By Sofiya Abdukhalikova, LL. B, is a member of Iustus Chamber of Legal Advisors
The increasing concern over air pollution and global warming has prompted the need for collaborative efforts at both the international and domestic levels. Addressing this issue requires the participation of states, businesses, and individuals, along with the development of technological and legal frameworks to facilitate cooperation. Carbon offset presents a novel approach for governments, companies, and individuals to engage in sale and purchase agreements within a market where greenhouse gas emissions are traded as commodities. This research paper focuses on the implementation of carbon offset in Kazakhstan, an area where such transactions are still relatively unfamiliar.
The study explores the international and domestic legal foundations for carbon offset, delves into the technology and distinctions between various carbon markets, and conducts a comprehensive analysis of Kazakhstan’s environmental law and international commitments. The findings of this research will identify key aspects that need to be considered to establish an effective carbon offset system in Kazakhstan, contributing to the country’s efforts in addressing air pollution and global warming.
Key words: Kazakhstan, environmental law, air pollution, carbon offset, international law
- Relevance of the Climate Change Agenda
- Global view on climate change
“We, the generation that faces the next century, can add the solemn injunction ‘If we don’t do the impossible, we shall be faced with the unthinkable” — those are the words of Petra Kelly (1947–1992), the German politician and peace activist, and one of the founders of the Green Party in Germany. This statement was inspired by Petra’s personal experience, as she witnessed her sister’s death from radiation-induced cancer.
Throughout different stages of human history, Homo sapiens have had an impact on nature, disrupting the natural order. Only in the late nineteenth — mid twentieth century humanity started witnessing the devastating effects of climate change, and prognose the potential consequences of our inaction.
Even though the climate on Earth has been changing over the time, the current warming trend is different. It is characterized as unprecedented and unpredictable, for it results from human activities since the mid nineteenth century.
Indeed, referring to the statistical data, fossil fuels (coal, gas, and oil) are still among the largest contributors to global climate change; they account for over 75 percent of global GHG emissions and 90 percent of global CO2 emissions. This leads to the temperature rise making the decade 2010-2020 the warmest in the history of humanity. As long as the Earth is the unique interconnected ecosystem, such changes will inevitably lead to such consequences as intense droughts, water scarcity, severe fires, rising sea levels, flooding, melting polar ice, catastrophic storms and declining biodiversity.
- UN on Climate Change
These days the importance of the climate change and environment protection agenda is constantly accentuated on an international level. For instance, the United Nations (UN) is one of the greatest proponents of emissions reductions. Thus, in the 2020 Greening the Blue Report, the Secretary-General of the UN reminded humanity of the strong connection between people’s actions and the environment; it was claimed that our integrity with nature requires continuous cooperation in the sphere of environment protection with particular emphasis on GHG emissions reduction. Moreover, the UN 2030 Agenda for Sustainable Development launched by a UN Summit in New York on 25-27 September 2015 in paragraph 31 “calls for the widest possible international cooperation aimed at accelerating the reduction of global greenhouse gas emissions and addressing adaptation to the adverse impacts of climate change”. Under the UN, the Intergovernmental Panel on Climate Change was established in 1988 to provide the global community with regular updates on current state of knowledge on climate change and its actual and potential impacts on environment and society.
The UN initiated the development and adoption of the Framework Convention on Climate Change (UNFCCC), which was signed in Rio de Janeiro and took effect on 21 March 1994. The UNFCCC has almost universal membership, with 198 countries being a party to the Convention. The UNFCCC Secretariat conducts the annual Conference of the Parties to UNFCCC (COP) to discuss global measures to fight climate change.
For instance, as the result of the COP27 of 2022 conducted in Sharm el-Sheikh, Egypt, the following five key takeaways can be highlighted:
- Agreement to provide loss and damage funding for vulnerable countries suffering the consequences of climate catastrophes;
- The goal to limit global warming to 1.5 degrees, which requires reduction of GHG emissions by 43% by 2030;
- New standards of accountability in terms of commitments made by sectors, businesses and institutions;
- Provision of more financial support to developing countries towards lower emissions and climate resilient development;
- Prioritizing the just transition to the green future.
- Climate Change as a Threat to International Security and Human Rights
The international environmental law envisages the fundamental principle of connection between human rights and environment. This principle illustrates the direct correlation between the nature protection and wellbeing of everyone. According to the UN Office of the High Commissioner, “a safe, clean, healthy and sustainable environment is integral to the full enjoyment of a wide range of human rights, including the rights to life, health, food, water and sanitation”. Indeed, the topic of climate change is highly related to international security and human rights protection. The devastating consequences of the human actions lead to the climate catastrophes negatively affecting the people’s security, which is interconnected with the lack of food, water, and energy supplies, increased competition regarding natural resources, loss of the domiciles, forced migration, and displacement.
According to the Universal Declaration of Human Rights (1948) (UDHR), “everyone has a right to life, liberty and security of the person”. It is impossible to talk about global security and peace if reckless behavior towards the environment leads to uncontrollable natural disasters. The negative outcomes of climate change and global warming lead to violation of the rights and freedoms of people, such as the freedom of movement and residence. People are forced to leave their home countries in search of shelter. UDHR also establishes that “everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care…”. This right is complex and includes several crucial aspects necessary for an adequate living, which can become inaccessible due to the negative effects of climate change.
There are numerous cases in the practice of the European Court of Human Rights (ECHR) dealing with the protection of the right to a safe environment. For instance, in the case Duarte Agostinho and Others v. Portugal and 33 Other States, the applicants (Portuguese nationals aged between 10 and 23) argued that the GHG emissions of 33 Contracting States caused the global warming and the heatwaves, which affect the applicants’ living conditions and health.
The applicants raised concerns regarding the failure of these 33 states to fulfill their commitments outlined in the 2015 Paris Agreement on Climate Change (COP21). These commitments include ensuring that the global average temperature does not rise more than 2 degrees Celsius above pre-industrial levels and making efforts to limit the temperature increase to 1.5 degrees Celsius above those levels. By doing so, the risks and impacts of climate change would be significantly reduced. The applicants argue that the states who signed the agreement have a responsibility to implement effective measures to regulate their contributions to climate change.
On 13 November 2020 the Governments concerned were given notice of the application, with questions from the ECHR in connection to the right to life, prohibition of inhuman or degrading treatment, right to private and family life and home, prohibition of discrimination, etc. The ECHR also decided to deal with this case as a matter of priority.
Thus, we have seen the importance of the climate change discourse on the international arena. However, this research paper focuses on the attitude of Kazakhstan towards the problem of climate change. Therefore, it will be useful to address some country-specific statistics.
- Relevance of the Climate Change Agenda for Kazakhstan
Kazakhstan’s economy relies to the major extent on dirty energy sources such as coal, oil, and gas. This economic model was a forced choice of Kazakhstan leaders after the dissolution of the Union of Soviet Socialist Republics to maintain a successful economy. The strategy resulted in Kazakhstan being the most developed country in the Central Asia region; however, today, Kazakhstan is the largest emitter of CO2 in Central Asia and is also the 14th large emitter worldwide. The effects of climate change are evident now; in the last 75 years the median annual temperature has increased 2°C, and serious droughts are now striking twice every five years.
Kazakhstan is an ambitious state, which actively participates in the global discourse on environment protection and is willing to stand in a row with the world’s most developed countries by implementing the best available practices and technologies in the sphere of green economy and production. Kazakhstan has undertaken some major obligations in the sphere of emissions reduction by means of participating in the international treaties such as Paris Agreement (December 12, 2015; 194 member states) and Kyoto Protocol (December 11, 1997; 192 member states).
On 13 October 2021, the President of Kazakhstan Kassym-Zhomart Tokayev presented the Doctrine for Carbon Neutrality of Kazakhstan by 2060. The Doctrine contains a list of key measures on reduction of emissions and decarbonization of the economy, which include:
- abandonment of new coal-fired generation projects and the phasing out of coal combustion during years 2021-2025;
- implementation of a program to plant 2 billion trees by 2025;
- doubling of the share of renewable energy sources in electricity generation by 2030;
- complete sorting of municipal solid waste by 2040;
- sustainable agriculture on 75% of arable land by 2045;
- full electrification of personal passenger transport by 2045;
- use of green hydrogen only; and
- complete refusal to use coal-fired production from 2050 onwards.
This Doctrine is a justification of the Kazakhstan government’s concern with climate change and the need for immediate action. It clearly illustrates the overall tendency to reduce the consumption of energy produced from the dirty sources and increase the percentage of green energy.
Despite the fact that the issue of air pollution requires a complex of collective measures in different aspects of our lives rather than one panacea, the author would like to familiarize the readers with one of the tools to fight climate change and air pollution — carbon offsetting.
- Understanding Carbon Offsetting
One of the global trends in the sphere of carbon neutrality is carbon offsetting. It has been developing over years, and now is incorporated into the day-to-day life of eco-friendly individuals and corporations all around the world. Carbon offsetting made the GHG emissions a tradable good, which can be sold and bought on the corresponding carbon market.
The idea of carbon offsetting can be traced back to the 1980s; the first offset project took place in Guatemala, and its goal was to plant trees to offset the emissions caused by power plants in Connecticut, the United States.
The main presumption behind the concept of carbon offsetting is that the Earth has one whole indivisible atmosphere; therefore, the damage in the form of emissions caused in one country influences the overall atmosphere of the world. This assumption leads to another idea, according to which it is possible to offset the emissions produced by one entity (legal entity or physical person) by helping the project on emissions reduction located elsewhere develop by means of financial support. This scheme is also called carbon neutrality.
- Carbon Markets
The carbon offset takes place on carbon markets, which unite the buyers and sellers of carbon credits (usually, one carbon credit, or carbon offset, equals 1 metric tonne of CO2 or other GHG emissions).
There are two types of carbon markets: the compliance carbon market (CCM) and the voluntary carbon market (VCM).
- Compliance Carbon Market
CCM is entirely regulated by the government. Usually, participants of CCM are engaged in the carbon offset to fulfill their mandatory law-based obligations on GHG emissions reduction in the framework of quotas distributed on the international level in accordance with the international treaties. The offsets conducted internally within the state are counted towards the general obligations of that state under the international treaties.
CCMs are regulated by the governments, they are restricted to the borders of one state or region, and to the limited number of participants falling under specific requirements making CCM inaccessible for independent market participants. The more detailed mechanism will be discussed below with references to the relevant international treaties.
- Voluntary Carbon Market
VCM emerged only around 2005, as legal entities and people beside those legally obliged to reduce their carbon footprint became interested in achieving carbon neutrality. VCMs allow any carbon emitters to offset their unavoidable emissions by purchasing carbon credits emitted by projects aimed at removing or reducing GHG from the atmosphere. The main feature of the VCMs is that they are substantially flexible and not limited by national or regional boundaries. VCMs serve as a platform for micro-scale projects that are too small to warrant the administrative burden of compliance offset programs, and consequently are not covered under compliance schemes.
There are several main elements of VCMs:
- Program (Standard) is either governmental or non-governmental standard-setting organization established to provide quality assurance for carbon offsets. Programs (Standards) develop certain independent rules on verification of the green projects and distribution of carbon credits within the online registry;
- Project is an activity registered in accordance with the requirements of the chosen Program aimed at reduction of GHG emissions. Project developers register their projects within the registry of the Program (Standard) and receive a certain amount of certified carbon credits.
VCMs allow carbon emitters to purchase carbon credits that are awarded to projects registered within a Program (Standard) that reduce and (or) remove the atmospheric carbon with no intended use for compliance purposes. All participants willing to trade on VCMs shall register within the online platform. The carbon credits are stored at a personalized account in a registry owned or retained by the Standard that certified the Project. The Project developer can either retire the credits, i.e. annul them to claim the reductions they represent, or sell them to another entity owning an account at the registry in different ways, including through brokers, exchanges, retail traders, advisors. Certified carbon credits issued by a given Standard and stored in a registry managed or retained by this Standard cannot be transferred to a registry of a different Standard.
- Regulation of Compliance Carbon Markets through the Prism of International Environmental Law
- International Environmental Law Principles
As long as principles serve as one of the sources of international law, the author would like to refer to those guiding the international environmental law, and carbon offset in particular.
First principle is the unacceptability of damage to the environment of another state or international spaces, in the framework of which attention is paid to the assessment of the transboundary impact, provision of ecological information to other states, and control of the activity of private entities and individuals, including by means of establishing the procedural and material guarantees of damage reimbursement. Second, is the principle of natural resources management in the common interests. Thus, the natural objects which are characterized by physical integrity (i.e. the ozone layer or atmosphere) shall be taken care of jointly by all nations (common care regime). The principle of connection between human rights and environment was touched upon earlier in this research paper. Lastly, the sustainable development principle establishes the balance between ecological and economic interests of the society by supporting the intergenerational equity idea, according to which the economic needs of these days shall not endanger the needs of future generations. All these principles are laid down in the foundation of CCM, and they also make the idea of VCM plausible. They can be traced in the main international treaties.
- International Treaties Overview
Among the most important documents in the sphere of climate change and emission reductions the author would like to accentuate the following:
- Geneva Convention on Long-Range Transboundary Air Pollution (1979) obliges the states to regulate the air quality, to engage into the scientific cooperation, and information exchange;
- Vienna Convention for Ozone Layer Protection (1985) obliges to limit the negative effect on ozone layer, to take protection measures in terms of consequences of ozone layer’s change, to organize the research and to cooperate. The convention is supplemented by Montreal protocol of 1987, establishing a list of substances polluting the ozone layer, limiting the freon absorption and production, etc.;
- The UNFCCC obliges the states to compose the cadasters of GHG, to implement programs on emissions reductions, to develop and transfer the technologies of emissions limitation, to rationally use the GHG absorbents, to organize the research, etc. The UNFCCC serves as a parent treaty to the Kyoto protocol of 11 December 1997 and Paris agreement of 12 December 2016.
- Kyoto protocol
Kyoto protocol obliged the States not to exceed the volume of emissions established as a percentage of the emissions level of 1990 with the purpose to decrease the overall emissions volume by 5%. Kyoto protocol allowed the states, which have decreased emissions or increased their absorption, to sell the emissions quotas.
Thus, Kyoto protocol envisages three main flexibility mechanisms, which are aimed at stimulation of events to decrease the anthropogenic influence on the environment. All the mechanisms contain obligations on GHG emissions reduction.
- Clean Development Mechanism (CDM) is enshrined in Art.12 of the Kyoto protocol. Under CDM, the investors from developed countries listed in Annex 1 to the UNFCCC and in Annex B to the Kyoto protocol may implement environmental projects in developing countries not listed in those Annexes. The emission decrease in the course of the projects will be achieved due to investors’ funding, which leads to corresponding decrease of investors’ emissions account. The CDM mechanism contributes to the improvement of environmental conditions in developing countries.
- Joint Implementation Mechanism (JIM) is described in Art.6 of the Kyoto protocol. In accordance with this mechanism the investor from countries listed in Annex B to the Kyoto protocol can implement ecological projects on the territory of other countries listed in Annex B. The achieved decrease in emissions is indicated in Emissions Reduction Units (ERU). The ERU obtainment shall consequently lead to the decrease of quantitative obligations of the country (Assigned Amount Units; AAU) defined by Annex B to the Kyoto protocol. JIM is only available for the developed countries.
- Emissions Trading Mechanism (ETM) is described in Art.17 of Kyoto protocol. This market instrument is available for the countries listed in the Annex B to the Kyoto protocol; it allows trading unused AAU on the international level with countries listed in the Annex B to Kyoto protocol, which exceeded the AAU.
Thus, the first regulatory basis for CCM was laid down in the Kyoto protocol in the CDM and ETM concept in 1992. One of the evident drawbacks of the regulatory approach was that the Kyoto protocol limited the access to the CCM and inter-state emissions reductions by means of carbon trading for developing countries not listed in the Annex B to the Kyoto protocol. This approach was proven ineffective and discriminating.
- Paris agreement
The Kyoto protocol, in fact, lost its legal force in 2015 with adoption of the Paris Agreement, which is a global agreement, which reflects the world’s desire to prevent climate change and to fight environmental degradation together.
Under Paris Agreement, the Parties to the Agreement are obliged to enhance implementation of the UNFCCC and strengthen the global response to the threat of climate change by:
- holding the increase in the global average temperature to well below 2 Celsius degrees above pre-industrial level and pursuing efforts to limit the temperature increase to 1.5 Celsius degrees above pre-industrial levels;
- increasing the ability to adapt to the adverse impacts of climate change and foster climate resilience and low GHG emissions development, in a manner that does not threaten food production; and
- making finance flows consistent with a pathway towards low GHG emissions and climate-resilient development.
In terms of emissions trading, the Paris Agreement envisages two main tools available to countries as compared to the Kyoto protocol.
Firstly, Art.6.2 allows inter-state emission reductions and removal trading by means of bilateral or multilateral agreements. The traded carbon credits are called Internationally Transferred Mitigation Outcomes (ITMOs). They can be measured in CO2 equivalent or using other metrics, such as kilowatt-hours of renewable energy.
Secondly, Art.6.4 creates a global carbon market regulated by a UN Supervisory Body. Projects shall be registered with the Supervisory Body and approved by both the country where they are implemented, and the Supervisory Body, before it can start issuing UN-recognized credits. These credits can be bought by countries, companies, or even individuals.
Thus, Art.6.4 of the Paris Agreement establishes the mechanism of GHG emission reductions between countries under the supervision of the COP, which is the decision-making body of the UNFCCC.
Unlike the Kyoto protocol, the Paris agreement became an effective tool allowing access to the emissions trading on CCM to all countries without discrimination and without creating artificial obstacles.
Currently, the carbon credits are part of GHG ETS operating on the cap-and-trade principle. A government or an international organization establishes a cap on allowable GHG emissions into the atmosphere in the form of quotas, which are distributed among producers and main emitters. If the companies emit less than the allowable limit, they can sell their surplus to other companies which failed to reduce their emissions, i.e. trade. Thus, the companies achieve net-zero within the state. Majority of the governments calculate their ‘caps’ in accordance with the undertakings under Paris Agreement and Kyoto protocol, which were discussed above. The results of carbon trading on such CCMs are calculated towards the country’s NDC.
- Regulation of the Voluntary Carbon Markets
As we have already seen above, the VCMs are self-regulated rather than mandated by centralized governmental organization. There are several Programs (Standards) which regulate the VCM, two of them are Verra and Gold Standard
Verra is a non-profit legal entity incorporated under the laws of the District of Columbia, establishing the world’s leading standards for climate actions and sustainable development. Verra has launched the Verified Carbon Standard (VCS), which is the world’s most popular GHG crediting Program. Verra’s VCS Program is trustworthy, for it guarantees the quality of the certified projects as well as their positive outcome for the environment.
VCS refers to the VCS Quality Assurance Principles, which guarantee the high standard of carbon offsetting under the Program. Among them there are the following:
- Projects must demonstrate that they are more than usual business and demonstrate that the GHG would not occur without revenue from sale of generated Verified Carbon Units (VCU).
- Projects apply the specifically developed methodology to ensure the GHG emissions reduction or removal took place and is measurable. Methodologies for quantifying project benefits are a key component of all Verra standard programs, for they play a great role in establishing requirements and procedures to determine project boundaries, identifying the baseline, assessing additionality, monitoring the relevant parameters, and ultimately quantifying the GHG emission reductions or removals. These documents are of a technical and scientific nature rather than legal, but are important to make the whole concept functioning.
- Conservative assumptions, values, and procedures must be guiding the Projects to ensure the GHG emissions are not overstated.
- Permanent result of the Projects’ activities.
- Projects are independently verified by the validation/verification body to confirm that they meet the VCS criteria and that all GHG emissions reductions or removals are quantified according to VCS requirements.
- Projects must be uniquely numbered and transparently listed on the Verra registry.
However, the voluntary market offset credits, unless directly accepted into the compliance regime, are not allowed to fulfill compliance market demand. The VCS Program is currently accepted into the CCMs such as Colombia’s Carbon Market, South Africa Carbon Market, and Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).
- Gold standard
Gold Standard is a non-profit organization that was established in 2003 by the World Wildlife Fund together with other non-governmental organizations to fight climate change and function in accordance with the directories established by the Paris Agreement. The Gold Standard was based on the principle that measures to combat climate change cannot be one-sided, and that climate projects must deliver substantial sustainable development benefits beyond reducing emissions. The results achieved by this Program (Standard) are outstanding; the Program has over 1,900 projects in over 90 countries underway.
Gold Standard carbon credits differentiate between:
- Verified Emissions Reductions (VER) for voluntary climate action. VERs are usually cheaper to obtain, and they also do not result in containment of any ‘eco’ labels; and
- Labels for Certified Emissions Reductions (CER) for meeting compliance targets. These labels are proving that the enterprise is green and meets the necessary emissions reduction threshold. Usually, businesses are encouraged to participate in the CER for marketing purposes, for they receive ‘eco’ labels and can increase product prices.
Gold Standard provides for the best practice corporate climate action allowing private businesses to directly contribute to the goals of the Paris Agreement. To be registered in the Gold Standard registry, the Project shall undergo the procedure of verification for compliance with Principles and Requirements created by Gold Standard. Like Verra, the Gold Standard Principles and Requirements are aimed at guaranteeing the effectiveness, quality, accountability, and clarity of the Projects registered.
Thus, we have seen the features of the most famous Programs (Standards) worldwide. Now the author would like to analyze the representation of the carbon offsetting in the laws of Kazakhstan and discuss the possibility of implementation of CCM and VCM in the state.
- Kazakhstan Carbon Neutrality Regulation through the Prism of International and Domestic Legislation
As we have seen above, carbon offsetting can work on two levels: international and intra-state. In this section we will consider both levels through the prism of laws of Kazakhstan and analyze the space for possible legislation and practical developments.
- General overview of Kazakhstan legal system
Prior to considering the more specific legislation regulating carbon offsetting, let us see the general overview of the Kazakhstan legal system. The main source of law in the republic is the Constitution of Kazakhstan (1995), which serves as a guarantor of political stability and human rights protection. In accordance with the Art.1.1 of the Constitution, Kazakhstan declares itself to be a democratic, secular, social state of law, the primary values of which are individual, his/her life, rights, and freedoms.
In accordance with the Art.4.1 of the Constitution, the sources of law include norms of the Constitution, constitutional laws, normative legal acts, international undertakings of the Republic, and the normative decrees of the Constitutional Court and Supreme Court of Kazakhstan. International treaties ratified by Kazakhstan prevail over the laws of Kazakhstan but cannot contradict the Constitution and constitutional laws. This means that in case of contradictions between the norms of the domestic law of Kazakhstan and ratified international documents on the same issue, the latter will take precedence. This approach corresponds to the international standards and can ensure that the internal legal politics of the state does not contradict the undertakings of that state on the international level.
- Domestic legal framework of environment protection
Talking about environment protection, the Constitution establishes the protection of the environment favorable for the life and health of individuals as one of the primary goals of the state. The environment protection issues are also regulated by the Environmental Code of RK serving as the main source of the environmental law, and other derivative normative legal acts.
The environmental law of Kazakhstan met a new dawn with the implementation of the new Environmental Code on 2 January 2021 (EC 2021), which replaced the old Environmental Code adopted on 9 January 2007 (EC 2007). Even though the EC 2007 played an important role in establishing the foundation of environmental law of Kazakhstan for 14 years, it had the main goal to fulfill the gaps in the state budget. The EC 2007 had several problems and gaps, including:
- the ineffective method of environmental impact assessment;
- inefficiency of the ecological approvals;
- obsolete approach to waste management;
- limited participation of the civil society in the ecological control and decision-making; and
- inappropriate ways of economic estimation of the environmental damage.
The EC 2021 aims at elimination of above-mentioned problems, implementation of the positive experience of the European Union and countries-members of the Organization for Economic Cooperation and Development.
Besides viewing the environment protection from radically different angles, the EC 2021 introduces the understanding of the carbon offset, which was not familiar to the EC 2007.
- Environmental Code 2021: View on Climate and Ozone Layer protection
The EC 2021 follows the pandect system and contains the general and special parts. While the general part deals with the definitions, main principles and purposes of the environment protection, the special part concerns the more detailed approach to safeguarding specific aspects of the environment, among which forests, water resources, soil, air, flora, fauna, and climate.
Thus, section 18 deals with various aspects of climate and the ozone layer of the atmosphere. The section introduces the domestic definitions of the carbon offset concept and explains its legal foundations.
The section defines the GHGs as gaseous substances (chemical compounds) constituting the Earth’s atmosphere, both natural and anthropogenic, which are capable of absorbing or reflecting infrared radiation. They include:
- Methane (CH4);
- Nitrous oxide (N2O);
- Hydrofluorocarbons (HFCs);
- Perfluorocarbons (PFCs); and
- Sulfur hexafluoride (SF6).
Furthermore, GHG emissions are defined as the release of GHG into the atmosphere because of anthropogenic processes. Absorption of GHG means the removal of a GHG from the atmosphere occurring as a result of any natural process or activity. The legislator established 1 metric tonne of CO2 as a metric unit for calculation of the GHG emissions volume, which corresponds to the international standards in the sphere of carbon offset.
The carbon offset in Kazakhstan functions based on the concepts of carbon budget, carbon quotas, and administering of plants operators; these are the instruments of state regulation in the sphere of GHG emissions and absorption regulations. The instruments are applied to the plants (stationary sources of the GHGs), the GHG emissions of which exceed the corresponding limits. Let us consider each of them step by step.
- The Carbon Budget
The carbon budget represents the established limit for carbon balance for the period of carbon budgeting, i.e., 5 (five) consequent years. For the purposes of this paper, the carbon balance is defined as the volume of factual GHG emissions minus volume of factual GHG absorption. The carbon budget is developed taking into account the need to comply with national contributions in accordance with international treaties of Kazakhstan in such a way that:
- for the carbon budgeting period from 2021 to 2025, the carbon budget for 2021 was not less than 1.5% below the 1990 carbon balance, in subsequent years — reduced by not less than 1.5% annually from the previous year’s carbon budget;
- for the carbon budgeting period from 2026 to 2030, the carbon budget for each calendar year was reduced by at least 1.5% of the carbon budget level of the previous year;
- for further periods of carbon budgeting, the carbon budget for each calendar year was not less than 15% below the level of the carbon budget of 1990.
- The Carbon Quota
For the period of carbon budgeting, the state establishes a quantitative limit on the total amount of quotable GHG emissions by quota-eligible plants (i.e., plants, the volume of GHG emissions of which exceeds 20,000 CO2 tonnes per year) in the framework of the National Carbon Quota Plan in the following economy sectors:
- electric power;
- oil and gas;
- metallurgical industry;
- chemical industry; and
- manufacturing industry in terms of cement, lime, gypsum, and brick production.
The National Carbon Quota Plan approved by the order of the Minister of the ecology, geology, and mineral resources of Kazakhstan on 11 July 2022 can be found in the Annex 1 to this research paper.
- Administering of the Plant’s Operator
The subject of quoting (i.e. the operator of the plant) receives a certain amount of quotas distributed by the state; quotas can be allocated between the plants upon discretion of the operator. The quota is also formed of the carbon units purchased by the operator on the carbon market. In the framework of those quotas the operators of the plants are entitled to trade their carbon credits.
- Compliance Carbon Markets within Kazakhstan
Carbon offsets under the legislation of Kazakhstan mean the reduction of GHG emissions and (or) an increase in GHG removals achieved as a result of activities in any sectors of the economy in Kazakhstan aimed at reducing GHG emissions and (or) increasing GHG removals. In fact, carbon offset cannot be recognized as a reduction in the quoted GHG emissions of a quoted plant.
The carbon offset scheme in Kazakhstan can be described as a centralized and state-regulated compliance market. Physical persons or legal entities wishing to participate in the carbon quotas trading shall register their Project, which is aimed at GHG emissions reduction or removal as described above, shall apply to the authorized body in the sphere of environment protection to receive approval of carbon offset and receive the offset credits. Notably, the credits are equal to 1 tonne of CO2 equivalent and do not have a term of expiration. The project applicant has the right to sell the offset units in the manner determined by the authorized body for environmental protection. The subject of the quota has the right to reduce the volume of redemption of carbon quota units by the volume of offset units received (purchased).
The CCM in Kazakhstan unites the following subjects of the market:
- Subjects of quota;
- Individuals and physical persons conducting a project on GHG removals and (or) reduction;
- Operator of the system of carbon units trading.
Distribution of carbon quota units among quota subjects is carried out on conditions of their free distribution and sale by auction within the limits of volumes determined by the National Carbon Quota Plan.
Due to the fact that this research paper does not focus on the detailed procedure of emissions trading in Kazakhstan, the author would like to provide a brief description of the CCM carbon units trading process. Thus, a brief algorithm of functioning of the ETS in Kazakhstan consists of the following steps:
- The subject of quotas until the 01 April of the current year must fill in the state carbon inventory electronic form of the report on the inventory of GHG emissions for the previous year.
- Based on the reports on the inventory of GHG emissions, a list of quota facilities to be included in the National Carbon Quota Plan is formed.
- The number of carbon quota units for quota plants to be distributed free of charge is calculated by applying benchmarks.
- The National Carbon Quota Plan is developed and approved for the relevant five-year period.
- The carbon quota determined in the National Carbon Quota Plan for each quota plant is credited to the corresponding account of the operator of the quota plant in the state registry of carbon units.
- The annual report on the inventory of GHG emissions is redeemed.
Importantly, carbon units generated by reducing the capacity of the quota unit cannot be sold and must be returned to the reserve of the National Carbon Quota Plan. Reduced capacity means a reduction in the annual volume of extraction, production, processing and (or) transportation of products.
If the capacity of the quota plant increases, the quota subject shall apply to the authorized body in the field of environmental protection to obtain an additional carbon quota. Also, the subject of quotas in the case of surplus (deficit) of quotas can sell (buy) carbon quotas through the trade exchange or through a direct transaction in the manner prescribed by the legislation.
The state registry of carbon units contains records of all transactions with carbon units (withdrawal, redemption, purchase, sale, receipt of the main (additional) quota, etc.). The state carbon cadaster contains electronic reporting data of enterprises (reports on the inventory of GHG emissions).
The legislator differentiates between two types of carbon markets in Kazakhstan — primary and secondary.
The procedure of trading at both types of markets is regulated by the Rules of carbon units trading approved by the Order of the Ministry of ecology, geology, and natural resources of Kazakhstan No.221 of 29 June 2021 (hereinafter, the “Rules of carbon units trading”).
- Primary Carbon Market
On the primary carbon market, the operator of the carbon units trade system conducts the sale of the carbon quota units from the corresponding category of the reserve of National plan of carbon quotas to the subjects of the carbon market by means of auction. In Kazakhstan, the operator of the carbon units trading system is Zhasyl Damu Joint Stock Company (Zhasyl Damu JSC), which is a subordinate company of the Ministry of ecology, geology, and natural resources. The author has found no evidence of the auctions conducted by Zhasyl Damu JSC. These days the main way by which the quotas are distributed is by means of free distribution plus by the results of the application for additional quotas discussed above.
- Secondary Carbon Market
On a secondary carbon market, the subjects of the carbon market conduct the sale and purchase of carbon units by means of direct transaction or through a trading exchange between each other.
Direct transaction on carbon units is made by participants of the carbon market based on a contract of sale and purchase at a price not lower than the level of the exchange quotation of carbon quota unit and offset unit on the day of the transaction. In the absence of such price, it is determined by the last available price quotation for a carbon quota unit or offset unit.
In the case of a direct transaction on carbon units, the buyer of carbon units shall provide Zhasyl Damu JSC with the third copy of the sale and purchase agreement in order to form the price indicator of transactions on carbon units and ensure their delivery in the state register of carbon units. Zhasyl Damu JSC publishes the price indicator of out-of-trade-exchange transactions, compiled based on a contract provided by the purchaser of carbon units monthly. Lastly, Zhasyl Damu JSC conducts the transfer of purchased carbon units in the state register of carbon units from the seller’s account to the buyer’s account within 3 working days from the date of submission to him of the contract of sale.
The trading on secondary carbon market can also be conducted through the trading exchanges such as:
The trading on such trade exchanges is conducted on the basis of the Rules of Exchange Trading approved by the Order of the Minister of national economy of Kazakhstan No.280 dated 30 March 2015.
From 2018 to 2020, the country had a total of 52 transactions and realized allowances of more than 5.6 million tons of CO2, an estimate made by HS Markit in the Kazenergy-2021 National Energy Report (NER).
Under the Paris agreement, ratified by Kazakhstan on 4 November 2016, Kazakhstan’s NDC target is to reduce its GHG emissions by between 15% and 25% by 2030 compared with levels of 1990. Moreover, Kazakhstan envisages in the environment legislation the obligation to decrease the carbon balance not less than by 15% as compared to the level of 1990 by 31 December 2030. This will inevitably lead to decrease of free carbon quotas distributed by the government, and subsequent price decrease of carbon credits on the secondary market.
To conclude this part, ETS under Kazakhstani legislation is mostly state-controlled and is connected to the legal obligations of the states enshrined in the international treaties. Even though there are free trade exchanges, it is hard to speak about the VCM in Kazakhstan as it is understood internationally. The access to emissions trading within the state is limited to certain types of quoted plants as discussed above, which makes the experience of the state in the sphere of carbon offset incomplete.
- Kazakhstan on the International Compliance Carbon Market
In section 2.2, we have seen some major documents in international law governing the issues of climate change and emissions reduction. They have influenced Kazakhstan, which ratified UNFCCC by the order of the President of the Republic of Kazakhstan on 4 May 1995, and the Kyoto protocolon 26 March 2009.
After the accession to the Kyoto protocol Kazakhstan undertook the obligation not to exceed the GHG emissions level of 1992. According to statistical data, Kazakhstan has succeeded in the described goal; the level of GHG emissions of Kazakhstan was approximately 80 million tonnes below the threshold level already by 2010. However, Kazakhstan was never listed among the countries in Annex 1 to UNFCCC or Annex B to the Kyoto protocol, which prevented the state from participation in the international CCM. Potentially, those unused AAU could have been sold on the international carbon market under Kyoto protocol and attract foreign investors to develop ‘green’ projects, which in turn will contribute to the infrastructural and economic development of the state. However, the initiative experienced some difficulties.
Based on the existing legislation, Kazakhstan tried to participate in the CDM project “quotas in exchange to investment” in cooperation with Japanese investors. In 2002 Japanese company NEDO signed a model contract on energy-saving on Ural power plant with the Ministry of Energy and Natural Resources. According to the Model contract, NEDO undertook to install the gas turbine station with a capacity of 28.6 MW. The installment successfully reduced the amount of GHG emissions by 62,000 tonnes per annum. However, because of the Kyoto protocol being non-functional in Kazakhstan, the transfer of quotas was not successful. This can be a result of the underdeveloped legislation. Before 2007 in Kazakhstan there was no Environmental code in the state and the sphere was regulated by the Law No.160-I of 15 July 1997 “On environment protection”.
The possibilities for free carbon trading became broader with the Paris Agreement as compared to Kyoto protocol. As we have seen above, the environmental legislation introduces the concept of carbon offset; the EC 2021 in Art.299.11 envisages the possibilities for international carbon trading by means of international treaties. Statistical data also shows a drastic decrease of CO2 emissions, which are the potential commodities on the carbon market. However, to this day Kazakhstan has never participated in the international carbon offsetting.
To analyze the reasons behind such a situation, the author conducted an interview with Ms. Laura Malikova, a Chairman of the Association of Practicing Ecologists of Kazakhstan. Ms. Malikova is also an environmental expert with extensive experience in environmental engineering, environmental project design in different sectors of the economy, environmental policy making process; she is currently actively involved in environmental policy review and capacity building in environmental areas.
- Challenges on the Way to International Compliance Carbon Market
In opinion of Mrs. Malikova, Kazakhstan does not have enough tradable emissions reductions to propose on the international CCM. The statistical data provided in the relevant sources is often biased and exaggerated, not reflecting the reality. In fact, the drastic reductions in the CO2 emissions in the beginning of the independence period were caused by one-time radical measures rather than by the results of long-term climate change policy, while only the latter could bring the significant reductions in GHG gases and possibilities to access the international CCM.
For the government of Kazakhstan, the issue of emissions reduction was not a priority until approximately 2016. Thus, in 2017 Kazakhstan was the first country in Central Asia to host the international EXPO-2017 exhibition devoted to the renewable energy resources. In the annual message of the President of Kazakhstan to the nation dated 10 January 2018, the national leader accentuated the importance of increasing the share of the alternative energy to 30% by year 2030. Today, the climate change agenda cannot be ignored anymore.
According to Mrs. Malikova, there were several factors due to which Kazakhstan could not accumulate enough tradable carbon credits. Firstly, for a period between 2014 and 2019 there was no separate Ministry of Ecology. It was a part of the Ministry of Energy, Ministry of industry and infrastructural development, and Ministry of agriculture. During this period the issues of environment protection were not the primary focus of the government; this led to the lack of funding of the environment protection programs and ignorance of the major ecological problems. Moreover, the further distribution of money coming to the state budget from environmental fines, fees and taxes could not be traced. The fact that those money could have been allocated on healthcare, education, social allowances, etc. violated the principle of restoration of the environmental damage. Only on 17 June 2019 the Ministry of Ecology, Geology, and Mineral resources was established to govern the issues of environment protection.
Secondly, Ms. Malikova accentuates the lack of qualified ecologists on governing positions. It can be illustrated by the events of January 2019 in Kazakhstan, when the act of violence in the country’s large cities caused by the people’s protests resulted in the series of rotation of governmental officials rather than thoughtful consideration of the experts for the corresponding ministerial office.
Lastly, Ms. Malikova mentioned that today, after 30 years of independence, most of the energy in Kazakhstan is obtained from fossil fuels. It is necessary to develop clean energy sources, especially with the fact that in the EC 2021, a lot of barriers to implementation of the renewable energy sources (RES) development were eliminated. “Currently, the main problem of RES in Kazakhstan is the absence of energy storage systems. The energy is obtained but cannot be accumulated for the purposes of later usage” — says Laura Malikova. Therefore, the state needs to encourage the development of RES business by means of eliminating the legislative barriers and reducing the tax burden on RES producing companies. Moreover, it is important to encourage scientific research aimed at application of the best available technologies.
Thus, mentioned criticism is aimed at giving the state officials the fresh view on systematic problems from the representatives of the civil society, as well as the impulse to act towards the green future of the state and new possibilities for its economic development. Moreover, the solution of the mentioned obstacles to the development of the international CCM may become a first step towards establishment of the Central Asian CCM based on the example of European Union.
- Voluntary Carbon Market in Kazakhstan: A Way Towards Green Business
Talking about the VCM, currently in Kazakhstan there is no separate VCM available for the people and legal entities willing to reduce their emissions. The free trade on the exchanges discussed above is conducted between the subjects of quota, which is still narrowing down the access to carbon markets. Currently, the awareness of businesses about carbon trace elimination is rising in connection to the promotion of the Environment, Social, and Governance (ESG) Standards as modern standards of companies reporting for potential investment and sale-and-purchase activities. Besides financial indicators, ESG standards consider – among others – the impact of the business on environment. Participation in emissions reduction programs may help businesses attract investors and increase price of the shares.
According to Laura Malikova, even though the interest of business in carbon credits trading is increasing, the government is not ready to provide us with the comprehensive legal and technological foundation for the VCM development. Introduction of the VCM will require additional legislative reforms, supplementary technical assistance, time, and efforts. Prior to deciding to establish the VCM in Kazakhstan, it is important to understand its importance and relevance.
As we have seen above, the carbon markets are growing intensively. Through the carbon offset the large indicators in terms of GHG reduction are achieved. However, there are some drawbacks of carbon offset, especially relevant for the VCM.
- Criticism of the Voluntary Carbon Markets
Despite the growth of the VCM, its contribution to the GHG reduction has been relatively small as compared to the reductions on CCM. VCMs alone cannot reach the temperature targets set forth by the Paris agreement. To reach the 1.5-degree Celsius goal, annual net GHG emissions must fall by 23 billion tonnes of CO2 equivalent by 2030. VCMs, in a highly optimistic view, can hope to achieve a 2 billion CO2 equivalent reduction by 2030, which is less than 10% of the desirable amount.
Then, it is important that the Programs (Standards) regulating the VCM are qualified to issue carbon credits and assess the effect of green Projects. Therefore, prior to launch VCM, the government needs to make sure that the new subjects entering the carbon quota market are reliable.
Another point is the reliability of the registry; when the transaction on carbon credits sale and purchase is conducted, it is necessary to keep the correct record of the credits transferred to prevent the double offset. This requires the technical assistance and highly developed accounting systems.
Lastly, the lack of governance and unity of Standards on different VCMs makes it harder for the subjects of carbon offsetting to trust them. Businesses and individuals prefer not to invest money into the projects, which cannot be trusted.
Thus, we see that the VCM shall act as rather a supplementary measure to the well-developed national and international CCM. As it was discussed earlier, there are some major tasks Kazakhstan needs to face to enter the international CCM and come closer to the target emissions.
This research paper is an original work aimed at creating a comprehensive analysis of the modern trend of carbon offsetting from the legal and practical standpoints. The author tried to illustrate the essence of the concept, describe the legal foundations of carbon offset functioning on both international and domestic levels, and provide key advice for Kazakhstan to become more advance on the way to net-zero in terms of CCM development and VCM implementation.
The author expresses her hope that the research paper will encourage the further research and actions from civil society and government representatives and will serve as a foundation for forming a climate change discourse in a new way.
National plan of carbon quotas
approved by the order of the Minister of the ecology, geology, and mineral resources of Kazakhstan on 11 July 2022
|Regulated sphere of activity||Number of installments||Volume of quotas for 2023, CO2 tonnes||Volume of quotas for 2024, CO2 tonnes||Volume of quotas for 2025, CO2 tonnes|
|Electric power||89||93 872 608||92 469 647||91 076 361|
|Oil and gas||49||22 692 974||22 353 819||22 017 003|
|Mining||21||7 224 012||7 116 047||7 008 826|
|Metallurgical||19||30 285 148||29 832 525||29 383 023|
|Chemical||7||1 689 335||1 664 087||1 639 013|
|Manufacturing (in terms of the production of building materials: cement, lime, plaster and bricks)||14||7 889 302||7 781 244||7 664 000|
|Total||199||163 663 379||161 217 369||158 788 226|
|Total volume||649 828 969|
|Reserved||11 643 887||11 460 288||11 299 264|
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 For the purposes of this research paper the following definitions shall be introduced:
- Program (also Standard) – either governmental or non-governmental standard-setting organization established to provide quality assurance for carbon offsets;
- Project – an activity registered in accordance with the requirements of the chosen Program aimed at reduction of GHG emissions.
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