Russia, Energy, and Global Climate Change

Speaker: Bill Chandler is Senior Staff Scientist and Director of Advanced International Studies at Battelle Memorial Institute's Pacific Northwest National Laboratory. Chandler is also an adjunct professor at Johns Hopkins University. Bill Chandler has worked in energy and environmental policy for 30 years, and authored or edited 11 books. His latest monograph, "Energy and Environment in the Transition Economies," was released in September (2000) by Westview Press.

Mr. Chandler addressed key questions on issues related to global climate change and energy in Russia and other transition economies. Mr. Chandler noted that the economies of the former Soviet Union and Eastern Europe are the world's least energy efficient nations, and they produce more greenhouse gas emissions than all others except the United States and China. The energy sector remains the least-reformed sector in post-Communist countries. Nevertheless, the transition economies, and especially Russia, offer the largest and least expensive near-term opportunities for curbing gas emissions and could benefit from any emissions trading or joint implementation schemes.

According to Mr. Chandler, planned economies tend to be more energy intensive than market ones. Over time, reform, or lack thereof, should be mirrored in the changing energy intensity of the transition economies. Since 1990, energy consumption in the Former Soviet Union and Eastern Europe has fallen by 25 exajoules, which equals two-and-one-half times total demand for Africa. Energy demand fell roughly by one-third, with Ukraine falling the hardest, tumbling 40 percent since 1990.

High energy intensity in the former Soviet Union points to economic inefficiency. Energy intensity in the United States in 1996 was about 13 megajoules per dollar of GDP, whereas Russia's was about three times higher. Russia's figure is distorted by the way GDP was measured. However, compelling evidence of energy waste, in the economic sense, remains even after converting Russian GDP to purchasing power parity. Energy intensity in the region was driven not so much by fuel type, be it coal, natural gas, or oil, but by economic factors stemming from central planning, such as the domination of heavy industry, distorted price signals, soft budget constraints, and stifled technological development.

Advanced reforms in Central Europe resulted in improved energy efficiency, where energy intensity dropped by one-fifth. Conversely, in nations in which reform lagged, energy intensity has increased. Energy consumed per unit of GDP went up significantly in Ukraine and Central Asia during the 1990s. Energy use serves as an index of reform, and the experience of Central Europe demonstrates that implementing hard budget constraints, meaningful prices, institutional reform, and economic restructuring has paid off in economic recovery and environmental improvement.

Energy inefficiency existed throughout the history of the Soviet Union. Inability to get higher value-added services and light manufacturing stemmed from policy choices but was also evident in the technology of buildings, industry, and transportation. Some experts estimate the heat loss in the pipelines at up to 40 percent of total heat production. Buildings lacked basic energy efficiency measures and were built of such materials as cement blocks or prefabricated concrete panels that easily conducted heat to the outdoors. Another factor contributing to energy losses is lack of basic meters and controls of heating plants, built without sensors indicating demand for heat. The Soviet energy system mainly served heavy industry and military production that required large amounts of energy, particularly compared to its value.

In Russia's road to reform, the government chose to protect customers in the earlier phase of liberalization, and although energy prices increased, they did so more slowly than overall price index. Residents typically paid one-quarter or even less of the cost of housing and utilities, and heating accounted for most of that cost. Currently, both residential and industrial heat and power prices remain low. However, Russia has made progress in utility reform and increased the rate of utility collections to 85 percent of total billings in 2000.

Mr. Chandler pointed out that in accordance with the Kyoto Protocol of the United Nations Framework Convention on Climate Change, Russia and Ukraine promised to hold their greenhouse emissions in 2008-2012 on the level of 1990, while Europe, the United States, and Japan agreed to cut emissions by 8, 7 and 6 percent, respectively. From 1990 to 2000, emissions in Russia dropped by 30 percent and in Ukraine by 40-50 percent. Opponents of Kyoto objected that by buying reductions made as a result of economic collapse since 1990, the United States, especially, could meet its targets without r educing its own emissions. Some European and developing countries opposed trading of "hot air," arguing that one ought to clean up one's own emissions, not hire someone else to do it. Supporters of emissions trading argue that it would reduce the cost of emissions reductions and provide badly needed financing for the transition economies.

After the United States withdrew from Kyoto Protocol in March 2001, the projected sale price of Russian emissions in 2010 fell from more than $60 per ton to less than $3 per ton, because the U.S. would account for a large share of the emissions trading market. Russia's potential revenue of emissions trading plummeted from a few tens of billions of dollars to just a few billion over a five year period to begin in 2008. However, the U.S. withdrawal put Russia in a position of strength because Russian emissions together with those of such countries as Japan, New Zealand, Canada, and Australia, now account for more than 55 percent of total emissions of Kyoto's participants that are needed for the Protocol to come into force. The "55 percent" rule gives Russia a decisive vote. The goal of the Convention has become one simply of getting mechanisms for mitigation in place, and that the reduction targets become even less relevant. This was demonstrated at the recent Conference of Parties in Marrakesh, where Russia took a "belligerent" position and won more emission allotments.

In Mr. Chandler's opinion, Russia is unprepared to implement Kyoto and has little incentive to become so inclined. The nation's ability to participate in Kyoto is jeopardized because of lack of coordination among government agencies, and little guidance from top leaders. However, Russia will be vital to a cost-effective climate policy. Improved cooperation on climate between Russia and the west would both promote economic development and reduce the risk of climate change. The most useful form of cooperation would come in the form of finance and infrastructure development. Because the cheapest emissions reductions opportunities are probably in Russia and the formerly planned economies, creating the institutions for facilitating joint implementation or emissions trading is a priority.

Summary by Marat Umerov, Junior Fellow, Russian and Eurasian Program.