GHG emissions

Kazakhstan to Cut Free Carbon Quotas by 26% Starting Next Year

Starting next year, the Government of the Republic of Kazakhstan will reduce free carbon quotas by 26%, from 169 million to 125 million units. At the current price of a single carbon unit, this could increase the total annual costs for companies subject to carbon regulation by 22 times, from $2 million in 2020 to $44 million in 2022. Kursiv reports on the current plans of Kazakh authorities to tighten environmental regulations.

Currently, carbon regulation in Kazakhstan covers only carbon dioxide (CO2) emissions from major “polluters.” Under existing environmental legislation, this list includes stationary emission sources (installations) in sectors such as power generation, oil and gas, mining, metallurgy, and chemicals, as well as certain building materials manufacturing industries (cement, lime, gypsum, brick) in the processing sector. Free quotas are distributed by JSC “Zhasyl Damu,” a subsidiary of the Ministry of Ecology, Geology and Natural Resources (MEGR) of Kazakhstan.

In 2022, the number of free CO2 emission quotas for 128 companies subject to carbon regulation in Kazakhstan will be reduced by 26%, to 124.8 million units (from 169.2 million units in 2021). These figures are presented in the draft National Quota Allocation Plan for 2022–2025, developed by the MEGR. The document reflects a gradual reduction of quotas until 2025, averaging 5.4% per year.

The government is reducing quotas to fulfill Kazakhstan’s commitments under the Paris Agreement to cut greenhouse gas emissions by 15% by 2030 relative to 1990 levels. The legal basis for these changes is the updated Environmental Code, which came into force on July 1 of the current year.

Reduction Scope

All major industrial “polluters” will be affected, totaling 128 companies and 200 power-generating installations. The largest emitters are in the power generation and oil & gas sectors. In the power sector, which includes 88 installations under carbon regulation, quotas are being reduced for most of the largest power plants, including Ekibastuz GRES-1 and GRES-2, stations in the AlES complex (all controlled by the national company Samruk-Energy), and assets of the private company CAEC (generating assets include Pavlodar CHP-2 and CHP-3, and Petropavlovsk CHP-2). In the oil and gas sector, CO2 emissions must be reduced at 50 installations, including those supporting Kazakhstan’s largest oil fields – Kashagan, Tengiz, and Karachaganak.

For new industrial facilities, the national plan provides for reserve quotas. By 2025, several large industrial enterprises will appear in Kazakhstan: gas processing plants in Zhanaozen and near the Kashagan field with a total capacity of 1.5 billion cubic meters of commercial gas, polyethylene production facilities with 430,000 tons per year in Atyrau region, and methanol production with 130,000 tons per year in West Kazakhstan region.

According to Olzhas Agabekov, Director of the Department of Climate Policy and Green Technologies at the Ministry of Ecology, the reserve is formed by reducing quotas for existing emitters. However, even with the annual reserve, the total allocated quota (allocated quotas plus reserve) will remain below the current year’s limits (180.7 million units in 2021, including the reserve).

“Quota reduction in 2022 is related not so much to the trajectory of Paris Agreement compliance as to reserving quotas needed for future production growth, including new installations and enterprises,” Agabekov explained to Kursiv.

Buying and Selling

Companies exceeding their quotas can purchase additional quotas from enterprises with surplus. Quota trading takes place on the Caspian Commodity Exchange (CCX), Modern Trading Solutions, and STV, as well as via direct transactions. According to the 2021 National Energy Report by Kazenergy, from 2018 to 2020, a total of 52 transactions were made, with more than 5.6 million tons of CO2 quotas sold for $5.6 million (averaging 1.9 million tons and $1.9 million annually).

Full data for 2021 will be available in 2022 after submission of verified greenhouse gas inventory reports. Among the buyers this year (to cover deficits from the previous period) were stations of the energy holding CAEC. According to the company, at the end of the previous three-year national quota allocation plan (2018–2020), its subsidiary Pavlodar CHP-2 had a significant quota deficit of 2.3 million tons, of which 1.1 million tons were purchased on the exchange and directly from companies with a surplus.

“The cost of quota purchases amounted to 570 million KZT, which is an unrecoverable loss for Pavlodar CHP-2, as quota purchase costs are not included in heat and electricity tariffs,” the company clarified.

According to Erik Tanayev, a board member of CCX, the main purchaser of quotas in 2021 was the energy sector, while the seller was the oil sector, whose main assets are more modern and have lower emission levels than mining and energy companies.

The price of a carbon unit in 2021 ranged between $1 and $1.2. Kursiv contacted Samruk-Energy and ERG for information on additional quota needs in previous years but had not received a response by the time of publication.

KazMunaiGas reported that the group did not buy or sell additional quotas in 2020–2021. Polymetal clarified that its Kazakh enterprises are not subject to regulation as they are non-quota installations.

Increased Costs for Polluters

As a result of free quota reductions, the deficit in 2022 will amount to 44.4 million units. At the current price of $1 per carbon unit, polluters’ costs next year could increase by at least $44.4 million. CAEC expects a total quota deficit of 2 million tons of CO2 in 2022. The company will have to purchase additional quotas from others or pay fines (the fine for unmet quotas is 5 MCI, or $35, per ton of CO2). Likely, under quota shortages, the market price of carbon units will rise, increasing emitter costs.

High carbon unit prices benefit sellers of surplus quotas, but for energy producers (about 70% of electricity in Kazakhstan is generated by coal power plants) this will be challenging.

“The company group is already purchasing and plans to continue purchasing quotas, as there is no other way to cover the deficit,” CAEC emphasized.

The Ministry of Ecology cannot provide a benchmark for future carbon unit prices and notes that a price cap is not currently established by law. The ministry only comments that carbon prices should align with Paris Agreement goals without negatively affecting the economy. The roadmap for the updated document “Kazakhstan’s Nationally Determined Contribution for 2021–2025” recommends that the price per carbon unit rises from $1.1 in 2021 to $16.9 per ton CO2-eq in 2023–2025 and to $50.8 per ton in 2026–2030. For comparison, in the EU, carbon unit prices on exchanges exceed $70 per ton.

Source: Article on Kursiv.kz, 06.12.2021, 12:00 (author – Kuralay Abylgazina)