KAZAKHSTAN ENERGY WEEK – 2023
Steps to be Made for Kazakhstan Business to Adapt to a Tighter Carbon Regulation Environment
As part of Kazakhstan’s ratification of the Paris Agreement the government committed to a stronger global response to climate change impacts in the light of sustainable development. This commitment has become a key objective of the new environmental legislation and consideration of the need to launch tools to drive the country’s decarbonisation.
Following the publication of the new Environmental Code of the Republic of Kazakhstan (the Code) the country’s government approved RK’s Carbon Neutrality Strategy until 2060 and updated INDC – intended nationally determined contribution of the Republic of Kazakhstan to the global response to climate change. These policy papers shape the future vector of the development of the country’s industry and economy, where the short-term objective is to reduce emissions of greenhouse gases (GHG) by 15% by the end of 2030 against the 1990 baseline emissions, while the long-term objective is to achieve carbon neutrality by 2060.
For reaching the ambitious goals set, Kazakhstan needs to come up with no less ambitious solutions to change the regulatory framework. Current carbon regulatory framework is represented only by the carbon emissions trading scheme (KazETS), which covers 200 major operators and accounts for almost a half of the total national GHG emissions.
Victor Kovalenko
Aibek Tulepbergenov
Adaptation of large business
For the purposes of environmental legislation, large business refers to operators that negatively impact the environment and engage in operations listed in the Code in Section 1 of Appendix 2. For the purposes of carbon regulation, it refers to KazETS participants with CO2 emissions of more than 20 thousand tonnes.
Currently, the operators participating in KazETS are in a comfortable position. Thus, the operators get free-of-charge carbon credits in plenty, and whenever the credits are not enough, e.g., when the production capacity has increased, the operator has the right to request additional credits to cover the shortage from the state or buy them in the secondary market at about KZT 500 per tonne of CO2.
It is evident that these arrangements do not encourage operators to reduce their GHG emissions; in addition, they do not allow KazETS to become a market tool for carbon regulation.
The government understands this situation and plans to improve KazETS by introducing initial auction (fee-based portion of carbon credits allocation), revising product benchmarks, increasing the annual reduction factor of total limit (LRF), launching the carbon fund and other administrative actions.
It cannot be ruled out that a tolerant carbon regulation system will be gradually becoming more stringent, which will have a drastic impact on energy generation and manufacturing sectors targeting the domestic market. But for RK’s export-oriented economy these steps are needed both as a measure to prevent an outflow of funds from the economy (for reference: adoption of CBAM standards implies that operators exporting their products to the EU (iron and steel, cement, fertilisers, aluminium and hydrogen) shall pay the difference of the carbon price in Kazakhstan and the EU) and as a way to meet their target in terms of Intended Nationally Determined Contributions.
Large business should respond to these messages today to be able to keep business afloat as well as use the opportunity of benefiting from the sale of carbon credits.
EY gives the following recommendations to KazETS participants:
1. Enhance the quality of internal monitoring, reporting and verification because reliable information on the volumes and quality of any company’s emissions is fundamental for strategic planning and monitoring of the GHG emissions reduction progress.
2. Enhance energy efficiency of applied technology and equipment by introducing best available technology, which is the key method for GHG emissions reduction; BAT implementation also brings about a bonus in the form of an operating permit releasing the company from the payment for pollutants.
3. Launch projects to replace, where possible, the traditional generation with renewable electricity generation – Scope 1 and 2 emissions reduction.
4. Integrate/include the fee for carbon credits in the corporate strategies and development programmes. Develop an internal carbon fee, i.e., a mechanism used by the companies to assess their GHG emissions so that it drives positive changes in their business.
5. Enhance the key company’s decision makers’ awareness of the climate change agenda and transition risks.
Adaptation of small and medium business
This category refers both to the companies with low GHG emissions and “administered” facilities with emissions, which are close to the KazETS threshold of 20 thousand tonnes of CO2.
Tighter carbon regulation will impact small and medium business sectors due to the potential introduction of a carbon tax. Currently different scenarios are considered for implementing the carbon tax, but a tax levied on fossil fuels is viewed as the best option. The carbon tax on fuel as an alternative carbon regulation tool is used in many countries in the EU, South and North America.
EY analysis established that the implementation of the carbon tax on the burning of various types of fuel (coal, gas, oil products) will allow covering approximately 70 million tonnes of СО2 emissions. Financial resources received by the government from the tax will be allocated to the new carbon fund, which will be set up to provide financial support to decarbonisation projects.
Meanwhile, carbon regulation is perceived by most of the companies in this category of business as something “out-of-the-way” and having nothing to do with their operations; however, given the country’s ambitious goals and the global trend, business will have to revise its views and start applying various techniques to adapt it to the new environment.
EY suggests taking the following actions to adapt your business today for achieving sustainability in the future:
- Financial estimate: analysing current fuel costs and assessing financial impacts of the carbon tax on your company will allow the company to understand what changes and investments will be needed to cut fuel consumption and, as a result, reduce tax expenses.
- Improving operational energy efficiency: the same as for large business, the implementation of energy efficiency measures will drive reduction of energy consumption; consequently, these measures will also help mitigating the exposure to the carbon tax.
- Implementing the carbon tax in the corporate development plans: such measures as investments in renewables or the transfer from the used fuel to more eco-friendly types of fuel may allow the company to rely on fossil fuel in a lesser extent.
- Education and communication: raising awareness of the company’s employees and clients (product consumers) through delivery of seminars, training sessions, references, will help comprehending the importance of GHG emissions reduction and having the opportunity to operate a sustainable business.
We would like to conclude that by improving the carbon market, introducing emissions taxation and promoting innovation, the government encourages the country's enterprises, companies and people to reduce GHG emissions. These actions will not only mitigate the impacts on the climate but also generate new economic opportunities by driving the development of efficient production sites, technologies and green infrastructures. Thus, it is critical for business community (large, medium and small business) as a key element of the country’s economy to take up future challenges and ensure sustainable adaptation for the sake of the country and next generations.
Authors:
Victor Kovalenko, EY Partner, Climate Change and Sustainability Services Leader in Central Asia, Caucasus and Ukraine
Tel.: +7 (727) 258 5960
E-mail: Victor.Kovalenko@kz.ey.com
Aibek Tulepbergenov
Consultant, Climate Change and Sustainability Services, EY Kazakhstan
E-mail: Aibek.Tulepbergenov@kz.ey.com