A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 0 6 83505 ENVIRONMENTAL PERSPECTIVE OF RUSSIA’S ACCESSION TO THE WORLD TRADE ORGANIZATION WORLD BANK REPORT NUMBER 83505-RU FEBRUARY 2014 A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 0 6 ENVIRONMENTAL PERSPECTIVE OF RUSSIA’S ACCESSION TO THE WORLD TRADE ORGANIZATION FEBRUARY 2014 SUSTAINABLE DEVELOPMENT DEPARTMENT RUSSIA COUNTRY UNIT EUROPE AND CENTRAL ASIA REGION © 2014 The International Bank for Reconstruction and Development/The World Bank 1818 H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org Email: feedback@worldbank.org All rights reserved. February 2014 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. 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CONTENTS III CONTENTS Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vii Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Chapter 1: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Russia’s WTO Accession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Trade Liberalization and the Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Russia’s Environmental Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Trade and Environment: Economic Theory in a Nutshell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Chapter 2: An Economic Model of WTO Accession and the Environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Basic Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Base-Year Characteristics (2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Policy Scenarios and Simulation Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Macroeconomic and Environmental Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Chapter 3: Russian Environmental Policies and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Environmental Regulations and Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Price and Market Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Certification and Voluntary Compliance, Eco Labeling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Chapter 4: Introduction of Clean Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Current Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Chapter 5: Environmental Policies and WTO Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Environmental Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Environmental Charges and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Eco-Labeling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Government Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R IV CONTENTS Chapter 6: Evidence of Potential for Efficiency Gains and Cleaner Technology Adoption in Russia . . . . . . . . . . . . . . 35 Russia’s Current Resource Use Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Regional Impacts of Energy Sector Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Potential Efficiency Savings in Russia’s Foundry Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 What Do Foundries Think of WTO? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Potential Efficiency Savings in Russia’s Automotive Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Chapter 7: Key Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Appendix 1: Russian Federation and WTO Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Appendix 2: Excerpt from Report of the Working Party on the Accession of the Russian Federation . . . . . . . . . . . . . 51 Appendix 3: Trade and the Environment—A Brief Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Appendix 4: List of Regions Included in the Model (with Mapping to Oblasts) . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Appendix 5: Model Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Appendix 6: Reference on WTO Rules Relevant to Environmental Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Appendix 7: Status of Best Available Technique Reference Documents (BREF) for Specific Sectors (EU data) . . . . . . . 63 BOXES Box 1.1: Trade Liberalization and Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Box 1.2: Environmental Lessons from NAFTA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Box 2.1: The Scale, Composition and Technique Effects for Greenhouse Gases Associated with Fuel Use in Manufacturing in India, 1985–2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Box 3.1: Examples of Government Resolutions on Rules for Environmental Protection Standards . . . . . . . . . . . . . . . . . . 20 Box 3.2: Current Trade Disputes With Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Box 4.1: BREFs in the EU and Its Role . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Box 4.2: Tradable Permits Led to More Cost Efficient and Environmentally Effective Innovation to Control Sulfur Dioxide Emissions and Acid Rain in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Box 4.3: Tax and Rebates: Sweden’s Politically-Effective Regulation of NOx Emissions to Control Acid Rain . . . . . . . . . . . . 30 Box 6.1: Benchmarking Russian Foundries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Box 6.2: IFC Support to the Auto Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 FIGURES Figure 2.1: Base-Year Tax Rates Prior to WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 2.2: Productivity Changes of Sector Production from WTO Accession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N CONTENTS V Figure 2.3: Base-Year CO2 Emission Intensities from Fossil Fuel Combustion (Direct) and Indirect Emissions from Electricity Inputs (ELE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 2.4: Base-Year Pollution Intensities—Other than CO2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 2.5: Energy Cost Shares Across Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Figure 2.6: Impacts of WTO Accession without Productivity Impacts on Sector Activities (Scenario WTOcrts) . . . . . . . . . . 15 Figure 2.7: Impacts of WTO Accession with Productivity Impacts on Sector Activities (Scenario WTO) . . . . . . . . . . . . . . . 17 Figure 6.1: Energy Consumption (tons of fuel)/mln Rubles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Figure 6.2: Water Use (‘000 m3)/mln Rubles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Figure 6.3: Contaminated/Industrial Wastewater (‘000 m3)/mln Rubles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Figure 6.4: Air Emissions (tons)/mln Rubles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Figure 6.5: Waste Generation (tons)/mln Rubles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Figure 6.6: Change in Air emissions/mln Rubles (2000 = 100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Figure 6.7: Change in Industrial Wastewater/mln Rubles (2000 = 100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Figure 6.8: Change in Waste Generation/mln Rubles (2000 = 100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Figure 6.9: Share of Power and Coal Production in GRP (Percent). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Figure 6.10: Share of Oil and Gas Production in GRP (Percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Figure 6.11: Share of the Steel and Non-Ferrous Metals Industry in GRP (Percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Figure 6.12: Costs of Russia Foundries in Comparison with EU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Figure 6.13: Defect Rates in Russian and EU Foundries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Figure 6.14: Russia Ferrous Foundry Industry Gains via Resource Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Figure 6.15: Measures to Optimize Resource Efficiency in Russian Foundries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Figure 6.16: Investment Priorities Among Russian Automotive Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Figure 6.17: Major Issues in the Production Process in Russia and Samara Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Figure A5.1: Production of Goods Other Than Fossil Fuels and Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Figure A5.2: Production of Fossil Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Figure A5.3: Production of the Final Consumption Composite . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Figure A5.4: Armington Production for Intermediate and Final Demands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Figure A5.5: Transformation of Domestically (Regionally) Produced Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 TABLES Table 2.1: Examples of Trade-Liberalization-Induced Effects Expected on the Environment . . . . . . . . . . . . . . . . . . . . . . .7 Table 2.2: List of Sectors Included in the Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Table 2.3: Overview of Pollutants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R VI CONTENTS Table 2.4: Key Features of Trade and Environmental Policy Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Table 2.5: Economic and Environmental Impacts of Trade Reforms and Environmental Regulation . . . . . . . . . . . . . . . . . 14 Table 2.6: Decomposition of CO2 Emission Changes (in Mt) for Scenario WTOcrts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Table 2.7: Decomposition of CO2 Emission Changes (in Mt) for IRTS Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Table 3.1: Selected Pollution Charges, in RUR/ton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Table 3.2: Economic Incentives for Environmental Protection Embedded in National and Regional Legislation . . . . . . . . . 24 E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N ACKNOWLEDGMENTS VII ACKNOWLEDGMENTS This report was prepared by a team of World Bank staff and consultants working on sustainable development, environment and resource efficiency, growth and liberalization of international trade in the Europe and Central Asia (ECA) Region of the World Bank, under the leader- ship of Michal Rutkowski, Country Director Russia and Kulsum Ahmed, Sector Manager and with support of John Kellenberg, Manager, Sustainable Business Advisory, International Finance Corporation. The report is inspired by the opportunities which Russia’s accession to the World Trade Organization and trade liberalization presents to drive fundamental change that could help reverse environmental damage in Russia and demonstrate that environment and trade goals could be mutually supportive. The report is a synthesis of inputs of a wide range of contributors and the team would like to acknowledge all of them. The team comprise Adriana Damianova, Lead Environmental Specialist and Task Team Leader, Craig Meisner, Senior Environmental Economist and Co-Task Team Leader, David Tarr, Former Lead Economist, Development Economics (DEC), and Vladislava Nemova, Natural Resources Economist. A central element of the analysis is the economic modeling carried out by a team of Loch Alpine Economics led by Prof Christoph Böhringer and Prof Thomas Rutherford, and Natalia Tourdiyeva, Senior Economist from the Centre for Economic and Financial Research, the New Economic School. Natalia Geyts, Associate Professor in Environmental Law made important contribution to the report. A team from International Finance Corporation (IFC) led by Kristina Turilova, Operations Officer, Clean Production, contributed to the development of case studies and included Boris Nekrasov and Vadim Shcherbakov. Victoria Mishina and Josephine Kida provided administrative support. Ana Hristoslavova Bachurova, Natural Resources Specialist conducted extensive research and contributed to several chapters of the report. Thanks to the many generous peer reviewers who, at various stages, advised the team and provided valuable comments. These include William Martin, Elena Yanchovichina, Richard Damania, Marcelo Selowski, Machael Toman, Muthukumara Mani, and Souleyman Coulibaly. The team would like to particularly thank to Mr. Simon Levi, Deputy Minister, Mr. Denis A. Brunin, Director of Department of Public Policy and Regulation of Hydrometeorology and Environmental Monitoring and Mr. Inamov, Head of International Relations Department, from the Ministry of Environment and Natural Resources who supported this work and facilitated the discussions on the report at the level of the Government of the Russian Federation. The team is grateful for the generous support and cooperation of Alexander Martynov, Director of Ecological and Energy Rating Agency, Interfax, and for the valuable information on regional and sector emission profiles. Many of the important details in the analysis were obtained through discussions with representatives of the public sector and industry during a series of consultation events which took place in April and October 2013 and who provided essential comments. Many other colleagues provided valuable inputs. We thank them all. A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R A B B R E V I AT I O N S IX ABBREVIATIONS AEL Associated Emissions Levels GPA Agreement on government procurement AGR Agricultural GRP Gross Regional Product APEC Asia-Pacific Economic Cooperation GWh Gigawatt hours BAT Best Available Technique HEV Hicksun Equivalent Variation BCA Benefit-cost Analysis IED Industrial Emission Directive BREFs Best Available Technique Reference Documents IFC International Finance Corporation CES Constant Elasticity of Substitution IO Input-Output CGE Computable General Equilibrium IPPC Integrated Pollution Prevention and Control CHM Chemical Products IRTS Increasing Returns to Scale CIS Commonwealth Independent States ISO International Standards Organization CLI Textiles and Apparel KPI Key performance indicators CnHm Hydrocarbons LCP Large Combustion Plants CNM Construction materials MAC Maximum Allowable Concentration CO Carbon monoxide MBI Market-based Instruments CO2 Carbon dioxide MEA Multilateral Environmental Agreement CRTS Constant Returns to Scale MFN Most favored nation EC European Commission NAFTA North American Free Trade Agreement EEF Energy Efficient Target NFM Non-ferrous metals EEIA Economic and Environmental Impact Analysis NGO Nongovernmental Organization EGS Environmental Goods and Services NOx Nitrogen oxides ELV Emission limit values NTF Nontariff EQS Environmental quality standards OECD Organization for Economic Cooperation and ETS Emission Trading Scheme Development EU European Union OEM Original equipment manufacturer EV Emission values PAC Pollution abatement costs FDI Foreign Direct Investment PM Particulate matter FME Ferrous metals PM10 Particulate matter with a diameter of less than 10 FOO Food microns GATS General Agreement on Trade in Services PPM Processes and production methods GATT General Agreemant on Tariffs and Trade SCM Subsidies and countervailing measures GDP Gross Domestic Product SED Solvent Emissions Directive GHG Greenhouse gasses SO2 Sulfur dioxide A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R X A B B R E V I AT I O N S SPS Sanitary and Phytosanitary TWG Technical Working Group TBT Technical trade VOC Volatile Organic Compounds TPP Wood, paper, and pulp WID Waste Incineration Directive TRIP Agreement on Trade-Related Aspects of Intellectual WTO World Trade Organization Property E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N EXECUTIVE SUMMARY XI EXECUTIVE SUMMARY Sustainable development is about profound change of policies that drive systemic transformation of production, consumption and behav- ioral patterns. Policies which promote energy efficiency, technology innovation, clean production in supply chains, and addressing climate change are receiving increasing attention in Russian society, and nowadays, shape the economic modernization agenda of the Russian political leadership. On many fronts Russian economic polices demonstrate a noticeable transformation. The Government adopted1 ambitious goals to modern- ize and transform the economy into an “economy of leadership and innovation” focusing on sectors that will enable Russia “to compete economically and geopolitically in a globalized world.” The fundamentals of the Government Policy for Economic Development of the Russian Federation until 2030, acknowledge as a key task “ensuring ecologically-oriented economy growth and introduction of eco-efficient technological innovations.” As President, Dmitry Medvedev stated “environmental quality must become the most important indicator of quality of life” and thus one of the key determinants of socio-economic development. He also emphasized that achieving this, henceforth, will become a measure of local government effectiveness.2 In its Climate Doctrine,3 Russia officially acknowledges the alarming effects of global warming and the threat it poses to its security, and has committed to improve its energy efficiency and reduce emissions. The Energy Efficiency Law adopted in November 2009 marks a significant step towards efficient energy use and supply. Yet, economic and technical modernization of aging industry remains a major challenge to address as Russia implements its World Trade Organization (WTO) commitments. This report is designed to provide senior Russian policy makers with recommendations on certain areas where national environmental pro- tection policies can be complemented by the benefits of trade liberalization. Industrial leaders may also benefit from many of the report’s conclusions and recommendation. The report has several objectives. The first is to draw attention to the local impacts of air pollution impacting human health—which have been previously estimated to be between 12 and 17 percent of all-cause mortality in Russia and costing the economy upwards of $14 bil- lion annually (Strukova, Balbus and Golub 2007; Reshetin and Kazazyan 2004). Correcting for this “external cost” to society is not trivial and has serious implications for sector reform. The second objective is about reducing global warming, and in particular CO2. Russia’s commit- ments to reducing Greenhouse Gas Emissions have adjustment costs to the economy and the modeling undertaken in this report provides some relative magnitude. The third objective is related to the technological modernization that needs to take place in order to realize cost reductions (efficiency improvements) and what the associated environmental benefits would be. Finally, the report also demonstrates how the Government can reduce the marginal cost of funds from Russia’s tax system. What this means is that money is currently being spent (tax Rubles) in an inefficient manner—either through large subsidies or funding inefficient production and consumption. Modernization, 1 Concept for Long-Term Social and Economic Development to 2020. 2 Address of President Dmitry Medvedev to the Federal Assembly of the Russian Federation, November 2010. 3 The Climate Doctrine of the Russian Federation, December 17, 2009: http:/eng.kremlin.ru/text/docs/2009/12/223509.shtml. A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R XII EXECUTIVE SUMMARY induced directly or indirectly, would serve to promote better efficiency and would represent a cost-savings to the Government in subsidiz- ing this economic structure. The core of the paper is an economic modeling exercise that informs each of the above objectives. The model investigates the impacts of trade liberalization through three impacts: the change in production output (the scale effect), sector mix (the composition effect), and productivity (the technique effect). The model highlights several areas where benefits could lead to better protection of the environment, and where liberalization measures could significantly enhance the effectiveness of national policies to address key environmental challenges. This report discusses Russia‘s accession to WTO from this perspective. How Does Trade Liberalization Affect Environmental Quality? There are concerns that environmental quality in Russia could be potentially affected by the trade liberalization. Economic and physi- cal linkages between trade, environment and development are complex and interdependent. From an economic perspective, WTO accession and the environment are related because most economic outputs are based on inputs from the environment, including the energy for processing them, and waste discharged to environment. However, trade liberalization effects on the environment would vary and depend on the sector, country policies, markets, technologies and management systems. Change of environmental quality as a result of potential expansion of “dirty industries” (for example, ferrous and non-ferrous metals, chemicals) could be mitigated by effec- tive and transparent enforcement mechanisms. Russia’s economic gains from trade liberalization which are estimated to about US$49 billion annually, based on 2010 GDP. For these gains to be environmentally sustainable, it will be crucial to implement complementary “do-no-harm” policies tailored to address environmental concerns. This, in the long run, will be pivotal for sustaining the sources of gains from WTO accession. Trade liberalization could induce reallocation of resources within Russia with some sectors expanding and some contracting. If expanding sectors are more pollution-intensive than contracting sectors, the sector reallocation of output will be harmful to the environ- ment—unless there are countermeasures to reduce pollution. On the other hand, access to global markets and growing trade cooperation may create national wealth that can be used for environmental protection measures. Various countries have struggled through the process of implementation of WTO accession rules and Russia will be no exception to that. WTO gives great latitude to its members to restrict trade to protect the environment and realize national environmental goals. Russia’s ac- cession to WTO represents an enormous opportunity to make strides and overcome environmental damaging development by lowering trade barriers on green products and technologies. On one hand, Russia could foster the effectiveness of its own environmental protection policies, and, on the other hand, reaffirm its commitments to international environmental regimes governed by multilateral environmental agreements (MEA) especially those focusing on global environmental goods. Furthermore national and international policy instruments if implemented with transparency and participation will reduce significantly potential conflicts between trade liberalization and environmen- tal protection. Trade liberalization can expand the marketplace and wealth creation opportunities. There is also a positive relationship between trade and environment, as the wealth that trade liberalization creates tends to generate a demand for environmental improvements; and trade liberalization induces efficiency gains from more effective resource use and less waste generation. Therefore, establishing more explicit links between trade liberalization and environmental performance, and shaping national policies with this in mind, is a useful direction for both policy makers and industries to consider. At the same time, the worldwide trade and environment debate has broadened to include concerns that open trade will induce the pro- duction of pollution intensive goods to shift away from countries with stringent environmental and safety standards toward countries with E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N EXECUTIVE SUMMARY XIII less stringent controls. Further excessive demand for natural resource commodities could undermine long-term development prospects of natural resource based economies. By adding an environmental dimension to the earlier research on the economy-wide impacts of WTO carried out by the World Bank, the analysis of the study addresses a specific question at hand: what are the environmental prospects of WTO accession and what policies could be implemented that will allow Russia to achieve the greatest environmentally sustainable growth? Modeling Economic and Environmental Implications from Trade Liberalization: Key Results The study investigates the economic and environmental implications of Russia’s accession to WTO, by employing a single-country, multi- sector, computable general equilibrium (CGE) model of the Russian economy constructed to capture characteristics of regional production and consumption patterns and links regions via bilateral trade flows. The CGE model was then further developed to quantify the changes in economy-wide emission levels and selected pollutants of interest from a policy and regulatory standpoint. The CGE model formulation adopted for the study integrates data on CO2 and non-CO2 emissions4 and the associated costs of these technologies. The model used na- tional output-input data from the national statistics office of the Russian Federation with data expanded from 22 to 30 economic sectors in order to include more details on service industries. Environmental data was taken from the SUST-RUS Project which developed an integrated spatial-economic-ecological modeling approach linked to environmental effects on sustainability. In order to quantify the economic and environmental impacts associated with WTO accession seven policy scenarios were developed. Three of these scenarios show the impacts of overlapping policy reforms using the central case WTO liberalization (WTOcrts) that is implemented simultaneously with “green” policies which include: (a) WTO liberalization with a commitment to CO2 reductions (CO2); (b) WTO liberalization with an energy efficiency target (EEF); and (c) WTO liberalization with CO2 reductions and EEF. Note that the results do not include health benefits normally associated with pollution reduction—which could be quite significant. So pollution reduction to sectors enters the model as a cost, but the potentially-realizable health benefits (improved worker productivity and lower health expenditures) do not. What this implies is that the (negative) impact on sectors may not be as high as the results suggest due to the omission of the positive feedback of improved worker productivity and lower health expenditures. Future model extensions could consider this to form a more complete and dynamic picture. To illustrate the importance of productivity effects, the scenarios are grouped in two scenario groups. The first CRTS5 group does not refer to any technology shift through productivity effects. As has been elaborated, however, by Jensen, Rutherford and Tarr (2007) and Rutherford and Tarr (2010), productivity effects from trade and foreign direct investment liberalization are central to the impacts of WTO accession of Russia. We focus on our second group of scenarios as our central group—they feature increasing returns to scale (IRTS), with productivity effects from trade liberalization and liberalization of barriers to foreign direct investment. Productivity effects imply non-negligible increases in CO2, PM, CO, NOx, and VOC, although a decrease in SO2 and a small decrease in CnHm. The impacts of policy changes are shown mainly in terms of percentage changes in key variables from the base year 2001, which is the last year for which economy-wide, disaggregate, trade data at regional level is available. The table below provides a summary of CTRS and IRTS scenarios and the economic and environmental impacts of trade reforms and environmental regulation. 4 In particular, the model includes information on: particulate matter (PM), sulfur dioxide (SO2), carbon monoxide (CO), nitrogen oxides (NOx), hydrocarbons (CnHm), and volatile organic compounds (VOCs). 5 CGE models of constant-returns-to-scale (CRTS), where competitive markets capture the composition and scale effects triggered by trade liberalization policies. CRTS, however, omits potentially important productivity changes in sector production (that is, part of the technique effect). A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R XIV EXECUTIVE SUMMARY CRTS SCENARIOS IRTS SCENARIOS WTOcrts CO2 EEF WTO WTO_CO2 WTO_EEF WTO_CO2_EEF (1) (2) (3) (4) (5) (6) (7) EV (% GDP) 0.28 –0.16 –1.19 6.43 6.08 5.32 5.18 CO2 price (Rubles/t) – 137.6 – – 159.9 – 138.1 CO2 0.3 –20.0 –16.3 3.7 –20.0 –11.2 –20.0 Emissions ( percent change) PM 0.4 –2.2 –9.6 2.0 –0.9 –6.8 –8.0 SO2 1.0 –0.1 –6.4 –2.6 –3.5 –9.5 –8.9 CO 1.0 –1.2 –3.6 3.3 1.6 0.0 –0.7 NOx 0.3 –2.6 –12.6 2.0 –1.2 –9.4 –10.7 CnHm 0.7 –4.6 –4.3 –0.3 –6.0 –3.3 –7.8 VOC 0.4 –1.5 –5.5 3.2 1.6 –1.1 –2.4 Emission intensity Electricity 0.1 –2.7 –20.0 –6.7 –9.7 –21.5 –22.1 (percent change) of production Oil 0.2 8.6 –20.0 –6.0 3.6 –21.4 –21.4 Gas –0.4 –50.2 –20.0 –4.6 –57.6 –20.9 –30.6 The summary results show that if WTO accession is viewed in isolation of any other policies on energy or pollution reduction targets—the impact looks to be quite positive for the economy—as measured by its impact on income. However, largely due to a shift to “dirtier” (more pollution-intensive) sectors, the environmental picture looks less positive. Similarly, if environmental policies are pursued without account- ing for the economically-beneficial aspects of WTO accession—the impact on income is negative. Crucially, the results from the economic modeling show that when WTO accession and environmental policies are combined (taking into account potential improvements in productivity from WTO accession (for example, the adoption of more modern technologies that are also more environmentally friendly) there is a substantial increase in income and an improvement in the environment as well. For example, just looking at the case of CO2 emissions (scenarios without productivity spillover) indicates that applying uniform emis- sion standards across sectors would result in a loss of real income and does not constitute a cost effective measure for emissions reduction. The objective of reducing energy intensity should be pursued through a system of tradable efficiency permits across energy carriers, sectors, and regions rather than through specific mandates on all firms. A tradable scheme would achieve the same emission reduction objective, at a lower cost since some firms who will have higher marginal abatement cost could purchase permits from lower cost firms. Why Does Trade Liberalization Present Significant Opportunities for Environmental Improvements? Russia’s WTO Accession presents significant opportunities for economy-wide improvements in economic output, productivity, and govern- ment revenues. Russia will also reap substantial gains from WTO accession with widespread benefits such as reduced poverty and greater economic gains in regions that establish a better investment climate. At the same, trade liberalization presents enormous opportunities for lowering the barriers for overcoming many environmental and human health consequences of localized industrial pollution by employing the policy synergies described in this report. The impact of trade liberalization on the output of different sectors will be mixed, with some expected to expand and some expected to decline. There will be a negative impact on sector output from tariff decreases on the import-competing sectors. But there will be a positive impact from a decline in the price of intermediate inputs in goods and services. Export-intensive industries should see an increase in the prices they receive in rubles from a depreciation of the real exchange rate and improved treatment in antidumping. More E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N EXECUTIVE SUMMARY XV generally, export-intensive sectors such as ferrous metals, non-ferrous metals and chemicals are the manufacturing sectors are most likely to expand, while light industry, food industry and construction materials are sectors that most likely to contract. Since the expanding sectors are more pollution-intensive and natural resource using than contracting sectors, the sector reallocation of output could have a negative impact on the environment (unless there are countermeasures to reduce pollution). The technology choices from WTO accession and from complementary environmental policies are more important than the scale of production on the product mix of production induced by WTO accession. WTO accession will increase in emissions from the scale effect (more output) and from a likely shift toward more polluting industries. But direct emission pricing or indirect emission pricing through energy efficiency standards would cause price-responsive technology adjustment in production and consumption through fuel switching or energy saving technologies that would dominate. Increased access to foreign suppliers of environmental goods and services6 would allow Russian enterprises to choose from a wider set of technologies and management systems which will reduce the costs of producing in a more environmentally- friendly manner. The potential gains from WTO accession affords substantial opportunities to improve environmental quality in many regions by introducing energy efficiency standards, and emissions pricing levels that would push adoption of clean technologies. The objective of reducing energy intensity should be pursued through a system of tradable efficiency permits across energy carriers, sectors, and regions rather than through specific mandates on all firms. A tradable scheme would achieve the same emission reduction objective, at a lower cost since some firms who will have higher marginal abatement cost could purchase permits from lower cost firms. Focusing on selected policy measures that can help recoup potential increase of industrial emissions and simultaneously in- fluence behavioral change towards the use of more energy efficient and cleaner technologies, would be a win-win approach. On one hand, it will help address the pending trade-offs between economic growth and pollution triggered by trade liberalization, and, on the other, complement the effective implementation of WTO rules. In order to increase Russia’s environmental policy effectiveness while modernizing industry and trade, of no lesser priority will be to neutralize the negative ecological consequences from past economic activi- ties. Furthermore, an important step will be to align environmental policy and practice with international norms and standards as well as to combine environmental and economic levers of influencing polluters’ behavior. Several policy areas which if implemented consistently could reinforce in a positive way the long term impacts on the sustainability profile of Russian industry. These include: § Reform the current system of pollution charges by introducing coefficients that capture meaningful economic incentives for adop- tion of best available techniques; § Extend the opportunities for temporary tax breaks and privileges for industries that are fiscally neutral from public finance point of view, and encourage improved efficiency and technology upgrading in the long run; § Strengthen the economic incentives and government support for nature protection activities for businesses which make invest- ments to introduce best available techniques through tax credits; § Tighten the relationship between multilateral environmental protection agreements and the WTO principles across industrial sectors. There are substantial opportunities for potential gains from WTO accession to improve environmental quality in many regions by introducing energy efficiency standards, and emissions pricing levels that would push adoption of clean techno- logies. Russia will reap substantial gains from WTO accession with widespread benefits such as reduced poverty and greater economic gains in regions that establish better investment climate. Introduction of market-based instruments (MBIs) could create a platform for 6 Services include: sewage, refuse disposal, sanitation, cleaning services of exhaust gases, noise abatement, nature and landscape protection, and environ- mental impact assessment. A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R XVI EXECUTIVE SUMMARY “greening” and win-win outcomes, thereby stimulating compliance and better environmental performance. In fact, Russian environmental protection policies refer to Best Available Techniques (BAT) as a way to make more effective pollution prevention and controls and improve industrial environmental compliance. Since, the framework for implementation of BATs is yet to be developed the analysis of the report suggests the adoption of market based instruments that allow firms with higher costs of abatement to trade with firms with lower costs to achieve the better level of environmental quality in a movement toward BATs. To address political opposition to environmental abatement policies among firms, mechanisms could be designed that are broadly revenue neutral, that is, there could be tax incentives provided for firms that adopt clean technologies at the same time there are charges for pollution. Russia’s commitment to implement its Climate Doctrine, supported by the Complex Implementation Plan of Actions until 20207, is another venue for operationalization of the modernization agenda in the industry, transport and housing sectors. Trade liberalization will increase the opportunities for innovation, using renewable and energy efficient technologies as well as the contri- bution of Russia to international efforts to mitigate climate change impacts. To address political opposition to environmental abatement policies among firms, mechanisms could be designed that are broadly revenue neutral, that is, there could be tax incentives provided for firms that adopt clean technologies at the same time there are charges for pollution. Transition to an effective system of incentives that promotes less resource use, cleaner and greener production would typically also improve competitiveness and increase access to export markets which demand efficient, low environmental-impact materials and products. By taking this avenue Russia could reaffirm its standing on its target of 25 percent announced at COP15 and 40 percent goal mentioned in Russia’s state program on “Energy Savings and Energy Efficiency Improvements until 2020.” There is evidence that Russian production sector can gauge the potential of cleaner, more efficient, technologies while ben- efiting from resource efficiency savings. Several recent studies, conducted by the International Finance Cooperation (IFC) in collabora- tion with the foundry and automotive sectors, have shown that enormous cost savings exist. For example, given the low costs of labor, energy, and raw materials, Russia’s ferrous foundry industry could potentially realize a 36 percent cost advantage over its international peers. The case study on the Russian foundries discussed in the report shows that more than half of the resource efficiency savings and benefits could be achieved through better management practices and various low-cost initiatives alone, with no need for major capital expenditure. However, due to poor resource efficiency, and a lack of focus on quality, means this advantage is entirely lost. Factory audits revealed that improvements in resource efficiency could result in a cost savings of up to $3.3 billion annually to the sector. The main finding of this analysis is that productivity increases from Russia’s WTO accession and trade liberalization are substantial. While trade liberalization will induce more pollution, the real income growth is large enough to pay for greening of the industry in terms of CO2 emission reduction and energy efficiency improvements, with the majority of real income growth remaining. Thus, WTO may be used in a manner that increased both real income and environmental quality in regions with high concentration of polluting industries. Trade and environment thus might not be viewed as antipodes but rather as mutually beneficial in the spirit of green growth. 7 Complex Plan for realization of the Climate Doctrine of the Russian Federation for the period until 2020, April 25, 2011, Government Decree no. 730-p. E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N CHAPTER 1 — INTRODUC TION 1 Chapter 1 INTRODUCTION RUSSIA’S WTO ACCESSION removing various limitations on foreign equity and foreign capital Russia‘s exports, imports and ability to attract foreign direct invest- participation in services and productive sectors.9 Russia will apply ment (FDI) continue to grow. Russia’s exports and imports increased international standards on sanitary measures and technical barriers more than fourfold between 2000 and 2008 as did its trade surplus. to trade. Many specific limitations on foreign investors who would Exports of goods exceeded imports by more than $100 billion since like to provide services in Russia will be liberalized. Russia agrees to 2005 and by 2011 Russia was the world’s ninth largest exporter, open negotiations to join the plurilateral government procurement shipping $522 billion in goods and $53 billion in services to its trad- agreement within four years of accession to the WTO. Many conces- ing partners. The trade surplus also expanded from at $154.7 billion sions have already been implemented prior to accession, but for in 2008 to nearly $200 billion by 2011—the largest trade surplus many others there will be a long transition period. A more detailed on goods of any country in the world. Foreign direct investment overview of Russia’s WTO commitments is provided in appendix 1. constituted one percent of GDP and 5.5 percent of gross capital The Ministry of Economic Development and Trade of the Russian formation in 2000 and 4.5 percent of GDP and 18.1 percent of gross Federation requested that the World Bank undertake studies to capital formation in 2008, showing that as the economy has grown assess the consequences of WTO accession in Russia. This has led the ability to attract FDI grew faster.8 FDI did, however, fall back to to several studies of the likely impacts. Jensen, Rutherford, and Tarr about 2.9 percent between 2009 and 2011—a likely investors’ reac- (2007) estimated that in the medium term, Russia should gain about tion to the global economic crisis. 3.3 percent per year of the value of Russian gross domestic product In December 2011, after eighteen years of negotiations, the World (GDP) (or about $49 billion per year based on 2010 GDP at market ex- Trade Organization invited Russia to join WTO on the basis of the change rates). In the long term, when the positive impact on the in- negotiated protocol of Russian accession. Russia ratified the agree- vestment climate is incorporated, the gains should increase to about ment in July 2012. 11 percent per year of the value of Russian GDP (or about $162 bil- lion per year at market exchange rates).10 Rutherford and Tarr (2008) As part of its accession to the WTO, Russia agreed to a series of important commitments to further open its trade and foreign in- 9 Notable commitments include: the quota on the maximum share of for- eign banks or insurance companies increased from 15 percent to 50 per- vestment regimes. Russia will open its market to foreign imports cent. Branches of foreign insurance companies will be allowed 9 years by setting binding tariff levels on a wide range of products and after accession. In telecommunication services—the 49 percent maxi- mum foreign equity restriction will be removed 4 years after accession. eliminating all industrial subsidies. By 2020, the average tariff will National treatment and market access will be provided for wide variety of professions (such as lawyers and accountants), and for wholesale and fall from 11 percent to 7.6 percent on a simple average basis. Its retail trade and courier services. use of standards and norms will be constrained to be applied in 10 Russia’s GDP at market exchange rates is estimated at $1.61 trillion by the World Bank in 2008; $1.68 trillion by the IMF and $1.76 trillion a nonprotective manner. Russia has made commitments in 116 by the CIA, making it either the eighth or ninth largest economy in the world. Based on Purchasing Power Parity (PPP) exchange rates, Russia’s services sub-sectors. Market access for services will be provided by GDP was $2.3 trillion in 2008, making it the sixth largest economy in the world—larger than the UK or France. At PPP exchange rates, the esti- mated gains per year for WTO accession would rise in the medium term 8 See Tarr and Volchkova (2013). to about $76 billion per year and $253 billion per year in the long term. A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 2 CHAPTER 1 — INTRODUC TION examined household and poverty impacts and found that virtually A more recent momentum on policy development was gained all household should gain from WTO accession due to the increase during the 2012 Rio+20 Earth Summit reaffirming the importance in wages and the returns to mobile capital. They found that skilled of trade as an “engine for development and sustained economic labor and urban households gain relatively more than average due growth.” The Earth Summit also declared that not only could trade to the increase in foreign direct investment in the skills intensive liberalization facilitate achievement of sustainable development business services sectors. The poorest households are estimated benefits globally, but it could act as a powerful tool for growth and to gain at about the level of the average household. Given the vast employment generation, use of innovative technologies and trans- geographic diversity of Russia, Rutherford and Tarr (2010) estimated fer of knowhow and skills. Russia’s economic modernization agenda that all regions should gain substantially, but the regions that will and accession to WTO are mutually supportive. Gradually opening gain the most are those that are most successful at attracting foreign Russian markets to environmental goods and services can yield a direct investment and creating a good investment climate. number of positive effects such as reduced air and water pollution, improved energy and resources efficiency, and facilitation of proper In summary, these studies indicate that Russia will reap substantial waste disposal. Undoubtedly, by becoming a WTO member, Russia gains from WTO accession; the benefits are widespread and will will be affected by the complex linkages that bind trade with sus- reduce poverty. Those regions that establish a better investment tainable development but the direction it has taken seems right. climate will reap greater gains from WTO accession, and, crucially, most of the gains are due to Russia’s commitments to implement From an economic perspective, WTO accession and the environ- its own reforms. The commitments to implement reforms in the ment are related because most economic outputs are based on services sectors are the most important of Russia’s own reforms that inputs from the environment, including the energy for processing produce the gains. them, and waste discharged to environment. The WTO recognizes that the protection of the environment and the promotion of sustainable development are indispensable elements of its com- TRADE LIBERALIZATION AND THE ENVIRONMENT mitment to an open and nondiscriminatory multilateral trading There is a broad agreement among the international development system.12 Paragraph 31(iii) of the Doha Ministerial Declaration13 calls community that economic, social and environmental objectives are for reduction or as appropriate, elimination of tariffs and nontariff central to sustainable development. Several provisions in the WTO barriers (NTF) on environmental goods and services (EGS), although Agreements recognize the linkages between sustainable develop- it will take a while for WTO to agree on the definition of EGS. WTO ment and environment. gives great latitude to its members to apply the most effective poli- The core agreement of WTO system, the General Agreement on cies and approaches to protect the environment. Tariffs and Trade (GATT), refers to provisions for protection of hu- Although the process is far from being completed, due to differences man, animal and plant life, health and safety conservation of natural among WTO members on what goods to liberalize, significant prog- resources. While these were not specifically written with living natu- ress was achieved by the leaders of the 21 Asia-Pacific Economic ral environment in mind, they could be reasonably interpreted as Cooperation (APEC) economies meeting in Vladivostok, Russia, who tied to environment protection based on several WTO/GATT panel agreed to voluntarily liberalize tariffs on 54 environmental goods. statements.11 Potential economic gains from WTO accession can be grouped Environmental goods and services as a subset of goods and services in three categories: (1) gains from imports, (2) gains from exports, were singled out for attention of negotiating parties and adopted and (3) gains from liberalization of barriers to FDI. WTO accession at the Fourth Ministerial Conference of WTO in November 2001. 12 This is stated in the preamble of the Marrakesh Agreement and reaf- 11 Brown and Jackson, eds. 2001. Reconciling Trade and Environment. New firmed in the Doha Ministerial Declaration. York: Transnational Publishers. 13 Doha WTO Declaration adopted in November, 2001. E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N CHAPTER 1 — INTRODUC TION 3 BOX 1.1: Trade Liberalization and Environment General Agreement on Trade in Services (GATS) to market access and national treatment of foreign firms that provide environmental The APEC Forum is an economic forum set up with objective services (see appendix 2 for details). Increased access to foreign sup- of supporting sustainable economic growth and prosperity in the Asia-Pacific region, including by championing free open pliers of environmental services15 should allow Russian enterprises to trade and investments. The Vladivostok Declaration states choose from a wider set of technologies and management systems that applied tariffs can be cut to five percent or less taking which will reduce the costs of producing in a more environmentally- into account economies’ economic circumstances and with- friendly manner. Further, trade and foreign direct investment liberal- out prejudice to their positions in the WTO. The APEC List of Environmental Goods contains 54, 6-digit sub-headings of ization should improve incentives for exporters.16 the Harmonized System (HS). The APEC List of environmental All of the above indicates that the impact of WTO accession on the goods: environmental categories includes output of different sectors is mixed, with some expected to expand NUMBER OF CATEGORIES OF MAIN ENVIRONMENTAL PROTECTION SUB-HEADINGS and some expected to decline. There will be a negative impact on Renewable energy 15 sector output from tariff decreases on the import-competing sec- Environmental monitoring, Analysis and Assessment Equipment 17 tors. But there will be a positive impact from a decline in the price Environmental protection principally SHW, WWM, APC 21 of intermediate inputs in goods and services. Export-intensive indus- Environmental Preferable Products (bamboo) 1 tries should see an increase in the prices they receive in rubles from Total 54 a depreciation of the real exchange rate and improved treatment in Source: The APEC List of Environmental Goods; Issues Paper No. 18 ICTSD’s Global Platform For Climate Change, Trade and Sustainable Energy. antidumping. The impact studies more generally find that export- SHM = solid and hazardous waste WWM = waste water management intensive sectors such as ferrous metals, non-ferrous metals and APC = air pollution control ICTSD = International Center for Trade and Sustainable Development chemicals are the manufacturing sectors most likely to expand, while light industry, food industry and construction materials are sec- tors most likely to contract. Since the expanding sectors are more pollution-intensive and natural resource using than contracting will affect Russian imports in two ways: through the reduction in sectors, the sector reallocation of output could be harmful to the import tariffs, and through the introduction of greater competition environment (unless there are countermeasures to reduce pollution). from foreign firms in the Russian goods and services markets. Lower prices for imported machinery and services should benefit Russian RUSSIA’S ENVIRONMENTAL CHALLENGE firms, for example, by facilitating the import of cleaner technolo- gies. Competitive markets can spur innovation and accelerate firms’ As the largest country in the world spanning nine time zones with capital and investments in more productive technologies. The gains a population of 142 million people, Russia is also one of the rich- from exports depend on the success of the general economic re- est countries in the world for oil, gas and a wide range of minerals. form over the medium to long term (creating a positive business Russia’s natural endowment is a key driver of economic growth environment, adequate industrial policies, and so on). Russian based on production and export of raw materials. As a legacy of the exporters will benefit from legal provisions in antidumping cases. technology of the Soviet era in the extraction and manufacturing in- Although they are unlikely to gain substantially several sectors sub- dustries, many industries are characterized by high resource use, ex- ject to antidumping actions, such as ferrous and nonferrous met- tremely high energy inefficiency and obsolete production processes. als, and some basic chemicals, are expected to experience gains in 15 Services include: sewage, refuse disposal, sanitation, cleaning services of international competitiveness.14 Significant welfare gains from WTO exhaust gases, noise abatement, nature and landscape protection, and accession are likely to occur through liberalization of the barriers environmental impact assessment. 16 This is known as the Lerner Symmetry Theorem. It follows from the fact to FDI in services. Russia had made broad commitments under the that trade liberalization increases the demand for imports and therefore the demand for foreign exchange. The home country’s currency must depreciate to reestablish equilibrium in its foreign exchange market; the 14 See Tarr and Volchkova (2013) and Connolly and Hanson (2012). depreciated real exchange rate improves the incentives to exporters. A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 4 CHAPTER 1 — INTRODUC TION The quality of environmental conditions in Russia is inadequate on of 25 percent from 1990 emission levels by 2020, despite a shift in about 15 percent of the country’s territory which is home to 60 per- attitude to national, nonbinding targets and refusal to renew its cent of the population. Due to high levels of air pollution the average Kyoto Protocol commitments at the Durban conference in 2011, life expectancy of the population is reduced by about one year, while and following the Copenhagen accords. in more polluted cities by about four years. It is estimated that air pol- Today, environmental challenges are being recognized in the lution is responsible for about 12–15 percent of total deaths annually. national policies, strategies and programs. Russia’s Program on The economic cost of air pollution has been estimated to average Environmental Protection 2012–20 acknowledge the inseparabil- around $14 billion annually—or 4–12 percent of GDP—depending ity of environment, social and economic objectives as central for on the methods employed (Strukova, Balbus and Golub (2007); sustainable development. Russian policies mark a shift towards a sus- Reshetin and Kazazyan (2004). The main sources of air pollution are tainable development model emphasizing increased investments in PM10, SO2, and NOx, linked to fossil fuel combustion (IFC 2008). energy and resource efficiency, cleaner technologies, recycling and A major challenge for Russia, to address air pollution, is the potential reuse of wastes. Transition to an effective system of incentives that increase of the share of coal in the fuel mix, as export markets take promotes less resource use, cleaner and greener production would priority for oil and natural gas use. Russia is currently planning to triple typically also improve competitiveness and increase access to export the share of coal in the energy mix so that the amount of coal burnt markets which demand efficient, low environmental-impact materi- will grow to between 150 million and 290 million tons of coal per year als and products. According to its state program on “Energy Saving by 2020. New coal generation is potentially a good option for Russia to and Energy Efficiency Improvement until 2020,” Russia is seeking increase its generation capacity, but care needs to be taken to identify to achieve a 40 percent reduction in energy intensity by 2020 and 17 the best “clean-coal” technologies to use in these new plants. 56 percent by 2030. In addition, it is striving to achieve 53 percent efficiency in gas-fired power generation by 2030. Russia’s economy is currently one of the most energy- and carbon intensive economies and is the fourth largest emitter of greenhouse Concerns of environmental quality could be fostered through poten- gas emissions worldwide. It uses 822.7 tons of carbon dioxide equiv- tial environmental impacts triggered by the WTO accession. Trade alents (t CO2e) to create one million USD of GDP,18 compared to less liberalization will induce a reallocation of resources within Russia than half that for appendix 1 countries under the Kyoto Protocol.19 At with some sectors expanding and some contracting. If expanding the international level, Russia ratified the Kyoto Protocol in 2004 as sectors are more pollution-intensive than contracting sectors, the part of the global community’s solution to climate change.20 Russia sector reallocation of output will be harmful to the environment— is committed to pursuing a greenhouse gas emission reduction unless there are countermeasures to reduce pollution. On the other hand, access to global markets and growing trade cooperation may create national wealth that can be used for environmental protec- 17 This could include carbon capture and storage options—however the tion measures. The experience from other trade agreements—such adoption of cleaner technologies would be preferable rather than end- of-pipe solutions. as the North American Free Trade Agreement (NAFTA) between the 18 At purchasing power parity. United States, Canada, and Mexico generated some mixed results 19 Climate Analysis Indicators Tool (CAIT) data for 2005: http://cait.wri.org/ where the main lessons appear to focus on institutional reform to 20 On November 5, 2004, Russia ratified the Kyoto Protocol, and the Protocol came into force in February 2005. Russia is listed in Annex B of run parallel to sector reform (box 1.2). the Protocol and, as such, is subject to a constraint on its greenhouse gasses (GHG) emissions for the period 2008–2012. The target for Russia is that the country’s combined emissions of Kyoto gases should not TRADE AND ENVIRONMENT: ECONOMIC THEORY exceed five times their combined 1990 levels during the period 2008– 2012. This target is generally expressed in annual terms: on average, IN A NUTSHELL Russia’s annual emissions of the six Kyoto gases should not exceed their 1990 level—3,048 MtCO2e—over the period 2008–2012. Since 1999, Impact assessment of NAFTA in the early 1990s stimulated theo- Russia’s economy has grown at a pace of more than 6 percent per year, retical and empirical analysis on the environmental impacts of trade calling into question whether Russia will stay within the borders set by the Kyoto Protocol for the period beyond 2012. liberalization. Following the seminal work by Grossman and Krueger E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N CHAPTER 1 — INTRODUC TION 5 BOX 1.2: Environmental Lessons from NAFTA policy regulations such as trade reforms or emission control policies. Traditional multi-sector, multi-region CGE models building on the During the NAFTA negotiations, proponents of the agree- notion of constant-returns-to-scale (CRTS) and competitive markets ment argued that free trade would lead to seemingly automatic improvements in environmental conditions may adequately capture the composition and scale effect triggered in countries like Mexico. Opponents of NAFTA said that by policy reforms. However, they omit potentially important pro- the environment would automatically worsen in Mexico ductivity changes in sector production that would be associated because Mexico’s lower standards would attract highly pol- with the technique effect. Such productivity effects are on the other luting firms from the United States. In effect, Mexico would serve as a pollution haven for U.S. industry. Ten years after hand captured by more elaborate CGE trade models building on NAFTA, what happened? the new trade theory (Krugman 1981) through the introduction of There is no evidence that pollution has begun to decrease now imperfect competition and increasing returns to scale (IRTS)—yet, that Mexico has passed the theoretical turning point of $5,000 per these models typically fall short of detailed environmental account- capita. Nor have other environmental indicators begun to show ing and the more sophisticated representation of input substitution improvement. This study also suggests that fears that NAFTA possibilities in production and consumption. Nonetheless, econo- would create a pollution haven for dirty industry in Mexico were mists argue that CGE models can incorporate several key sustain- not justified overall, though the firms that have moved to Mexico have not always followed environmental best practice. ability (meta-) indicators in a single micro-consistent framework, Together, these findings suggest two important conclusions as thereby allowing for a systematic quantitative trade-off analysis be- countries continue to negotiate the terms under which they tween environmental quality, economic performance and income will integrate into the global economy. First, if growth alone distribution. Furthermore, the CGE approach constitutes an open will not bring with it a long-term tendency toward environ- framework for linkages to models from other disciplines thereby mental improvement, or if the turning point is so distant as to make the environmental costs of waiting unacceptable, accommodating the integrated assessment of sustainability issues. then governments need to put in place the institutional More generally, one should not exaggerate the role numerical mod- mechanisms that can monitor environmental impacts and els can play in impact assessment. Policy decisions are the outcome prevent unacceptable levels of environmental destruction. of a broader participatory process where stakeholders and other Without environmental laws, regulations, and the willingness interested parties communicate a wide range of values, perceptions and capacity to enforce them, trade-led growth will lead to increases in environmental degradation. and judgments to policy makers. Quantitative analysis, if available, Second, since the evidence from Mexico suggests that environ- at all, can at best strengthen or weaken policy arguments, putting mental regulations and enforcement are not generally decisive decision making on a more informed basis. in most firms’ location decisions, governments should have little fear in strengthening such safeguards. Governments will A substantial part of the applied literature on trade-environment not be jeopardizing their access to foreign direct investment linkage is based on computable general equilibrium analyses. Most by enacting strong environmental legislation and enforcing it. applications focus on the mutual effects that trade policies and CO2 In short, governments need to act to protect their environments. reduction policies can have on each other. Examples are Babiker et al. The costs of doing so, in terms of lost investment, are likely to be (1997) and Kuik and Gerlagh (2003), who use standard multi-region, very low. The costs of inaction are likely to be very high. Source: Gallagher 2004. multi-sector CGE models of global trade and energy use. In the same vein, Vennemo et al. (2007) quantify the environmental impacts of China’s accession to the WTO as the outcome of scale, composition (1993) as well as Copeland and Taylor (1994, 1995) environmental and technique effects (they use a small open economy model). They impacts of trade liberalization can be decomposed into three ef- identify a dominating composition effect in favor of clean industries fects—changes in scale, composition, and technique. which leads to a decrease of China’s greenhouse gas emissions. More Computable general equilibrium (CGE) models are widely details on trade-environment research and literature dealing with the used to quantify the economic and environmental impacts of implications of FDI are provided in appendix 3. A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R C H A P T E R 2 — A N E C O N O M I C M O D E L O F W TO A C C E S S I O N A N D T H E E N V I R O N M E N T 7 Chapter 2 AN ECONOMIC MODEL OF WTO ACCESSION AND THE ENVIRONMENT Using this theoretical background the report applies an integrated to the use of different technologies, changes in process efficiency, assessment framework where a traditional trade model with details and changes in fuel mix. The composition effect refers to changes on technology and pollutants is complemented with productivity in the sector composition of an economy after trade liberalization. impacts emerging from simulations with a more compact increas- Whether the pollution-intensive industries or the clean industries ing returns to scale (IRTS) model variant of the model of Rutherford expand, depends on a nation’s comparative advantage. While the and Tarr (2010). The model is used to quantify not only the mag- scale effect is unambiguous, the technique and composition effects nitude but also the direction of the individual and the composite can cut either way—the aggregate impact of trade liberalization on impacts. The aggregate impact of trade liberalization on the envi- the environment is thus an open issue subject to empirical analysis ronment can be formally decomposed into three partial effects: (see box 2.1). scale, composition, and technique (table 2.1). The scale effect links the free trade to an increase in economic activ- BASIC STRUCTURE ity, holding constant the mix of goods produced and the produc- To investigate the economic and environmental implications of tion techniques. As a result, a higher level of pollution emissions Russia’s WTO accession, a single-country, multi-sector, computable may be expected if the output of the economy increases, as emis- general equilibrium (CGE) model of the Russian economy was con- sions are a by-product of output. The technique effect is linked to structed. General equilibrium models are useful in understanding changes in the mix of polluting and clean inputs that are used by the economy-wide impacts of a change in policy or an economic the economy—comprising all of the effects that change average ‘shock’—since it includes all sectors of the economy and their asso- pollution intensity of production including within-firm changes due ciated inter-linkages. The CGE model for Russia captures characteristics of regional pro- TABLE 2.1: Examples of Trade-Liberalization-Induced Effects duction and consumption patterns through detailed input-output Expected on The Environment tables21 and links regions via bilateral trade flows. The segmentation POSITIVE EFFECT of the overall Russian economy into regional markets builds on NEGATIVE EFFECT ON ON ENVIRONMENT, EFFECTS DEFINITION ENVIRONMENT, IF . . . IF . . . the aggregation of 88 Russian “oblasts” (see appendix 4 for a list of Scale Increase in . . . trade induces a . . . growing trade oblasts). The model described below is presented by sector given economic activity, contraction of output creates national wealth holding the product that is used for environ- that tariff changes are sector-specific—but also because improve- mix constant mental protection ments in technology (for example, clean technologies) are sector- Composition Sector mix changes . . . pollution-intensive . . . pollution-intensive sectors expand sectors contract specific as well. Technique Technology changes . . . less efficient and . . . more efficient eco-friendly technologies and eco-friendly 21 Input-output tables describe the value of production and consumption enter the production technologies enter the flows—and thus the interdependencies—between different branches process production process of a national economy or different regional economies. A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 8 C H A P T E R 2 — A N E C O N O M I C M O D E L O F W TO A C C E S S I O N A N D T H E E N V I R O N M E N T BOX 2.1: The Scale, Composition and Technique Effects for TABLE 2.2: List of Sectors Included in The Model Greenhouse Gases (GHG) Associated With Fuel Use SECTOR ABBREVIATION SECTOR ABBREVIATION in Manufacturing in India, 1985–2004 Electricity ELE Maritime transportation MAR Oil CRU Railway transportation RLW A study of fuel use and associated greenhouse gas emissions Oil processing OIL Truck transportation TRK in India’s manufacturing sector1,2 revealed two drivers of GHG savings: (1) a reallocation of market share across sectors and (2) Gas GAS Pipelines transportation PIP within-firm improvements. Coal COL Air transportation AIR Ferrous metals FME Other transportation TRO The manufacturing sector grew about 5 percent per year over the period between 1985 and 2005, that is, the scale effect was Non-ferrous metals NFM Wholesale and retail TRD trade the primary driver of growth in GHG emissions from fuel use. Chemical and petro- CHM Construction CON The composition and technique effects played a larger role af- chemical products ter the 1991 liberalization. Machinery MWO Telecommunications TMS The composition effect reduced emissions by 37 percent be- Forestry – wood – TPP Post PST tween 1991 and 2004. Fuel-intensive sectors like iron and steel pulp – paper grew in absolute terms of output, yet they experienced a de- Construction material CNM Other goods and OTH services crease in share of output. Sectors with above-average energy Other industrial products OTI Housing and other HOU intensity, such as cotton spinning and weaving and cement, communal services experienced similar trends. On the other hand, the manufac- Textiles and apparel CLI Agricultural products AGR turing sectors that grew the most post-liberalization were plas- Food industry FOO Science, geology, miner- SCI tics, cars, sewing, spinning and weaving of synthetic fibers, and al exploration, geodesy grain milling—all of them with below-average energy intensity. and hydrometeorology Financial intermediaries, FIN Public health, sports, HEA Reductions in greenhouse gas emissions in manufacturing insurance, management social security, educa- depend critically on policies that give firms direct incentives and public organizations tion, culture and arts to use fuel inputs efficiently, or on policies that shift market share away from input-inefficient firms (the technique effect). Reductions in input tariffs on intermediate inputs led to with- The inclusion of such health benefits would tend to decrease sector in-firm improvements: a 23 percent improvement in fuel ef- adjustment costs, or put another way, the productivity gains from ficiency. Post-liberalization changes in licensing requirements better worker health would partially offset the negative cost impact improved fuel efficiency by an additional 7 percent. of reducing pollution in sectors. Source: Martin (2011). 1 The industry sectors that use the most fuel are cement, textiles, iron and steel, basic chemicals (chloral-alkali), paper, and fertilizers and pesticides. These six Given the importance of fossil fuel sectors and energy-intensive sectors are responsible for 50 percent of the country’s fuel use in manufacturing. Other large consumers of fuels include nonferrous metals, medicine, and clay. industries for environmental quality—the choice of sectors has been 2 India has been a WTO member since 1995. to keep emission- and energy-intensive sectors in the available data as separate as possible. The energy goods identified include coal, gas, crude oil, refined oil products and electricity. This disaggregation It should also be clarified at this point that the following analysis is essential in order to distinguish energy goods by carbon-intensity is a cost-effective approach rather than a traditional benefit-cost and the degree of substitutability. Production processes which have analysis (BCA). A cost-effective approach weighs alternatives to few substitutable inputs are more likely to be impacted by price achieve a given target or goal. BCA is normally used to do a full- changes in that particular input. In addition the model features major benefit and cost accounting in order to establish a target. However, energy-intensive industries which are potentially most affected by a full BCA cannot be undertaken without information on the associ- “green” policy initiatives designed for environmental protection. ated health benefits from air pollution reduction in Russia (that is, A summary of included sectors is in table 2.2 above. Details of the detailed health studies), and how this would translate into increased model’s production, consumption, trade structure and substitution labor productivity gains (that is, fewer lost work days, and so on). possibilities are provided in appendix 5. E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N C H A P T E R 2 — A N E C O N O M I C M O D E L O F W TO A C C E S S I O N A N D T H E E N V I R O N M E N T 9 TABLE 2.3: Overview of Pollutants EMISSIONS IN BASE YEAR POLLUTANT ABBREVIATION ENVIRONMENTAL IMPACT HEALTH EFFECTS (2001)* Particulate matter PM Soil and damage to materials, smog Lung cancer, asthma, birth defects 2,973 (in kt) Sulphur dioxide SO2 Acid rain, atmospheric particulates Asthmatic, alterations in the lungs 5,254 (in kt) Carbon monoxide CO Leads to increased concentrations of Headache, nausea, dizziness, seizures 5,148 (in kt) methane and tropospheric ozone Nitrogen oxide NOx Acid rain, eutrophication in coastal waters Difficulty breathing, fluid build-up in the lungs 1,679 (in kt; Stationary sources only) Hydrocarbons CnHm Smog, leads to increased concentrations of Affects the central nervous system 2,724 (in kt) tropospheric ozone Volatile organic components VOC Damage to soil and groundwater Damage to liver, cancer, headaches 1,131 (in kt) Carbon dioxide CO2 Climate change, ocean acidification High concentration: rapid heart rate, clumsiness 1,411 (in Mt) From coal: 315; from gas: 761; from oil: 364 * Source: Information from SUST-RUS, 2006. Emissions Productivity Impacts of Trade Liberalization The model accounts for seven pollutants whose environmental and CGE models traditionally build on the notion of constant-returns- health impacts are listed in table 2.3—along with their economy- to-scale (CRTS),24 where competitive markets adequately capture wide emission levels for the base year.22 The selected pollutants the composition and scale effects triggered by policy reforms such listed in table 2.3 are also of interest from a policy and regulatory as trade liberalization. However, they omit potentially important standpoint. productivity changes in sector production (that is, part of the tech- nique effect). Such productivity effects can be captured through Carbon dioxide (CO2) emissions, which are by far the most important the introduction of imperfect competition and increasing returns greenhouse gas emissions for Russia, are linked in fixed proportions to scale (IRTS). Models featuring imperfection competition and IRTS, to the use of fossil fuels, with CO2 coefficients differentiated by the however, typically fall short of detailed environmental accounting specific carbon content of fuels. CO2 abatement can take place by and the more sophisticated representation of input substitution fuel-switching (inter-fuel substitution) or energy savings (either by possibilities in production and consumption. Against this back- fuel-non-fuel substitution or by a scale reduction of production and ground, the CGE model used for this analysis was developed to final demand activities). All other non-CO2 emissions are represented complement the traditional CRTS trade model with productivity as process-specific in fixed proportions to output or consumption impacts emerging from simulations with a more compact IRTS activities. Without further refinements in the model representation model variant.25 Thus, the analysis takes into account the impact of of production technologies, the (model-based) reduction of non- productivity changes. CO2 emissions can only take place through equivalent down-scaling of output. However, there could be cheaper technological process Data options to reduce emissions than output cuts. Information on such The model used national input-output data for the year 2001 from options is collected through bottom-up engineering studies on the national statistical office (Rosstat 2002 and 2003) with data marginal abatement cost curves for non-CO2 pollutants. The CGE model formulation adopted in this study allows for integrating 24 A production function exhibits constant returns to scale if changing all direct, bottom-up estimates of discrete abatement potentials for inputs by a positive proportional factor has the effect of increasing out- puts by that factor. This may be true only over some range, in which case non-CO2 emissions and the associated costs of these technologies.23 one might say that the production function has constant returns over that range. If output increases by more than that proportional change, there are increasing returns to scale (IRTS). Thus, the returns to scale 22 Due to the lack of economic accounts for the more recent years, the faced by a firm are purely technologically imposed and are not influ- base-year of modeling is 2001. enced by economic decisions or by market conditions. 23 See Böhringer, Löschel, and Rutherford (2006). 25 See Rutherford and Tarr (2010). A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 10 C H A P T E R 2 — A N E C O N O M I C M O D E L O F W TO A C C E S S I O N A N D T H E E N V I R O N M E N T expanded from 22 to 30 sectors in order to include more detail on tariffs (or likewise with lower tariffs), countries can specialize accord- service industries (table 2.2). This was the latest year in which trade ing to its comparative advantage—where specialization will be the data were disaggregated at the regional level. At the regional level primary source of gains from trade. 10 jurisdictions are distinguished based on the aggregate satellite Overall efficiency gains from trade liberalization are typically asso- data from the 88 regions of the Rosstat data which are referred to as ciated with adverse economic impacts for specific industries that “oblasts”—and bilateral trade flows (trade intensities) are adjusted previously enjoyed tariff protection. Increased demand for imports to ensure that oblast-level exports and imports in aggregate are after tariff reduction will depreciate the real exchange rate favoring consistent with national import and export values. export-intensive sectors that benefit from higher export prices in Tariff rates before WTO accession and tariff reductions as a result of domestic currency. Other determinants of sector impacts include 26,27 WTO are taken from recent empirical studies for Russia. Under changes in intermediate input cost and the aforementioned WTO, Russia will have improved rights under antidumping and coun- improved market access due to WTO rule protection in antidump- tervailing duty investigations in its export markets. Consequently, ing cases. Liberalization of barriers against foreign-service provid- Russian exporters in sectors which have been subject to antidump- ers will lead to an increase in foreign direct investment in services ing actions in Russia’s export markets will see an improvement in and increased availability of competitive services. As emphasized 28 their terms of trade ranging from 0.5 to 1.5 percent. by the new trade literature, the economy-wide and sector-specific impacts of trade liberalization may to a large extent hinge on Environmental data is taken from the SUST-RUS project29 with sec- induced productivity effects. Due to liberalization commitments tor-level information on pollutants (emissions) at the national level as part of WTO accession, increased foreign direct investment in and then divided to the oblast-level proportional to output. Table services will allow Russian businesses to have access to a greater 2.3 reports economy-wide emission levels for the different pollut- variety of efficient, competitive and modern business services; ants in the base year 2001. and lower tariffs will allow Russian businesses to be able to more easily import modern technologies or a greater variety BASE-YEAR CHARACTERISTICS (2001) of technologies, which will increase Russian productivity. This Regarding trade liberalization—most important are the initial tariff productivity impact of trade and foreign direct investment liber- rates that will be reduced by roughly 50 percent as a consequence alization through new or higher quality goods and services can of Russia’s WTO accession. Import tariffs favor protected domes- be much more important quantitatively than improved resource tic industries at the expense of consumers. From a single-market allocation. perspective, the loss in consumer surplus from higher prices for Figure 2.1 presents a summary of the various taxes that apply in the goods will exceed the gain in producer surplus (due to expanded base year at the sector level. Beyond tariffs on imports (“Import”) domestic production) and tariff revenues. Tariff reduction will lead there are export duties (“Export”), production taxes (“Output”) and to improved domestic resource allocation since tariff reduction value-added taxes (“VAT”) on intermediate inputs. induces the country to shift production to sectors where produc- tion is valued more highly based on world market prices. Without Initial tariffs are highest for textiles and apparel (CLI), food (FOO), wood, paper and pulp (TPP), construction materials (CNM) as well 26 See Shepotylo and Tarr (2008). as materials ranging between 10-20 percent at the national average. 27 See Shepotylo and Tarr (2012). 28 See Rutherford and Tarr (2010). A second group of tariff-protected industries with rates between 29 The SUST-RUS Project aimed to develop an integrated spatial-economic- 5–10 percent includes ferrous (FME) and non-ferrous (NFM) metals, ecological modeling approach, which represented different areas of economic, transport, resource-use linked to environmental effects on agricultural (AGR) and chemical products (CHM). With substantial sustainability that can be used to assist Russian policy makers in their tariff cuts the first-round impacts of WTO accession on the output of choice of medium and long-term sustainability policies. See http:// sustrus.org/en/project/. previously protected industries should be negative. E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N C H A P T E R 2 — A N E C O N O M I C M O D E L O F W TO A C C E S S I O N A N D T H E E N V I R O N M E N T 11 FIGURE 2.1: Base-Year Tax Rates Prior to WTO (Percent) 50 Import Export Output VAT 40 30 20 10 0 CLI OTH OTI FOO TPP CNM MWO NFM AGR CHM FME GAS OIL ELE COL PST HOU SCI CON PIP CRU RLW TRK TMS AIR TRD TRO FIN MAR HEA –10 –20 –30 –40 Source: Calculated from Rutherford and Tarr (2010). FIGURE 2.2: Productivity Changes of Sector Production from WTO Accession (Percent) TMS SCI TRK FIN TRO RLW PIP AIR MAR FOO NFM MWO CNM TPP CHM FME OTI –10 0 10 20 30 40 50 Percent Source: Estimated from the CGE model. Figure 2.2 shows the productivity effects of WTO accession across With respect to environmental impacts of trade liberaliza- 30 the model’s sectors calculated with the IRTS model variant. The tion and the economic implications of emission control results show that Russia’s WTO accession leads to pronounced pro- policies, emission intensities play a key role. The more emis- ductivity gains in particular for telecommunication (TMS), financial sion intensive a sector is, the more adversely its production (FIN) and transportation services (TRK, TRO, RWL). should be affected by pricing of emission inputs. Another key determinant of adjustment cost is the ease of substituting 30 Productivity changes are subsequently imposed in the scenarios away from emission inputs as described through the model’s with the CRTS model—and where productivity changes are explicitly incorporated. structure and the elasticities of substitution between inputs A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 12 C H A P T E R 2 — A N E C O N O M I C M O D E L O F W TO A C C E S S I O N A N D T H E E N V I R O N M E N T FIGURE 2.3: Base-Year CO2 Emission Intensities from Fossil Fuel Combustion (Direct) and Indirect Emissions from Electricity Inputs (ELE) (kg per Ruble)* 0.8 ELE Direct 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 COL GAS ELE PIP FME HOU CNM CHM AIR TRK mean TPP all MWO OTI FIN HEA MAR TRO SCI CRU CON AGR RLW CLI FOO NFM OIL TRD OTH PST c TMS * Key: mean—average across all sectors; all—average across all sectors including final consumption; c—final consumption. Source: Estimated from the CGE model. (see appendix 5). Figure 2.3 and figure 2.4 provide insights as for carbon monoxide (CO) where crude oil production has by far to the pollution profile across Russian industries. the highest intensity. The release of hydrocarbons (CnHm) is pre- dominantly associated with coal production and transportation Figure 2.3 presents CO2 emission intensities composed of direct activities. emissions from fossil fuel inputs and indirect emissions embodied in electricity inputs. Emission intensities in coal and gas production, Figure 2.5 provides information on energy cost shares in electricity generation and pipeline transportation (including gas production for electricity, gas, and oil—where the label “all” leakage) range highest. Indirect emissions embodied in electricity refers to the sum of these shares. Knowing the cost share of play a secondary role for most sectors. energy in production is important so as to better understand the distributional effects placed on any one sector when Figure 2.4 reports emission intensities for non-CO2 pollutants energy prices change. In this case, the electricity, housing, across industries—listed in descending order for sulfur dioxide pipeline and air transport sectors have energy cost shares (SO2). Electricity generation, non-ferrous and ferrous industries rank above 15 percent. highest. These sectors also show substantial emission intensities FIGURE 2.4: Base-Year Pollution Intensities—Other than CO2 (Grams per Ruble) 4.5 SO2 CnHm CO NOx PM VOC 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 NFM ELE FME mean OIL CRU CHM CLI CNM HOU COL MAR RLW TRK AIR TRO GAS PIP FOO MWO TPP AGR OTH OTI Source: Estimated from the CGE model. E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N C H A P T E R 2 — A N E C O N O M I C M O D E L O F W TO A C C E S S I O N A N D T H E E N V I R O N M E N T 13 FIGURE 2.5: Energy Cost Shares Across Industries (Percent) 25 all ELE GAS OIL 20 15 10 5 0 ELE HOU PIP AIR GAS TRK CNM CHM FME TRO TPP RLW HEA CRU MAR mean COL MWO NFM FIN SCI CON OTI OIL CLI AGR FOO TMS TRD PST OTH Source: Estimated from the CGE model. POLICY SCENARIOS AND SIMULATION RESULTS TABLE 2.4: Key Features of Trade and Environmental Policy Scenarios In order to quantify the economic and environmental impacts ENVIRONMENTAL associated with Russia’s WTO accession, seven policy scenarios are SCENARIO TRADE REFORM REGULATION REFORM developed. Table 2.4 summarizes their main features. WTOcrts WTO accession without None productivity impacts Some of the general assumptions are: applied tariffs will roughly WTO WTO accession with IRTS None productivity impacts 31 fall by 50 percent from initial levels and better access to export CO2 None 20% CO2 emission reduction markets for some industries will lead to improvement in terms of EFF None 20% energy intensity reduction trade ranging from 0.5 percent (sectors: other industrial products, WTO_CO2 WTO accession with IRTS produc- 20% CO2 emission reduction food industry, other goods and services) to 1.5 percent (sectors: tivity impacts WTO_EFF WTO accession with IRTS produc- 20% energy intensity reduction ferrous metals, non-ferrous metals, chemical and petrochemical tivity impacts products).32 The central case scenario WTO contains the sector- and WTO_CO2_EFF WTO accession with IRTS produc- 20% CO2 emission reduction and region-specific productivity changes as calculated by the IRTS “twin” tivity impacts 20% energy intensity reduction model (figure 2.2).33 To investigate the importance of productivity changes emerging from trade liberalization, the central case sce- policy as well as domestic energy use. Scenario CO2 imposes a 20 nario WTO is contrasted with an alternative scenario variant WTOcrts percent reduction of CO2 emissions in Russia from base-year emis- where productivity impacts are omitted. sion levels to be achieved through a system of tradable emission “Green” policy initiatives in Russia are reflected by means of two rights (or likewise a nation-wide CO2 tax).34 Tradable rights (or per- scenarios that capture Russia’s objectives in international climate mits) are normally preferred to command-and-control measures (such as standards) because they achieve the same target at a lower overall cost (since they allow low-abatement-cost firms to sell their 31 Based on Shepotylo and Tarr (2012). 32 Based on Rutherford and Tarr (2006). 33 Application of the productivity parameters to sector outputs destined for the domestic and regional markets will somewhat exacerbate the welfare gains from WTO accession in the perfect competition model 34 Note that emission taxes are fully equivalent to a tradable permit system since we do not account for an increase in fixed cost with new firm en- (if there is no uncertainty of the costs and benefits of emission abate- tries (as is the case in the imperfect competition model). ment) auctioned by the government. A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 14 C H A P T E R 2 — A N E C O N O M I C M O D E L O F W TO A C C E S S I O N A N D T H E E N V I R O N M E N T TABLE 2.5: Economic and Environmental Impacts of Trade Reforms and Environmental Regulation CRTS SCENARIOS IRTS SCENARIOS WTOcrts CO2 EEF WTO WTO_CO2 WTO_EEF WTO_CO2_EEF (1) (2) (3) (4) (5) (6) (7) EV (% GDP) 0.28 –0.16 –1.19 6.43 6.08 5.32 5.18 CO2 price (Rubles/t) – 137.6 – – 159.9 – 138.1 CO2 0.3 –20.0 –16.3 3.7 –20.0 –11.2 –20.0 Emissions ( percent change) PM 0.4 –2.2 –9.6 2.0 –0.9 –6.8 –8.0 SO2 1.0 –0.1 –6.4 –2.6 –3.5 –9.5 –8.9 CO 1.0 –1.2 –3.6 3.3 1.6 0.0 –0.7 NOx 0.3 –2.6 –12.6 2.0 –1.2 –9.4 –10.7 CnHm 0.7 –4.6 –4.3 –0.3 –6.0 –3.3 –7.8 VOC 0.4 –1.5 –5.5 3.2 1.6 –1.1 –2.4 Emission intensity Electricity 0.1 –2.7 –20.0 –6.7 –9.7 –21.5 –22.1 (percent change) of production Oil 0.2 8.6 –20.0 –6.0 3.6 –21.4 –21.4 Gas –0.4 –50.2 –20.0 –4.6 –57.6 –20.9 –30.6 (unused) permits to high-abatement-cost firms).35 Tradable rights simultaneously with each of the green policy initiatives (scenarios are also discussed further in the policy section of the report. WTO_CO2 and WTO_EFF) or with both environmental policies (sce- nario WTO_CO2_EFF). The quantitative CO2 emission reduction target is in the mid-range of pledges communicated by Russia under the Copenhagen accords. Scenario EFF mandates sector- and region-specific energy efficiency MACROECONOMIC AND ENVIRONMENTAL IMPACTS standards with a uniform decline of energy intensity for gas, oil and Table 2.5 provides a condensed report of economic and environ- electricity by 20 percent in sectors other than electricity and fossil mental impacts for Russia at the nation-wide level across the dif- fuel production compared to the base year. The assumed intensity ferent policy scenarios. The scenarios are grouped in two sections target is markedly less ambitious than the 25 percent announced “CRTS” and “IRTS” to differentiate the productivity impacts from at COP15 and 40 percent goal mentioned in Russia’s state program trade liberalization. The section “CRTS” framework does not refer on “Energy Savings and Energy Efficiency Improvements until 2020.” to any technological shifts through productivity effects. This set of scenarios includes trade liberalization (scenario WTOcrts) on The last three scenarios show the impacts of “overlapping” policy the one hand, and separate environmental policies on either CO2 reforms, where the central case WTO accession is implemented reduction (scenario CO2) or energy efficiency improvements (sce- nario EEF). The section “IRTS” features the scenarios with productivity 35 The choice between taxes and permits may not be just a matter of the political acceptability of each. Tradable permits if allocated for free to impacts for sectors emerging from trade liberalization and liberal- industries (for example, through an output-based allocation) might be ization of barriers against foreign direct investment in services (see preferred by emission-intensive industries over taxes since industries then directly receive at least part of the scarcity rents (depending on figure 2.2): trade liberalization stand-alone (scenario WTO) or over- what portion of permits is allocated for free). An output-based allocation which implicitly works as production subsidy helps to increase policy laid with environmental policies (scenarios WTO_CO2, WTO_EEF, acceptance of regulated industries and also has some support from a WTO_CO2_EEF). The impacts of policy interference are shown cost-efficiency consideration in the case of unilateral regulation of trans- national externalities such as CO2 in order to offset counterproductive mainly in terms of percentage changes in key variables from their emission leakages. On the other hand, emission taxes may be preferred by regional/federal governments to achieve additional revenues. From base-year levels. The central welfare indicator is the ‘equivalent an efficiency perspective additional environmental taxes can be used to variation’ in income, expressed as a percentage of base-year GDP. reduce other distortionary impacts (green/environmental tax reforms) and therefore potentially reduce the marginal cost of public funds. The so-called Hicksian equivalent variation (HEV) in income is the E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N C H A P T E R 2 — A N E C O N O M I C M O D E L O F W TO A C C E S S I O N A N D T H E E N V I R O N M E N T 15 FIGURE 2.6: Impacts of WTO Accession Without Productivity Impacts on Sector Activities (Scenario WTOcrts) (Percent from Base-Year, 2001) 40 Output Export Import 30 20 10 0 OTH FOO CNM AGR OTI GAS TPP OIL MWO ELE CLI COL CHM MAR PIP TRD PST TMS CRU RLW HOU TRO TRK AIR FIN FME HEA SCI CON NFM –10 amount of income necessary to add to (or deduct from) the average TABLE 2.6: Decomposition of CO2 Emission Changes (in Mt) for consumer so that she enjoys the same standard of living (that is, Scenario WTOcrts utility) as in the base case. The welfare measure is then expressed as SCALE COMPOSITION TECHNIQUE TOTAL 1.5 2.1 0.1 3.7 a percentage of base-year GDP. CRTS Scenarios Table 2.6 provides a decomposition of CO2 emission changes in Without productivity spillovers, the economic and environmental terms of the scale, composition and technique effects. In this case impacts of Russia’s WTO accession are very small (WTOcrts in col- we define the scale effect as the change in emissions that would umn 1). The gains from improved resource allocation after tariff result if all sectors (including final demand production activities) reduction amount to less than a third percentage point of GDP expanded output proportionally and the emission intensity of out- (0.28) and the level of CO2 emissions and non-CO2 pollutants hardly put were to remain constant. The composition effect is interpreted change (between 0.3 and 1.0 percent). as the change in emissions which is solely due to changes in the composition of sector output, assuming that the carbon intensity of The impacts of WTO accession for sector output, exports and output remained constant.36 Finally, the technique effect is defined imports are displayed in figure 2.6. These impacts are triggered by as the residual in emission change, that is, the total emission change tariff reductions and terms-of-trade improvements on the export minus the scale and composition effects. The total CO2 emission side for specific industries (including sectors ferrous metals [FME], change for scenario WTOcrts only amounts to around 3.7 Mt, which non-ferrous metals [NFM], and chemical products [CHM]). is about 0.3 percent of base-year emissions at 1441 Mt CO2 (see table 2.3). As a first-round effect, tariff reduction leads to higher imports along with decreased domestic production and exports. This pattern is All three partial effects contribute with the same (positive) sign particularly pronounced for industries that initially were protected to the overall emission increase—the composition effect being with high tariff rates and which have a relatively small share of strongest followed by the scale effect and a rather weak technique exports, for example, food (FOO), textiles (CLI), and construction effect. Note that the change in sector composition is greater than materials (CNM). For sectors which gain on the export side through either the scale or productivity (technique) effects. increased market access (and the decline in the exchange rate), the dampening impact of tariff reduction on production and exports can be outweighed leading to an effective increase in produc- tion and exports joint with a decrease in imports (for example, 36 Note: The composition effect is computed as a difference from the scale effect relative to the hypothetical assumption of constant emission non-ferrous metal production (NFM). intensity. A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 16 C H A P T E R 2 — A N E C O N O M I C M O D E L O F W TO A C C E S S I O N A N D T H E E N V I R O N M E N T In the next scenario (CO2 in column 2 of table 2.5), a 20 percent IRTS Scenarios, Including Productivity Changes reduction from base-year CO2 emissions induces an economic Inclusion of the productivity effects in the IRTS model generates adjustment cost (EV falls) reflecting the shift towards less carbon- substantial welfare gains in the WTO scenario (6.43 percent in col- emitting but more expensive production and consumption pat- umn 4 of table 2.5), which are considerably higher than those in terns. The welfare losses are relatively modest (–0.16 percent), WTOcrts. Economic gains from new or higher quality goods and reflecting low-cost options in the Russian economy to shift away services are much more important quantitatively than improved from carbon. It should be noted that the welfare metric does not resource allocation as captured by the standard perfect competi- value any change in CO2 emissions (e.g. external costs on health tion CRTS approach. Thus the productivity impacts of trade and or the negative impacts on infrastructure), nor those of other pol- foreign direct investment reform in this case is an important factor lutants which decline as well under the CO2 emission constraint when considering policy reform. (various other non-CO2 pollutants are directly or indirectly cor- The impacts of WTO accession on sector output, exports and related with fossil fuel use).37 The marginal abatement cost of CO2 imports are displayed in figure 2.7. Sector impacts are much more emissions to achieve a 20 percent emission reduction amounts to pronounced, and in part qualitatively distinct, from the effects in roughly 137.6 Rubles per ton of CO2. Interestingly, the emission scenario WTOcrts, reflecting the imposed changes in output produc- intensity of gas declines in a drastic manner. This can be traced tivity (see figure 2.2). The figure shows the output of most business back to the fact that—according to Russian base-year statistics— services firms declining. An important caveat to the sector impacts, gas has by far the highest CO2 emissions per monetary value however, is that the figure only shows the output of domestic ser- across fossil fuels (coal, oil, gas). vices firms. The model does not incorporate the additional output Energy efficiency standards (scenario EFF in column 3 of table of multinational services firms deriving from the additional foreign 2.5) that are uniformly mandated for electricity, gas and oil inputs direct investment. The output effects in the business services sector across all sectors (excluding electricity generation and fossil fuel tend to be slightly positive when multinational output is included in production) and regions trigger pronounced welfare losses in sector output calculations.38 the order of about 1.2 percent of GDP. The associated decline The productivity effects imply a non-negligible increase in CO2 emis- in CO2 emissions and other pollutants is quite distinct. However, sions, PM, CO, NOx, and VOC. Energy intensities for electricity, oil and just looking at the case of CO2 emissions, it is clear that applying gas production decline, that is, the productivity gains help reduce uniform standards across all sectors would not constitute a cost- energy input per output. Yet, the technique effect is overcompen- effective measure for emissions reduction—since firms have sated for most pollutants. Table 2.7 presents the decomposition of different pollution abatement costs. Likewise, the objective of scale, composition and technique effects for a total increase of CO2 reducing energy intensity—if a reasonable goal in itself—should emissions by roughly 53 Mt. The scale effect is positive, dominating be pursued through a system of tradable efficiency permits the negative composition and technique effects. This means that across energy carriers, sectors and regions rather than specific despite the shift to cleaner sectors (through the composition effect) mandates. A tradable scheme would achieve the same reduc- and the small offsetting effect through productivity improvements, tion objective—but at a lower cost since some firms who have overall the absolute rise in emissions from output expansion out- higher marginal abatement cost could purchase permits from weighs any gains from the other two effects. Thus, although WTO lower cost firms. appears to be positive from an income standpoint—in the absence of any “complementary” energy or emissions policy (to dampen the 37 On the other hand one must bear in mind that the impacts reported for scale effect)—emissions can be expected to rise substantially. environmental and energy regulation in scenarios CO2 and EFF are based on a perfect competition framework without endogenous productivity changes. Thus, potentially negative implications of environmental regu- lation on productivity (growth) are not accounted for. 38 See Jensen, Rutherford, and Tarr (2007) and Rutherford and Tarr (2010). E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N C H A P T E R 2 — A N E C O N O M I C M O D E L O F W TO A C C E S S I O N A N D T H E E N V I R O N M E N T 17 FIGURE 2.7: Impacts of WTO Accession with Productivity Impacts on Sector Activities (Scenario WTO) (Percent from Base Year) 40 Output Export Import 30 20 10 0 OTH NFM AGR FOO OTI CLI CNM TRD TPP HOU ELE GAS CHM COL MWO FME OIL PST HEA CRU MAR PIP CON AIR RLW TRO TRK FIN TMS SCI –10 –20 –30 –40 –50 –60 –70 –80 TABLE 2.7: Decomposition of CO2 Emission Changes (in Mt) for The relative importance of the scale, composition and technique IRTS Scenarios effect for CO2 emission changes vary substantially as we move SCENARIO SCALE COMPOSITION TECHNIQUE TOTAL from WTO accession stand-alone to combination with emission WTO 85.8 –27.3 –5.1 53.4 constraints and energy efficiency mandates. The technique effect WTO_CO2 67.6 –87.5 –268.3 –288.2 becomes by far the dominant driver of CO2 emission changes: Direct WTO_EFF 39.4 –79.4 –120.9 –160.9 CO2 emission pricing (scenarios WTO_CO2 and WTO_CO2_EFF) WTO_CO2_EFF 31.6 –114.8 –204.9 –288.2 or indirect emission pricing through energy efficiency standards (scenarios WTO_EFF and WTO_CO2_EFF) cause price-responsive The three remaining scenarios in table 2.5 combine trade reforms technology adjustment in production and consumption—on the under scenario WTO with CO2 emission constraints and energy effi- one hand via fuel switching across energy carriers and on the other ciency mandates (columns 5–7). The CO2 price in scenario WTO_CO2 hand via energy savings. The scale effect of trade liberalization still to achieve a 20 percent emissions reduction from base-year levels leads to an increase in CO2 emissions; however, complementary must be higher than for scenario CO2 to counteract the emission emission constraints and in particular efficiency standards dampen increase associated with trade liberalization. Uniform energy effi- economic activity and thus the CO2 emission increase triggered ciency targets of 20 percent coupled with WTO accession (scenario by the overall productivity gains from WTO accession. Besides the WTO_EFF) leads to energy intensities overshooting 20 percent on drastic push of the technique effect, the “green” policy initiatives also average. The reason is that energy efficiency for some energy inputs trigger structural change in favor of less pollution-intensive indus- is falling more than required by the standard in several sectors as a tries as becomes evident in the stronger composition effect towards consequence of productivity improvements and binding standards de-carbonization. for other industries. Binding efficiency standards exert downward The key insight from the combined IRTS scenarios with overlapping pressure on the CO2 price in scenario WTO_CO2_EFF compared to regulation is that productivity increases from Russia’s WTO acces- scenario WTO_CO2. The simultaneous imposition of efficiency stan- sion are sufficiently large to pay for greening of growth in terms of dards and CO2 emission constraints that are both restrictive (again CO2 emission reduction and energy efficiency improvements. the standards are not binding for all sectors and energy goods) explain why the welfare gains among the IRTS variants with produc- It is also important to reiterate the point made in section 2 (c) tivity impacts are lowest for scenario WTO_CO2_EFF (5.18 percent). that these results are achieved through a system of tradable A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 18 C H A P T E R 2 — A N E C O N O M I C M O D E L O F W TO A C C E S S I O N A N D T H E E N V I R O N M E N T emissions rights or permits (or the imposition of an national CO2 acceptability of imposing a tax or the manner in which per- tax). In our modeling framework emission taxes or auctioned mits are distributed (for example, auctioned or output-based). permits are equivalent and both instruments are cost-effective Authorities would also have to consider how enforceable these tools in achieving a given environmental target—as they equal- options would be in the future given the power structure and ize marginal abatement costs across emission sources—and the influence of industry. To glean some insight on the policy and market thereby determines the cost-efficient abatement pattern regulatory environment in which firms currently operate in across sectors and provinces through the price mechanism. Russia, and what options the country might consider, the follow- However, the choice of policy is not only a matter of the political ing sections provide a brief summary. E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N C H A P T E R 3 — R U S S I A N E N V I R O N M E N TA L P O L I C I E S A N D   R E G U L AT I O N S 19 Chapter 3 RUSSIAN ENVIRONMENTAL POLICIES AND REGULATIONS Trade liberalization effects on the environment may vary and Russia’s commitment to implement its Climate Doctrine, supported depend on the sector, country policies, markets, technologies and by the Complex Implementation Plan of Actions until 2020,40 management systems. Change of environmental quality as a result underpins the modernization agenda in the industry, transport and of potential expansion of “dirty industries” (for example, ferrous and housing sectors. This also implies increasing the opportunities for non-ferrous metals, chemicals) could be mitigated by effective poli- innovation, using renewable and energy efficient technologies and cies and transparent enforcement mechanisms. Russia’s economic greater contribution of Russia to international efforts to mitigate cli- gains from trade liberalization are estimated at about US$49 billion mate change impacts. Pursuant to the Plan of Actions the Ministry a year based on 2010 GDP. These economy–wide gains could be of Economic Development will introduce changes to Russia’s long- sustained if complementary “do-no-harm” policies and regulations term macroeconomic forecasts “taking into account climate risks, tailored to address environmental concerns are put in place. In this mitigation and anthropogenic impacts on the climate, and adapta- respect Russian policy-makers face a twofold challenge. On the one tion to climate change” (2011–20). Russia is the third largest emitter of hand, environmental regulations should avoid creating “pollution CO2 after USA and the EU. Notwithstanding, the concerns expressed 39 haven”; on the other hand, environmental regulations should be by the Russian President’s economic team about Russia’s capacity compatible with trade liberalization provisions. to undertake greenhouse gasses (GHG) reduction obligations, the most quoted target of Russia to reduce GHG emissions is the state- The Federal Law on Environmental Protection recognizes the need ment made at Copenhagen (COP15) by President Medvedev who to include environmental considerations in decision-making that said that “Moscow will adopt the 25 percent reduction goal, unilat- pertains to socio-economic development. The Federal Law on erally, as it is beneficial primarily for Russia”.41 Achieving this target Technical Regulations codifies safety requirements for products could be a challenging task with the potential increase of the share and processes (including design, production, installation, operation, of coal in the fuel mix as export markets take priority for oil and storage, transportation, and sale), with the purpose, among others, natural gas. The Decree of the Russian President from September 30, to “protect the environment”. Projections that pollution-intensive 2013 on the Reduction of GHG Emissions confirmed Russia’s target manufacturing sectors (for example, production of metals and to reduce GHG emissions to 75 percent of 1990 levels by 2020. WTO chemicals) are most likely to expand after the WTO accession will presents a strategic win-win opportunity for Russia to modernize need not only regulations to control pollution emissions but incen- and decarbonize its industry if environmental and sector policies are tives to adopt low-cost options and economic incentives for emis- tailored to influence this process along the way. sion reduction. 39 The “pollution haven” hypothesis suggests that pollution-intensive in- dustries will choose to relocate to jurisdictions with less stringent envi- ronmental regulations, in order to avoid policy-induced increases of the 40 Complex Plan for realization of the Climate Doctrine of the Russian cost of their key inputs. It is assumed that a trade-liberalization regime Federation for the period until 2020, April 25, 2011, Government Decree would facilitate such relocation of firms. For a more detailed description, no. 730-p. see “Racing to the Bottom? Foreign Investment and Air Pollution in Develop- 41 President Dmitry Medvedev’s Discourse in Copenhagen, December 18 ing Countries,” David Wheeler (1999). 2009, http://unepcom.ru A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 20 C H A P T E R 3 — R U S S I A N E N V I R O N M E N TA L P O L I C I E S A N D   R E G U L AT I O N S WTO recognizes that protection of the environment and promo- BOX 3.1: Examples of Government Resolutions on Rules for tion of sustainable development are indispensable elements of Environmental Protection Standards its commitment to an open and nondiscriminatory multilateral trading system.42 Trade regulations imposed under the WTO, how- • Government Resolution № 545 as of August 03, 1992 On Approving the Development and Approval Procedures ever, also acknowledge that certain measures for environmental for Environmental Standards to Regulate the Levels of protection may restrict basic trade rules (such as the nondiscrimi- Emissions and Discharges of Pollutant Limits of the Use of Natural Resources and Waste Disposal (incl. amendments) nation obligation and the prohibition of quantitative restrictions), and thereby impacts on the WTO rights of other members. WTO • Government Resolution № 183 as of March 02, 2000 On Standards to Regulate the Levels of Hazardous (Polluting) members are expected to design trade and environmental poli- Emissions into the Atmospheric Air and Harmful Physical cies which are compatible with their obligations. RF Government Impact on it Resolution No. 2231-r dated 13 December 2011 “On Signing the • Government Resolution № 208 as of March 10, 2000 On Approving the Rules of Development and Approval Protocol of Accession of the Russian Federation to the World Trade of Standards for Maximum Permissible Concentrations Organization” proclaims the mandatory nature of the requirements, of Hazardous Substances and Standards for Maximum directly or indirectly stated in the WTO agreements. Permissible Harmful Impact on the Marine Environment and Natural Resources of Internal Sea Waters and the Territorial Sea of the Russian Federation ENVIRONMENTAL REGULATIONS AND COMPLIANCE • Government Resolution № 881 as of December 30, 2006 On Procedures for Approval of Standards for Permissible Environmental protection in Russia is regulated primarily through Impact on Water Sources legal and administrative norms, such as nature protection norms, • Government Resolution № 469 as of July 23, 2007 emission permits, registration regimes for noxious substances etc. On Procedures for Approval of Standards for Permissible The Government of Russia has adopted a number of Resolutions Discharges of Substances and Microorganisms into Water Sources for Water Users which define the rules for developing and approving environmental protection standards (see box 3.1). Environmental protection standards fall in three main groups and are defined as: Compliance with environmental requirements in the Russian Federation is problematic for several reasons. First, there is no one, § Maximum allowable concentrations (MACs)—environmental quality standards that set the level of permissible pollution uniform compendium of documents comprising such require- levels released in the environment in order to preserve natu- ments. The legislative system includes over 4,000 federal-level regu- ral ecological systems and protect human health. latory legal documents, and is thus difficult to follow as quite a few § Emission limit values (ELV)—admissible effect on the envi- of them contravene one another. So even if industrial compliance ronment caused by anthropogenic activities set for different were genuine, the rules of the game are too difficult to follow. pollution sources. ELVs are set in permits issued for specific economic activity. The ELVs are derived from the MACs. The Secondly, due to aging technology, many industrial facilities can- next section explains implications for relevant pollution not comply with the standards for allowable emission limits (even charges. from a technical standpoint, let alone economic). The legislation § Temporary emission limits—a limit set when ELV compliance has provisions for temporary ELV permits with, often, less stringent is not possible. These are regulated by Government Decision environmental limits. Although, they are only valid on condition #183 as of March 2, 2000. that the enterprise is implementing environmental protection mea- sures, introducing best available techniques, and/or implementing other nature conservation projects (Article 23 of the Federal Law 42 This is stated in the preamble of the Marrakesh Agreement and reaf- firmed in the Doha Ministerial Declaration. on Environmental Protection, and other federal laws), the current E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N C H A P T E R 3 — R U S S I A N E N V I R O N M E N TA L P O L I C I E S A N D   R E G U L AT I O N S 21 system of monitoring at the facility level may not support such enforcement, and avoidance of moral hazards for firms to comply— provisions. economic regulation and market-based instruments could be a major factor for the success of environmental protection activities. Thirdly, there is the issue of compliance enforcement, which remains The Fundamental also elaborate on the use of the market based variable in Russia. Regulation is only as effective as its enforceability instruments “both as coercive tools and incentive mechanisms.” and there has been little analysis on the topic. While there appears to Likewise, many of the impediments for technological retrofitting of be a “business-as-usual” attitude, as Russia becomes more open it will the Russian industry will be resolved if taxation policies promote the have to address enforcement issues since voluntary industrial com- application of new eco-friendly and/or energy-saving technologies pliance is virtually non-existent. This will become increasingly impor- by offering reductions of profit tax for organizations, and reduc- tant if the country decides to develop policy instruments along the tions of land tax, property tax, and income tax for legal entities and market-based approach (for example, tradable permits or rights). individuals. The institution of indemnity for environmental damage Overall, the development of environmental legislation has made which is under development has to complete as well in order to progress by the introduction of adequate environmental protection protect public interest and ensure environment justice. requirements and the encouragement of adoption of eco-friendly production processes using best available techniques (BAT). The Pollution Charges Federal Law on Environmental Protection defines BAT as ”based Russian pollutant specific rates for pollution charges are set to on the latest scientific and technological achievements, aiming compensate for negative impacts on the environment pursuant to to reduce the adverse impact on the environment and having an Government Decision No. 344 of 12 June 2003 as follows: established timeframe for practical application in view of economic § Emission amount not exceeding the established norms of and social factors” and “technologies which include nonconventional nature user limits emissions of hazardous substances and energy sources, use of secondary resources and waste recycling, the volume of waste disposal; as well as other efficient environmental protection methods.” To § Within the established limits (provisionally agreed encourage the application of BATs, Russian federal and regional laws standards); formalize tax breaks and other privileges (see table 3.2 for details). § For excessive pollution. The charges applicable for selected air pollutants are shown in PRICE AND MARKET MECHANISMS table 3.1. Economic instruments emerged in the late 1970s and 1980s, as direct instruments for regulation of environment. In late nineties Russian environmental regulation was focused on provision of state TABLE 3.1: Selected Pollution Charges, in RUR/ton public goods and regulation of technology and less so on regulation WITHIN THE SET WITHIN THE OF PERMISSIBLE ESTABLISHED LIMITS of performance. Although instituting a charge for adverse impact on POLLUTANT EMISSION STANDARDS OF EMISSIONS the environment has been applied in regulatory practice, modern Carbon dioxide CO2 NA NA price-type policies which impose tax or fee on polluters, thus moti- Particulate PM 13.7 68.5 matter vating them to cut back pollution which promote clean produc- Sulfur dioxide SO2 21 105 tion methods really featured in “The Fundamentals of Government Carbon monoxide CO 0.6 3 Policy for Environmental Development of the Russian Federation Nitrogen oxides NOx 35 175 until 2030”43 and in the Federal Law on Environmental Protection. Hydrocarbons CnHm 5 25 If implemented rigorously—which means monitoring and Volatile organic VOC NA NA components 43 The Russian text is available at http://www.mnr.gov.ru/regulatory/. Source: Government Decision No 344 of June 12, 2003. A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 22 C H A P T E R 3 — R U S S I A N E N V I R O N M E N TA L P O L I C I E S A N D   R E G U L AT I O N S As policy instruments pollution charges are optimal when their reduced pollution charges for water and waste disposal apply if levels are adequate to the marginal cost of abatement of environ- companies construct or modernize their water and wastewater mental damage caused by dirty production, and when they mean- treatment facilities, and if they apply waste reduction technolo- ingfully correct for market failure such as the cost of environmental gies. While there is no account of the effect of these incentives at externalities. Currently, the Russian pollution charges which are national or regional level where emission levels are high, it would be levied are based on an algorithm, established by the law, and do useful to validate the effectiveness of such measures by instituting not always reflect the economic losses due to environmental pol- an effective monitoring system. lution (or the recoverable amount of environmental damage). As Current laws specify differentiation of the rates for reducing pollu- set in the law calculating the pollution charge payment takes into tion charges or partial exemptions from such charges. Differentiated consideration several coefficients: charges and tax breaks apply in cases where low-waste and § An inflation index, which in 2013 was set at 2.20 (replacing resource-saving technologies and equipment are introduced and 2.05) and 1.79 (replacing 1.67) for previous periods; and used. The specific rate is established upon the issuance of a license. § The ecological value of the region and additional coefficients Rates should also be differentiated depending on the market situ- of 2 and 1.2. ation, the domestic and world prices for mineral raw materials and The current pollution charge system in Russia is rather weak products of their processing. However, there is no clarity on how because it targets too many pollutants, and consequently results in rate differentiation would affect the revenue generated from pol- insufficient capacity for monitoring and enforcement. The charge lution charges. Moreover revenues are not tied to environmental rates have been comparatively low to countries with similar level protection activities and mainly flow to general federal, regional, of industrialization. For an illustration the following examples could and municipal budgets. be considered. The rates introduced in Poland in 2000 for SO2 and NOx were 85 €/ton.44 In Spain rates are in the range of €33 to €94 At the regional level, there are best practices examples of introduc- per ton of SO2 and €50 to €140 per ton of NOx. However, these tax ing tax breaks for introducing eco-friendly and resource-efficient rates are only a fraction of SO2 tax rates implemented in Denmark technology. The Yaroslavl Oblast has a law empowering the regional which are €2,680 per ton of SO2 or in Sweden—€5,370 per ton of government to extend legal guarantees to businesses recycling NOx. In Denmark, sulfur and nitrogen taxes raised revenue to the industrial waste, to grant interest-free or low-interest loans, and to budget of about €10 million in 2010. Revenue numbers represent offer tax breaks to waste recycling R&D projects. The Oblast also a meaningful measure of the enforcement effectiveness, and with offers reduced waste disposal charges to businesses taking mea- an effective monitoring system in place they could reflect emission sures to recycle waste. The Nizhny Novgorod Oblast can reduce trends. For instance the level revenues from air pollution taxes in pollution charges, property tax and local taxes for businesses to Spain dropped from €28 million in 2005 to €7 million in 2010— incentivize the development of the sanitation system in the Oblast. reflecting a decrease of emissions.45 The municipal authorities can offer contracts or guarantees to pro- cure products from eco-friendly businesses, products manufactured In Russia, reduction in pollution charges is used as incentive for pro- with the use of recycled waste, or get sanitation services provided moting application of clean technologies and as a lever for making by eco-friendly businesses. environmental protection investments by the firms. For example, according to Federal Laws No. 416-FZ On Water Supply and Water Environmental Fees/Taxation46 Disposal and No. 89-FZ On Production and Consumption Waste, There are no environmental taxes, per se, in the Russian environmen- tal policy system. However, companies that carry out activities that 44 REC, 2001. 45 EEA Staff Position Note (September 2012), SPN12/01, By Stefan Speck and Mikael Skou Andersen, page 9. 46 Environmental law and practice in Russian Federation: overview. E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N C H A P T E R 3 — R U S S I A N E N V I R O N M E N TA L P O L I C I E S A N D   R E G U L AT I O N S 23 BOX 3.2: Current Trade Disputes with Russia can cause or result in an environmental impact are liable for mak- ing respective payments (for example, the automobile recycling The first dispute involving the Russian Federation since it fee). The automobile recycling fee was adopted after the Russian acceded to the WTO was initiated on 9 July 2013. The European Union requested consultations with the Russian Federation Federation’s accession to the WTO. It is paid by importers, manufac- about a recycling fee, imposed on motor vehicles. On 24 July turers and buyers of cars to which the fee is applicable. Since July 2013, Japan filed a dispute over the same issue. 2013, the automobile recycling fee is a subject of a dispute being Russia imposes a recycling fee on each vehicle imported into resolved through the WTO’s Dispute Settlement Body (box 3.2). Russia or produced/manufactured on the territory of Russia. An exemption applies to vehicles manufactured or produced by While an effort to develop a recycling system following the principle companies committed to ensure subsequent safe handling of of extended producer responsibility with fees based on projected waste. However, this exemption is only available to vehicles man- or actual costs of recycling per product category is a positive step, ufactured by companies which are legal entities in Russia, and which produce their vehicles in Russia according to certain spe- developing of the appropriate infrastructure to enable treatment cific manufacturing operations in the territory of Russia, Belarus is associated with significant investments and implementation or Kazakhstan. Therefore, the EU and Japan claim that vehicles challenges. imported into Russia are treated less favorably than domestic vehicles, or vehicles imported from Belarus and Kazakhstan. Economic Incentives The EU and Japan quote the following Russian legislation: Although the market instruments of regulating business impact on • Federal Law No 89-FZ on production and consumption the environment have not become widespread in Russia, some of wastes, as amended by Federal Law No 128-FZ, pub- lished in Rossiyskaya Gazeta No 5845 of 30 July 2012; them have been formalized in the existing environmental protection • Resolution of the Government No 870 on recycling fee laws. Chapter 4 of Federal Law on Environmental Protection describes for wheeled transport vehicles, published in Rossiyskaya economic incentives for environmental protection, such as: Gazeta No 5873 of 31 August 2012; Furthermore, Japan refers to: § Tax breaks and other privileges for using best available techniques, nonconventional types of energy, secondary • Joint Order “On approving Regulation on vehicle regis- resources, for recycling wastes and for taking other effective tration passports and chassis registration passports” of 23 June 2005 as amended and published in the Russian environmental protection measures in compliance with the Gazette No 203 of 5 September 2012; Russian Federation laws; • Resolution of the Government No 520 of 20 June 2013 § Support for entrepreneurial, innovation and other types of on, among others, the approval of the rules for granting activities (including environmental liability insurance) aiming subsidies from the federal budget to organizations at environmental protection. and individual entrepreneurs to reimburse expenses Other federal and regional legal acts with economic incentives for related to their handling of wastes resulting from the environmental protection are listed in table 3.2. loss of consumer good characteristics of wheeled means of transport for which the recycling fee was paid as published in the Collection of Laws of the Russian CERTIFICATION AND VOLUNTARY COMPLIANCE, Federation of 1 July 2013, N 26, p. 3342. ECO LABELING Russia’s measures appear to be inconsistent with Russia’s obli- The GOST R ISO 14000 standards series adopted in 1998 serve as gations under the WTO agreements: the basis for ecological certification in the Russian Federation. • GATT 1994: Article I:1, Article II:1 (a) and (b), Article III:2, Environmental management systems and products which are and Article III:4; potentially hazardous for the environment at any stage of their • TRIMs Agreement: Article 2.1 and 2.2 in conjunction production and use are subject to ecological certification regime. with paragraphs 1(a) and/or 2(a) of the Illustrative List annexed to the TRIMs Agreement. Ecological certification is carried out within the framework of • TBT Agreement: Article 2.1 and 2.2. certification systems registered under the established procedure Source: WTO. with the issue of ecological certificates of conformity, ecological A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 24 C H A P T E R 3 — R U S S I A N E N V I R O N M E N TA L P O L I C I E S A N D   R E G U L AT I O N S TABLE 3.2: Economic Incentives for Environmental Protection institutional system (at the government and nongovernment lev- Embedded in National and Regional Legislation els) for voluntary and mandatory certification and rating of product LEGAL ACT TYPE OF INCENTIVE quality in keeping with environmental requirements. The already Federal Law No. 52, On • tax breaks and other privileges for legal entities and individu- the Animal World, April als ensuring the protection, reproduction and stable use of operating segments of ecological certification and rating system 24, 1995 fauna, as well as the protection and improvement of their will also have to be adjusted in accordance with these rules. habitat; • easy credits to legal entities for fauna protection and reproduc- tion projects; Environmental audits are a fast-growing area in business opera- Federal Law No. 261, On • reimbursement of interest expenses on loans, drawn from tions used by corporations as a mechanism for environmental Saving Energy and Energy Russian lending institutions, for investments in energy conser- Efficiency, November vation and energy efficiency; management in market conditions. An environmental audit is 23, 2009 • long-term tariff regulation methods for natural monopolies and public utility organizations. Tariffs will be established for defined by the Federal Law on Environmental Protection as “an 3 years or more, along with companies’ obligations to ensure independent, comprehensive and documented evaluation of energy efficiency; compliance by business and other entities with requirements, Law No. 9 of the City • privileges for application of BATs, low-waste and waste-free of Moscow on the production, utilization of secondary resources, and also other including norms and regulations, in the sphere of environmen- Comprehensive Use of effective measures to protect the environment and restore the Nature, March 2, 2005 local natural assets. tal protection, the requirements of international standards, and Law No. 35 of the City • tariff (price) differentiation, and privileged (reduced) tariffs for development of recommendations to improve such activi- of Moscow on Energy certain consumers of energy resources; Conservation, July 5, 2006 • tax breaks to organizations undertaking energy conservation ties.” Conversely, the Federal Law on Auditing does not define projects and R&D and experimental design projects in energy conservation; “environmental auditing.” A number of by-laws, however, can be Water Code of the Russian • water protection expenditures are being taken into account considered to establish an enabling framework for implemen- Federation (74-FZ), June when water use charges are calculated; tation, for example, the provision on environmental audit in 3, 2006 Tax Code of the Russian • tax incentives to support innovations, R&D and experimental the Classifier of Legal Acts (110.010.100). As an instrument for Federation, August 5, design, to retrofit operators towards protection of the environ- voluntary compliance a voluntary environmental audit removes 2000 (Part One No. 146- ment from pollution; FZ, Part Two No. 117-FZ) • expenditures for maintenance and operation of fixed assets administrative barriers to organizations’ market entry. Following intended for nature protection are considered as ‘material expenses’ for purposes of profit tax calculation; an environmental seal of approval of legitimate certification • fees and other payments for excess emissions of pollutants authority, the producer is able to receive an environmental cer- into the environment are not considered as expenditures in determining the tax base. tificate for its product, that is, to make it competitive not only on Source: Geyts (2013). the home market, but internationally, which is in tune with WTO declarations of conformity and eco-labeling. Russian companies processes. have started to introduce international corporate-management Russia is slowly introducing other voluntary market-based “green” and environmental-efficiency standards. As reported in 2008, Russia mechanisms (for example, publication of nonfinancial reports ranks fifty by the number of ISO 14000-compliant Environmental verified by an independent third party, among others). In particu- Management Systems certificates.47 Compared with other countries lar, Russian banks or investment companies could join the Equator Russia lags behind with only 267 certificates issued compared to Principles or the UN Principles of Responsible Investment (http:// other BRIC countries (India ranks twelfth with 2,640 certificates, and www.equator-principles.com/), the most widespread mechanisms Brazil fifteenth with 1,872 certificates. This is negligible in compari- for assessing environmental and social responsibility of financial son with China (1st place, 30,489 certificates) or Japan (2nd place, institutions. Opening the financial sector to support environ- 27,955 certificates). mentally responsible operations might pay off in the short run to Based on the rules codified in the WTO Agreement on the Use of support the competitiveness of Russian industry and meeting the Sanitary and Phytosanitary Measures, Russia will have to organize an national sustainability agenda. Today, a number of Russian ministries and agencies are already 47 “Overview of Russia Environmental Management System. Directions for Its Modernization,” 2000, World Bank. developing their own industry-specific systems of voluntary E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N C H A P T E R 3 — R U S S I A N E N V I R O N M E N TA L P O L I C I E S A N D   R E G U L AT I O N S 25 eco-certification and are preparing to implement the requirements requiring public disclosure of environmental information—or of the Federal Law on Technical Regulation. Russia’s Standardization through building capacity in the regulated community—such as Committee and its territorial offices initiated a series of seminars for providing training in specific issues. Eco-labeling or environmental producers to educate them on Russia’s accession to WTO and com- product declaration measures that aim to influence consumer pliance with its requirements. While regulation of mandatory certifi- behavior, issuing high-profile awards for desired performers, and cation is not in effect the existing legal framework makes it possible promoting R&D and demonstration programs are other examples to establish voluntary eco-certification systems, conduct such pro- of information-based instruments. Eco-labeling has been most cedures and use logotypes of compliance with the ISO-14000 stan- successful in the Nordic countries because eco-labels had turned dards on par with the Green Seal in the US. Eco-certification based out to be popular with consumers and most large producers vol- on the findings of environmental audits can become a strong eco- untarily followed suit. nomic mechanism for protecting the environment and improving Russia’s already functioning segments of an eco-certification and the environmental situation in Russia. eco-labeling system will have to be adapted in accordance with Information-based instruments apply directly to the product and the WTO rules on labeling, since in practice a number of difficulties are used as an alternative to direct control and to provide incen- arise due to the ‘blurry’ borderlines between mandatory (technical tives to reduce pollution. For example this could be through regulations) and voluntary (standards) eco-labeling. A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R C H A P T E R 4 — I N T R O D U C T I O N O F C L E A N T E C H N O LO G I E S 27 Chapter 4 INTRODUCTION OF CLEAN TECHNOLOGIES CURRENT LIMITATIONS of retrofitting old industrial facilities in operation for decades. Even Introduction of eco-efficient technologies, ensuring ecologically- though from an economic perspective it is more expedient to close oriented economic growth and introduction of eco-efficient inno- such enterprises than to retrofit and modernize them the social vation is anchored in the “Fundamentals of Government Policy impact of closings (for example, unemployment, social exclusion, for Environmental Development of the Russian Federation until migration and crime) will be a deterrent in regions where pollut- 2030.” The penetration of clean technologies in Russia is one of ing industries dominate. Underdeveloped economic incentives to the key expected positive results from the WTO accession. Yet, efficient environmental protection also contribute to slowing down current environmental policy instruments have shortcomings, industrial modernization rates. At the same time, an analysis of which should be addressed in order to enable technology trans- national practices of government regulation of environmental pro- formations to actually take place. While WTO is one of the avenues tection shows that it is precisely the economic incentives that are for countering “age-long economic backwardness of the Russian most effective for promoting broader application of best available industry,” there are relatively simple measures that could reap techniques by industries using natural resources. and augment these benefits. There is vast potential in the area of Gaps in the legal and regulatory framework: The Federal Law renewable energy where China, Brazil, Indonesia, and Turkey are on Environmental Protection provides a general definition of best making impressive leaps in developing renewable technologies. available techniques (BAT), and describes their use as a basic prin- In January 2009, the Russian Government passed a decree to ciple for environmental protection. It promotes their development increase the share of renewable energy up to 4.5 percent by 2020. through economic incentives and scientific research which need A number of ambitious projects are under implementation such to be supported by enabling institutional and fiscal environment, as Rosnano project creating a vertically-integrated company in the meaning that regulatory frameworks for environmental protection area of solar energy. While the beginning is promising—the 4.5 have to provide further guidance on the use of BATs and invest in percent target will not be met with the current legal and regula- the development BAT reference documents. However, in practice, 48 tory framework. Regardless of the positive initiatives the pace of the definition of BAT has faced challenges in legal interpretation, replacement rate of obsolete technologies in industry has been leading to ambiguity and a general lack of enforceability. To close slow. For instance, in 2007 some 45 to 56 percent of material assets the gap in the legal interpretation—Russia could develop a set of were fully depreciated in key sectors such as mining and process- guidelines much like that in the EU (box 4.1). ing, power, water supply, and construction. The experience of European countries, implementing BATs (and Financial constraints: Broader introduction of best available BAT References [BREFs]) for a long time, shows that this tool is techniques (BATs) is held back primarily by the huge financial cost instrumental in reducing industries’ impact on the environment and in catalyzing resource productivity gains. Implementation, however, also poses challenges for both the regulator and the 48 “Renewable Energy Policy in Russia: Walking the Green Giant,” IFC Green paper, 2011. regulated. These challenges are primarily linked to the case-specific A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 28 C H A P T E R 4 — I N T R O D U C T I O N O F C L E A N T E C H N O LO G I E S BOX 4.1: BREFs in The EU and Its Role In the EU to prevent and minimize pollution and to achieve a high are required to take these documents into account when deter- level of protection for the environment as a whole, the Industrial mining best available techniques generally or in specific cases Emission Directive (IED) entered into force in January 2011 and under the Directive. has to be transposed into national legislation by Member States BREFs are guidance documents only. They do not have legal by January 2013. Seven existing Directives related to industrial status and they are meant to give guidance to industry, mem- emissions, including the Integrated Pollution Prevention and ber states and the public on achievable emission and consump- Control (IPPC) Directive, the Waste Incineration Directive (WID), tion levels when using specified BAT techniques. In every case the Large Combustion Plants Directive (LCP) and the Solvent the local conditions shall be taken into account when decid- Emissions Directive (SED) were to be combined into a single, clear ing the emission limit values and other conditions. In specific and coherent legislative instrument. The IPPC System in EU aims cases, the emission limit values might be higher or lower. to protect the environment as a whole and avoid shifting pollu- Environmental quality standards in water and air may mean tion from one medium to another. It aims addresses the preven- more strict values—or even zero emission/discharge. There also tion or reduction of air emissions; water emissions; production could be cases where the emission limit values are less strict— of waste; odor and noise, consumption of energy and natural re- to comply with the “best for environment as a whole” principle. sources. The Industrial Emission Directive is the law in the EU and the specific recommendations are contained in BREFs: which define the Best Available Techniques (BAT). How BREFs are prepared? The European IPPC Bureau in Seville, Spain, facilitates the draft- What is a BREF and who are its main users? ing of the BREFs. For each BREF, a Technical Working Group (TWG) BAT-Reference Documents (BREFs) are a result of information with representatives of Member States, industry and nongovern- exchange. They provide guidance to decision makers involved mental organizations (NGOs) is set up. BREFs are revised regularly in the implementation of the IPPC Directive. BREFs are used by (approximately every 3 years). Appendix 7 contains a list of sectors operators of installations (during application preparation for the for which BREFs have been adopted, under discussion or are in draft. IPPC Permit), the Environmental Authorities (Permit writers, Policy makers) and the public in general. How BREFs are applied by EU member states? BREFs are a series of reference documents covering, as far as is In Austria, Emission limit values for iron and steel production are practicable, the industrial activities listed in appendix 1 to the laid down in installation permits issued by local authority and are EU’s IPPC Directive. BREFs have a central role in the implementa- based on BAT and other standards or state-of-the-art technology. tion of the IPPC Directive. They provide descriptions of a range of In the Netherlands, in order to operate in compliance with industrial processes and for example, their respective operating the IPPC Directive, Dutch industrial installations must have a li- conditions and emission rates. They are a result of the informa- cense based on the Environmental Management Act and a tion exchange between Member States and Industry in Europe license based on the Pollution of Surface Waters Act. Combined, level; provide information on best available techniques; provide these two licenses comply with the conditions of the IPPC for each BAT associated emission levels (BAT-AELs); provide infor- Directive. mation on reference plants; and are available on the internet for all users including the public (http://eippcb.jrc.es). Member States Source: EC IPPC Directive. implementation procedures that require continual dialogue countries: in 2008 Russia spent on research in that sphere just between the regulated and the regulator, allocation of responsi- 1 percent of the total research expenses, whereas in Austria the bilities among various public agencies, and inadequate capacities figure was 8.2 percent, in Mexico 7.8 percent and in South Africa of public organizations. Learning from this experience would be 4 percent. The share of business in financing R&D in the sphere of useful for the Russian policy makers. rational use of natural resources in Russia is less than 25 percent. Lack of innovation: Russia’s scientific and technological potential Public procurement: Russia could consider introducing energy- in environmental protection is lagging far behind that of foreign and environmental-efficiency requirements for goods and services E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N C H A P T E R 4 — I N T R O D U C T I O N O F C L E A N T E C H N O LO G I E S 29 procured by federal, regional and municipal authorities. Such mea- BOX 4.2: Tradable Permits Led to More Cost Efficient and sures could act as a trigger to provide for the economies of scale Environmentally Effective Innovation to Control Sulfur Dioxide Emissions and Acid Rain in The United States required for modernization and “greening” of domestic industries and business processes. In this context, Russia could benefit from U.S. electric power plants emit sulfur dioxide (SO2), which has international experience. Since government expenditure con- been a major cause of acid rain in the Midwest and Northeast of the United States and in Canada. Starting in 1971, the United stitutes a large portion of GDP, public procurement could drive States used a form of “command and control” regulation by re- “greening” and increase the demand for energy efficient products. quiring power plants to install “scrubbers” that remove sulfur Such requirements, could for instance, be for goods which contain from the smokestacks of electric power plants. Technological certain percentage of recycled inputs. A useful reference is the EU innovation led to the reduction in the cost of scrubbers, but standard for public procurement policies, Directive 2004/17/EC from not to their environmental efficiency, since the regulation did not provide an incentive for power companies to demand envi- March 31, 2004. Implementation of green procurement policies has ronmentally efficient scrubbers. Further, power companies had been adopted by WTO member countries such as Austria, Belgium, no incentive to take other steps to emit less sulfur dioxide. For United Kingdom, Germany, Greece, Denmark, The Netherlands, and example, Western coal (for example, from Utah) has much low- France. The United States, Canada, Japan, New Zealand, Mexico, and er sulfur content than coal from Appalachian states like West Virginia, Kentucky and Pennsylvania; but the regulation provid- many other countries have similar practices. ed no incentive to switch to lower sulfur content coal that pro- duces less acid rain. Although the system was inefficient from Introduction of market-based instruments (MBIs) in Russia several perspectives, it did bring about a reduction in acid rain. could create a platform for win-win outcomes, thereby stimulat- With the Clean Air Act Amendments in 1990 the U.S. Environmental ing compliance and better environmental performance. To this Protection Agency shifted to a system of tradable permits for sul- end, the development of pilot emission trading scheme (ETS) for fur dioxide and nitrogen oxide emissions. Power plants that re- industrial sector covering major emissions, like CO2 or NOx, could duce their emissions below the number of allowances they hold may trade allowances with other units in their system, sell them bring significant public health benefits. The approximate benefits to other utilities on the open market or through EPA auctions, or and costs of such a scheme were explored in the modeling sec- bank them to cover emissions in future years. Utilities now reduce tion. If carefully crafted, such schemes could assist the sustainable emissions by employing energy conservation measures, increas- long-term growth of industry. Equally important, such initiatives ing reliance on renewable energy, reducing usage of coal, em- ploying pollution control technologies, switching to lower sulfur could provide highly valuable experience to the country and help fuel, or developing other alternate strategies. Given the incentive build capacity that will become increasingly important in light of to reduce emissions in a tradable permit system, technological industrial competitiveness and managing greenhouse gas emis- innovation since 1990 has led to environmentally more efficient sions. Introduction of other MBIs, such as earmarked taxing sys- scrubbers, not just cheaper scrubbers. And trades among power tems for selected emissions can also be considered. These tools companies mean that the emissions reduction occurs where the marginal costs of abatement are the lowest. can be developed based on holistic and rigorous analyses of the Compared to the “command and control” system of requiring legal and technical requirements in order to avoid the promotion scrubbers, the tradable permit program has been assessed as a of unintended outcomes countering WTO rules. Some successful success in meeting the targeted reduction in emissions and doing examples of MBIs have been implemented in the USA (SO2 emis- so at least cost to utilities. Further, since the power companies are sions trading, see box 4.2) and Sweden (tax and rebates for NOx, given the property rights to a number of allowances, the system does not entail a tax payment to the government, and this helps see box 4.3). with the political economy problem of addressing opposition from industry to regulatory systems that impose substantial costs. In view of Russia’s accession to the WTO, the question of a “road- See Organization for Economic Cooperation and Development map” for business is particularly relevant. According to a survey (2008), “An OECD Framework for Effective and Efficient by Kommersant Publishers, only 6 percent of Russian companies Environmental Policies: Overview,” Paris: OECD. Available at: have designed strategies of adaptation to WTO membership. As http://www.oecd.org/env/tools-evaluation/40501159.pdf. many as 48 percent of those surveyed expected to take some Source: OECD. A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 30 C H A P T E R 4 — I N T R O D U C T I O N O F C L E A N T E C H N O LO G I E S BOX 4.3: Tax and Rebates: Sweden’s Politically-Effective Regulation of NOx Emissions to Control Acid Rain In the 1980s, acid rain was a major problem in Sweden. Beginning more than 50 percent, with total emissions falling by about 30 in January 1992, Swedish firms that produce more than a given percent. Since there is not net tax burden on industry, the sys- amount of energy from boilers, stationary combustion engines tem also addresses the political economy problem of opposi- and gas turbines had to pay a tax of 40 Swedish kroner per kilo- tion from industry to regulatory systems that impose substantial gram of nitrogen oxide produced. Plants that produced less than costs. 25 gigawatt hours per year were exempted from the tax. See Organization for Economic Cooperation and Development In order not to provide a competitive advantage to the plants ex- (2008), “An OECD Framework for Effective and Efficient empted from the tax, the total collected taxes on the NOx emis- Environmental Policies: Overview,” Paris: OECD. Available at: sions (less administrative costs) are distributed back to the firms. http://www.oecd.org/env/tools-evaluation/40501159.pdf. For a Importantly, the rebates are based on NOx emissions per unit of more detailed analysis see Swedish Environmental Protection energy produced. Lower polluting firms are the winners and high Agency (2006), “The Swedish Charge on Nitrogen Oxides—Cost polluting firms are the losers, but the system is revenue neutral Effective Emission Reduction.” http://www.naturvardsverket.se/ for the government. Documents/publikationer/620-8245-0.pdf. The system has led to significant technological innovation. Emissions per unit of energy produced have been reduced by Source: OECD. individual measures, while 34 percent were not going to draft In order to increase the respect to environmental laws in Russian any strategies whatsoever. Small and medium-sized businesses, society, it is important to increase the business community’s for which it is harder to devise successful development strate- awareness on environmental protection, the rational use of natural gies under the conditions of WTO membership, are a special risk resources and raise the priority of protecting public health, each of group. which supports sustainable development in Russia. E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N C H A P T E R 5 — E N V I R O N M E N TA L P O L I C I E S A N D W TO R U L E S 31 Chapter 5 ENVIRONMENTAL POLICIES AND WTO RULES 49,50 Russia has developed most of the policy attributes in order to domestic product by at least 40 percent by 2020 compared to the increase the competitiveness of its industry while implementing the 2007 level. Resolution No. 1662-r On the Concept of Long-Term Socio- WTO accession rules and meet the national environmental protec- Economic Development of the Russian Federation Until 2020, dated tion objectives. The Russian Constitution refers to the protection of November 17, 2008, stipulates that encouragement of the introduc- the environment. A framework law and a series of specific laws or tion of advanced oil and gas production and processing technologies codes are in place to protect the environment and its various ele- will become a priority development target in the oil and gas sector. ments. Ensuring consistency and coherence between environmen- At the regional level, appropriate conditions for modernization of tal laws and other sector laws is an unfinished task. Similarly, at the production facilities through encouragement of application of level of detailed regulations, these are nominally comprehensive in high-tech machinery, foreign technologies, and resource-saving terms of subject but are increasingly layered and patchy with often techniques have been put in place. For example, Article 3 of Law conflicting and inconsistent requirements. Public inputs and con- No. 42-RZ of the Republic of Komi, dated May 14, 2005, restricts the sultation on legislative and regulatory acts is practiced in Russia but use of oil products and other fuels that pollute the atmosphere, and would benefit from broadening and wider engagement of various encourages production and application of eco-friendly fuels and stakeholders. Regulatory monitoring performed at different levels other energy carriers. The Republic of Tatarstan has developed its needs to be modernized to meet the international monitoring stan- Republican Standard of Tatarstan Resource-Saving Management dards. The current modernization effort to simplify and make the Systems (RST RT SUR 64-31/1) and own Industry Standard Resource- Russian environmental monitoring system more efficient is com- Saving Management System in Health Care Institutions and mendable. Improvements will be needed in respect of public access Organizations of the Ministry of Public Health of the Republic of to environmental monitoring information. Tatarstan (approved in 2002 by Order No. 1283 of the Minister of Two basic elements of “The Fundamentals of Government Policy for Public Health of the Republic of Tatarstan). Environmental Development of the Russian Federation until 2030” While WTO rules on the environment are still incomplete and provide are: (i) toughening environmental protection requirements for indus- little guidance on what to do, below is an outline of some aspects trial, commercial, social and cultural facilities, and (ii) encouraging that can inform national polices and instruments that are aligned the development of resource-saving technological solutions. Since with the multilateral trade regime and its fundamental principles.51 the fuel and energy sector is one of the largest sources of pollution, improving the energy efficiency of the Russian economy through 51 GATT, WTO aims to achieve its objectives by reducing existing barriers to trade and by preventing new ones to be developed. It seeks to ensure modernization of production and introduction of new processes is fair and equal competitive conditions for market access, and predictabil- a foremost priority. To remove barriers and realize its energy saving ity of access for all traded goods and services. These principles are coded in the following: (a) The principle of national treatment requires that the potential it would be necessary to reduce the energy intensity of gross goods and services of other countries be treated in the same way as those of your own country; and (b) the most favored nation principle requires that if a specific treatment is given to good and services of one 49 WTO (2011). country, it must be given to all WTO member countries. No one country 50 WTO (2004). should receive favors that distort trade. A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 32 C H A P T E R 5 — E N V I R O N M E N TA L P O L I C I E S A N D W TO R U L E S ENVIRONMENTAL REQUIREMENTS adverse impacts on international trade without undermining the Environmental requirements (in the form of product and produc- intended environmental benefits of the taxes and trading schemes. tion method specifications, voluntary and mandatory requirements, Border adjustments do not apply for “process” taxes and charges (for labeling requirements and conformity assessment procedures) are example, a tax on the energy consumed in producing a ton of steel significant determinants of access to foreign markets, especially for cannot be applied to imported steel). Since environmental taxes countries which are on a path to “greening” their economies. At the and charges are equally process-oriented as product-oriented, WTO same time environmental requirements may affect international members are very sensitive about the competitiveness implications trade, if they have a discriminatory nature. The design of national of environmental process taxes and charges applied to domestic measures in terms of transparency and harmonization with interna- producers. tional norms determine the level of recognition, and consequently the potential for concerns and disputes. ECO-LABELING The Agreement on Technical Barriers to Trade (TBT Agreement) is Concerns about eco-labeling have been raised based on the the main WTO instrument dealing with environmental regulations growing complexity and diversity of environmental label- and standards. The rules of the TBT Agreement aim at ensuring that ing schemes, which could be misused for the protection of such measures do not create unnecessary obstacles to international domestic markets. Another difficult issue is the Processes and trade. WTO members are encouraged to use international standards Production Methods (PPM) for labeling. WTO Members disagree as a basis for their own regulations and standards, in recognition of over the WTO consistency of measures based on PPMs which the fact that environmental requirements can create trade barriers leave no trace in the final product (for example, cotton grown when they differ from country to country. using pesticides, with there being no trace of the pesticides in the cotton). ENVIRONMENTAL CHARGES AND TAXES The nondiscriminatory and transparent character of mandatory The design of environmental charges and taxes is a sig- eco-labeling, used by governments as an environmental protec- nificant cost factor for producers and service providers, and tion measure, is discussed in the TBT Agreement. The main princi- hence can affect trade relations. A green tax, trading scheme ples of voluntary labeling are formulated in the WTO Code of Good or price/cost adjustments may conflict with the WTO nondiscrimi- Practice for Preparation, Adoption and Application of Standards, nation principle.52 Likewisethe national treatment principle may and the national standardizing authorities (governmental and non- be triggered when an environmental tax is applied differently to governmental bodies) must follow them. The Code includes norms domestic and foreign producers; the most-favored nation treatment for the preparation, approval and application of voluntary eco- (MFN) principle becomes relevant where an environmental tax is labeling standards in the member countries. In particular, it stresses applied differently to producers from various exporting countries. the need for giving the WTO notice of any standards adopted by countries, for the publication of information about any newly intro- The imposition of a price on environmental damage at the duced eco-labeling standards and the rates of payment for eco- domestic level can raise concerns that polluting industries labeling services that are available to both domestic and foreign will relocate to countries with less strict environmental producers. regulations (for example, pollution haven). To minimize this risk, adjusting the environmental cost at the border is one widely GOVERNMENT SUPPORT debated option. However, such adjustments would need to avoid Government support for “green” goods and technologies (for example, non-repayable grants, preferential credit guarantees, 52 GATT, Article I on most-favored nation treatment and Article III on national treatment. preferential tax treatment, and price support measures) affect the E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N C H A P T E R 5 — E N V I R O N M E N TA L P O L I C I E S A N D W TO R U L E S 33 price and production of such goods. As a result, it may be harder “Green” public procurement is encouraged as an important vehicle for other countries’ exporters to compete in the subsidizing coun- to make contribution to sustainable consumption and production. try, or make the exports of the subsidizing country more competi- The WTO Agreement on Government Procurement (GPA) provides tive abroad. Some countries may also support domestic firms with disciplines on nondiscrimination and transparency in procurement the installation of more environmentally friendly technologies, of covered goods and services by designated governmental enti- thus enabling these firms to maintain international competitive- ties. Participation in the GPA, a plurilateral agreement within the ness. Unlike support linked to production, government support WTO framework that applies only to parties that have accepted for consumption will not affect international trade provided that the Agreement, provides legal guarantees of access to the parties’ it does not distinguish between domestic and imported goods or covered government procurement markets by the goods, services services. and suppliers of all parties. The forthcoming revision of the text of The Agreement on Subsidies and Countervailing Measures (SCM the Agreement will explicitly state, for greater certainty, that parties Agreement) establishes the conditions under which WTO mem- and their procuring entities may prepare, adopt or apply technical bers can use subsidies, and regulate the remedies (countervailing specifications to promote the conservation of natural resources or duties) that may be taken against subsidized imports. Provided protect the environment. Parties may also evaluate offers received certain rules are respected, the Agreement leaves members room based on environmental characteristics set out in notices or tender to encourage green technologies. In addition, the WTO Agreement documentation. on Agriculture contains a category of permissible “green” subsidies, Appendix 6 summarizes WTO Rules relevant to environmental poli- which could allow countries to pursue green economy policies in cies in more detail. agriculture. A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R C H A P T E R 6 — E V I D E N C E O F P OT E N T I A L F O R E F F I C I E N C Y G A I N S A N D C L E A N E R T E C H N O LO G Y A D O P T I O N I N R U S S I A 35 Chapter 6 EVIDENCE OF POTENTIAL FOR EFFICIENCY GAINS AND CLEANER TECHNOLOGY ADOPTION IN RUSSIA Russia’s production processes will require massive modern- energy, electricity) and although it is only a sample of industry—it ization if they are to effectively compete in the domestic and still yields very important insights on the resource use intensity of international markets. WTO will act as one motivating force for Russian production. firms to consider in deciding the speed and level of required invest- The second and third studies below summarize ongoing work ments—in both hard physical infrastructure and softer investments by the IFC is currently working with industry to identify potential in greater human resource capabilities. Many of these investments resource-use efficiency gains. The first study was conducted in will result in efficiency savings to the firm—so it is crucial to identify collaboration with the foundry industry—known to be an intensive and prioritize these potential opportunities. user of natural resources. The second study was with the automo- This section showcases some important, and ongoing, survey work tive sector, and as a sector, it is anticipated to be directly affected by with industry in tracking resource use, identifying potential cost sav- WTO accession. ings and ultimately investing in efficiency improvements. Russia’s production is concentrated in selected sectors and regions—so RUSSIA’S CURRENT RESOURCE USE PROFILE it is important to benchmark these areas and gain some insights The structure of Russia’s economy is heavily weighted towards the of where, and in which sector, resource savings can be realized. To extractive industries such as oil, gas and metallurgy. This focus can get a sense of this potential—the first section below summarizes also be seen when we look at various indicators of natural resource sector and regional results of one of the most comprehensive envi- use (see figure 6.1 through figure 6.5). For example, the energy sec- ronmental surveys in Russia. Interfax-ERA (Moscow) regularly under- tor is the largest consumer of energy and water and also contributes takes annual enterprise surveys on resource use (for example, water, FIGURE 6.1: Energy Consumption (Tons of Fuel)/mln Rubles 160 25 140 120 20 100 15 80 60 10 40 20 5 0 0 tro prod rgy ref on ng as l y Ch s… ee l g od r in ood y tru re Tra tion he Hou rt g ies l ral ral l ral l l l me Coa a era era era era era n-f llurg Ag ustr rin r in sin po En emic Co icultu G i ini Wo de de de str leu uct e ou c F ed ed ed ed ed ns En d Fe Fe Fe ta du err gin F F F F nF r ns m al t ern ian lga al an es he ter ntr Ur eri us l No -W as Vo uth Oi Ot as Ce Sib rro Ot c rth rE So au Pe Fe No -C Fa rth No Source: Interfax-ERA (2013). A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 36 0.0 1.0 2.0 3.0 4.0 5.0 6.0 0.0 0.5 1.0 1.5 2.0 2.5 0.0 0.5 1.0 1.5 2.0 2.5 Oi En Oi En Oi En Pe l e Pe l e Pe l e tro prod rgy tro prod rgy tro prod rgy leu uct leu uct leu uct m io m io m io ref n ref n re f n ini ini ini ng ng ng Fe Ga Fe Ga Fe Ga rro us s rro us s rro us s Source: Interfax-ERA (2013). Source: Interfax-ERA (2013). Source: Interfax-ERA (2013). me Coa me Coa me Coa No ta l No ta l No ta l n-f llurg n-f llurg n-f llurg err y err y e rr y ou ou ou Ch s… Ch s… Ch s… En emic En emic En emic gin a gin a gin a ee l ee l ee l rin rin rin g g g Wo Wo Wo od od od Ot F Ot F Ot F he he he r in ood r in ood r in ood du du du Ag str Ag str Ag str r y r y r y FIGURE 6.2: Water Use (‘000 m3)/mln Rubles FIGURE 6.4: Air Emissions (Tons)/mln Rubles Co icultu Co icultu Co icultu ns ns ns tru re tru re tru re c c c Tra tion Tra tion Tra tion ns ns ns po po po Ot r Ot Ot r he Hous t he Hous rt he Hous t r in ing r in i r in ing du du ng du str str str ies ies ies Ce Ce Ce 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.0 0.1 0.1 0.2 0.2 0.3 0.3 0.4 ntr al ntr al ntra F ed Fe lF No era No de No ed rth l rth ral rth e ra -W -W l FIGURE 6.3: Contaminated/Industrial Wastewater (‘000 m3)/mln Rubles es -W tF es es ed tF tF So e ed ed uth ral So era So e ra e uth l uth l No rn ern e rth Fe No Fe No rn -C de rth de rth Fe au ral -C -C de ca au ral au ra l sia ca ca n Fe sio nF sia nF de ed ed ral era e ra Vo l Vo l lg aF Vo lga lga ed Fe Fe era de de l ral ra l Ur Ur al Ur al F ed al Fe era Fe de Sib l de Sib ra l e ria Sib eri ral e ri nF an an Fa ed Fe Fe rE era Fa de Fa de as l rE as ral rE ra l ter ter as nF nF ter ed ed nF era era ed l l e ra l E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N C H A P T E R 6 — E V I D E N C E O F P OT E N T I A L F O R E F F I C I E N C Y G A I N S A N D C L E A N E R T E C H N O LO G Y A D O P T I O N I N R U S S I A C H A P T E R 6 — E V I D E N C E O F P OT E N T I A L F O R E F F I C I E N C Y G A I N S A N D C L E A N E R T E C H N O LO G Y A D O P T I O N I N R U S S I A 37 FIGURE 6.5: Waste Generation (Tons)/mln Rubles 18.0 4.0 16.0 3.5 14.0 3.0 12.0 10.0 2.5 8.0 2.0 6.0 1.5 4.0 1.0 2.0 0.5 0.0 0.0 tro prod rgy re f n ng s l y Ch s… ee l g od r in ood y tru re Tra tion he Hous t ing ies ra l l ra l l ra l ra l ra l ra l me Coa a e ra e ra r Ga n-f llurg str io rin po En emic Co icultu ini Wo de de de de de de str leu uct e ou du c F ed ed ns En Fe Fe Fe Fe Fe Fe ta du e rr gin tF nF r ns r in m Ag l e rn lga al an n tra es he sia ter Ur e ri us l No -W Vo n uth Oi Ot as ca Ce Sib rro Ot rth rE So au Pe Fe No -C Fa rth No Source: Interfax-ERA (2013). FIGURE 6.6: Change in Air Emissions/mln Rubles (2000 = 100) 140 120 100 80 Energy 60 Oil production Gas 40 Coal Ferrous metallurgy 20 Non-ferrous metallurgy Housing 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 FIGURE 6.7: Change in Industrial Wastewater/mln Rubles (2000 = 100) Energy Oil production 250 Gas Coal Ferrous metallurgy Non-ferrous metallurgy 200 Housing 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 significantly to wastewater and air emissions. The metallurgical sec- these districts so there appears to be less incentive to conserve or tors contribute significantly to pollution emissions (air, water, waste), improve efficiency from a supply-side argument. Meanwhile these and the housing sector (that is, households) are large water users areas also tend to be associated with higher pollution emissions, and the largest in terms of wastewater generation. which may also reflect the use of older (dirtier) technologies in production. Regionally, consumptive energy and water use is highest in the north and eastern districts (for example, Ural, Siberian and Far Eastern). The trends in pollution tell a bit of a more positive story (see figure Access and supply to these natural resources is less constrained in 6.6 through figure 6.8). While resource use intensity per value of A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 38 C H A P T E R 6 — E V I D E N C E O F P OT E N T I A L F O R E F F I C I E N C Y G A I N S A N D C L E A N E R T E C H N O LO G Y A D O P T I O N I N R U S S I A FIGURE 6.8: Change in Waste Generation/mln Rubles (2000 = 100) 140 120 100 80 Energy 60 Oil production Gas 40 Coal Ferrous metallurgy 20 Non-ferrous metallurgy Housing 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Interfax-ERA (2013). FIGURE 6.9: Share of Power and Coal Production in GRP (Percent) 60 60 55 55 50 50 120 120 45 0.8–2.7% 45 0.08–0.3% 2.7–3.2% 0.3–0.5% 3.2–4.3% 0.5–0.8% 4.3–5.47% 0.8–1.5% 5.7–12.4% 1.5–15.0% 40 40 60 80 60 80 FIGURE 6.10: Share of Oil and Gas Production in GRP (Percent) 60 60 55 55 50 50 120 120 45 0.02–0.4% 45 0.01–0.04% 0.4–2.1% 0.4–0.16% 2.1–4.0% 0.16–0.8% 4.0–10.0% 0.8–1.5% 40 10.0–58.0% 40 1.5–15.0% 60 80 60 80 Source: Interfax-ERA (2013). production may be high in absolute terms, many of the resource- differently. Given the focus of this paper on the energy and metal- intensive sectors have observed a decline in their pollution intensity lurgical sectors, the figures below indicate the share of these sectors since the year 2000, with the exception of the coal industry which in Gross Regional Product (GRP) (see figure 6.9 through figure 6.11). doubled its contaminated wastewater intensity. Darker shades indicate that particular sector is more important to the regional economy. REGIONAL IMPACTS OF ENERGY SECTOR REFORM Eastern districts rely more heavily on the production of energy Sector reform—whether induced through the impacts of WTO (power) and coal, whereas oil and gas are more significant for the accession, policy or otherwise—will impact the regions of Russia central districts. The metals sectors are more evenly divided among E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N C H A P T E R 6 — E V I D E N C E O F P OT E N T I A L F O R E F F I C I E N C Y G A I N S A N D C L E A N E R T E C H N O LO G Y A D O P T I O N I N R U S S I A 39 FIGURE 6.11: Share of The Steel and Non-Ferrous Metals Industry in GRP (Percent) 60 60 55 55 50 50 120 120 45 0.01–0.09% 45 0.02–0.1% 0.1–0.19% 0.1–0.5% 0.19–0.51% 0.5–1.1% 0.55–2.16% 1.1–3.3% 40 2.23–10.19% 40 3.3–12.7% 60 80 60 80 Source: Interfax-ERA (2013). selected districts in the west and east—with steel in the west and BOX 6.1: Benchmarking Russian Foundries non-ferrous metals in the east. This illustration is provided to inform policy makers in these regions on the possibilities to use the policy • Russian foundries use three times more energy, 160 times more water, nearly four times more sand, and synergies between trade liberalization and environmental policies 14 percent more metal per ton of high-quality fer- described in the report. rous castings product in comparison with European foundries, while the average production volume per Russian employee is nearly four times lower than in the POTENTIAL EFFICIENCY SAVINGS IN RUSSIA’S European Union. FOUNDRY INDUSTRY • If Russian foundries were able to match the efficiency of The potential for natural resource and efficiency savings in the the best-performing EU plants, the energy saved would be sufficient to power a typical Russian city of Russian foundry industry is tremendous. A recent study of 26 manu- 1.5 million people. facturers of ferrous metal castings (foundries), conducted by the IFC,53 identified numerous process areas—that if modernized to EU • Matching EU standards in water efficiency would save enough to supply more than 3.5 million Russian citizens standards to use more efficiently the natural resources—could save for one year. up to RUB100 billion ($3.3 billion) annually, and improve individual • In terms of competitiveness, the Russian foundry indus- foundry profitability by up to 15 percent. Some of the main findings try lags significantly behind Europe—between 1.5 and four times less competitive. are summarized in box 6.1. • Russian foundries use 14 percent more metal to The study benchmarked industrial processes against compa- produce one ton of finished product. Source: Low production efficiency means producing one ton of rable operations in the European Union according to seven key good-quality castings takes 60 percent longer (in man- hours) in Russia than in Europe. 53 The Resource Efficiency in the Ferrous Foundry Industry in Russia: Bench- marking Study (2010) was prepared under the IFC Cleaner Production • Operational efficiency at Russian foundries is currently Program in Eastern Europe and Central Asia and in close cooperation only 50 percent of capacity. with GEMCO Engineers B.V., together with its sister company Knight Wendling GmbH, count for well over 30 years of experience in the • Despite prices of major resources being as much as half foundry industry and offer dedicated foundry solutions for iron, steel, of those in Europe, inefficiency erodes any cost advan- aluminum, and all other castable metals. It was financed by the Free tage Russian foundries may have. State of Saxony (Germany), the Netherlands’ Agency for International Business and Cooperation (EVD, a branch of the Ministry of Economic Affairs of the Netherlands), the Ministry of Employment and the Econ- Source: IFC (2010), Resource Efficiency in the Ferrous Foundry Industry in Russia: omy of Finland, and the IFC. Available at: http://www.ifc.org/ifcext Benchmarking Study, International Finance. /climatechange.nsf/Content/CleanerProduction A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 40 C H A P T E R 6 — E V I D E N C E O F P OT E N T I A L F O R E F F I C I E N C Y G A I N S A N D C L E A N E R T E C H N O LO G Y A D O P T I O N I N R U S S I A FIGURE 6.12: Costs of Russia Foundries in FIGURE 6.13: Defect Rates in Russian Comparison with EU and EU Foundries 4 times 100% 96% 64% 3.4% 13.4% EU Russia Russia at EU EU Russia efficiency level Source: IFC. Source: IFC. performance indicators (KPIs) that heavily influence operating costs goods for domestic customers, or for export to customers in the 54 and profits: (1) process yield, (2) production efficiency, (3) capac- CIS, have never been subject to the more stringent quality controls ity utilization, (4) energy use, (5) fresh water consumption, (6) fresh enforced in the international markets. sand consumption, and (7) labor productivity. Recommendations Domestic and international pressure for product quality improve- were then provided how to improve resource efficiency, competi- ments are necessary and if undertaken could result in higher tiveness, and profitability. The results were organized around several value-added throughout the market—leading to higher profit key questions: margins. An important part of this shift will be to increase effi- 1. Why is resource efficiency so important for Russia’s fer- ciency in resources management (particularly in containing raw rous foundry industry? Russian foundries have enjoyed a highly- material and energy consumption and costs, as well as in improv- competitive cost advantage in comparison with Western European ing labor productivity). countries (for example, Germany) with lower energy costs (54 per- 2. Where does the greatest potential for better resources cent lower), labor costs (92 percent), and overhead and service costs management rest? Matching the efficiency of the best- (71 percent). However, these cost advantages have not translated performing EU plants would save enough energy to power into more competitive prices for finished products. a typical Russian city of 1.5 million people: and matching EU The first reason is that low labor productivity (it takes 3.3 times standards in water efficiency would result in savings equiva- as many human resources to produce an equivalent amount of lent to total residential consumption in the Netherlands. On product) and high volumes of energy consumption (for example, the basis of Russia’s current annual production of 6.1 million tons, Russian smelting uses twice as much energy) negate any of the matching the efficiency of European plants would save 19,882 giga- above cost savings. The second reason stems from the current poor watt hours (GWh) of energy, 5.7 million tons of sand, and 879 million quality of castings that are denied access to export markets, while cubic meters of water, per year. falling demand puts even local markets at risk. Only a few Russian Russia’s ferrous foundries could save up to $3.3 billion per foundries have any experience in exporting beyond countries of year. Efficiency gains in the assumed cost base of raw materials, the Commonwealth Independent States (CIS). Foundries producing energy, labor, equipment, and overheads could reduce costs up to 54 The study did not cover issues relating to the strategic development of 29 percent if performance were to match that in Europe. This would the foundry sector as a whole (that is, in terms of industry-wide trends, amount to a sector-wide savings of $3.3 billion annually and reduce government policy, or incentives to promote innovation or to support specific sub-sectors). CO2 emissions by up to 4.5 million tons a year. E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N C H A P T E R 6 — E V I D E N C E O F P OT E N T I A L F O R E F F I C I E N C Y G A I N S A N D C L E A N E R T E C H N O LO G Y A D O P T I O N I N R U S S I A 41 FIGURE 6.14: Russia Ferrous Foundry Industry Gains Via FIGURE 6.15: Measures to Optimize Resource Efficiency in Resource Efficiency Russian Foundries $2.13 bln –19% –26% $3 bln –29% $3.3 bln –57% USD USD USD $3.3 bln USD Low cost and –43% management practices Capital investment 100% Russia average Russia best Europe average Europe best Source: IFC. Russia average Europe best Source: IFC. Matching the efficiency of the leading Russian enterprises could achieve savings in the order of 19 percent across the area for reducing energy costs is to avoid holding and treating metal sector, while individual enterprises could increase opera- for long periods of time in melting furnaces. This practice is unnec- tional profitability by up to 15 percent. While KPIs for the best essary and cost savings could be realized through simple changes Russian enterprises currently only match average efficiency stan- in the melting procedure. dards in Europe, achieving these standards could, in addition to Closing the resource-efficiency gap on European standards raising the overall efficiency of the Russian ferrous foundry industry, will require Russian foundry owners and management to result in cost savings in the order of 19 percent—or RUB65 billion commit to improving operational performance and chang- per year. Even on the basis of current operating costs and profit ing their business model. Better energy efficiency in the melting margins, better resource efficiency could potentially increase the process could reduce total costs by as much as five percent. While a operating profit of individual enterprises by up to 15 percent. degree of capital investment may be required (in the replacement 3. How can the benefits of better resource efficiency be of outdated equipment with a more energy-efficient plant) a num- optimized? More than half of the resource efficiency savings ber of savings might also be achieved through organizational initia- and benefits could be achieved through better management tives. Minimizing energy costs will become increasingly important practices and various low-cost initiatives alone, with no need as energy prices continue to rise. Improved labor productivity could for major capital expenditure. Of the total potential for better result in a saving of up to four percent on total costs: much of it resource efficiency in the Russian foundry sector, around 57 percent achievable without the need for any financial investment, through could be achieved solely through the implementation of low-cost organizational initiatives such as reducing overmanned and initiatives and improved management practices: less than half (43 administrative processes. This will become increasingly important percent) would require any capital expenditure or refurbishment. as wages rise in line with Russia’s developing economy. Businesses For example, in the moulding process, more gross castings could be should also further specialize and focus on a core set of products produced within the same amount of time if losses due to excessive (as is done in Europe) rather than trying to be a one-stop-shop 55 downtime were avoided. These losses could be avoided through for all castings. This old business model is expensive to maintain. modest monitoring and quality control programs that would Russian foundries have opportunities to increase their international reduce the number of rejected (or inferior) castings. Another simple competitiveness if performance is improved and cost advantages exploited and maintained. But only when the quality of castings 55 Downtime (measured at the moulding line) can be due to a variety of is improved will Russian foundries be able to increase production reasons including: mechanical and electrical stoppages, waiting periods volumes significantly, and on a sustainable basis. This should then and delays for metal or sand, a high number of pattern changes, opera- tional and/or organizational inefficiencies, and poor scheduling. be coupled with more ambitious sales and marketing strategies and A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 42 C H A P T E R 6 — E V I D E N C E O F P OT E N T I A L F O R E F F I C I E N C Y G A I N S A N D C L E A N E R T E C H N O LO G Y A D O P T I O N I N R U S S I A customer-service skills directed at developing both domestic and § Respondents mention the following measures could create international markets conditions for the implementation of cleaner production technologies: ú Encouragement of industry modernization WHAT DO FOUNDRIES THINK OF WTO? ú Development of “road maps” to improve the foundries A survey among members of the foundry industry was conducted to ú An investment fund for the implementation of measures gauge their perception of the potential impacts of WTO accession. 56 to reduce environmental pollution ú A system of incentives (including subsidies) to finance Overall, the survey demonstrates a rather skeptical attitude toward green technologies the consequences of WTO accession. There appears to be some ú Stricter requirements for environmental protection, uncertainty about the future based on (a) a lack of understanding including strengthened penalties for emissions and waste of concrete changes related to WTO accession, and (b) a lack of ú Regulation of tariffs on energy knowledge on current environmental legislation and its provisions for economic incentives for modernization. This confirms one of the POTENTIAL EFFICIENCY SAVINGS IN RUSSIA’S findings in chapter 4 that information and awareness-raising are key AUTOMOTIVE INDUSTRY factors to overcome the current constraints for introducing clean In Russia, the automotive industry represented 2 percent of GDP in technologies. 2011–12 however from 2012–15 its annual growth rate is expected to exceed 10 percent.57 The components industry is also expected § Two-thirds of the respondents believe that the reduction in to grow at 13 percent per annum reaching $62.52 bln by 2015.58 It import tariffs or barriers to foreign-service providers would not result in an increase in imports of clean technologies, employs up to 13 percent of the Russian population in some regions. and consequently, would not lead to modernization of their Most products manufactured in Russia involve complex technologi- production technologies. At the same time, the majority of cal processes with wide scope for more efficient production, greater respondents expect that the market will shift towards more resource efficiency and instituting environmental programs. Firms technologically-efficient and competitive foreign suppliers, vary widely in their resource intensity and quality control is a large which would become a problem for local foundries. issue (for example, 0.06 percent of production is recalled—300 § All of the respondents assume a negative overall impact on times higher than in Europe).59 See box 6.2 on page 44. their companies due to Russia’s WTO accession. § The most common explanation of the negative impact of The automotive industry is poised to undergo significant changes the WTO accession are related to the expectation of and one of the drivers is Russia’s WTO accession. But how will the additional costs (due to higher energy prices and upgrading sector be affected? This was one of the main questions of a recent requirements), the shift of the market in favor of modern survey by the IFC in the Samara60 region. The survey identified areas production processes, and the lack of financial resources and affordable credit resources. such as resource efficiency (requirements from original equipment § Two-thirds of respondents did not implement measures for manufacturer [OEMs] and suppliers; major production challenges; energy efficiency in 2011–12. More than half of them believe major capacities, technology vintage and plans to modernize). that the State should provide incentives for such invest- ments. Despite the existence of some environmental laws 57 Sources: Autostat, Rosstat, Ernst & Young. Auto components market was (see chapter 3)—enterprises indicated that the regions in estimated at $38.72bn in 2011 and $41.84bn in 2012. Russian GDP was which they locate do not have the relevant environmental $1860bn in 2011 and $2079bn in 2012. 58 Ernst & Young. laws or incentives. 59 Bazel, IFC team’s own research. 60 The Samara region was defined by geography or by respondent (OPAK and some respondents via NAPAK). The survey was in the form of ques- tionnaires and client visits. There were 60 responses: 13 from OPAK 56 Eleven representatives of the foundry industry were interviewed—with (Samara region association of auto-component producers) and 47 from a combined annual turnover of 32.4 billion rubles in 2011. NAPAK (National association of auto-component producers). E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N C H A P T E R 6 — E V I D E N C E O F P OT E N T I A L F O R E F F I C I E N C Y G A I N S A N D C L E A N E R T E C H N O LO G Y A D O P T I O N I N R U S S I A 43 FIGURE 6.16: Investment Priorities Among Russian Automotive Firms Large Small 3.0 Investments in new/additional equipment 3.6 2.8 Replacement/modernization of equipment 3.3 2.8 Incorporation of resource tracking system 3.0 2.0 Creation of JV with foreign components producers 2.5 More efficient and less polluting technologies 1.4 1.9 1.3 Creation of R&D centres and laboratories 1.7 Source: IFC (2013). FIGURE 6.17: Major Issues in the Production Process in Russia and Samara Region Russia Samara region High share of resources in the cost structure 3.7 4.0 2.8 Insufficient funds for CAPEX 3.3 Financing: insufficient working capital 2.7 2.6 Long time to complete orders 2.6 2.7 Low level of process automatization 2.5 2.7 Low level of diversification 2.4 3.2 Difficulties with integration into supply chain 2.4 2.4 Personnel: low qualification or unavailability of people 2.3 3.1 Quality 2.2 2.8 Project management: no working groups 2.0 3.2 High ecological fees for pollution and waste 1.8 1.6 Reclamation of products: (refusal by clients) 1.8 2.6 No ISO certification 1.7 2.1 Source: IFC (2013). The IFC concluded that resource efficiency schemes for supply § High spending on resources and financing issues are a chains are new to the industry, but crucial for OEMs and suppli- challenge. At the same time, firms ranked ecological fees for ers’ sustainability. Given the growth potential of the sector, and pollution and waste a very low priority. § Low levels of automation in plants can be explained by less in light of WTO, identifying inefficiencies and improving quality need for resource efficiency over the past few years and should be the major focus. A number of findings support this greater dependence on orders from one OEM could be conclusion: A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 44 C H A P T E R 6 — E V I D E N C E O F P OT E N T I A L F O R E F F I C I E N C Y G A I N S A N D C L E A N E R T E C H N O LO G Y A D O P T I O N I N R U S S I A BOX 6.2: IFC Support to the Auto Industry § Good quality for price matters along the supply chain, with the actual price following a close second in importance. A ZMZ-DAIDO, Russia: IFC support of $5 million with overall proper price for quality offer from suppliers is expected. If project size of $20 million. Daido metal Co. acquired LLC ZMZ- the quality is in doubt, OEMs can switch to other lower-tier Bearings. The project impact was the efficiency improvement suppliers. through technology transfer from a Tier 1 manufacturer and § Still the issue of old equipment is coupled with lack of served as a catalyst for other investments in the region. financing: half of the primary equipment is older than IFC project financing for Ford’s factory in St. Petersburg: The 10 years. When defining areas of investments, firms project helped Ford’s potential Russian suppliers meet their target investing in new and modernized equipment, commitments to Ford Motor Company for low-cost and high- though more efficient and less pollutant technologies quality production. Three of the 4 client suppliers were able to were ranked as 1.9 by small firms and 1.4 by large firms. sign production contracts with Ford. It demonstrated that small companies (revenue below Engineering and production quality improvements at $100 mln) that each type of investment being of greater Zavolzhski Motorni Zavod (ZMZ): The project identified and necessity for them. improved engine defects and new parts engineering for a Euro-3 compliant engine. The IFC worked with ZMZ and 3 other With Russia now in the WTO, a key implication for industry will be the suppliers to improve operations through more efficient pro- entrance of foreign suppliers to meet demand from foreign OEMs duction. The project also facilitated financial support through in Russia. As of 2011, the industrial assembly in Russia is regulated donor funding. by Decrees 166 and 566. In the case of imported components, the Source: IFC. preferential customs regime is applicable. Yet negotiations resulted in the allowance of a long transition period to ensure the return on investments. Producers are now induced to open R&D centers factors to explain low level of automation; low qualification and unavailability of people; poor project management for and reach target level of localization (up to 60 percent) in 5 years to an average company in Samara region. import auto-components without tariffs. § Large companies tend to measure resource consumption In terms of modernization needs—national producers still need to at separate stages of production reasoned by larger scale of production. Smaller companies may have one single stage recognize that old equipment and entrance of advanced technolo- of production. The most popular type of certification is gies from foreign suppliers will be the driving factors in the sectors’ ISO9001, followed by ISO/TS 16949. transformation. E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N CHAPTER 7 — KEY FINDINGS 45 Chapter 7 KEY FINDINGS Public concerns of environmental quality have led the Russian § Strengthen the economic incentives and government sup- Government to contemplate regulatory policies for a cleaner envi- port for nature protection activities for businesses which ronment. Overall, Russia has developed most of the policy instru- undertake BAT investments through tax credits; § Explore market-based instruments as a tool for achieving ments needed to meet national environmental objectives, increase targets among polluters—at lower cost (for example, the competitiveness of its industry, while implementing WTO acces- marketable emissions permits); sion rules. These policies, however, will need further strengthening § Tighten the relationship between multilateral environmen- and realignment with sector policies to take account of productivity tal protection agreements and the WTO principles across changes triggered by Russia’s WTO accession. Focusing on selected industrial sectors. policy measures that can help recoup the potential increase of in- The impact of WTO accession on the output of different sec- dustrial emissions and simultaneously influence behavioral change tors will be mixed, with some expected to expand and some towards the use of more energy efficient and cleaner technologies, expected to decline. There will be a negative impact on sector would be a win-win approach that, on one hand, will help address output from tariff decreases on the import-competing sectors. But the pending trade-offs between economic growth and pollution there will be a positive impact from a decline in the price of inter- triggered by trade liberalization, and, on the other, complement the mediate inputs in goods and services. Export-intensive industries effective implementation of WTO rules. In order to increase Russia’s should see an increase in the prices they receive in Rubles from a environmental policy effectiveness while modernizing industry and depreciation of the real exchange rate and improved treatment trade, of no lesser priority will be to neutralize the negative ecologi- in antidumping. More generally, export-intensive sectors such as cal consequences from past economic activities. Furthermore, an ferrous metals, non-ferrous metals and chemicals are the manufac- important step will be to align environmental policy and practice turing sectors are most likely to expand, while light industry, food with international norms and standards as well as to combine en- industry and construction materials are sectors that most likely to vironmental and economic levers to influence polluters’ behavior. contract (the scale effect of output). Since the expanding sectors are Several policy areas, which if implemented consistently, could rein- more pollution-intensive and natural resource using than contract- force in a positive way the long term impacts on the sustainability ing sectors, the sector reallocation of output could have negative profile of Russian industry. These include: impact on the environment (the composition effect). However the § Reform the current system of pollution charges by introduc- policy scenarios simulated by the modeling suggest that if counter- ing coefficients that capture meaningful economic incen- measures are undertaken to reduce pollution or increase energy ef- tives for adoption of best available techniques (BATs); ficiency, the corresponding productivity improvements could offset § Extend (and simplify) opportunities for temporary tax breaks the negative impacts of the scale and composition effects above. and privileges for industries that are fiscally-neutral from public finance point of view, and encourage improved ef- There are substantial opportunities for potential gains ficiency and technology upgrading in the long run; from WTO accession to improve environmental quality in A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 46 CHAPTER 7 — KEY FINDINGS many regions by introducing energy efficiency standards, effect towards decarbonization. Russia’s commitment to imple- and emissions pricing levels that would push adoption of ment its Climate Doctrine is another venue for operationalization clean technologies. Russia will reap substantial gains from WTO of the modernization agenda in the industry, transport and hous- accession with widespread benefits such as reduced poverty and ing sectors. Trade liberalization will increase the opportunities for greater economic gains in regions that establish better investment innovation, using renewable and energy efficient technologies. By climate. Introduction of market-based instruments (MBIs) could implementing more rigorous policy reforms to maximize the ben- create a platform for “greening” and win-win outcomes, thereby efits from the WTO gains Russia will increase the opportunities to stimulating compliance and better environmental performance. meet its target of reducing greenhouse gasses (GHG) emissions by In fact, Russian environmental protection policies refer to BATs as a 25 percent compared to 1990s’ levels by the year 202063 as well as way to make more effective pollution prevention and controls and augment Russia’s contribution to the international effort to mitigate improve industrial environmental compliance. Since, the framework climate change impacts. WTO presents a strategic win-win oppor- for implementation of BATs is yet to be developed; the analysis of tunity for modernization and decarbonization of industry if envi- the report suggests the adoption of market based instruments that ronmental and sector policies are tailored to influence this process allow firms with higher costs of abatement to trade with firms with along the way. lower costs to achieve the better level of environmental quality in There is evidence of an untapped potential cost savings a movement toward BATs. To address political opposition to envi- from adoption of cleaner, more efficient, technologies in ronmental abatement policies among firms, mechanisms could be the Russian production sectors. The cases of the foundry and designed that are broadly revenue neutral, that is, there could be tax automotive sectors have shown that there is enormous cost savings incentives provided for firms that adopt clean technologies at the potential. For example, given the low costs of labor, energy, and raw same time there are charges for pollution. materials, Russia’s ferrous foundry industry could potentially real- Increased access to foreign suppliers of environmental ize a 36 percent cost advantage over its international peers. More 61 goods and services would allow Russian enterprises to than half of the resource efficiency savings and benefits could be choose from a wider set of technologies and management achieved through better management practices and various low- systems which will reduce the costs of producing in a more cost initiatives alone, with no need for major capital expenditure. environmentally-friendly manner. At the same time trade and However, due to poor resource efficiency, and a lack of focus on foreign direct investment liberalization will improve the incentives quality, this advantage is entirely lost. Factory audits of foundries 62 for exporters to innovate, will also increase the opportunities for revealed that improvements in resource efficiency could result in a wealth creation which they can use for environmental improve- cost savings of up to $3.3 billion annually to the sector. ments and efficiency gains. Scale effects of trade liberalization will The main finding of this overall analysis is that productivity increases most likely lead to increase in emissions. “Greening” policies and ef- from Russia’s WTO accession and trade liberalization are large. While ficiency standards could control emissions triggered by productivity trade liberalization may induce more pollution, the welfare gains are gains of WTO accession and augment the benefits of the technique large enough to pay for industrial greening in terms of CO2 emission effect, and most importantly they can trigger structural changes reduction and energy efficiency improvements, and thus increase in favor of less-polluting industries and trigger a decomposition environmental quality in regions with high concentration of pollut- ing industries. Trade and environment thus might not be viewed as 61 Services include: sewage, refuse disposal, sanitation, cleaning services of exhaust gases, noise abatement, nature and landscape protection, and antipodes but rather as mutually beneficial in the spirit of “green” environmental impact assessment. growth. 62 This is known as the Lerner Symmetry Theorem. It follows from the fact that trade liberalization increases the demand for imports and therefore the demand for foreign exchange. The home country’s currency must depreciate to reestablish equilibrium in its foreign exchange market; the 63 Decree of the President of the Russian Federation from September 30 depreciated real exchange rate improves the incentives to exporters. 2013, No. 752 “On Reduction of GHG Emissions.” E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N REFERENCES 47 REFERENCES Antweiler, W., B. R. Copeland, and M. S. Taylor (2001), Is Free Trade Good Helpman, E. (1981), International Trade in the Presence of Product for the Environment? The American Economic Review, 91: 877–908. Differentiation, Economies of Scale, and Monopolistic Competition: A Chamberlin–Heckscher–Ohlin Model, Journal of International Babiker, M. H., K. E. Maskus, and T. F. 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E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N A P P E N D I X 1 — R U S S I A N F E D E R AT I O N A N D W TO C O M M I T M E N T S 49 Appendix 1 RUSSIAN FEDERATION AND WTO COMMITMENTS 64 From the date of accession, the Russian Federation has committed after accession. Foreign insurance companies would be allowed to to fully apply all WTO provisions, with recourse to very few a transi- establish branches nine years after Russia accedes. Foreign banks tional periods. would be allowed to establish subsidiaries. There would be no cap on foreign equity in individual banking institutions, but the overall Market access for goods and services: As part of the accession foreign capital participation in the banking system of the Russian Russia concluded 57 bilateral agreements on market access for Federation would be limited to 50 percent (not including foreign goods and 30 on market access for services. capital invested in potentially privatized banks). On average, the final legally binding tariff ceiling for the Russian On transport services, the Russian Federation made commitments Federation will be 7.8 percent compared with a 2011 average of in maritime and road transport services, including the actual trans- 10 percent for all products: The average tariff ceiling for agriculture portation of freight and passengers. products will be 10.8 percent, lower than the current average of 13.2 percent. The ceiling average for manufactured goods will be 7.3 per- On distribution services, Russia would allow 100 percent foreign- cent vs. the 9.5 percent average today on manufactured imports. owned companies to engage in wholesale, retail and franchise sec- tors upon accession to the WTO. Russia has agreed to lower its tariffs on a wide range of products. Average duties after full implementation of tariff reductions will be: Quantitative restrictions on imports, such as quotas, bans, permits, § 5.2 percent for chemicals (current applied tariff 6.5 percent) prior authorization requirements, licensing requirements or other § 12.0 percent for automobiles (current applied tariff 15.5 requirements or restrictions that could not be justified under the percent) WTO provisions would be eliminated and not (re) introduced. § 6.2 percent for electrical machinery (current applied tariff 8.4 The Russian Federation would apply all its laws, regulations and percent) other measures governing transit of goods (including energy), in § 8.0 percent for wood and paper (current applied tariff 13.4 percent) conformity with GATT and WTO provisions. The final bound rate will be implemented on the date of accession Export duties: Export duties would be fixed for over 700 tariff lines, for more than one third of national tariff lines, with another quarter including certain products in the sectors of fish and crustaceans, of the tariff cuts to be put in place three years later. mineral fuels and oils, raw hides and skins, wood, pulp and paper and base metals. The Russian Federation has made specific commitments on 11 ser- vices sectors and on 116 sub-sectors. On telecommunications, the Government Procurement Agreement: The Russian Federation foreign equity limitation (49 percent) would be eliminated four years intends to join the WTO Government Procurement Agreement (GPA) and would notify this intention to the WTO Government 64 http://www.wto.org/english/thewto_e/minist_e/min11_e/brief_russia _e.htm. Procurement Committee at the time of accession. Russia would A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 50 A P P E N D I X 1 — R U S S I A N F E D E R AT I O N A N D W TO C O M M I T M E N T S become an observer to the GPA and would initiate negotiations for Phytosanitary Surveillance, would not suspend imports from estab- membership within four years of its accession. Russian government lishments based on the results of on-site inspection before it had agencies would, upon accession, award contracts in a transparent given the exporting country the opportunity to propose corrective manner. measures. Rosselkhoznadzor would send preliminary report to the competent authority of the exporting country for comments. Industrial subsidies: The Russian Federation would eliminate all its industrial subsidies programs or modify them so that any sub- The Russian Federation would ensure that all legislation related sidy provided would not be contingent upon exportation or upon to technical regulations, standards and conformity assessment the use of domestic over imported goods. The Russian Federation procedures, complies with the WTO TBT Agreement. The Russian would notify its subsidies to the WTO and would not invoke any Federation would use international standards for the development of the provisions of Articles 27 and 28 of the WTO Agreement on of technical regulations unless they were an ineffective or inappro- Subsidies and Countervailing Measures. priate means for achieving the pursued objectives. Pricing of energy: Producers and distributors of natural gas in The Russian Federation would regularly review its lists of products the Russian Federation would operate on the basis of normal com- subject to obligatory certification or declaration of conformity, as mercial considerations, based on recovery of costs and profit. The well as all the technical regulations applied on its territory (Custom Russian Federation would continue to regulate price supplies to Union and Eurasian Economic Community included) to ensure that households and other noncommercial users, based on domestic they remained necessary to achieve the Federation’s objective, in social policy considerations. accordance to the WTO TBT Agreement. Sanitary and Phytosanitary Measures (SPS) and Technical Trade-related investment measures: The Russian Federation Barriers to Trade (TBT): All SPS measures would be developed would ensure that all laws, regulations and other measures related and applied in the Russian Federation and the Custom Union, in ac- to the Agreement on Trade-Related Investment Measures would be cordance with the WTO Agreement. The Russian Federation would consistent with the WTO provisions. All WTO-inconsistent invest- develop and apply international standards on SPS measures through ment measures, including preferential tariffs or tariff exemptions, membership and active participation in the Codex Alimentarius, the applied in relation to the existing automobile investment programs World Organization for Animal Health (OIE) and the International and any agreements concluded under them would be eliminated Plant Protection Convention. by 1 July 2018. No other trade related investment measures in- Except in case of serious risks of animal or human health, consistent with the WTO Agreement may be applied after Russia’s Rosselkhoznadzor, the Federal Service for Veterinary and accession to the WTO. E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N A P P E N D I X 2 — E XC E R P T F R O M R E P O R T O F T H E W O R K I N G PA R T Y O N T H E A C C E S S I O N O F T H E R U S S I A N F E D E R AT I O N 51 Appendix 2 EXCERPT FROM REPORT OF THE WORKING PARTY ON THE ACCESSION OF THE RUSSIAN FEDERATION Part II—Schedule of Specific Commitments on Services List of Article II MFN Exemptions Addendum 6. ENVIRONMENTAL SERVICES* Except for treatment of radioactive wastes/contamination. LIMITATIONS ON MARKET ACCESS LIMITATIONS ON NATIONAL TREATMENT A. Sewage services (CPC 9401) (1) Unbound, except the following: (1) Unbound, except the following: B. Refuse disposal services (CPC 9402) – for environmental impact assessment services – for environmental impact assessment services (CPC 9409*)—none; (CPC 9409*)—none; C. Sanitation and similar services (CPC 9403) – for consultancy/advisory services—none. – for consultancy/advisory services—none. D. Other: – Cleaning services of exhaust gases (CPC 9404); (2) None. (2) None. – Noise abatement services (CPC 9405); (3) None, except the following: (3) None, except as indicated in the column “Limitations on market access”. – Nature and landscape protection (CPC 9406); – with respect to treatment of hazardous wastes: commercial presence is allowed only in the form of a juridical person of the Russian Federation. – Environmental impact assessment services (4) Unbound except as indicated in Part I “Horizontal commitments”. (4) Unbound except as indicated in Part I “Horizontal commitments”. (CPC 9409*). Modes of supply: (1) cross-border supply (2) consumption abroad (3) commercial presence (4) presence of natural persons A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R A P P E N D I X 3 — T R A D E A N D T H E E N V I R O N M E N T — A B R I E F L I T E R AT U R E R E V I E W 53 Appendix 3 TRADE AND THE ENVIRONMENT—A BRIEF LITERATURE REVIEW Impact assessment of the North American Free Trade Agreement constant returns to scale (CRTS) and perfect competition). Relaxing (NAFTA) in the early 1990s stimulated theoretical and empiri- the assumption of CRTS and perfect competition, increased com- cal analysis on the environmental impacts of trade liberalization. petition in oligopolistic industries would tend to lower price-cost In their seminal papers, Grossman and Krueger (1993) as well as mark-ups and lead to exploitation of scale economies—so-called Copeland and Taylor (1994, 1995) decomposed the overall impact rationalization gains. If trade liberalization leads to an expansion into three effects—changes in scale, composition and technique of capital-intensive industries subject to IRTS technology, such as (see introduction). In the environment-trade literature the economic refineries, base metals and chemicals—that are also very energy- drivers for changes in scale, composition and technique are most intensive—pollution problems will be exacerbated due to the scale commonly captured through the classical model of comparative and composition effects compared to a CRTS reference. On the other advantage which explains the pattern of international trade through hand, the technique effect could be offsetting. Productivity changes the relative cost differences between countries (see Rauscher 1997 may emerge through trade liberalization due to rationalization gains and Dean 1992, 2002 for overviews). The theory of comparative or as the number of product varieties and technologies increase advantage gives rise for two complementary views on the environ- thereby rendering those sectors more productive, resulting in less mental impacts of trade liberalization (Antweiler et al. 2001). The so- resource use per unit of output and less pollution (formally repre- called Factor Endowment hypothesis suggests that—as countries sented in models of monopolistic competition with Dixit-Stiglitz specialize according to their traditional comparative advantages— varieties (Dixit and Stiglitz 1977). Romer (1994) emphasized that the freer trade leads to a further concentration of those industries that impact of trade liberalization via new or higher quality products can employ the relatively abundant production factor: if emissions be much more important quantitatively than improved resource are linked to capital-intensive industries then trade liberalization allocation. Finally, the new trade theory initiated by Melitz (2003) would lead to an expansion of these industries in relatively capital- provides yet another source for productivity changes through firm abundant countries and thereby also increase emissions. The heterogeneity. Trade creates competitive pressure which improves so-called Pollution Haven hypothesis, suggests that trade liberaliza- resource allocation across firms within the very same industry. High tion will make countries with less stringent environmental regula- productivity firms expand output and export while low productiv- tions dirtier as they possess a policy-induced cost advantage. ity firms drop out of the market, increasing aggregate productivity. The intra-industry reallocations of market shares and productive While the traditional theory of comparative advantage indirectly resources add to effects associated with inter-industry reallocations captures scale and technique effects, it mainly refers to composition that are driven by comparative advantage. effects through specialization. The new trade theory pioneered by Dixit and Norman (1980), Helpman (1981), or Krugman (1981) puts A more specific strand of the trade-environment literature deals more emphasis on the role of the scale and technique by introduc- with the implications of Foreign Direct Investment (FDI). Analogous ing imperfect competition and increasing returns to scale (IRTS) in to trade in goods and services the impacts of FDI are decomposed the standard trade models (which usually adopt the assumption of in scale, composition and technique effects—yet, the focus is A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 54 A P P E N D I X 3 — T R A D E A N D T H E E N V I R O N M E N T — A B R I E F L I T E R AT U R E R E V I E W predominantly on the technique effect. From an aggregate per- liberalization induced an expansion of energy-intensive industries spective, FDI provides better access to capital, thereby decreasing in industrialized countries and an expansion of labor-intensive capital cost and increasing productivity. The optimistic micro view manufactures in developing countries thus suggesting that in their is that FDI supports knowledge transfer and market-penetration analysis the Factor Endowment hypothesis dominates the Pollution of innovative technologies which allow firms to reduce energy-/ Haven hypothesis. More recent empirical work (Frankel and Rose pollution-intensity of production and consumption with the poten- 2005; Kellenberg 2008) highlights the complex interplay between tial of leapfrogging, that is, the possibility to bypass environment- the Factor Endowment hypothesis and the Pollution Haven hy- intensive developments (Gentry 1999; Mielnik and Goldemberg pothesis and the need for country-specific analysis to determine 2002). The prospects of FDI-induced environmental improve- which effect is dominating based on real data (see also the mixed ments in host countries through better technologies and higher evidence on environmental impacts through FDI in Esty and Gentry environmental standards are referred to as “pollution halo” hypoth- 1997 and Smarzynska and Wei 2001). Econometric estimates on the esis (Zarsky 1999). This contrasts with the more popular “pollution technique effect of trade liberalization are scarce in part because haven” hypothesis that fears environmental degradation through of limited data availability. One exception is Martin (2012) who as- the relocation of firms to countries where environmental standards sesses the implications of trade openness on greenhouse gas emis- are laxer. sions by India’s manufacturing firms. Martin finds that reduction in import tariffs led to improved fuel efficiency as fuel efficient manu- On theoretical grounds, the scale, composition and technique ef- facturing firms gained market share whereas fuel-inefficient firms fect can have positive or negative signs. Given this ambiguity, there lost market shares—within the manufacturing sector, improved is the need for empirical analysis to quantify not only the magni- capital access tends to reduce fuel-intensity rather than increase tude but also the direction of the individual and the composite en- it because of technological (energy-saving) progress embodied in vironmental impacts. One rigorous empirical analysis is provided by new vintages. Antweiler et al. (2001) who estimated the magnitudes of the scale, composition and technique effects for the case of sulphur dioxide A substantial part of the applied literature on trade-environment concentrations in more than forty countries. According to their linkage is based on computable general equilibrium analyses. Most econometric regressions, a strong negative technique effect domi- applications focus on the mutual effects that trade policies and CO2 nated the positive scale effect leading to a decrease in emissions reduction policies can have on each other. Examples are Babiker et (the technique effect, however, was mainly due to stricter environ- al. 1997 and Kuik and Gerlagh 2003, who use standard multi-region mental regulations after trade liberalization). Another econometric multi-sector CGE models of global trade and energy use. In the same assessment has been undertaken by Cole et al. (1998) on the emis- vein, Vennemo et al. (2007) quantify the environmental impacts of sion impacts of trade policy changes suggested by the Uruguay China’s accession to the WTO as the outcome of scale, composition Round. In their analysis the composition effect increased emissions and technique effects (they use a small open economy model). They for industrialized countries whereas for most developing countries, identify a dominating composition effect in favor of clean industries emissions associated with the composition effect declined. Trade which leads to a decrease of China’s greenhouse gas emission. E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N A P P E N D I X 4 — L I S T O F R E G I O N S I N C LU D E D I N T H E M O D E L ( W I T H M A P P I N G TO O B L A S T S ) 55 Appendix 4 LIST OF REGIONS INCLUDED IN THE MODEL (WITH MAPPING TO OBLASTS) REGIONAL AGGREGATION ABBREVIATION REGION ABBREVIATION Moscow msc Moscow City, Moscow Region msk, mos Saint-Petersburg stp Leningrad Region, St. Petersburg Federal City len, spb Central cen Belgorod Region, Bryansk Region, Vladimir Region, Voronezh Region, bel, bry, vla, vor, iva, kal, kos, krs, lip, orl, rya, smo, tam, Invanovo Region, Kaluga Region, Kostroma Region, Kursk Region, Lipetsk tve, tul, yar Region, Oryal Region, Ryazan Region, Smolensk Region, Tambov Region, Tver Region, Tula Region, Yaroslavl Region South sou Sarativ Region, Republic of Adygeya, Republic of Dagestan, Republic of sar, ady, dag, ing, kab, klr, kar, sev, kdk, sta, ast, vlg, ros Ingushetia, Republic of Kabardino-Balkaria, Republic of Kalmykia, Republic of Karachayevo-Cherkessia, Republic of North Ossetia–Alania, Krasnodar Territory, Stravropol Territory, Astrakhan Region, Volgograd Region, Rostov Region Far east far Aginsky Buryatsky Autonomous District, Chita Region, Khabarovsk Territory, agi, chi, hab, amu, sao, pri, eao Amur Region, Sakhalin Region, Maritime Territory, Jewish Autonomous Region Northwest vgd Vologda Region, Kaliningrad Region, Novgorod Region, Pskov Region vol, klg, nov, psk North nor Komi-Permyatsky Autonomous District, Nenetsky Autonomous District, kpa, nen, krl, kom, arh, mur Republic of Karelia, Komi Republic, Arkhangelsk Region, Murmansk Region Urals and near east url Republic of Marity El, Republic of Mordovia, Republic of Tatarstan, Republic mar, mor, tat, udm, chv, kir, niz, pen, ulo, ore, sam, bas, of Udmurtia, Rupublic of Chavashia, Kirov Region, Nizhny Novgorod Region, per, krg, sve, chl Penza Region, Ulyanovsk Region, Orenburg Region, Samara Region, Republic of Bashkortostan, Perm Region, Kurgan Region, Sverdlovsky Region, Chelyabinsk Region Siberia sib Republic of Altai, Republic of Buryatia, Republic of Tyva, Republic of alr, bur, tyv, hak, alt, kem, nvs, tom, oms, tai, kra, sah, Khakassia, Altai Territory, Irkutsk Region, Kemerovo Region, Novosibirsk ust, eve, kor, chu, irk, kam, mag Region, Tomsk Region, Omsk Region Evenkiysky Autonomous District, Taimyrksy (Dolgano-Nenetsky) Autonomous District, Ust-Ordynsky Buryatsky Autonomous District, Krasnoyarsk Territory, Republic of Sakha, Kamchatka Region, Magadan Region, Koryaksky Autonomous District, Chukotsky Autonomous District Tumenskaya oblast tmn Tyumen Region, Khanty-Mansiysky Autonomous District kha, yam, tum A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R APPENDIX 5 — MODEL STRUC TURE 57 Appendix 5 MODEL STRUCTURE Within each region a representative agent receives income from three FIGURE A5.1: Production of Goods Other Than Fossil primary factors: labor, capital, and fossil-fuel resources. There are three Fuels and Electricity fossil resources specific to respective sectors, namely, coal, crude oil σS and gas. Fossil-fuel resources are specific to fossil fuel production sec- tors in each region. For the short- to mid-run impact assessment of σKLE σM policy shocks labor is treated as perfectly mobile between sectors within a region, but not mobile between regions; likewise, capital is σVA σEN inter-regionally immobile and in part sector-specific. 65 COL Non-energy goods σpETR K L ELE PRODUCTION OIL GAS Production of commodities in each region, other than primary fossil fuels, is captured by multi-level constant elasticity of substitution FIGURE A5.2: Production of Fossil Fuels (CES) cost functions describing the price-dependent use of capital, η labor, energy and materials (figure A5.1). σid At the top level, a CES composite of non-energy intermediate mate- rial demands trades off with an aggregate of energy, capital, and Resource labor subject to a constant elasticity of substitution. At the second Non-resource inputs level, a CES function describes the substitution possibilities between intermediate demand for the energy aggregate and a value-added In the production of fossil fuels (coal, crude oil and natural gas), all composite of labor and capital. At the third level, capital and labor inputs, except for the sector-specific fossil fuel resource, are aggre- substitution possibilities within the value-added composite are gated in fixed proportions (figure A5.2). This aggregate trades off captured by a CES function. The aggregate energy input is defined with the sector-specific fossil fuel resource at a constant elasticity of as a CES function of coal and the composite of electricity, oil, and substitution. The latter is calibrated to reflect empirical evidence on gas. At the fourth level the composite of electricity, oil and gas is a fossil fuel supply elasticities. CES function of electricity and a CES aggregate of oil and gas. The production of electricity slightly differs with respect to the nesting FINAL CONSUMPTION of the energy composite. Here, electricity trades off with a CES com- In each region a representative household maximizes consump- posite of coal and a combined CES good of oil and gas. tion welfare subject to a budget constraint. Total income of the representative household consists of net factor income and trans- 65 For the mid- to long-run impact assessment these assumptions can be relaxed towards factor mobility across regions. fers. Consumption 1 is given as a CES composite that combines A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 58 APPENDIX 5 — MODEL STRUC TURE FIGURE A5.3: Production of the Final Consumption FIGURE A5.4: Armington Production for Composite Intermediate and Final Demands σS σS σD σENRG σR WMKT σM DMKT σFUEL ELE RMKTs Non-energy goods σREFR COL FIGURE A5.5: Transformation of Domestically (Regionally) OIL GAS Produced Goods DMKT RMKTs WMKT consumption of composite energy and an aggregate of other (non- energy) consumption goods (figure A5.3). Inputs to the non-energy ␶=4 composite trade off at a constant elasticity of substitution. The en- ergy composite in final demand corresponds to a CES aggregation of electricity and a CES composite of fossil fuels. Within the latter, Output electricity trades off with a CES aggregate of oil and gas at a con- so that any change in the value of imports (either from the rest of the stant elasticity of substitution. Investment demand is exogenous world or another regional market within Russia) is matched by an and determines savings of the representative household. increase in the value of exports. Russia as a whole, represented as an aggregate of the regional markets, must satisfy a typical economy- GOVERNMENT wide balance of the trade constraint. The real exchange rate adjusts Government demand across all regions is fixed at exogenous real to assure that any change in the aggregate value of regional imports levels. The government receives taxes to finance public expendi- from the rest of the world, is matched by an equal change in the tures. Public surpluses or deficits are balanced through lump-sum value of aggregate exports to the rest of the world. On the export transfers with the representative households in each region. side, goods produced within one region are supplied to the domes- tic market, to regional markets and to the world markets subject to a TRADE constant elasticity of transformation (figure A5.5). Bilateral trade between regions is specified following the Armington (1969) approach, which distinguishes goods by origin. PRODUCTIVITY IMPACTS OF TRADE LIBERALIZATION All goods used on the domestic market in intermediate and final Trade liberalization induces productivity changes due to effi- demand correspond to a CES composite that combines the domes- ciency gains (rationalization)66 or an increasing number of product tically produced good and the imported goods from other regions and the rest of the world (figure A5.4). Regions are assumed to be 66 As imports enter the domestic market, firms with the least-productive technology may see their profits become negative. Import competition price takers in world market—that is, the representation of the rest of forces them to exit the market. As a result, the number of domestic firms in the market declines, which in turn implies that the demand for each the world is reduced to perfectly elastic import demand and export of the remaining firms in the market increases. This leads to a higher supply functions (export and import prices from the rest of the level of production by the remaining and more efficient domestic firms. In the presence of economies of scale, this leads to lower prices and world are exogenous). Each region has a balance of trade constraint therefore further gains from trade associated with rationalization. E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N APPENDIX 5 — MODEL STRUC TURE 59 varieties and technologies. Such productivity impacts are formally Model calibration is based on the economic dataset for Russia previ- represented in models of monopolistic competition with Dixit- ously compiled by Rutherford and Tarr (2006). The core IO data at the Stiglitz varieties (Dixit and Stiglitz 1977). The core computable national level for the year 2001 comes from the national statistical of- general equilibrium (CGE) model is specified as a perfect competi- fice (Rosstat 2002 and 2003) and was expanded from 22 to 30 sectors tion constant-returns-to-scale (CRTS) model but can be adjusted to to include more details on service industries (table 2.2). At the region- external productivity changes. In our integrated CGE framework the al level we distinguish 10 jurisdictions based on satellite data from latter are computed by means of a “twin” model where additional the 88 oblasts—the derived input-output tables for the ten regional product varieties in imperfectly competitive goods sectors with markets are aggregates of the input-output tables of oblasts in their increasing returns to scale (IRTS) can occur due to trade liberaliza- respective regional markets. Bilateral trade flows (trade intensities) are tion. The more complicated marked conduct in the “twin” model adjusted to assure that oblast exports and imports in aggregate are developed by Rutherford and Tarr (2010) goes at the expense of consistent with national import and export values. details on energy demand structures that characterize the perfect Tariff rates that characterize trade barriers before WTO accession competition model version. Building on the same data, as well as are taken from Shepotylo and Tarr (2008) and tariff reductions from identical sector and regional disaggregation, the combined model WTO accession are calculated from the work of Shepotylo and Tarr accommodates the integration of productivity impacts from trade (2012). With WTO accession, Russia will have improved rights under liberalization in a rather detailed energy-economy CRTS model. antidumping and countervailing duty investigations in its export markets. Consequently, Russian exporters in sectors which have DATA been subject to antidumping actions in Russia’s export markets will Model parameterization followed a standard calibration procedure see improvement in their terms of trade ranging from 0.5 percent or in applied general equilibrium analysis. The base-year input-output 1.5 percent (Rutherford and Tarr 2006). Environmental data is taken (IO) data determines the parameters of functional forms (that is, cost from the SUST-RUS project67 with sector-level information on pol- and expenditure functions) such that economic flows represented lutants (emissions) at the national level which then is split down to in the data are consistent with the optimizing behavior of economic the oblast level based on a symmetry assumption. Table 2.3 reports agents. The responses of agents to price changes are determined by economy-wide emission levels for the different pollutants in the a set of elasticities pertinent in the econometric literature. base year 2001. 67 The SUST-RUS Project aimed to develop an integrated spatial-economic- ecological modeling approach, which represented different areas of economic, transport, resource-use linked to environmental effects on sustainability that can be used to assist Russian policy makers in their choice of medium and long-term sustainability policies. See http:// sustrus.org/en/project/. A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R A P P E N D I X 6 — R E F E R E N C E O N W TO R U L E S R E L E VA N T TO E N V I R O N M E N TA L P O L I C I E S 61 Appendix 6 REFERENCE ON WTO RULES RELEVANT TO ENVIRONMENTAL POLICIES 68 Measures for environmental protection should be applied in alignment with the basic WTO rules—the nondiscrimination obligation and the prohibition of quantitative restrictions—and should not constitute a “disguised restriction on international trade.” THE PRINCIPLE OF NON-DISCRIMINATION PROHIBITION OF QUANTITATIVE RESTRICTIONS If trade-related environmental or health measures are to be consistent with WTO rules, they Certain environmental measures (such as bans) may violate the GATT Article XI, which provides, cannot result in discrimination: among other things, that restrictions on the importation or sale of products from other WTO (i) between “like” products from different trading partners, and members are prohibited. (ii) between its own and like foreign products A number of WTO Agreements have provisions for environmental measures: The General Agreement on Tariffs and Trade (GATT) The General Agreement on Trade in Services (GATS) GATT Article XX on General Exceptions lays out two exceptions of particular relevance to the protection of the environment: WTO members may adopt policy measures that are inconsistent with GATT disciplines, but are: • necessary to protect human, animal or plant life or health (paragraph (b)), or • relating to the conservation of exhaustible natural resources (paragraph (g)). GATS Article XIV on General Exceptions, paragraph (b), allows WTO members to adopt policy measures that would normally be inconsistent with GATS if this is “necessary to protect human, animal or plant life or health.” This must not result in arbitrary or unjustifiable discrimination and must not constitute protectionism in disguise. The Agreement on Technical Barriers to Trade (TBT) The TBT Agreement tries to ensure that regulations, standards, testing and certification procedures do not create unnecessary obstacles to trade, while also providing members with the right to imple- ment measures to achieve environmental and health policy objectives. Among the agreement’s important features are: • nondiscrimination in the preparation, adoption and application of technical regulations, standards, and conformity assessment procedures; • avoiding unnecessary obstacles to trade; • harmonizing specifications and procedures with international standards as far as possible; • the transparency of these measures, through governments notifying them to the WTO Secretariat and establishing national enquiry points. The Agreement on Sanitary and Phytosanitary Measures (SPS) The SPS Agreement allows countries to set their own food safety and animal and plant health standards. Regulations must be based on science and should be applied only to the extent necessary to protect human, animal or plant life or health. They should not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail. The SPS Agreement allows members to adopt SPS measures for environmental purposes, but subject to such requirements as risk assessment, nondiscrimination and transparency. Member countries are encouraged to use international standards, guidelines and recommendations where they exist. The Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) The TRIPS Agreement refers explicitly to the environment in Section 5, which deals with patents (Article 27.2 and 27.3). The TRIPS Agreement allows members to refuse to patent inventions that may endanger the environment (provided their commercial exploitation is prohibited as a necessary condition for the protection of the environment). For ethical or other reasons, they can also exclude plants or animals from patentability, subject to the conditions described above. The Agreement on Agriculture In its preamble, the Agreement on Agriculture reiterates members’ commitment to reform agriculture in a manner that protects the environment. Annex 2 explains the domestic support measures for which exemption from the reduction commitments can be claimed, if they meet the fundamental requirement that they have no, or at most minimal, trade-distorting effects or effects on produc- tion (so-called Green Box). Among these measures are expenditures under environmental programs (for example, research programs, infrastructure works), provided that they meet certain conditions. Plurilateral Agreement on Government Procurement The Agreement on Government Procurement (GPA) provides disciplines on nondiscrimination and transparency in procurement of covered goods and services by designated governmental entities. Article XXIII specifies that exceptions to the Agreement apply, if necessary to protect human, animal or plant life or health. Parties may also evaluate offers received based on environmental characteristics set out in notices or tender documentation. 68 The following overview is entirely based on information available at www.wto.org A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R A P P E N D I X 7 — S TAT U S O F B E S T AVA I L A B L E T E C H N I Q U E R E F E R E N C E D O C U M E N T S ( B R E F ) F O R S P E C I F I C S E C TO R S ( E U D ATA ) 63 Appendix 7 STATUS OF BEST AVAILABLE TECHNIQUE REFERENCE DOCUMENTS (BREF) FOR SPECIFIC SECTORS (EU DATA) BREF DOCUMENT HAS BEEN PUBLISHED BY THE EUROPEAN COMMISSION UNDER THE IED (POST 2010). BREF OR REF, DOCUMENT UNDER ADOPTED DOCUMENT WORK ON BREF IS PLANNED FORMALLY ADOPTED BY THE BOTH THE BREF AND THE WORK ON BREF HAS STARTED TO COMMENCE IN THE YEAR EUROPEAN COMMISSION RELATED BAT CONCLUSIONS BUT A DRAFT IS NOT YET LATEST DRAFT OF BREF SHOWN BUT HAS NOT YET UNDER THE IPPC DIRECTIVE CAN BE FOUND AVAILABLE WHICH IS AVAILABLE STARTED Ceramic Manufacturing Industry Iron and Steel Production Ferrous Metals Processing Industry Common Waste Water and Waste Gas Food, Drink and Milk Industries BREF (08.2007) BATC (03.2012) BREF (03.2012) BREF (12.2001) Treatment/Management Systems in BREF (08.2006) 2014 Review started the Chemical Sector BREF (02.2003) D2 (07.2011) MR (06.2008)  Emissions from Storage Manufacture of Glass Large Volume Organic Chemical Intensive Rearing of Poultry and Pigs Surface Treatment Using Organic BREF (07.2006) BATC (03.2012) Industry BREF (07.2003 Solvents BREF (03.12) BREF (02.2003) D2 (08.2013) 2014 BREF (03.2012)  MR (06.2009) Energy Efficiency Production of Cement, Lime and Waste Treatments Industries Large Combustion Plants Waste Incineration BREF (02.2009) Magnesium Oxide BREF (08.2006) 2013 BREF(07.2006) BREF (08.2006) 2014 BATC (04.2013) D1 (06.2013) BREF (04.2013) MR (10.2011 Industrial Cooling Systems Tanning of Hides and Skins General Principles of Monitoring Non-ferrous Metals Industries Wood and Wood Products BREF (12.2001) BATC (02.2013) BREF (02.2013)  REF (07.2003) BREF (12.2001) Preservation with Chemicals Review started D3 (02.2013) 2014 MR (09.2007) Large Volume Inorganic Wood-based Panels Production Chemicals—Ammonia, Acids and D1 (07.2013) Fertilisers Industries MR (11.2011)  BREF (08.2007) Large Volume Inorganic Chemicals—Solids and Others Industry—BREF (08.2007) Management of Tailings and Waste- rock in Mining Activities BREF (01.2009)  Manufacture of Organic Fine Chemicals BREF (08.2006) Production of Polymers BREF (08.2007) Production of Specialty Inorganic Chemicals BREF (08.2007)  A G R I C U LT U R E A N D E N V I R O N M E N TA L S E R V I C E S D I S C U S S I O N PA P E R 64 A P P E N D I X 7 — S TAT U S O F B E S T AVA I L A B L E T E C H N I Q U E R E F E R E N C E D O C U M E N T S ( B R E F ) F O R S P E C I F I C S E C TO R S ( E U D ATA ) BREF DOCUMENT HAS BEEN PUBLISHED BY THE EUROPEAN COMMISSION UNDER THE IED (POST 2010). BREF OR REF, DOCUMENT UNDER ADOPTED DOCUMENT WORK ON BREF IS PLANNED FORMALLY ADOPTED BY THE BOTH THE BREF AND THE WORK ON BREF HAS STARTED TO COMMENCE IN THE YEAR EUROPEAN COMMISSION RELATED BAT CONCLUSIONS BUT A DRAFT IS NOT YET LATEST DRAFT OF BREF SHOWN BUT HAS NOT YET UNDER THE IPPC DIRECTIVE CAN BE FOUND AVAILABLE WHICH IS AVAILABLE STARTED Slaughterhouses and Animals By- products Industries BREF (05.2005) Smitheries and Foundries Industry BREF (05.2005) Surface Treatment of Metals and Plastics BREF (08.2006) Surface Treatment Using Organic Solvents BREF (08.2007)  Textiles Industry BREF (07.2003) Economics and Cross-media Effects BREF (07.2006)  E N V I R O N M E N TA L P E R S P E C T I V E O F R U S S I A’ S A C C E S S I O N TO T H E W O R L D T R A D E O R G A N I Z AT I O N Agriculture and Environmental Services (AES) 1818 H Street, NW Washington, DC 20433 USA Telephone: 202-473-1000 Internet: www.worldbank.org and www.worldbank.org/en/region/eca