Introduction

In Russia, particularly in the Arctic region, the rate of climate warming is significantly higher than the global average. In 2020, Russia ranked third in total carbon dioxide emissions. Observations indicate that the average rate of surface warming for the globe is 0.17°C/10 years for 1976-2012, while in Russia, it is warming at a rate of 0.43°C/10 years. The most rapid warming is observed at northern latitudes. On Russian territory, the annual average temperature is increasing 2.5 to 2.8 times faster than the global average. Negative consequences include decreased reliability of foundations for residential buildings and technical structures located on permafrost (covering about 67% of the country's territory), forest fires, and permafrost thawing. An essential element of climate regulation in Russia is the fight against forest fires and the development strategy of the forestry sector, as forests have significant greenhouse gas absorption potential (up to 25%). In Russia, the Forest Complex Development Strategy until 2030 was adopted in 2021. Currently, there is low efficiency in preserving forests. For example, the forest fires in Yakutia, a series of large-scale forest fires in 2020-2022, are considered the world's largest forest fires. The smoke from the fires reached the Urals, Yamal, Yugra, Sakhalin, Kazakhstan, and Alaska. Many areas in Yakutia experienced severe air pollution from combustion products (on August 12, 2021, air pollution in Yakutsk exceeded WHO-recommended parameters by 247 times). The main immediate causes of the fires were cited by authorities as climate change and dry thunderstorms. However, another reason is the low funding for forest protection in Yakutia (6 rubles per hectare, compared to 180-200 rubles per hectare in central Russia). Such a significant difference in funding standards between regions indicates the inadequacy of the methods used, based on regional populations and the territory of protected forest areas, as well as inadequate state policy in Russia, which does not account for long-term climate risks associated with permafrost melting, which can be accelerated by large-scale forest burning in Siberia and Yakutia.

Permafrost Thaw

The organic matter frozen in permafrost is called organic carbon. As permafrost melts, microbes begin to decompose the material and release greenhouse gases, including carbon dioxide and methane, into the atmosphere. Net methane emissions from northern permafrost regions included 64% from Russia, 11% from Canada, and 7% from Alaska (2004). Conventional business scenarios estimate Arctic methane emissions due to permafrost thaw and rising temperatures in the range of 54 to 105 million metric tons of methane per year (2006). A recent study published in the journal Nature Climate Change indicates that more than 100 diverse and antibiotic-resistant microorganisms have been found in Siberia at depths of over three meters. As permafrost melts, these bacteria can mix with meltwater and create new strains.

Climate Risks and Economic Component

In Russia, where budget revenues depend on the export of raw materials, the climate agenda includes a significant economic component. By the end of 2022, the Central Bank of Russia prepared a report on climate and geopolitical risks for the Russian economy, titled "Climate Risks in a Changing Economic Environment." In this report, the bank assesses Russia's high degree of vulnerability to transition risks, such as the carbon intensity of the economy and the dominance of exports of high-carbon footprint products. The report primarily focuses on the climate risks faced by Russian businesses, leading to reduced income, increased operating and investment costs, higher borrowing costs, and consequently, increased indebtedness of the most carbon-emitting companies. The Central Bank of Russia reports that the growth of electric transportation and the introduction of carbon regulation worldwide will reduce the demand for energy resources and high-carbon goods, potentially leading to the depletion of Russia's current raw material export-driven economic model. Coupled with the accumulation of lag in the development of new green industries and technologies, this could significantly exacerbate transition risks in the 2030s.

Russia in the Paris Climate Agreement.

The adoption of the Paris Climate Agreement was largely driven by economic considerations to allow Russian industrial exporters to continue trading in raw materials. The Paris Agreement was signed in 2015, adopted in Russia on November 6, 2019, and entered into force in 2021. Russia has not ratified it but has accepted it. According to the law on international treaties of the Russian Federation, ratification applies to treaties that require amendments or the adoption of new federal laws. For adoption, a decree from the head of the government is sufficient, while ratification involves the adoption of a federal law and its passage through the State Duma. Within the framework of the Paris Agreement, Russia has declared that it will reduce its emissions by 25 to 30% by 2030 compared to 1990 levels, taking into account the maximum possible absorption capacity of forests. So far, this obligation has been met: in recent years, emissions, considering absorptions, have averaged 2 billion tonnes of CO2-eq, which is 51.6% of the 1990 level. Russia is not obliged to declare or contribute, but it can do so voluntarily. In general, Russia's adoption of the Paris Agreement is a step that demonstrates to the world that Russia understands environmental and climate issues but fundamentally changes nothing for the country. Thanks to the Paris Agreement, first and foremost, Russia has the opportunity to fully participate in shaping the global climate agenda: export-oriented companies are integrated into economic ties. The fact is that Russian companies will not be able to sell their products abroad if they do not meet the environmental requirements of foreign buyers, especially if they do not consider the volume of greenhouse gas emissions.

Development of Carbon Regulation in Russia.

On October 29, 2021, the government of the Russian Federation approved the "Strategy for Socio-Economic Development of Russia with Low Greenhouse Gas Emissions until 2050." The strategy includes two scenarios—inertial and target—that differ in the set of measures for decarbonizing the Russian economy. In the preferred target scenario, ensuring Russia's competitiveness and sustainable economic growth in the context of global energy transition is designated as a key task, with the achievement of a balance between anthropogenic greenhouse gas emissions and their absorption by no later than 2060. The legal basis for national carbon regulation is established by the federal law of July 2, 2021, No. 296-FZ, "On the Limitation of Greenhouse Gas Emissions." Russian carbon regulation aims to minimize the negative impact of industries through the reduction of greenhouse gas emissions, notably through the implementation of climate projects, the verified outcome of which is carbon units (CUs) and quotas for the volume of permitted emissions.
Law No. 296-FZ provides for the establishment and assessment of the achievement of greenhouse gas emission reduction targets for the economy of the Russian Federation as a whole and for its individual industries, obtaining reliable information on greenhouse gas emissions generated as a result of economic activities and other activities of regulated entities, and providing reliable information to all interested persons. The target indicator for reducing greenhouse gas emissions for the Russian Federation's economy is defined, taking into account the absorption of greenhouse gases in forests and other natural ecological systems. Legal entities and individual entrepreneurs whose activities are accompanied by greenhouse gas emissions with a mass equivalent to 150,000 tonnes of carbon dioxide or more per year for the period up to January 1, 2024, and 50,000 tonnes of carbon dioxide or more per year for the period from January 1, 2024 (Part 1, Article 7 of Law No. 296-FZ), and who meet the criteria specified in the Government of the Russian Federation Decree No. 355 of March 14, 2022, "On the Criteria for Classifying Legal Entities and Individual Entrepreneurs as Regulated Entities." At the same time, Law No. 296-FZ provides for the possibility of stimulating activities aimed at reducing greenhouse gas emissions and increasing their absorption through state support for the implementation of climate projects (measures are being developed). Climate projects, in accordance with the standards of Law No. 296-FZ, have the right to be implemented by all legal subjects. At the same time, these activities must comply with the established criteria for climate projects; verified information on their implementation will be included in the carbon unit registry. To implement the provisions of Law No. 296-FZ, regulatory acts of the Government of the Russian Federation also regulate issues related to the establishment and maintenance of a registry of greenhouse gas emissions, the provision and verification of reports on greenhouse gas emissions, the issuance of carbon units, and transactions with them in the carbon unit registry, as well as billing services provided by the carbon unit registry operator. With the effective implementation of the measures provided for by Law No. 296-FZ, Russia will reduce its anthropogenic impact on the global climate system and reduce its carbon footprint.

Best Practices in Climate Management in Russia: Experience.

The first Russian region where this experience was initiated was the Sakhalin region. The experience began in September 2022 with the goal of achieving carbon neutrality in the Sakhalin Oblast by December 31, 2025, and in other subjects of the Russian Federation included in this experiment, at a later date. The region has a special program aimed at decarbonizing the economy and transitioning to development with net-negative emissions. The experiment's purpose is to test different methods and approaches for monitoring and accounting for greenhouse gas emissions, implementing climate projects, accounting for and trading carbon units (CUs), and compliance units (CRUs). In accordance with Law No. 34-FZ, a regulatory framework has been developed that establishes the greenhouse gas emissions inventory period, the procedure for classifying legal entities and individual entrepreneurs as regional regulated entities, the procedure for calculating and collecting excess quota fees, and finalizes certain resolutions adopted by the Government of the Russian Federation regarding the accounting system for carbon units.
Over-the-counter (OTC) trading of carbon units became available after the government acts regulating the operation of the carbon unit registry entered into force on September 1, 2022, and the direct launch of its operations. Kontur JSC was appointed as the registry operator. It is now possible to open an account in the carbon unit registry, register a climate project, or conduct transactions with carbon units using the Unified Public Services Portal. To develop approaches to the organization of the CU trading system, questions have arisen about the legal nature of CUs as organized trade objects and the possibility of using the Russian financial market infrastructure for their circulation. On September 26, 2022, the first purchase and sale transactions of carbon units were concluded on the JSC National Commodity Exchange.

Approaches to Information Disclosure in Russia.

To address the issue of disguising an ordinary or "brown" asset as "green" (greenwashing) in Russia, criteria for prioritizing projects and correct conclusions by project auditors are needed. In Russia, requirements for the sustainable development project verification system and approaches to evaluating their environmental and climate impact are being developed by the State Development Corporation VEB.RF.
The Central Bank of Russia has consistently developed recommendations on disclosing information about climate risks. However, due to the unprecedented sanctions in 2022, Russian companies and the financial sector were allowed to restrict the publication of financial statements to protect sensitive information, which led to the partial closure of non-financial reports. Some companies continued to publish information in the field of sustainable development; however, overall, disclosure in corporate reports deteriorated. Additionally, the departure of Western information providers from Russia had a negative impact. In the coming years, Russian issuers will need to strike a balance between minimizing sanctions risks and disclosing necessary information about their exposure to climate risks.
As such, aspects of recommended activities for disclosure by public joint-stock companies for sustainable development and recommendations from the Central Bank of Russia on the implementation of responsible investment principles have been published. One of them is the principle "Investor identification of responsible investment implementation approaches and disclosure of the adopted approaches." According to the Central Bank of Russia's monitoring of information disclosure by public companies whose shares are included in stock exchange listing, several Russian companies used international standards such as GRI, SASB, TCFD, and others to disclose information in the field of sustainable development in their reports for 2021. However, this trend was typical mainly for the largest non-financial organizations. There is a lack of consistency in the data compiled by companies on their exposure to transitional climate risks, the consideration of ESG factors, and sustainability issues, which allow for assessing corresponding risks. Therefore, it is challenging to develop and implement regulatory requirements to minimize the impact of climate change on financial stability. The question of the possibility of information disclosure in the field of sustainable development by financial and non-financial organizations is still under discussion, even considering the current challenging geopolitical situation. To minimize the negative consequences of the impact of sanctions, the government of the Russian Federation has given securities issuers and insiders the opportunity to limit the disclosure of sensitive information until July 1, 2023. Approximately half of public companies whose shares and/or bonds are admitted to organized trading have more or less limited information disclosure, including financial statements. However, the restriction of information disclosure is a special temporary measure that does not negate the general principle of financial market information transparency. Disclosure is a necessary basis for developing not only sustainable financing instruments and capital mobilization for sustainable development but also for directing capital flows to projects related to ensuring technological sovereignty and modernizing the economy. In 2023, it is planned to publish an information letter on recommendations for information disclosure by financial institutions in the field of sustainable development. In the future, with the adoption of international standards for sustainable development information disclosure and after extensive public debate, several relevant provisions could be enshrined at the regulatory level.

Transitional Climate Risks for Russia.

In previous years, the key channel of transitional climate risk for Russia was the introduction of a cross-border carbon tax in the EU in the mid-2020s. However, in the context of sanctions from western countries in 2022, the risks of restrictions on Russian exports are materializing at an accelerated pace. The EU plans to phase out 90% of Russian oil and oil product imports by late 2022 - early 2023, and starting from August 10, 2022, an embargo on the import of Russian coal and other solid hydrocarbons is in effect. Furthermore, a ban on the import of steel products, gold, cement, timber, and certain fertilizers has been imposed. The United States, the United Kingdom, Japan, and South Korea have also imposed restrictions on certain categories of Russian exports. Measures implemented by major countries worldwide to reduce carbon emissions and tighten environmental policies will continue to create financial risks for Russian companies.
1. Electricity production based on renewable energy sources (RES) becomes more profitable given the high prices of traditional energy resources. This will enable it to replace traditional production, thereby reducing global demand for coal and natural gas. According to McKinsey's forecasts, global coal consumption will peak in the coming years and then sharply decline. At the same time, geopolitical events in 2022 are pushing Western countries to abandon gas as an intermediate energy source during the transition to renewables. The International Energy Agency estimates that, with the implementation of current energy policies, global natural gas demand will increase by only 5% between 2021 and 2030.
2. Electrification of transportation will reduce global oil demand. Global sales of electric vehicles tripled in the last three years, with China and the European Union accounting for 16% and 17% of total sales in 2021, respectively. According to the IEA's projections, under the scenario, the share of electric vehicles on the world's roads will not reach 10-20% by 2030. This will reduce oil consumption by 3.4 to 4.6 million barrels per day (3.5 to 4.7% of the current level) and significantly increase electricity consumption. McKinsey predicts that global oil consumption will peak in 2024-2027 at 101-104 million barrels per day, after which it will begin to decline.
3. Domestic carbon emissions pricing and strengthened cross-border regulation will increase costs for carbon-intensive industries. Currently, various types of greenhouse gas emissions levies are in effect in 47 countries, covering approximately 23% of global emissions. Over time, each country will introduce cross-border corrective mechanisms to prevent "carbon leakage" and reduce the competitiveness of energy-intensive industries compared to carbon-free imports. At the same time, the introduction of Carbon Border Adjustment Mechanisms (CBAM) or the strengthening of environmental regulations in one country will affect another country's economy (even if it has no direct trade relations) through an extensive supply chain and the transfer of carbon price costs to the direct emitter of greenhouse gases.

Conclusion.

By the horizon of 2030-2050, the Russian economy becomes fundamentally vulnerable to climate risks due to the high share of the fuel and energy sector in GDP and the high carbon footprint of exports. Consequently, in the long term, the Russian economy may exhaust the current model of raw material exports and lag behind in technological development. Over time, this will lead to a decrease in export revenues and budget revenues, a loss of a share of the global GDP, and a decrease in household incomes.

Bibliography:

1. http://ac.gov.ru/files/publication/a/17409.pdf
2. https://tass.ru/obschestvo/5765421
3. Government Decree of the Russian Federation dated October 29, 2021, No. 3052-r, "Approval of the Strategy for Socio-Economic Development of the Russian Federation with Low Greenhouse Gas Emissions Until 2050."
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11. Approved by the Government of the Sakhalin Region on November 23, 2021.
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