Climate Project Development

Introduction

This material deals with the climate project development in accordance with national climate regulations.

This material may be useful:

• for regional regulated organizations as part of an experiment to limit greenhouse gas emissions in the Sakhalin region, planning to meet quotas through carbon units from the implementation of their own climate projects;
• for organizations forecasting the introduction of greenhouse gas emissions quotas at the federal level and planning to prepare for this event;
• for organizations planning to implement climate projects with the aim of supplying carbon units to the emerging carbon market.

By the Appendix No. 1 to the Order of the Ministry of Economic Development of Russia dated 11.05.2022 No. 248, the following criteria for climate projects have been determined:

• Compliance with legislation: Project activities must not contradict federal and regional laws and must also comply with documents of the national standardization system in the field of limiting greenhouse gas emissions.
• Emissions reduction: The project’s result should be a reduction (prevention) of greenhouse gas emissions and/or an increase in their absorption.
• Prevention of emission leaks: Project activities must not lead to an increase in greenhouse gas emissions or a decrease in their absorption elsewhere.
• Credibility: Emissions reduction should not result from factors unrelated to project activities.
• Additionality: Project activities must go beyond mandatory legislative requirements.

Climate project development is the first stage that determines the further course of work. At this stage:

• The needs and expectations of the project initiator are discussed.
• A list of possible projects for implementation is formed. The developer presents options from the list with assessments:
  • Projected investments.
  • Implementation timelines.
  • Project size.
• Choosing the project and its development.

Legislation does not require accreditation of developers. Essentially, this is a consulting service. If the client has different opportunities for implementing climate projects, the developer’s experience in all of them is important to choose the most promising one. It is worth choosing a developer who is ready for long-term cooperation until carbon units are brought to market.

Goal of climate project development

To assess the current demand for the development of climate projects, it is necessary to understand who, for what purpose, and when carbon units may be needed.

Firstly, carbon units are necessary for companies to achieve target indicators for reducing greenhouse gas emissions. Currently, measures to limit greenhouse gas emissions are introduced for the period from 2024 to 2028 in the Sakhalin region for 35 regional regulated organizations. Forecasting the demand for carbon units from organizations during the Sakhalin experiment is difficult. By 2025, they need to reduce greenhouse gas emissions by approximately 160 thousand tons. At the same time, part or all of the obligation may be fulfilled independently. If the quotas of regional regulated organizations are exceeded, they have the choice to:

• count quota fulfillment units
• count carbon units
• make a fixed payment of 1,000 rubles per ton of quota excess.

Secondly, carbon units can be used to reduce carbon footprint.

Carbon footprint is the sum of greenhouse gas emissions occurring at all stages of a product’s or service’s life cycle. It includes direct emissions and indirect emissions (associated with the consumption of electricity, heat energy, and other externally obtained resources).

Currently, there are no initiatives motivating companies to reduce their carbon footprint through carbon units.

Additional demand for carbon units may arise due to:

• introduction of a carbon price levy system (proposed in the Action Plan for the Implementation of the Strategy for Socio-Economic Development of the Russian Federation with a Low Level of Greenhouse Gas Emissions until 2050);
• introduction of a voluntary product certification system based on carbon footprint indicators (proposed in the Action Plan for the Implementation of the Strategy for Socio-Economic Development of the Russian Federation with a Low Level of Greenhouse Gas Emissions until 2050);
• creation of foreign demand for Russian carbon units.

Cost of Climate Projects Development

The cost of a climate project influences the decision to implement it. This material intentionally does not provide specific figures, as the cost of each project is individual and can vary several times.

The final cost is composed of expenses at each stage:

1. Development of the climate project. The cost is contractual and depends on the qualifications of the developer and the volume of services provided.
2. Validation and verification. The price is also determined by agreement between the parties.
3. Implementation of the climate project depends on the chosen project type and is subject to a contract.
4. Opening an account in the registry, registration of the climate project, issuance of carbon units, and other operations with them are established by Government Resolution No. 518 of March 30, 2022 “On the procedure for determining the fee for the provision of services by the operator for conducting operations in the carbon units registry.” For convenience, there is a calculator available. Registry Operator services are exempt from VAT.
5. Sale of carbon units in case of using intermediary services or carbon units exchange is also an expense item and is calculated individually in each case.

Current Status of Climate Projects Development and Carbon Unit Deals

Since the establishment of the Carbon Units Registry in September 2022, 19 climate projects have been registered, with 93,951 carbon units put into circulation. Another 65,601,616 carbon units are subject to issuance (as of the material’s writing on March 18, 2024).

During this time, transactions have been concluded for a total volume of 3,755 carbon units. Of these, 1000 units were counted for the purpose of reducing the carbon footprint, and the movement of the rest is unknown.

Up-to-date information on transactions with carbon units is contained in the table at the link.

Conclusion:

Considering that the Sakhalin experiment will not create sufficient demand relative to the existing and projected supply in the carbon units market, and voluntary carbon footprint offsetting is sporadic, it is advisable to develop a climate project along with obtaining accompanying benefits. For example, alongside reducing greenhouse gas emissions, modernizing production processes, minimizing the likelihood of environmental accidents, and social tension in the company’s presence region.

Developing a climate project with the sole purpose of generating income from carbon unit sales is not the best idea. It is too difficult to forecast demand and unit prices.