulation, and 65,601,616 carbon units planned for issuance.
According to the criteria of the Federal Law “On Limiting Greenhouse Gas Emissions,” climate projects are divided based on the following results:
- Reduction (prevention) of greenhouse gas emissions.
- Increase in greenhouse gas absorption.
Climate projects are also informally divided depending on the processes used:
- Natural processes and so-called natural-based projects. For example, tree planting, restoration of wetlands.
- Processes based on technologies and so-called technological projects. For example, the use of renewable energy sources, increasing energy efficiency.
Climate projects may be implemented by legal entities, individuals, and individual entrepreneurs throughout the territory of the Russian Federation.
Stages of climate project implementation:
- Preparation of project documentation.
- Project validation, i.e., assessment and confirmation of compliance with climate projects. Validation is carried out by legal entities or individual entrepreneurs accredited in the national accreditation system.
- Conclusion of a contract with the Registry Operator. Registration of the climate project.
- Implementation of the climate project.
- Compilation of a report on the implementation of the climate project.
- Verification of the report by a legal entity or individual entrepreneur accredited in the national accreditation system.
- Issuance of carbon units by the Registry Operator and crediting to the account of the climate project executor.
After being credited to the account of the climate project executor, carbon units are freely circulated and can be transferred under various civil contracts.
Why buy carbon units?
Carbon units are accounted for by companies to achieve target reductions in greenhouse gas emissions
At the time of writing this post, measures to limit greenhouse gas emissions for the years 2024-2028 have been implemented for 35 regional regulated organizations in the Sakhalin Region.
The demand for carbon units resulting from the Sakhalin experiment by organizations cannot be predicted. By 2025, they need to reduce greenhouse gas emissions by approximately 160 thousand tons, which is less than 2% of the emission level in 2022 considering production growth plans. It can be assumed that part or all of the commitments will be fulfilled by the regional regulated organizations.
In case of inability to meet obligations to reduce greenhouse gas emissions, regional regulated organizations can buy carbon units or pay a fixed fee for exceeding each ton of quota in the amount of 1,000 rubles. The latter is simpler to do, and the payment corresponds to the market-established price of carbon units.
Carbon units are accounted for by companies to reduce their carbon footprint
Carbon footprint is the total volume of greenhouse gas emissions and absorptions occurring during the production of goods or the provision of services.
Carbon units as an investment
Carbon units are available for purchase by legal entities, individuals, and individual entrepreneurs. They are also available for purchase by foreign legal entities without a permanent presence in the Russian Federation, as well as by foreign citizens.
Completed Deals
Since the launch of the Carbon Unit Registry, five transactions totaling 3,755 carbon units have been concluded at prices ranging from 700 rubles to 1000 rubles per unit. 1000 carbon units were purchased to offset indirect greenhouse gas emissions (reduce the carbon footprint) and were retired. There is no publicly available information about the remaining 2,755 carbon units from the other four transactions, so it is impossible to draw conclusions about the purpose of their acquisition.
Up-to-date information on transactions with carbon units can be found in the table at the link.
How to Buy Carbon Units
- Direct Purchase from Companies Implementing Climate Projects: Carbon units can be purchased directly from companies that have implemented climate projects.
- Brokerage Services: Brokers act as intermediaries between buyers and sellers of carbon units and perform the following functions:
- Finding buyers and sellers.
- Facilitating negotiations.
- Document processing.
- Ensuring compliance with regulatory requirements.
- Other services related to purchasing carbon units, such as market analysis and consultations.
- Carbon Unit Exchanges: The price per unit is determined by supply and demand.
Regardless of the method chosen, the buyer will need to open an account in the Registry for the carbon units to be credited to it.
Carbon Units as an Investment
Despite the availability of carbon units to a wide range of individuals, forecasting future returns from their realization is difficult. The current demand for them is ensured by:
- Obligations from regulated regional organizations within the Sakhalin experiment.
- The possibility of offsetting the carbon footprint of products and services.
Potential demand may increase due to:
- Introduction of a carbon price charging system.
- Introduction of a voluntary product certification system based on carbon footprint indicators.
- Initiatives to create foreign demand for Russian carbon units.
Conclusion
Although the infrastructure of the carbon unit market in Russia has been established, the carbon market is still in its development stage. Since 2022, after the launch of the Registry, 19 climate projects have been registered, and 93,951 carbon units have been issued.
Demand for carbon units is currently limited. The main buyers are 35 regional organizations participating in the Sakhalin experiment, as well as companies seeking to neutralize their carbon footprint.
Purchasing carbon units as an investment is risky because predicting their future value is difficult. Potential demand for carbon units may increase, but it depends on the implementation of state climate change policies.
