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Business Dialogue: Decarbonization in the Industrial Sector of the Russian Federation

The business dialogue was held during SPIEF-2021 on the broad
regional prospects for decarbonization in Russia. In 2020, carbon emission
reduction was one of the hottest discussed topics in the world, and projects
aimed at decarbonization became a priority vector of industrial development.

The issue of decarbonization is globally critical and fundamental. The
number of floods, fires, droughts, hurricanes, and other natural disasters on
the planet is increasing annually, and scientists directly relate this to the
increasing average temperature of the Earth.

Greenhouse gases are recognized as the main factor influencing the
growth of the Earth's average temperature. According to experts, humanity
has little time to reduce emissions. Otherwise, by 2050 the world will face
serious changes, and by the end of the XXI century a large part of the land
will become uninhabitable.

For Russia, as a country that actively supports global environmental
initiatives and agreements, the issue of decarbonization is more relevant
than ever. Particularly with the introduction and changes in Carbon Border
Adjustments Mechanism (CBAM), as well as other actions of the global
community aimed at reducing carbon emissions. With international
collaboration amongst communities and, therefore, act conjointly - nations
can reduce carbon footprints.

The main topics of the business dialogue were creating an effective
system to measure, record and verify greenhouse gas emissions, finding
ways to optimize production processes to reduce emissions, and
restructuring forest management to absorb excess carbon from the
atmosphere.

This event was attended by regional heads, government and banking
representatives, environmentalists, and scientists. During the meeting they
discussed the inevitability of reducing carbon emissions into the atmosphere.

The Deputy Minister of Energy of the Russian Federation P. Sorokin has
stated: “At the moment everyone thinks that this is all meaningless
conversations, and it will end soon. But whether we like it or not, this is the
reality in which we must live. I would like to get away from the "good or bad"
discussion. We all understand that the fate of the planet is our common
responsibility. According to Mr. Sorokin, the question of the day is how to
prevent the average temperature from rising by 2 degrees Celsius and that it
should be solved by all nations collectively. The EU, the U.S., and China are
already starting to introduce additional incentives which are not only the
money. Most of the time the incentive is penalties or restrictions that force
businesses to adopt to the new realities. The conditions for common
companies will gradually worsen, and the cost of doing business will
increase. “We understand that more than 5 billion people live in developing
countries, and they need sources of cheap energy. The energy cost increase
is not conducive to this goal; however, this path has been chosen, and
people have nothing left but to adopt. Regulatory conditions are now being
created to launch a carbon trading system. This is still a voluntary initiative,
but the foundations are already being laid for our companies to fit into the
global climate and environmental agenda.

Alexei Miroshnichenko, First Deputy Chairman - Member of the Board
of VEB.RF, spoke about the great work done jointly with the Ministry of
Economic Development and the Bank of Russia. “The goal of reducing the
carbon footprint to a level no higher than Europe has been clearly
highlighted, and work is in progress.” Green projects must have a clear
financial model that shows the level of reliability and stability. According to
Mr. Miroshnichenko, the result of almost two years of work should be the
emergence of Russian taxonomy and methodology and recommendations for
green finance. “This is the work that we started a year and a half ago with
the Ministry of Economics and the Bank of Russia. Last year we published the
first version of the Russian taxonomy". In May 2021, the latest version of the
document was approved by an interdepartmental group and submitted to
the government. The document is expected to be signed soon.

The Governor of Leningrad Region has also emphasized the
importance of taking the action at this moment: “I would like to mention that
since we are an export-oriented region, and our main partners are European
countries - the implementation of CBAM in 2023 is a serious challenge for the
Leningrad region.” According to the governor, for the region it is vital to keep
up with the budget and the development prospects. “We have come out with
a new initiative: not to exclude, but to include new lands in the forest fund
lands, agricultural lands where they are degraded. The implementation of
forest projects is also a very interesting and important prospect.”

Governor of the Tyumen region Alexander Moor highlighted the
potential of Russian forestry in the fight against carbon emissions: “A
significant part of the regional budget is formed by payments and taxes on
profits from oil and gas production and refining. If we do not act, the cost of
production will increase at the expense of environmental payments - this, of
course, is a drawback that we can face soon. Meanwhile, 72% of the Tyumen
region is forestry land.” “It is quite possible that from a region that exports
hydrocarbons, we can become a region that exports carbon credits.” “We
have totally new opportunities: instead of cutting down the forest, in fact, we
can improve it by planting new trees.”

Dmitry Makhonin, the Governor of the Perm region, made an
interesting observation:
“As an example of climate change on planet Earth the Perm region is the
best representation: there was such a 'Permian period,' when there was the
Perm Sea, and now this Perm Sea has turned into the largest deposits of
potassium-magnesium salts. The sea has dried up as the result of global
warming. It's hard to imagine that there were large emissions of CO2 back
then and that caused global warming just as much as the extinction of
mammoths and everything else. These climate questions are always
debatable: are CO2 emissions or solar activity more influential?” At the same
time, the governor noted that "the processes that are now taking place, in
terms of the prospects for the introduction of CBAM, the issuance of green
certificates, is a process which is unlikely to be stopped now." According to
Mr. Makhonin, it is important for our country to fully participate in this
process. Since Russia's forest coverage is significant, the Perm Territory is very
similar to Tyumen in terms of the structure of production and forestry. This
competitive advantage must be used. The Governor drew attention to the
ecological programs employed in the region and mentioned that "in 2023 the
amount of tree planting will already match the number of harvestings”.

According to Valery Subbotin, the chairman of the supervisory board of
GreenEco Invest LLC, modernization of forest management will increase the
intensity of resources of Russian forests in the absorption of harmful
emissions, and optimization of the production complex can reduce the
amount of greenhouse gases emitted into the atmosphere. “Decarbonization
is more relevant than ever. It is reflected in the SPIEF agenda, this topic is
discussed a lot. Currently, there is a lot of uncertainty in terms of regulation
both in the Russian Federation and in general. It is crucial to start taking
practical steps in this matter. The EU's statement on the introduction of a
cross-border carbon tax is a threat to Russian industry and exporters.
Especially for representatives of the oil and gas sector, half of whose
expected exports - which is from $3 to $6 billion annually - comes from oil
and gas”. There is a big new market emerging today. The estimation of CO2
emissions is about 35 billion tons. The cost per ton of CO2 on the European
market is $50, which means we are on the verge of forming the largest
market in the world. "No one has any doubt that the environmental agenda
is with us for the long time. The Russian economy will have to adapt to these
changes. It is important to ensure effective cooperation between federal and
regional authorities, as well as the participation of business. It is important to
start implementing pilot projects as soon as possible, which will enable us to
gain the necessary experience and move on to scaling up projects in Russia.
"We preferred to start implementing pilot projects today and solve the
problems that arise in close cooperation with the regulator. I'm sure that
together we have a fairly good chance of success”.
Carbon reduction requirements will soon become mandatory for all
market players. Now we have managed to attract significant funds, which
are aimed at developing our own pilot projects and investing in promising
startups. “GreenEco Investments” acts as a management company for these
businesses.

Carl Meurling, the head of GreenEco Investments' project office,
emphasized the importance of introducing expertise in forest management:
“Countries have to impose a number of restrictions to reduce emissions, but
these may not be sufficient to achieve the goals. Natural resources can be
used to bridge the gap to reduce about 30 billion CO2 emissions. And that's
where technology plays a big role.” Currently, most projects are not on a
large scale. More of these projects are needed that can increase global
demand for carbon credits. "Russia has plenty of forests that can absorb CO2
through the process of photosynthesis. We can use forests in Russia to
reduce CO2 emissions and achieve the goal - keeping the Earth's average
temperature from exceeding half a degree."

David Antonioli, CEO of Verra, and Valery Krivenko, the Chairman of
the Board of Directors of Angara Service LLC, also spoke at the meeting.
David Antonioli noted that "any country today must take actions to measure
and reduce carbon emissions. The goal is to switch from fossil sources to
other forms of energy. Russia needs to show its sustainability and
comprehensiveness to involve all participants in this process.” Mr. Krivenko
drew attention "technical limits and technologies for achieving them are
constantly changing. And technologies that have recently been too
expensive are becoming cost-effective given rising prices. Every year in the
world 6% of oil is burned at refineries to heat the remaining 94%. That's
about 300 million tons of oil, $200 billion or half of Russia's oil production.
“Five billion tons of oil is refined in the world every year. The recovery
system allows us to make this process more efficient - the exiting crude can
be used to preheat the incoming crude through heat exchangers, reducing
energy costs.”

According to the Russian President Vladimir Putin, "a frugal attitude
toward the environment and nature should be a prerequisite for this kind of
production. And we must consider that compliance with environmental
standards is becoming an important factor of product competitiveness: all
over the world, a serious attention is paid to the reduction of greenhouse gas
emissions”.

The decarbonization process in the domestic industrial sector and
forestry is aimed at maintaining competitiveness in the new environment
and taking care of the global climate situation. Reducing carbon emissions is
an urgent task for the economy of the future, and the last meeting was an
important step towards the implementation of decarbonization programs in
Russia.







SPIEF