environmental perspective of russia’s...

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

FEBRUARY 2014

ENVIRONMENTAL PERSPECTIVE OF RUSSIA’S ACCESSION TO THE WORLD TRADE ORGANIZATION

WORLD BANK REPORT NUMBER 83505-RU

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83505

ENVIRONMENTAL PERSPECTIVE OF RUSSIA’S ACCESSION TO THE WORLD TRADE ORGANIZATION

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

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, NWWashington, DC 20433Telephone: 202-473-1000Internet: www.worldbank.orgEmail: [email protected]

All rights reserved.

February 2014

This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The fi ndings, inter-pretations, and conclusions expressed in this paper do not necessarily refl ect the views of the Executive Directors of The World Bank or the governments they represent.

The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on maps in this work do not imply any judgment on the part of The World Bank concerning the legal status of any ter-ritory or the endorsement or acceptance of denoted boundaries.

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Cover Photos: Courtesy of Vassili Rodionov : Chemical plant with closed ODS production with a view of shore of a bromide Lake Yarovoe Slavgorod town in Altai Krai, and, courtesy of Shutterstock, LLC, a cargo ship plies the sea, transporting trade goods.

I I I

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

CO N T E N T S

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

Certifi cation 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

CO N T E N T SI V

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 CC 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 6: Evidence of Potential for Effi ciency Gains and Cleaner Technology Adoption in Russia . . . . . . . . . . . . . . 35

Russia’s Current Resource Use Profi le . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Regional Impacts of Energy Sector Reform. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Potential Effi ciency Savings in Russia’s Foundry Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

What Do Foundries Think of WTO? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Potential Effi ciency 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 Specifi c 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 Eff ects 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 Effi cient and Environmentally Eff ective Innovation to Control Sulfur Dioxide Emissions and Acid Rain in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Box 4.3: Tax and Rebates: Sweden’s Politically-Eff ective 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

V


CO N T E N T S

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 Effi ciency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Figure 6.15: Measures to Optimize Resource Effi ciency 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 Eff ects Expected on the Environment . . . . . . . . . . . . . . . . . . . . . . .7

Table 2.2: List of Sectors Included in the Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Table 2.3: Overview of Pollutants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9


V I CO N T E N T S

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

V I I


A C K N O W L E D G M E N T S

ACKNOWLEDGMENTS

This report was prepared by a team of World Bank staff and consultants working on sustainable development, environment and resource

effi ciency, 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 Offi cer, 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 profi les. 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.

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A B B R E V I AT I O N S

ABBREVIATIONS

AEL Associated Emissions Levels

AGR Agricultural

APEC Asia-Pacifi c Economic Cooperation

BAT Best Available Technique

BCA Benefi t-cost Analysis

BREFs Best Available Technique Reference Documents

CES Constant Elasticity of Substitution

CGE Computable General Equilibrium

CHM Chemical Products

CIS Commonwealth Independent States

CLI Textiles and Apparel

CnHm Hydrocarbons

CNM Construction materials

CO Carbon monoxide

CO2 Carbon dioxide

CRTS Constant Returns to Scale

EC European Commission

EEF Energy Effi cient Target

EEIA Economic and Environmental Impact Analysis

EGS Environmental Goods and Services

ELV Emission limit values

EQS Environmental quality standards

ETS Emission Trading Scheme

EU European Union

EV Emission values

FDI Foreign Direct Investment

FME Ferrous metals

FOO Food

GATS General Agreement on Trade in Services

GATT General Agreemant on Tariff s and Trade

GDP Gross Domestic Product

GHG Greenhouse gasses

GPA Agreement on government procurement

GRP Gross Regional Product

GWh Gigawatt hours

HEV Hicksun Equivalent Variation

IED Industrial Emission Directive

IFC International Finance Corporation

IO Input-Output

IPPC Integrated Pollution Prevention and Control

IRTS Increasing Returns to Scale

ISO International Standards Organization

KPI Key performance indicators

LCP Large Combustion Plants

MAC Maximum Allowable Concentration

MBI Market-based Instruments

MEA Multilateral Environmental Agreement

MFN Most favored nation

NAFTA North American Free Trade Agreement

NFM Non-ferrous metals

NGO Nongovernmental Organization

NOx Nitrogen oxides

NTF Nontariff

OECD Organization for Economic Cooperation and

Development

OEM Original equipment manufacturer

PAC Pollution abatement costs

PM Particulate matter

PM10 Particulate matter with a diameter of less than 10

microns

PPM Processes and production methods

SCM Subsidies and countervailing measures

SED Solvent Emissions Directive

SO2 Sulfur dioxide

SPS Sanitary and Phytosanitary

TBT Technical trade

TPP Wood, paper, and pulp

TRIP Agreement on Trade-Related Aspects of Intellectual

Property

TWG Technical Working Group

VOC Volatile Organic Compounds

WID Waste Incineration Directive

WTO World Trade Organization

X A B B R E V I AT I O N S


X I


E X E C U T I V E S U M MA R Y

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 effi ciency, 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-effi cient

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 eff ectiveness.2 In its Climate Doctrine,3 Russia offi cially acknowledges the alarming eff ects

of global warming and the threat it poses to its security, and has committed to improve its energy effi ciency and reduce emissions. The

Energy Effi ciency Law adopted in November 2009 marks a signifi cant step towards effi cient 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 benefi ts of trade liberalization. Industrial leaders may also benefi t from many of the report’s

conclusions and recommendation.

The report has several objectives. The fi rst 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 (effi ciency improvements) and what the associated environmental benefi ts 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 ineffi cient manner—either through large subsidies or funding ineffi cient 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.

X I I



induced directly or indirectly, would serve to promote better effi ciency 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 eff ect), sector mix (the composition eff ect), and

productivity (the technique eff ect). The model highlights several areas where benefi ts could lead to better protection of the environment, and

where liberalization measures could signifi cantly enhance the eff ectiveness 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 aff ected 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 eff ects 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 eff ec-

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 eff ectiveness of its own environmental protection

policies, and, on the other hand, reaffi rm 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 signifi cantly potential confl icts 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 effi ciency gains from more eff ective 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

X I I I



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 specifi c 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 fl ows. 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 offi ce 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 eff ects 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 effi ciency target (EEF); and (c) WTO liberalization with CO2 reductions and EEF. Note that the results do not include health

benefi ts normally associated with pollution reduction—which could be quite signifi cant. So pollution reduction to sectors enters the model

as a cost, but the potentially-realizable health benefi ts (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 eff ects, the scenarios are grouped in two scenario groups. The fi rst CRTS5 group does not refer to

any technology shift through productivity eff ects. As has been elaborated, however, by Jensen, Rutherford and Tarr (2007) and Rutherford

and Tarr (2010), productivity eff ects 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

eff ects from trade liberalization and liberalization of barriers to foreign direct investment. Productivity eff ects 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 eff ects triggered by trade liberalization policies. CRTS, however, omits potentially important productivity changes in sector production (that is, part of the technique eff ect).

X I V



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-benefi cial 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 eff ective measure for emissions

reduction. The objective of reducing energy intensity should be pursued through a system of tradable effi ciency permits across energy

carriers, sectors, and regions rather than through specifi c mandates on all fi rms. A tradable scheme would achieve the same emission

reduction objective, at a lower cost since some fi rms who will have higher marginal abatement cost could purchase permits from lower

cost fi rms.

Why Does Trade Liberalization Present Signifi cant Opportunities for Environmental Improvements?

Russia’s WTO Accession presents signifi cant opportunities for economy-wide improvements in economic output, productivity, and govern-

ment revenues. Russia will also reap substantial gains from WTO accession with widespread benefi ts 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 diff erent 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

CRTS SCENARIOS IRTS SCENARIOS

WTOcrts (1)

CO2 (2)

EEF (3)

WTO (4)

WTO_CO2 (5)

WTO_EEF (6)

WTO_CO2_EEF (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

Emis

sion

s ( p

erce

nt c

hang

e)

CO2

0.3 –20.0 –16.3 3.7 –20.0 –11.2 –20.0

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

Emis

sion

inte

nsit

y

of p

rodu

ctio

n

(per

cent

cha

nge) Electricity 0.1 –2.7 –20.0 –6.7 –9.7 –21.5 –22.1

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

X V



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 eff ect (more output) and from a likely shift toward more polluting industries. But direct emission pricing or indirect emission pricing

through energy effi ciency 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 aff ords substantial opportunities to improve environmental quality in many

regions by introducing energy effi ciency 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 effi ciency permits across energy carriers, sectors, and

regions rather than through specifi c mandates on all fi rms. A tradable scheme would achieve the same emission reduction objective, at a

lower cost since some fi rms who will have higher marginal abatement cost could purchase permits from lower cost fi rms.

Focusing on selected policy measures that can help recoup potential increase of industrial emissions and simultaneously in-

fl uence behavioral change towards the use of more energy effi cient and cleaner technologies, would be a win-win approach.

On one hand, it will help address the pending trade-off s between economic growth and pollution triggered by trade liberalization, and, on

the other, complement the eff ective implementation of WTO rules. In order to increase Russia’s environmental policy eff ectiveness 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 infl uencing polluters’ behavior. Several policy areas which if implemented consistently

could reinforce in a positive way the long term impacts on the sustainability profi le of Russian industry. These include:

§ Reform the current system of pollution charges by introducing coeffi cients 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 fi scally neutral from public fi nance point of

view, and encourage improved effi ciency 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 effi ciency standards, and emissions pricing levels that would push adoption of clean techno-

logies. Russia will reap substantial gains from WTO accession with widespread benefi ts 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.

X V I



“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 eff ective 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 fi rms with higher costs of abatement to trade with fi rms 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 fi rms, mechanisms could be designed that are broadly revenue neutral, that is, there could be tax incentives provided for

fi rms 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 effi cient technologies as well as the contri-

bution of Russia to international eff orts to mitigate climate change impacts. To address political opposition to environmental abatement

policies among fi rms, mechanisms could be designed that are broadly revenue neutral, that is, there could be tax incentives provided for

fi rms that adopt clean technologies at the same time there are charges for pollution. Transition to an eff ective 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 effi cient, low environmental-impact materials and products. By taking this avenue Russia could reaffi rm 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

Effi ciency Improvements until 2020.”

There is evidence that Russian production sector can gauge the potential of cleaner, more effi cient, technologies while ben-

efi ting from resource effi ciency 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 effi ciency savings and benefi ts

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 effi ciency, and a lack of focus on quality, means this advantage is entirely lost. Factory audits revealed that

improvements in resource effi ciency could result in a cost savings of up to $3.3 billion annually to the sector.

The main fi nding 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 effi ciency 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 benefi cial 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.

1


C H A P T E R 1 — I N T R O D U C T I O N

Chapter 1 INTRODUCTION

RUSSIA’S WTO ACCESSION

Russia‘s exports, imports and ability to attract foreign direct invest-

ment (FDI) continue to grow. Russia’s exports and imports increased

more than fourfold between 2000 and 2008 as did its trade surplus.

Exports of goods exceeded imports by more than $100 billion since

2005 and by 2011 Russia was the world’s ninth largest exporter,

shipping $522 billion in goods and $53 billion in services to its trad-

ing partners. The trade surplus also expanded from at $154.7 billion

in 2008 to nearly $200 billion by 2011—the largest trade surplus

on goods of any country in the world. Foreign direct investment

constituted one percent of GDP and 5.5 percent of gross capital

formation in 2000 and 4.5 percent of GDP and 18.1 percent of gross

capital formation in 2008, showing that as the economy has grown

the ability to attract FDI grew faster.8 FDI did, however, fall back to

about 2.9 percent between 2009 and 2011—a likely investors’ reac-

tion to the global economic crisis.

In December 2011, after eighteen years of negotiations, the World

Trade Organization invited Russia to join WTO on the basis of the

negotiated protocol of Russian accession. Russia ratifi ed the agree-

ment in July 2012.

As part of its accession to the WTO, Russia agreed to a series of

important commitments to further open its trade and foreign in-

vestment regimes. Russia will open its market to foreign imports

by setting binding tariff levels on a wide range of products and

eliminating all industrial subsidies. By 2020, the average tariff will

fall from 11 percent to 7.6 percent on a simple average basis. Its

use of standards and norms will be constrained to be applied in

a nonprotective manner. Russia has made commitments in 116

services sub-sectors. Market access for services will be provided by

8 See Tarr and Volchkova (2013).

removing various limitations on foreign equity and foreign capital

participation in services and productive sectors.9 Russia will apply

international standards on sanitary measures and technical barriers

to trade. Many specifi c limitations on foreign investors who would

like to provide services in Russia will be liberalized. Russia agrees to

open negotiations to join the plurilateral government procurement

agreement within four years of accession to the WTO. Many conces-

sions have already been implemented prior to accession, but for

many others there will be a long transition period. A more detailed

overview of Russia’s WTO commitments is provided in appendix 1.

The Ministry of Economic Development and Trade of the Russian

Federation requested that the World Bank undertake studies to

assess the consequences of WTO accession in Russia. This has led

to several studies of the likely impacts. Jensen, Rutherford, and Tarr

(2007) estimated that in the medium term, Russia should gain about

3.3 percent per year of the value of Russian gross domestic product

(GDP) (or about $49 billion per year based on 2010 GDP at market ex-

change rates). In the long term, when the positive impact on the in-

vestment climate is incorporated, the gains should increase to about

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)

9 Notable commitments include: the quota on the maximum share of for-eign banks or insurance companies increased from 15 percent to 50 per-cent. Branches of foreign insurance companies will be allowed 9 years after accession. In telecommunication services—the 49 percent maxi-mum foreign equity restriction will be removed 4 years after accession. National treatment and market access will be provided for wide variety of professions (such as lawyers and accountants), and for wholesale and retail trade and courier services.

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 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 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 to about $76 billion per year and $253 billion per year in the long term.

2



examined household and poverty impacts and found that virtually

all household should gain from WTO accession due to the increase

in wages and the returns to mobile capital. They found that skilled

labor and urban households gain relatively more than average due

to the increase in foreign direct investment in the skills intensive

business services sectors. The poorest households are estimated

to gain at about the level of the average household. Given the vast

geographic diversity of Russia, Rutherford and Tarr (2010) estimated

that all regions should gain substantially, but the regions that will

gain the most are those that are most successful at attracting foreign

direct investment and creating a good investment climate.

In summary, these studies indicate that Russia will reap substantial

gains from WTO accession; the benefi ts are widespread and will

reduce poverty. Those regions that establish a better investment

climate will reap greater gains from WTO accession, and, crucially,

most of the gains are due to Russia’s commitments to implement

its own reforms. The commitments to implement reforms in the

services sectors are the most important of Russia’s own reforms that

produce the gains.

TRADE LIBERALIZATION AND THE ENVIRONMENT

There is a broad agreement among the international development

community that economic, social and environmental objectives are

central to sustainable development. Several provisions in the WTO

Agreements recognize the linkages between sustainable develop-

ment and environment.

The core agreement of WTO system, the General Agreement on

Tariff s and Trade (GATT), refers to provisions for protection of hu-

man, animal and plant life, health and safety conservation of natural

resources. While these were not specifi cally written with living natu-

ral environment in mind, they could be reasonably interpreted as

tied to environment protection based on several WTO/GATT panel

statements.11

Environmental goods and services as a subset of goods and services

were singled out for attention of negotiating parties and adopted

at the Fourth Ministerial Conference of WTO in November 2001.

11 Brown and Jackson, eds. 2001. Reconciling Trade and Environment. New York: Transnational Publishers.

A more recent momentum on policy development was gained

during the 2012 Rio+20 Earth Summit reaffi rming the importance

of trade as an “engine for development and sustained economic

growth.” The Earth Summit also declared that not only could trade

liberalization facilitate achievement of sustainable development

benefi ts globally, but it could act as a powerful tool for growth and

employment generation, use of innovative technologies and trans-

fer of knowhow and skills. Russia’s economic modernization agenda

and accession to WTO are mutually supportive. Gradually opening

Russian markets to environmental goods and services can yield a

number of positive eff ects such as reduced air and water pollution,

improved energy and resources effi ciency, and facilitation of proper

waste disposal. Undoubtedly, by becoming a WTO member, Russia

will be aff ected by the complex linkages that bind trade with sus-

tainable development but the direction it has taken seems right.

From an economic perspective, WTO accession and the environ-

ment are related because most economic outputs are based on

inputs from the environment, including the energy for processing

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-

mitment to an open and nondiscriminatory multilateral trading

system.12 Paragraph 31(iii) of the Doha Ministerial Declaration13 calls

for reduction or as appropriate, elimination of tariff s and nontariff

barriers (NTF) on environmental goods and services (EGS), although

it will take a while for WTO to agree on the defi nition of EGS. WTO

gives great latitude to its members to apply the most eff ective poli-

cies and approaches to protect the environment.

Although the process is far from being completed, due to diff erences

among WTO members on what goods to liberalize, signifi cant prog-

ress was achieved by the leaders of the 21 Asia-Pacifi c Economic

Cooperation (APEC) economies meeting in Vladivostok, Russia, who

agreed to voluntarily liberalize tariff s on 54 environmental goods.

Potential economic gains from WTO accession can be grouped

in three categories: (1) gains from imports, (2) gains from exports,

and (3) gains from liberalization of barriers to FDI. WTO accession

12 This is stated in the preamble of the Marrakesh Agreement and reaf-fi rmed in the Doha Ministerial Declaration.

13 Doha WTO Declaration adopted in November, 2001.

3



will aff ect Russian imports in two ways: through the reduction in

import tariff s, and through the introduction of greater competition

from foreign fi rms in the Russian goods and services markets. Lower

prices for imported machinery and services should benefi t Russian

fi rms, for example, by facilitating the import of cleaner technolo-

gies. Competitive markets can spur innovation and accelerate fi rms’

capital and investments in more productive technologies. The gains

from exports depend on the success of the general economic re-

form over the medium to long term (creating a positive business

environment, adequate industrial policies, and so on). Russian

exporters will benefi t from legal provisions in antidumping cases.

Although they are unlikely to gain substantially several sectors sub-

ject to antidumping actions, such as ferrous and nonferrous met-

als, and some basic chemicals, are expected to experience gains in

international competitiveness.14 Signifi cant welfare gains from WTO

accession are likely to occur through liberalization of the barriers

to FDI in services. Russia had made broad commitments under the

14 See Tarr and Volchkova (2013) and Connolly and Hanson (2012).

General Agreement on Trade in Services (GATS) to market access

and national treatment of foreign fi rms that provide environmental

services (see appendix 2 for details). Increased access to foreign sup-

pliers of environmental services15 should 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. Further, trade and foreign direct investment liberal-

ization should improve incentives for exporters.16

All of the above indicates that the impact of WTO accession on the

output of diff erent sectors is 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 sec-

tors. But there will be a positive impact from a decline in the price

of intermediate inputs in goods and services. Export-intensive indus-

tries should see an increase in the prices they receive in rubles from

a depreciation of the real exchange rate and improved treatment in

antidumping. The impact studies more generally fi nd that export-

intensive sectors such as ferrous metals, non-ferrous metals and

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

sectors, the sector reallocation of output could be harmful to the

environment (unless there are countermeasures to reduce pollution).

RUSSIA’S ENVIRONMENTAL CHALLENGE

As the largest country in the world spanning nine time zones with

a population of 142 million people, Russia is also one of the rich-

est countries in the world for oil, gas and a wide range of minerals.

Russia’s natural endowment is a key driver of economic growth

based on production and export of raw materials. As a legacy of the

technology of the Soviet era in the extraction and manufacturing in-

dustries, many industries are characterized by high resource use, ex-

tremely high energy ineffi ciency and obsolete production processes.

15 Services include: sewage, refuse disposal, sanitation, cleaning services of exhaust gases, noise abatement, nature and landscape protection, and environmental impact assessment.

16 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 depreciated real exchange rate improves the incentives to exporters.

BOX 1.1: Trade Liberalization and Environment

The APEC Forum is an economic forum set up with objective of supporting sustainable economic growth and prosperity in the Asia-Pacifi c region, including by championing free open trade and investments. The Vladivostok Declaration states that applied tariff s can be cut to fi ve percent or less taking into account economies’ economic circumstances and with-out prejudice to their positions in the WTO. The APEC List of Environmental Goods contains 54, 6-digit sub-headings of the Harmonized System (HS). The APEC List of environmental goods: environmental categories includes

CATEGORIES OF MAIN ENVIRONMENTAL PROTECTIONNUMBER OF

SUB-HEADINGS

Renewable energy 15

Environmental monitoring, Analysis and Assessment Equipment 17

Environmental protection principally SHW, WWM, APC 21

Environmental Preferable Products (bamboo) 1

Total 54

Source: The APEC List of Environmental Goods; Issues Paper No. 18 ICTSD’s Global Platform For Climate Change, Trade and Sustainable Energy.SHM = solid and hazardous wasteWWM = waste water managementAPC = air pollution control ICTSD = International Center for Trade and Sustainable Development

4



The quality of environmental conditions in Russia is inadequate on

about 15 percent of the country’s territory which is home to 60 per-

cent of the population. Due to high levels of air pollution the average

life expectancy of the population is reduced by about one year, while

in more polluted cities by about four years. It is estimated that air pol-

lution is responsible for about 12–15 percent of total deaths annually.

The economic cost of air pollution has been estimated to average

around $14 billion annually—or 4–12 percent of GDP— depending

on the methods employed (Strukova, Balbus and Golub (2007);

Reshetin and Kazazyan (2004). The main sources of air pollution are

PM10, SO2, and NOx, linked to fossil fuel combustion (IFC 2008).

A major challenge for Russia, to address air pollution, is the potential

increase of the share of coal in the fuel mix, as export markets take

priority for oil and natural gas use. Russia is currently planning to triple

the share of coal in the energy mix so that the amount of coal burnt

will grow to between 150 million and 290 million tons of coal per year

by 2020. New coal generation is potentially a good option for Russia to

increase its generation capacity, but care needs to be taken to identify

the best “clean-coal” technologies to use in these new plants.17

Russia’s economy is currently one of the most energy- and carbon

intensive economies and is the fourth largest emitter of greenhouse

gas emissions worldwide. It uses 822.7 tons of carbon dioxide equiv-

alents (t CO2e) to create one million USD of GDP,18 compared to less

than half that for appendix 1 countries under the Kyoto Protocol.19 At

the international level, Russia ratifi ed the Kyoto Protocol in 2004 as

part of the global community’s solution to climate change.20 Russia

is committed to pursuing a greenhouse gas emission reduction

17 This could include carbon capture and storage options—however the adoption of cleaner technologies would be preferable rather than end-of-pipe solutions.

18 At purchasing power parity.

19 Climate Analysis Indicators Tool (CAIT) data for 2005: http://cait.wri.org/

20 On November 5, 2004, Russia ratifi ed the Kyoto Protocol, and the Protocol came into force in February 2005. Russia is listed in Annex B of 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 exceed fi ve times their combined 1990 levels during the period 2008–2012. This target is generally expressed in annual terms: on average, 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, Russia’s economy has grown at a pace of more than 6 percent per year, calling into question whether Russia will stay within the borders set by the Kyoto Protocol for the period beyond 2012.

of 25 percent from 1990 emission levels by 2020, despite a shift in

attitude to national, nonbinding targets and refusal to renew its

Kyoto Protocol commitments at the Durban conference in 2011,

and following the Copenhagen accords.

Today, environmental challenges are being recognized in the

national policies, strategies and programs. Russia’s Program on

Environmental Protection 2012–20 acknowledge the inseparabil-

ity of environment, social and economic objectives as central for

sustainable development. Russian policies mark a shift towards a sus-

tainable development model emphasizing increased investments in

energy and resource effi ciency, cleaner technologies, recycling and

reuse of wastes. Transition to an eff ective 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 effi cient, low environmental-impact materi-

als and products. According to its state program on “Energy Saving

and Energy Effi ciency Improvement until 2020,” Russia is seeking

to achieve a 40 percent reduction in energy intensity by 2020 and

56 percent by 2030. In addition, it is striving to achieve 53 percent

effi ciency in gas-fi red power generation by 2030.

Concerns of environmental quality could be fostered through poten-

tial environmental impacts triggered by the WTO accession. Trade

liberalization will induce a 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 environment—

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-

tion measures. The experience from other trade agreements—such

as the North American Free Trade Agreement (NAFTA) between the

United States, Canada, and Mexico generated some mixed results

where the main lessons appear to focus on institutional reform to

run parallel to sector reform (box 1.2).

TRADE AND ENVIRONMENT: ECONOMIC THEORY IN A NUTSHELL

Impact assessment of NAFTA in the early 1990s stimulated theo-

retical and empirical analysis on the environmental impacts of trade

liberalization. Following the seminal work by Grossman and Krueger

5



BOX 1.2: Environmental Lessons from NAFTA

During the NAFTA negotiations, proponents of the agree-ment argued that free trade would lead to seemingly automatic improvements in environmental conditions in countries like Mexico. Opponents of NAFTA said that the environment would automatically worsen in Mexico because Mexico’s lower standards would attract highly pol-luting fi rms from the United States. In eff ect, Mexico would serve as a pollution haven for U.S. industry. Ten years after NAFTA, what happened?

There is no evidence that pollution has begun to decrease now that Mexico has passed the theoretical turning point of $5,000 per capita. Nor have other environmental indicators begun to show improvement. This study also suggests that fears that NAFTA would create a pollution haven for dirty industry in Mexico were not justifi ed overall, though the fi rms that have moved to Mexico have not always followed environmental best practice.

Together, these fi ndings suggest two important conclusions as countries continue to negotiate the terms under which they will integrate into the global economy. First, if growth alone will not bring with it a long-term tendency toward environ-mental improvement, or if the turning point is so distant as to make the environmental costs of waiting unacceptable, then governments need to put in place the institutional mechanisms that can monitor environmental impacts and prevent unacceptable levels of environmental destruction. Without environmental laws, regulations, and the willingness and capacity to enforce them, trade-led growth will lead to increases in environmental degradation.

Second, since the evidence from Mexico suggests that environ-mental regulations and enforcement are not generally decisive in most fi rms’ location decisions, governments should have little fear in strengthening such safeguards. Governments will not be jeopardizing their access to foreign direct investment by enacting strong environmental legislation and enforcing it.

In short, governments need to act to protect their environments. The costs of doing so, in terms of lost investment, are likely to be very low. The costs of inaction are likely to be very high.Source: Gallagher 2004.

(1993) as well as Copeland and Taylor (1994, 1995) environmental

impacts of trade liberalization can be decomposed into three ef-

fects—changes in scale, composition, and technique.

Computable general equilibrium (CGE) models are widely

used to quantify the economic and environmental impacts of

policy regulations such as trade reforms or emission control policies.

Traditional multi-sector, multi-region CGE models building on the

notion of constant-returns-to-scale (CRTS) and competitive markets

may adequately capture the composition and scale eff ect triggered

by policy reforms. However, they omit potentially important pro-

ductivity changes in sector production that would be associated

with the technique eff ect. Such productivity eff ects are on the other

hand captured by more elaborate CGE trade models building on

the new trade theory (Krugman 1981) through the introduction of

imperfect competition and increasing returns to scale (IRTS)—yet,

these models typically fall short of detailed environmental account-

ing and the more sophisticated representation of input substitution

possibilities in production and consumption. Nonetheless, econo-

mists argue that CGE models can incorporate several key sustain-

ability (meta-) indicators in a single micro-consistent framework,

thereby allowing for a systematic quantitative trade-off analysis be-

tween environmental quality, economic performance and income

distribution. Furthermore, the CGE approach constitutes an open

framework for linkages to models from other disciplines thereby

accommodating the integrated assessment of sustainability issues.

More generally, one should not exaggerate the role numerical mod-

els can play in impact assessment. Policy decisions are the outcome

of a broader participatory process where stakeholders and other

interested parties communicate a wide range of values, perceptions

and judgments to policy makers. Quantitative analysis, if available,

at all, can at best strengthen or weaken policy arguments, putting

decision making on a more informed basis.

A substantial part of the applied literature on trade-environment

linkage is based on computable general equilibrium analyses. Most

applications focus on the mutual eff ects that trade policies and CO2

reduction policies can have on each other. Examples are Babiker et al.

(1997) and Kuik and Gerlagh (2003), who use standard multi-region,

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

and technique eff ects (they use a small open economy model). They

identify a dominating composition eff ect in favor of clean industries

which leads to a decrease of China’s greenhouse gas emissions. More

details on trade-environment research and literature dealing with the

implications of FDI are provided in appendix 3.

7


C H A P T E R 2 — A N E CO N O M I C M O D E L O F W TO A CC E S S I O N A N D T H E E N V I R O N M E N T

Chapter 2 AN ECONOMIC MODEL OF WTO ACCESSION AND THE ENVIRONMENT

Using this theoretical background the report applies an integrated

assessment framework where a traditional trade model with details

on technology and pollutants is complemented with productivity

impacts emerging from simulations with a more compact increas-

ing returns to scale (IRTS) model variant of the model of Rutherford

and Tarr (2010). The model is used to quantify not only the mag-

nitude but also the direction of the individual and the composite

impacts. The aggregate impact of trade liberalization on the envi-

ronment can be formally decomposed into three partial eff ects:

scale, composition, and technique (table 2.1).

The scale eff ect links the free trade to an increase in economic activ-

ity, holding constant the mix of goods produced and the produc-

tion techniques. As a result, a higher level of pollution emissions

may be expected if the output of the economy increases, as emis-

sions are a by-product of output. The technique eff ect is linked to

changes in the mix of polluting and clean inputs that are used by

the economy—comprising all of the eff ects that change average

pollution intensity of production including within-fi rm changes due

to the use of diff erent technologies, changes in process effi ciency,

and changes in fuel mix. The composition eff ect refers to changes

in the sector composition of an economy after trade liberalization.

Whether the pollution-intensive industries or the clean industries

expand, depends on a nation’s comparative advantage. While the

scale eff ect is unambiguous, the technique and composition eff ects

can cut either way—the aggregate impact of trade liberalization on

the environment is thus an open issue subject to empirical analysis

(see box 2.1).

BASIC STRUCTURE

To investigate the economic and environmental implications of

Russia’s WTO accession, a single-country, multi-sector, computable

general equilibrium (CGE) model of the Russian economy was con-

structed. General equilibrium models are useful in understanding

the economy-wide impacts of a change in policy or an economic

‘shock’—since it includes all sectors of the economy and their asso-

ciated inter-linkages.

The CGE model for Russia captures characteristics of regional pro-

duction and consumption patterns through detailed input-output

tables21 and links regions via bilateral trade fl ows. The segmentation

of the overall Russian economy into regional markets builds on

the aggregation of 88 Russian “oblasts” (see appendix 4 for a list of

oblasts). The model described below is presented by sector given

that tariff changes are sector-specifi c—but also because improve-

ments in technology (for example, clean technologies) are sector-

specifi c as well.

21 Input-output tables describe the value of production and consumption fl ows—and thus the interdependencies—between diff erent branches of a national economy or diff erent regional economies.

TABLE 2.1: Examples of Trade-Liberalization-Induced Eff ects Expected on The Environment

EFFECTS DEFINITIONNEGATIVE EFFECT ON ENVIRONMENT, IF . . .

POSITIVE EFFECT ON ENVIRONMENT,

IF . . .

Scale Increase in

economic activity,

holding the product

mix constant

. . . trade induces a

contraction of output

. . . growing trade

creates national wealth

that is used for environ-

mental protection

Composition Sector mix changes . . . pollution-intensive

sectors expand

. . . pollution-intensive

sectors contract

Technique Technology changes . . . less effi cient and

eco-friendly technologies

enter the production

process

. . . more effi cient

and eco-friendly

technologies enter the

production process

8



It should also be clarifi ed at this point that the following analysis

is a cost-eff ective approach rather than a traditional benefi t-cost

analysis (BCA). A cost-eff ective approach weighs alternatives to

achieve a given target or goal. BCA is normally used to do a full-

benefi t and cost accounting in order to establish a target. However,

a full BCA cannot be undertaken without information on the associ-

ated health benefi ts from air pollution reduction in Russia (that is,

detailed health studies), and how this would translate into increased

labor productivity gains (that is, fewer lost work days, and so on).

The inclusion of such health benefi ts would tend to decrease sector

adjustment costs, or put another way, the productivity gains from

better worker health would partially off set the negative cost impact

of reducing pollution in sectors.

Given the importance of fossil fuel sectors and energy-intensive

industries for environmental quality—the choice of sectors has been

to keep emission- and energy-intensive sectors in the available data

as separate as possible. The energy goods identifi ed include coal,

gas, crude oil, refi ned oil products and electricity. This disaggregation

is essential in order to distinguish energy goods by carbon-intensity

and the degree of substitutability. Production processes which have

few substitutable inputs are more likely to be impacted by price

changes in that particular input. In addition the model features major

energy-intensive industries which are potentially most aff ected by

“green” policy initiatives designed for environmental protection.

A summary of included sectors is in table 2.2 above. Details of the

model’s production, consumption, trade structure and substitution

possibilities are provided in appendix 5.

BOX 2.1: The Scale, Composition and Technique Effects for Greenhouse Gases (GHG) Associated With Fuel Use in Manufacturing in India, 1985–2004

A study of fuel use and associated greenhouse gas emissions in India’s manufacturing sector1,2 revealed two drivers of GHG savings: (1) a reallocation of market share across sectors and (2) within-fi rm improvements.

The manufacturing sector grew about 5 percent per year over the period between 1985 and 2005, that is, the scale eff ect was the primary driver of growth in GHG emissions from fuel use. The composition and technique eff ects played a larger role af-ter the 1991 liberalization.

The composition eff ect reduced emissions by 37 percent be-tween 1991 and 2004. Fuel-intensive sectors like iron and steel grew in absolute terms of output, yet they experienced a de-crease in share of output. Sectors with above-average energy intensity, such as cotton spinning and weaving and cement, experienced similar trends. On the other hand, the manufac-turing sectors that grew the most post-liberalization were plas-tics, cars, sewing, spinning and weaving of synthetic fi bers, and grain milling—all of them with below-average energy intensity.

Reductions in greenhouse gas emissions in manufacturing depend critically on policies that give fi rms direct incentives to use fuel inputs effi ciently, or on policies that shift market share away from input-ineffi cient fi rms (the technique eff ect). Reductions in input tariff s on intermediate inputs led to with-in-fi rm improvements: a 23 percent improvement in fuel ef-fi ciency. Post-liberalization changes in licensing requirements improved fuel effi ciency by an additional 7 percent.

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 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.2 India has been a WTO member since 1995.

TABLE 2.2: List of Sectors Included in The Model

SECTOR ABBREVIATION SECTOR ABBREVIATION

Electricity ELE Maritime transportation MAR

Oil CRU Railway transportation RLW

Oil processing OIL Truck transportation TRK

Gas GAS Pipelines transportation PIP

Coal COL Air transportation AIR

Ferrous metals FME Other transportation TRO

Non-ferrous metals NFM Wholesale and retail

trade

TRD

Chemical and petro-

chemical products

CHM Construction CON

Machinery MWO Telecommunications TMS

Forestry – wood –

pulp – paper

TPP Post PST

Construction material CNM Other goods and

services

OTH

Other industrial products OTI Housing and other

communal services

HOU

Textiles and apparel CLI Agricultural products AGR

Food industry FOO Science, geology, miner-

al exploration, geodesy

and hydrometeorology

SCI

Financial intermediaries,

insurance, management

and public organizations

FIN Public health, sports,

social security, educa-

tion, culture and arts

HEA

9



Emissions

The model accounts for seven pollutants whose environmental and

health impacts are listed in table 2.3—along with their economy-

wide emission levels for the base year.22 The selected pollutants

listed in table 2.3 are also of interest from a policy and regulatory

standpoint.

Carbon dioxide (CO2) emissions, which are by far the most important

greenhouse gas emissions for Russia, are linked in fi xed proportions

to the use of fossil fuels, with CO2 coeffi cients diff erentiated by the

specifi c carbon content of fuels. CO2 abatement can take place by

fuel-switching (inter-fuel substitution) or energy savings (either by

fuel-non-fuel substitution or by a scale reduction of production and

fi nal demand activities). All other non-CO2 emissions are represented

as process-specifi c in fi xed proportions to output or consumption

activities. Without further refi nements in the model representation

of production technologies, the (model-based) reduction of non-

CO2 emissions can only take place through equivalent down-scaling

of output. However, there could be cheaper technological process

options to reduce emissions than output cuts. Information on such

options is collected through bottom-up engineering studies on

marginal abatement cost curves for non-CO2 pollutants. The CGE

model formulation adopted in this study allows for integrating

direct, bottom-up estimates of discrete abatement potentials for

non-CO2 emissions and the associated costs of these technologies.23

22 Due to the lack of economic accounts for the more recent years, the base-year of modeling is 2001.

23 See Böhringer, Löschel, and Rutherford (2006).

Productivity Impacts of Trade Liberalization

CGE models traditionally build on the notion of constant-returns-

to-scale (CRTS),24 where competitive markets adequately capture

the composition and scale eff ects triggered by policy reforms such

as trade liberalization. However, they omit potentially important

productivity changes in sector production (that is, part of the tech-

nique eff ect). Such productivity eff ects can be captured through

the introduction of imperfect competition and increasing returns

to scale (IRTS). Models featuring imperfection competition and IRTS,

however, typically fall short of detailed environmental accounting

and the more sophisticated representation of input substitution

possibilities in production and consumption. Against this back-

ground, the CGE model used for this analysis was developed to

complement the traditional CRTS trade model with productivity

impacts emerging from simulations with a more compact IRTS

model variant.25 Thus, the analysis takes into account the impact of

productivity changes.

Data

The model used national input-output data for the year 2001 from

the national statistical offi ce (Rosstat 2002 and 2003) with data

24 A production function exhibits constant returns to scale if changing all inputs by a positive proportional factor has the eff ect of increasing out-puts by that factor. This may be true only over some range, in which case 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 faced by a fi rm are purely technologically imposed and are not infl u-enced by economic decisions or by market conditions.

25 See Rutherford and Tarr (2010).

TABLE 2.3: Overview of Pollutants

POLLUTANT ABBREVIATION ENVIRONMENTAL IMPACT HEALTH EFFECTSEMISSIONS IN BASE YEAR

(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

methane and tropospheric ozone

Headache, nausea, dizziness, seizures 5,148 (in kt)

Nitrogen oxide NOx Acid rain, eutrophication in coastal waters Diffi culty breathing, fl uid build-up in the lungs 1,679 (in kt; Stationary sources only)

Hydrocarbons CnHm Smog, leads to increased concentrations of

tropospheric ozone

Aff ects the central nervous system 2,724 (in kt)

Volatile organic components VOC Damage to soil and groundwater Damage to liver, cancer, headaches 1,131 (in kt)

Carbon dioxide CO2

Climate change, ocean acidifi cation 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.

10



expanded from 22 to 30 sectors in order to include more detail on

service industries (table 2.2). This was the latest year in which trade

data were disaggregated at the regional level. At the regional level

10 jurisdictions are distinguished based on the aggregate satellite

data from the 88 regions of the Rosstat data which are referred to as

“oblasts”—and bilateral trade fl ows (trade intensities) are adjusted

to ensure that oblast-level exports and imports in aggregate are

consistent with national import and export values.

Tariff rates before WTO accession and tariff reductions as a result of

WTO are taken from recent empirical studies26,27 for Russia. Under

WTO, Russia will have improved rights under antidumping and coun-

tervailing duty investigations in its export markets. Consequently,

Russian exporters in sectors which have been subject to antidump-

ing actions in Russia’s export markets will see an improvement in

their terms of trade ranging from 0.5 to 1.5 percent.28

Environmental data is taken from the SUST-RUS project29 with sec-

tor-level information on pollutants (emissions) at the national level

and then divided to the oblast-level proportional to output. Table

2.3 reports economy-wide emission levels for the diff erent pollut-

ants in the base year 2001.

BASE-YEAR CHARACTERISTICS (2001)

Regarding trade liberalization—most important are the initial tariff

rates that will be reduced by roughly 50 percent as a consequence

of Russia’s WTO accession. Import tariff s favor protected domes-

tic industries at the expense of consumers. From a single-market

perspective, the loss in consumer surplus from higher prices for

goods will exceed the gain in producer surplus (due to expanded

domestic production) and tariff revenues. Tariff reduction will lead

to improved domestic resource allocation since tariff reduction

induces the country to shift production to sectors where produc-

tion is valued more highly based on world market prices. Without

26 See Shepotylo and Tarr (2008).

27 See Shepotylo and Tarr (2012).

28 See Rutherford and Tarr (2010).

29 The SUST-RUS Project aimed to develop an integrated spatial-economic-ecological modeling approach, which represented diff erent areas of economic, transport, resource-use linked to environmental eff ects 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/.

tariff s (or likewise with lower tariff s), countries can specialize accord-

ing to its comparative advantage—where specialization will be the

primary source of gains from trade.

Overall effi ciency gains from trade liberalization are typically asso-

ciated with adverse economic impacts for specifi c industries that

previously enjoyed tariff protection. Increased demand for imports

after tariff reduction will depreciate the real exchange rate favoring

export-intensive sectors that benefi t from higher export prices in

domestic currency. Other determinants of sector impacts include

changes in intermediate input cost and the aforementioned

improved market access due to WTO rule protection in antidump-

ing cases. Liberalization of barriers against foreign-service provid-

ers will lead to an increase in foreign direct investment in services

and increased availability of competitive services. As emphasized

by the new trade literature, the economy-wide and sector-specific

impacts of trade liberalization may to a large extent hinge on

induced productivity effects. Due to liberalization commitments

as part of WTO accession, increased foreign direct investment in

services will allow Russian businesses to have access to a greater

variety of efficient, competitive and modern business services;

and lower tariffs will allow Russian businesses to be able to

more easily import modern technologies or a greater variety

of technologies, which will increase Russian productivity. This

productivity impact of trade and foreign direct investment liber-

alization through new or higher quality goods and services can

be much more important quantitatively than improved resource

allocation.

Figure 2.1 presents a summary of the various taxes that apply in the

base year at the sector level. Beyond tariff s on imports (“Import”)

there are export duties (“Export”), production taxes (“Output”) and

value-added taxes (“VAT”) on intermediate inputs.

Initial tariff s are highest for textiles and apparel (CLI), food (FOO),

wood, paper and pulp (TPP), construction materials (CNM) as well

as materials ranging between 10-20 percent at the national average.

A second group of tariff -protected industries with rates between

5–10 percent includes ferrous (FME) and non-ferrous (NFM) metals,

agricultural (AGR) and chemical products (CHM). With substantial

tariff cuts the fi rst-round impacts of WTO accession on the output of

previously protected industries should be negative.

11



Figure 2.2 shows the productivity eff ects of WTO accession across

the model’s sectors calculated with the IRTS model variant.30 The

results show that Russia’s WTO accession leads to pronounced pro-

ductivity gains in particular for telecommunication (TMS), fi nancial

(FIN) and transportation services (TRK, TRO, RWL).

30 Productivity changes are subsequently imposed in the scenarios with the CRTS model—and where productivity changes are explicitly incorporated.

With respect to environmental impacts of trade liberaliza-

tion and the economic implications of emission control

policies, emission intensities play a key role. The more emis-

sion intensive a sector is, the more adversely its production

should be affected by pricing of emission inputs. Another key

determinant of adjustment cost is the ease of substituting

away from emission inputs as described through the model’s

structure and the elasticities of substitution between inputs

50

40

30

20

10

–10

–20

–30

–40

0

CLI

OT

HO

TI

FO

OT

PP

CN

MM

WO

NF

MA

GR

CH

MF

ME

GA

SO

ILE

LEC

OL

PS

TH

OU

SC

IC

ON

PIP

CR

UR

LW TR

KT

MS

AIR

TR

DT

RO

FIN

MA

RH

EA

Import Export Output VAT

FIGURE 2.1: Base-Year Tax Rates Prior to WTO (Percent)

Source: Calculated from Rutherford and Tarr (2010).

Percent

TMS

SCI

TRK

FIN

TRO

RLW

PIP

AIR

MAR

FOO

NFM

MWO

CNM

TPP

CHM

FME

OTI

302010 40 50–10 0

FIGURE 2.2: Productivity Changes of Sector Production from WTO Accession (Percent)

Source: Estimated from the CGE model.

12



(see appendix 5). Figure 2.3 and figure 2.4 provide insights as

to the pollution profile across Russian industries.

Figure 2.3 presents CO2 emission intensities composed of direct

emissions from fossil fuel inputs and indirect emissions embodied

in electricity inputs. Emission intensities in coal and gas production,

electricity generation and pipeline transportation (including gas

leakage) range highest. Indirect emissions embodied in electricity

play a secondary role for most sectors.

Figure 2.4 reports emission intensities for non-CO2 pollutants

across industries—listed in descending order for sulfur dioxide

(SO2). Electricity generation, non-ferrous and ferrous industries rank

highest. These sectors also show substantial emission intensities

for carbon monoxide (CO) where crude oil production has by far

the highest intensity. The release of hydrocarbons (CnHm) is pre-

dominantly associated with coal production and transportation

activities.

Figure 2.5 provides information on energy cost shares in

production for electricity, gas, and oil—where the label “all”

refers to the sum of these shares. Knowing the cost share of

energy in production is important so as to better understand

the distributional effects placed on any one sector when

energy prices change. In this case, the electricity, housing,

pipeline and air transport sectors have energy cost shares

above 15 percent.

* Key: mean—average across all sectors; all—average across all sectors including fi nal consumption; c—fi nal consumption.Source: Estimated from the CGE model.

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0

CO

LG

AS

ELE PIP

FM

EH

OU

CN

MC

HM

AIR

TR

Km

ean

TP

P all

MW

OO

TI

FIN

HE

AM

AR

TR

OS

CI

CR

UC

ON

AG

RR

LW CLI

FO

ON

FM

OIL

TR

DO

TH

PS

T cT

MS

DirectELE

FIGURE 2.3: Base-Year CO2 Emission Intensities from Fossil Fuel Combustion (Direct) and Indirect Emissions from Electricity Inputs (ELE) (kg per Ruble)*

FIGURE 2.4: Base-Year Pollution Intensities—Other than CO2 (Grams per Ruble)

4.5

3.5

2.5

1.5

0.5

0

4.0

3.0

2.0

1.0

CO NOxSO2 CnHm PM VOC

NF

M

ELE

FM

E

mea

n

OIL

CR

U

CH

M

CLI

CN

M

HO

U

CO

L

MA

R

RLW TR

K

AIR

TR

O

GA

S

PIP

FO

O

MW

O

TP

P

AG

R

OT

H

OT

I


13



POLICY SCENARIOS AND SIMULATION RESULTS

In order to quantify the economic and environmental impacts

associated with Russia’s WTO accession, seven policy scenarios are

developed. Table 2.4 summarizes their main features.

Some of the general assumptions are: applied tariff s will roughly

fall by 50 percent from initial levels31 and better access to export

markets for some industries will lead to improvement in terms of

trade ranging from 0.5 percent (sectors: other industrial products,

food industry, other goods and services) to 1.5 percent (sectors:

ferrous metals, non-ferrous metals, chemical and petrochemical

products).32 The central case scenario WTO contains the sector- and

region-specifi c productivity changes as calculated by the IRTS “twin”

model (fi gure 2.2).33 To investigate the importance of productivity

changes emerging from trade liberalization, the central case sce-

nario WTO is contrasted with an alternative scenario variant WTOcrts

where productivity impacts are omitted.

“Green” policy initiatives in Russia are refl ected by means of two

scenarios that capture Russia’s objectives in international climate

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 since we do not account for an increase in fi xed cost with new fi rm en-tries (as is the case in the imperfect competition model).

policy as well as domestic energy use. Scenario CO2 imposes a 20

percent reduction of CO2 emissions in Russia from base-year emis-

sion levels to be achieved through a system of tradable emission

rights (or likewise a nation-wide CO2 tax).34 Tradable rights (or per-

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 fi rms to sell their

34 Note that emission taxes are fully equivalent to a tradable permit system (if there is no uncertainty of the costs and benefi ts of emission abate-ment) auctioned by the government.

25

20

15

10

0

5

ELE

HO

U

PIP

AIR

GA

S

TR

K

CN

M

CH

M

FM

E

TR

O

TP

P

RLW

HE

A

CR

U

MA

R

mea

n

CO

L

MW

O

NF

M

FIN

SC

I

CO

N

OT

I

OIL

CLI

AG

R

FO

O

TM

S

TR

D

PS

T

OT

H

all ELE GAS OIL

FIGURE 2.5: Energy Cost Shares Across Industries (Percent)


TABLE 2.4: Key Features of Trade and Environmental Policy Scenarios

SCENARIO TRADE REFORMENVIRONMENTAL

REGULATION REFORM

WTOcrts WTO accession without productivity impacts

None

WTO WTO accession with IRTS

productivity impacts

None

CO2 None 20% CO2 emission reduction

EFF None 20% energy intensity reduction

WTO_CO2 WTO accession with IRTS produc-

tivity impacts

20% CO2 emission reduction

WTO_EFF WTO accession with IRTS produc-

tivity impacts

20% energy intensity reduction

WTO_CO2_EFF WTO accession with IRTS produc-

tivity impacts

20% CO2 emission reduction and

20% energy intensity reduction

14



(unused) permits to high-abatement-cost fi rms).35 Tradable rights

are also discussed further in the policy section of the report.

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-specifi c energy effi ciency

standards with a uniform decline of energy intensity for gas, oil and

electricity by 20 percent in sectors other than electricity and fossil

fuel production compared to the base year. The assumed intensity

target is markedly less ambitious than the 25 percent announced

at COP15 and 40 percent goal mentioned in Russia’s state program

on “Energy Savings and Energy Effi ciency Improvements until 2020.”

The last three scenarios show the impacts of “overlapping” policy

reforms, where the central case WTO accession is implemented

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 industries (for example, through an output-based allocation) might be preferred by emission-intensive industries over taxes since industries then directly receive at least part of the scarcity rents (depending on what portion of permits is allocated for free). An output-based allocation which implicitly works as production subsidy helps to increase policy acceptance of regulated industries and also has some support from a cost-effi ciency consideration in the case of unilateral regulation of trans-national externalities such as CO2 in order to off set counterproductive emission leakages. On the other hand, emission taxes may be preferred by regional/federal governments to achieve additional revenues. From an effi ciency perspective additional environmental taxes can be used to reduce other distortionary impacts (green/environmental tax reforms) and therefore potentially reduce the marginal cost of public funds.

simultaneously with each of the green policy initiatives (scenarios

WTO_CO2 and WTO_EFF) or with both environmental policies (sce-

nario WTO_CO2_EFF).

MACROECONOMIC AND ENVIRONMENTAL IMPACTS

Table 2.5 provides a condensed report of economic and environ-

mental impacts for Russia at the nation-wide level across the dif-

ferent policy scenarios. The scenarios are grouped in two sections

“CRTS” and “IRTS” to diff erentiate the productivity impacts from

trade liberalization. The section “CRTS” framework does not refer

to any technological shifts through productivity eff ects. This set

of scenarios includes trade liberalization (scenario WTOcrts) on

the one hand, and separate environmental policies on either CO2

reduction (scenario CO2) or energy effi ciency improvements (sce-

nario EEF). The section “IRTS” features the scenarios with productivity

impacts for sectors emerging from trade liberalization and liberal-

ization of barriers against foreign direct investment in services (see

fi gure 2.2): trade liberalization stand-alone (scenario WTO) or over-

laid with environmental policies (scenarios WTO_CO2, WTO_EEF,

WTO_CO2_EEF). The impacts of policy interference are shown

mainly in terms of percentage changes in key variables from their

base-year levels. The central welfare indicator is the ‘equivalent

variation’ in income, expressed as a percentage of base-year GDP.

The so-called Hicksian equivalent variation (HEV) in income is the

TABLE 2.5: Economic and Environmental Impacts of Trade Reforms and Environmental Regulation

CRTS SCENARIOS IRTS SCENARIOS

WTOcrts (1)

CO2 (2)

EEF (3)

WTO (4)

WTO_CO2 (5)

WTO_EEF (6)

WTO_CO2_EEF (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

Emis

sion

s ( p

erce

nt c

hang

e)

CO2

0.3 –20.0 –16.3 3.7 –20.0 –11.2 –20.0

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

Emis

sion

inte

nsit

y

of p

rodu

ctio

n

(per

cent

cha

nge) Electricity 0.1 –2.7 –20.0 –6.7 –9.7 –21.5 –22.1

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

15



amount of income necessary to add to (or deduct from) the average

consumer so that she enjoys the same standard of living (that is,

utility) as in the base case. The welfare measure is then expressed as

a percentage of base-year GDP.

CRTS Scenarios

Without productivity spillovers, the economic and environmental

impacts of Russia’s WTO accession are very small (WTOcrts in col-

umn 1). The gains from improved resource allocation after tariff

reduction amount to less than a third percentage point of GDP

(0.28) and the level of CO2 emissions and non-CO2 pollutants hardly

change (between 0.3 and 1.0 percent).

The impacts of WTO accession for sector output, exports and

imports are displayed in fi gure 2.6. These impacts are triggered by

tariff reductions and terms-of-trade improvements on the export

side for specifi c industries (including sectors ferrous metals [FME],

non-ferrous metals [NFM], and chemical products [CHM]).

As a fi rst-round eff ect, tariff reduction leads to higher imports along

with decreased domestic production and exports. This pattern is

particularly pronounced for industries that initially were protected

with high tariff rates and which have a relatively small share of

exports, for example, food (FOO), textiles (CLI), and construction

materials (CNM). For sectors which gain on the export side through

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 eff ective increase in produc-

tion and exports joint with a decrease in imports (for example,

non-ferrous metal production (NFM).

Table 2.6 provides a decomposition of CO2 emission changes in

terms of the scale, composition and technique eff ects. In this case

we defi ne the scale eff ect as the change in emissions that would

result if all sectors (including fi nal demand production activities)

expanded output proportionally and the emission intensity of out-

put were to remain constant. The composition eff ect is interpreted

as the change in emissions which is solely due to changes in the

composition of sector output, assuming that the carbon intensity of

output remained constant.36 Finally, the technique eff ect is defi ned

as the residual in emission change, that is, the total emission change

minus the scale and composition eff ects. The total CO2 emission

change for scenario WTOcrts only amounts to around 3.7 Mt, which

is about 0.3 percent of base-year emissions at 1441 Mt CO2 (see

table 2.3).

All three partial eff ects contribute with the same (positive) sign

to the overall emission increase—the composition eff ect being

strongest followed by the scale eff ect and a rather weak technique

eff ect. Note that the change in sector composition is greater than

either the scale or productivity (technique) eff ects.

36 Note: The composition eff ect is computed as a diff erence from the scale eff ect relative to the hypothetical assumption of constant emission intensity.

FIGURE 2.6: Impacts of WTO Accession Without Productivity Impacts on Sector Activities (Scenario WTOcrts) (Percent from Base-Year, 2001)

40

30

20

10

–10

0

ImportExportOutputO

TH

FO

O

CN

M

AG

R

OT

I

GA

S

TP

P

OIL

MW

O

ELE CLI

CO

L

CH

M

MA

R

PIP

TR

D

PS

T

TM

S

CR

U

RLW

HO

U

TR

O

TR

K

AIR

FIN

FM

E

HE

A

SC

I

CO

N

NF

M

TABLE 2.6: Decomposition of CO2 Emission Changes (in Mt) for Scenario WTOcrts

SCALE COMPOSITION TECHNIQUE TOTAL

1.5 2.1 0.1 3.7

16



In the next scenario (CO2 in column 2 of table 2.5), a 20 percent

reduction from base-year CO2 emissions induces an economic

adjustment cost (EV falls) refl ecting the shift towards less carbon-

emitting but more expensive production and consumption pat-

terns. The welfare losses are relatively modest (–0.16 percent),

refl ecting low-cost options in the Russian economy to shift away

from carbon. It should be noted that the welfare metric does not

value any change in CO2 emissions (e.g. external costs on health

or the negative impacts on infrastructure), nor those of other pol-

lutants which decline as well under the CO2 emission constraint

(various other non-CO2 pollutants are directly or indirectly cor-

related with fossil fuel use).37 The marginal abatement cost of CO2

emissions to achieve a 20 percent emission reduction amounts to

roughly 137.6 Rubles per ton of CO2. Interestingly, the emission

intensity of gas declines in a drastic manner. This can be traced

back to the fact that—according to Russian base-year statistics—

gas has by far the highest CO2 emissions per monetary value

across fossil fuels (coal, oil, gas).

Energy efficiency standards (scenario EFF in column 3 of table

2.5) that are uniformly mandated for electricity, gas and oil inputs

across all sectors (excluding electricity generation and fossil fuel

production) and regions trigger pronounced welfare losses in

the order of about 1.2 percent of GDP. The associated decline

in CO2 emissions and other pollutants is quite distinct. However,

just looking at the case of CO2 emissions, it is clear that applying

uniform standards across all sectors would not constitute a cost-

effective measure for emissions reduction—since firms have

different pollution abatement costs. Likewise, the objective of

reducing energy intensity—if a reasonable goal in itself—should

be pursued through a system of tradable efficiency permits

across energy carriers, sectors and regions rather than specific

mandates. A tradable scheme would achieve the same reduc-

tion objective—but at a lower cost since some firms who have

higher marginal abatement cost could purchase permits from

lower cost firms.

37 On the other hand one must bear in mind that the impacts reported for 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.

IRTS Scenarios, Including Productivity Changes

Inclusion of the productivity eff ects in the IRTS model generates

substantial welfare gains in the WTO scenario (6.43 percent in col-

umn 4 of table 2.5), which are considerably higher than those in

WTOcrts. Economic gains from new or higher quality goods and

services are much more important quantitatively than improved

resource allocation as captured by the standard perfect competi-

tion CRTS approach. Thus the productivity impacts of trade and

foreign direct investment reform in this case is an important factor

when considering policy reform.

The impacts of WTO accession on sector output, exports and

imports are displayed in fi gure 2.7. Sector impacts are much more

pronounced, and in part qualitatively distinct, from the eff ects in

scenario WTOcrts, refl ecting the imposed changes in output produc-

tivity (see fi gure 2.2). The fi gure shows the output of most business

services fi rms declining. An important caveat to the sector impacts,

however, is that the fi gure only shows the output of domestic ser-

vices fi rms. The model does not incorporate the additional output

of multinational services fi rms deriving from the additional foreign

direct investment. The output eff ects in the business services sector

tend to be slightly positive when multinational output is included in

sector output calculations.38

The productivity eff ects imply a non-negligible increase in CO2 emis-

sions, PM, CO, NOx, and VOC. Energy intensities for electricity, oil and

gas production decline, that is, the productivity gains help reduce

energy input per output. Yet, the technique eff ect is overcompen-

sated for most pollutants. Table 2.7 presents the decomposition of

scale, composition and technique eff ects for a total increase of CO2

emissions by roughly 53 Mt. The scale eff ect is positive, dominating

the negative composition and technique eff ects. This means that

despite the shift to cleaner sectors (through the composition eff ect)

and the small off setting eff ect through productivity improvements,

overall the absolute rise in emissions from output expansion out-

weighs any gains from the other two eff ects. Thus, although WTO

appears to be positive from an income standpoint—in the absence

of any “complementary” energy or emissions policy (to dampen the

scale eff ect)—emissions can be expected to rise substantially.

38 See Jensen, Rutherford, and Tarr (2007) and Rutherford and Tarr (2010).

17



The three remaining scenarios in table 2.5 combine trade reforms

under scenario WTO with CO2 emission constraints and energy effi -

ciency mandates (columns 5–7). The CO2 price in scenario WTO_CO2

to achieve a 20 percent emissions reduction from base-year levels

must be higher than for scenario CO2 to counteract the emission

increase associated with trade liberalization. Uniform energy effi -

ciency targets of 20 percent coupled with WTO accession (scenario

WTO_EFF) leads to energy intensities overshooting 20 percent on

average. The reason is that energy effi ciency for some energy inputs

is falling more than required by the standard in several sectors as a

consequence of productivity improvements and binding standards

for other industries. Binding effi ciency standards exert downward

pressure on the CO2 price in scenario WTO_CO2_EFF compared to

scenario WTO_CO2. The simultaneous imposition of effi ciency stan-

dards and CO2 emission constraints that are both restrictive (again

the standards are not binding for all sectors and energy goods)

explain why the welfare gains among the IRTS variants with produc-

tivity impacts are lowest for scenario WTO_CO2_EFF (5.18 percent).

The relative importance of the scale, composition and technique

eff ect for CO2 emission changes vary substantially as we move

from WTO accession stand-alone to combination with emission

constraints and energy effi ciency mandates. The technique eff ect

becomes by far the dominant driver of CO2 emission changes: Direct

CO2 emission pricing (scenarios WTO_CO2 and WTO_CO2_EFF)

or indirect emission pricing through energy effi ciency standards

(scenarios WTO_EFF and WTO_CO2_EFF) cause price-responsive

technology adjustment in production and consumption—on the

one hand via fuel switching across energy carriers and on the other

hand via energy savings. The scale eff ect of trade liberalization still

leads to an increase in CO2 emissions; however, complementary

emission constraints and in particular effi ciency standards dampen

economic activity and thus the CO2 emission increase triggered

by the overall productivity gains from WTO accession. Besides the

drastic push of the technique eff ect, the “green” policy initiatives also

trigger structural change in favor of less pollution-intensive indus-

tries as becomes evident in the stronger composition eff ect towards

de-carbonization.

The key insight from the combined IRTS scenarios with overlapping

regulation is that productivity increases from Russia’s WTO acces-

sion are suffi ciently large to pay for greening of growth in terms of

CO2 emission reduction and energy effi ciency improvements.

It is also important to reiterate the point made in section 2 (c)

that these results are achieved through a system of tradable

40

30

20

10

–10

0

–20

–30

–50

–60

–70

–80

–40

ImportExportOutput

OT

HN

FM

AG

RF

OO

OT

IC

LIC

NM

TR

DT

PP

HO

UE

LEG

AS

CH

MC

OL

MW

OF

ME

OIL

PS

TH

EA

CR

UM

AR

PIP

CO

NA

IRR

LWT

RO

TR

KF

INT

MS

SC

I

FIGURE 2.7: Impacts of WTO Accession with Productivity Impacts on Sector Activities (Scenario WTO) (Percent from Base Year)

TABLE 2.7: Decomposition of CO2 Emission Changes (in Mt) for IRTS Scenarios

SCENARIO SCALE COMPOSITION TECHNIQUE TOTAL

WTO 85.8 –27.3 –5.1 53.4

WTO_CO2

67.6 –87.5 –268.3 –288.2

WTO_EFF 39.4 –79.4 –120.9 –160.9

WTO_CO2_EFF 31.6 –114.8 –204.9 –288.2

18



emissions rights or permits (or the imposition of an national CO2

tax). In our modeling framework emission taxes or auctioned

permits are equivalent and both instruments are cost-effective

tools in achieving a given environmental target—as they equal-

ize marginal abatement costs across emission sources—and the

market thereby determines the cost-efficient abatement pattern

across sectors and provinces through the price mechanism.

However, the choice of policy is not only a matter of the political

acceptability of imposing a tax or the manner in which per-

mits are distributed (for example, auctioned or output-based).

Authorities would also have to consider how enforceable these

options would be in the future given the power structure and

influence of industry. To glean some insight on the policy and

regulatory environment in which firms currently operate in

Russia, and what options the country might consider, the follow-

ing sections provide a brief summary.

19


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

Chapter 3 RUSSIAN ENVIRONMENTAL POLICIES AND REGULATIONS

Trade liberalization eff ects on the environment may 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 eff ective poli-

cies and transparent enforcement mechanisms. Russia’s economic

gains from trade liberalization are estimated at about US$49 billion

a year based on 2010 GDP. These economy–wide gains could be

sustained if complementary “do-no-harm” policies and regulations

tailored to address environmental concerns are put in place. In this

respect Russian policy-makers face a twofold challenge. On the one

hand, environmental regulations should avoid creating “pollution

haven”;39 on the other hand, environmental regulations should be

compatible with trade liberalization provisions.

The Federal Law on Environmental Protection recognizes the need

to include environmental considerations in decision-making that

pertains to socio-economic development. The Federal Law on

Technical Regulations codifi es safety requirements for products

and processes (including design, production, installation, operation,

storage, transportation, and sale), with the purpose, among others,

to “protect the environment”. Projections that pollution-intensive

manufacturing sectors (for example, production of metals and

chemicals) are most likely to expand after the WTO accession will

need not only regulations to control pollution emissions but incen-

tives to adopt low-cost options and economic incentives for emis-

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 cost of their key inputs. It is assumed that a trade-liberalization regime would facilitate such relocation of fi rms. For a more detailed description, see “Racing to the Bottom? Foreign Investment and Air Pollution in Develop-ing Countries,” David Wheeler (1999).

Russia’s commitment to implement its Climate Doctrine, supported

by the Complex Implementation Plan of Actions until 2020,40

underpins the modernization agenda in the industry, transport and

housing sectors. This also implies increasing the opportunities for

innovation, using renewable and energy effi cient technologies and

greater contribution of Russia to international eff orts to mitigate cli-

mate change impacts. Pursuant to the Plan of Actions the Ministry

of Economic Development will introduce changes to Russia’s long-

term macroeconomic forecasts “taking into account climate risks,

mitigation and anthropogenic impacts on the climate, and adapta-

tion to climate change” (2011–20). Russia is the third largest emitter of

CO2 after USA and the EU. Notwithstanding, the concerns expressed

by the Russian President’s economic team about Russia’s capacity

to undertake greenhouse gasses (GHG) reduction obligations, the

most quoted target of Russia to reduce GHG emissions is the state-

ment made at Copenhagen (COP15) by President Medvedev who

said that “Moscow will adopt the 25 percent reduction goal, unilat-

erally, as it is benefi cial primarily for Russia”.41 Achieving this target

could be a challenging task with the potential increase of the share

of coal in the fuel mix as export markets take priority for oil and

natural gas. The Decree of the Russian President from September 30,

2013 on the Reduction of GHG Emissions confi rmed Russia’s target

to reduce GHG emissions to 75 percent of 1990 levels by 2020. WTO

presents a strategic win-win opportunity for Russia to modernize

and decarbonize its industry if environmental and sector policies are

tailored to infl uence this process along the way.

40 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.

41 President Dmitry Medvedev’s Discourse in Copenhagen, December 18 2009, http://unepcom.ru

20



WTO recognizes that protection of the environment and promo-

tion of sustainable development are indispensable elements of

its commitment to an open and nondiscriminatory multilateral

trading system.42 Trade regulations imposed under the WTO, how-

ever, also acknowledge that certain measures for environmental

protection may restrict basic trade rules (such as the nondiscrimi-

nation obligation and the prohibition of quantitative restrictions),

and thereby impacts on the WTO rights of other members. WTO

members are expected to design trade and environmental poli-

cies which are compatible with their obligations. RF Government

Resolution No. 2231-r dated 13 December 2011 “On Signing the

Protocol of Accession of the Russian Federation to the World Trade

Organization” proclaims the mandatory nature of the requirements,

directly or indirectly stated in the WTO agreements.

ENVIRONMENTAL REGULATIONS AND COMPLIANCE

Environmental protection in Russia is regulated primarily through

legal and administrative norms, such as nature protection norms,

emission permits, registration regimes for noxious substances etc.

The Government of Russia has adopted a number of Resolutions

which defi ne the rules for developing and approving environmental

protection standards (see box 3.1).

Environmental protection standards fall in three main groups and

are defi ned as:

§ Maximum allowable concentrations (MACs)—environmental

quality standards that set the level of permissible pollution

levels released in the environment in order to preserve natu-

ral ecological systems and protect human health.

§ Emission limit values (ELV)—admissible eff ect on the envi-

ronment caused by anthropogenic activities set for diff erent

pollution sources. ELVs are set in permits issued for specifi c

economic activity. The ELVs are derived from the MACs. The

next section explains implications for relevant pollution

charges.

§ Temporary emission limits—a limit set when ELV compliance

is not possible. These are regulated by Government Decision

#183 as of March 2, 2000.

42 This is stated in the preamble of the Marrakesh Agreement and reaf-fi rmed in the Doha Ministerial Declaration.

Compliance with environmental requirements in the Russian

Federation is problematic for several reasons. First, there is no one,

uniform compendium of documents comprising such require-

ments. The legislative system includes over 4,000 federal-level regu-

latory legal documents, and is thus diffi cult to follow as quite a few

of them contravene one another. So even if industrial compliance

were genuine, the rules of the game are too diffi cult to follow.

Secondly, due to aging technology, many industrial facilities can-

not comply with the standards for allowable emission limits (even

from a technical standpoint, let alone economic). The legislation

has provisions for temporary ELV permits with, often, less stringent

environmental limits. Although, they are only valid on condition

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

on Environmental Protection, and other federal laws), the current

BOX 3.1: Examples of Government Resolutions on Rules for Environmental Protection Standards

• Government Resolution № 545 as of August 03, 1992 On Approving the Development and Approval Procedures for Environmental Standards to Regulate the Levels of Emissions and Discharges of Pollutant Limits of the Use of Natural Resources and Waste Disposal (incl. amendments)

• Government Resolution № 183 as of March 02, 2000 On Standards to Regulate the Levels of Hazardous (Polluting) Emissions into the Atmospheric Air and Harmful Physical Impact on it

• Government Resolution № 208 as of March 10, 2000 On Approving the Rules of Development and Approval of Standards for Maximum Permissible Concentrations of Hazardous Substances and Standards for Maximum Permissible Harmful Impact on the Marine Environment and Natural Resources of Internal Sea Waters and the Territorial Sea of the Russian Federation

• Government Resolution № 881 as of December 30, 2006 On Procedures for Approval of Standards for Permissible Impact on Water Sources

• Government Resolution № 469 as of July 23, 2007 On Procedures for Approval of Standards for Permissible Discharges of Substances and Microorganisms into Water Sources for Water Users

21



system of monitoring at the facility level may not support such

provisions.

Thirdly, there is the issue of compliance enforcement, which remains

variable in Russia. Regulation is only as eff ective as its enforceability

and there has been little analysis on the topic. While there appears to

be a “business-as-usual” attitude, as Russia becomes more open it will

have to address enforcement issues since voluntary industrial com-

pliance is virtually non-existent. This will become increasingly impor-

tant if the country decides to develop policy instruments along the

market-based approach (for example, tradable permits or rights).

Overall, the development of environmental legislation has made

progress by the introduction of adequate environmental protection

requirements and the encouragement of adoption of eco-friendly

production processes using best available techniques (BAT). The

Federal Law on Environmental Protection defi nes BAT as ”based

on the latest scientifi c and technological achievements, aiming

to reduce the adverse impact on the environment and having an

established timeframe for practical application in view of economic

and social factors” and “technologies which include nonconventional

energy sources, use of secondary resources and waste recycling,

as well as other effi cient environmental protection methods.” To

encourage the application of BATs, Russian federal and regional laws

formalize tax breaks and other privileges (see table 3.2 for details).

PRICE AND MARKET MECHANISMS

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

public goods and regulation of technology and less so on regulation

of performance. Although instituting a charge for adverse impact on

the environment has been applied in regulatory practice, modern

price-type policies which impose tax or fee on polluters, thus moti-

vating them to cut back pollution which promote clean produc-

tion methods really featured in “The Fundamentals of Government

Policy for Environmental Development of the Russian Federation

until 2030”43 and in the Federal Law on Environmental Protection.

If implemented rigorously—which means monitoring and

43 The Russian text is available at http://www.mnr.gov.ru/regulatory/.

enforcement, and avoidance of moral hazards for fi rms to comply—

economic regulation and market-based instruments could be a

major factor for the success of environmental protection activities.

The Fundamental also elaborate on the use of the market based

instruments “both as coercive tools and incentive mechanisms.”

Likewise, many of the impediments for technological retrofi tting of

the Russian industry will be resolved if taxation policies promote the

application of new eco-friendly and/or energy-saving technologies

by off ering reductions of profi t tax for organizations, and reduc-

tions of land tax, property tax, and income tax for legal entities and

individuals. The institution of indemnity for environmental damage

which is under development has to complete as well in order to

protect public interest and ensure environment justice.

Pollution Charges

Russian pollutant specifi c rates for pollution charges are set to

compensate for negative impacts on the environment pursuant to

Government Decision No. 344 of 12 June 2003 as follows:

§ Emission amount not exceeding the established norms of

nature user limits emissions of hazardous substances and

the volume of waste disposal;

§ Within the established limits (provisionally agreed

standards);

§ For excessive pollution.

The charges applicable for selected air pollutants are shown in

table 3.1.

TABLE 3.1: Selected Pollution Charges, in RUR/ton

POLLUTANT

WITHIN THE SET OF PERMISSIBLE

EMISSION STANDARDS

WITHIN THE ESTABLISHED LIMITS

OF EMISSIONS

Carbon dioxide CO2

NA NA

Particulate

matter

PM 13.7 68.5

Sulfur dioxide SO2

21 105

Carbon monoxide CO 0.6 3

Nitrogen oxides NOx 35 175

Hydrocarbons CnHm 5 25

Volatile organic

components

VOC NA NA

Source: Government Decision No 344 of June 12, 2003.

22



As policy instruments pollution charges are optimal when their

levels are adequate to the marginal cost of abatement of environ-

mental damage caused by dirty production, and when they mean-

ingfully correct for market failure such as the cost of environmental

externalities. Currently, the Russian pollution charges which are

levied are based on an algorithm, established by the law, and do

not always refl ect the economic losses due to environmental pol-

lution (or the recoverable amount of environmental damage). As

set in the law calculating the pollution charge payment takes into

consideration several coeffi cients:

§ An infl ation index, which in 2013 was set at 2.20 (replacing

2.05) and 1.79 (replacing 1.67) for previous periods; and

§ The ecological value of the region and additional coeffi cients

of 2 and 1.2.

The current pollution charge system in Russia is rather weak

because it targets too many pollutants, and consequently results in

insuffi cient capacity for monitoring and enforcement. The charge

rates have been comparatively low to countries with similar level

of industrialization. For an illustration the following examples could

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

per ton of SO2 and €50 to €140 per ton of NOx. However, these tax

rates are only a fraction of SO2 tax rates implemented in Denmark

which are €2,680 per ton of SO2 or in Sweden—€5,370 per ton of

NOx. In Denmark, sulfur and nitrogen taxes raised revenue to the

budget of about €10 million in 2010. Revenue numbers represent

a meaningful measure of the enforcement eff ectiveness, and with

an eff ective monitoring system in place they could refl ect emission

trends. For instance the level revenues from air pollution taxes in

Spain dropped from €28 million in 2005 to €7 million in 2010—

refl ecting a decrease of emissions.45

In Russia, reduction in pollution charges is used as incentive for pro-

moting application of clean technologies and as a lever for making

environmental protection investments by the fi rms. For example,

according to Federal Laws No. 416-FZ On Water Supply and Water

Disposal and No. 89-FZ On Production and Consumption Waste,

44 REC, 2001.

45 EEA Staff Position Note (September 2012), SPN12/01, By Stefan Speck and Mikael Skou Andersen, page 9.

reduced pollution charges for water and waste disposal apply if

companies construct or modernize their water and wastewater

treatment facilities, and if they apply waste reduction technolo-

gies. While there is no account of the eff ect of these incentives at

national or regional level where emission levels are high, it would be

useful to validate the eff ectiveness of such measures by instituting

an eff ective monitoring system.

Current laws specify diff erentiation of the rates for reducing pollu-

tion charges or partial exemptions from such charges. Diff erentiated

charges and tax breaks apply in cases where low-waste and

resource-saving technologies and equipment are introduced and

used. The specifi c rate is established upon the issuance of a license.

Rates should also be diff erentiated depending on the market situ-

ation, the domestic and world prices for mineral raw materials and

products of their processing. However, there is no clarity on how

rate diff erentiation would aff ect the revenue generated from pol-

lution charges. Moreover revenues are not tied to environmental

protection activities and mainly fl ow to general federal, regional,

and municipal budgets.

At the regional level, there are best practices examples of introduc-

ing tax breaks for introducing eco-friendly and resource-effi cient

technology. The Yaroslavl Oblast has a law empowering the regional

government to extend legal guarantees to businesses recycling

industrial waste, to grant interest-free or low-interest loans, and to

off er tax breaks to waste recycling R&D projects. The Oblast also

off ers reduced waste disposal charges to businesses taking mea-

sures to recycle waste. The Nizhny Novgorod Oblast can reduce

pollution charges, property tax and local taxes for businesses to

incentivize the development of the sanitation system in the Oblast.

The municipal authorities can off er contracts or guarantees to pro-

cure products from eco-friendly businesses, products manufactured

with the use of recycled waste, or get sanitation services provided

by eco-friendly businesses.

Environmental Fees/Taxation46

There are no environmental taxes, per se, in the Russian environmen-

tal policy system. However, companies that carry out activities that

46 Environmental law and practice in Russian Federation: overview.

23



BOX 3.2: Current Trade Disputes with Russia

The fi rst dispute involving the Russian Federation since it acceded to the WTO was initiated on 9 July 2013. The European Union requested consultations with the Russian Federation about a recycling fee, imposed on motor vehicles. On 24 July 2013, Japan fi led a dispute over the same issue.

Russia imposes a recycling fee on each vehicle imported into Russia or produced/manufactured on the territory of Russia. An exemption applies to vehicles manufactured or produced by companies committed to ensure subsequent safe handling of waste. However, this exemption is only available to vehicles man-ufactured by companies which are legal entities in Russia, and which produce their vehicles in Russia according to certain spe-cifi c manufacturing operations in the territory of Russia, Belarus or Kazakhstan. Therefore, the EU and Japan claim that vehicles imported into Russia are treated less favorably than domestic vehicles, or vehicles imported from Belarus and Kazakhstan.

The EU and Japan quote the following Russian legislation:

• Federal Law No 89-FZ on production and consumption wastes, as amended by Federal Law No 128-FZ, pub-lished in Rossiyskaya Gazeta No 5845 of 30 July 2012;

• Resolution of the Government No 870 on recycling fee for wheeled transport vehicles, published in Rossiyskaya Gazeta No 5873 of 31 August 2012;

Furthermore, Japan refers to:

• Joint Order “On approving Regulation on vehicle regis-tration passports and chassis registration passports” of 23 June 2005 as amended and published in the Russian Gazette No 203 of 5 September 2012;

• Resolution of the Government No 520 of 20 June 2013 on, among others, the approval of the rules for granting subsidies from the federal budget to organizations and individual entrepreneurs to reimburse expenses related to their handling of wastes resulting from the 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 Federation of 1 July 2013, N 26, p. 3342.

Russia’s measures appear to be inconsistent with Russia’s obli-gations under the WTO agreements:

• GATT 1994: Article I:1, Article II:1 (a) and (b), Article III:2, and Article III:4;

• TRIMs Agreement: Article 2.1 and 2.2 in conjunction with paragraphs 1(a) and/or 2(a) of the Illustrative List annexed to the TRIMs Agreement.

• TBT Agreement: Article 2.1 and 2.2.

Source: WTO.

can cause or result in an environmental impact are liable for mak-

ing respective payments (for example, the automobile recycling

fee). The automobile recycling fee was adopted after the Russian

Federation’s accession to the WTO. It is paid by importers, manufac-

turers and buyers of cars to which the fee is applicable. Since July

2013, the automobile recycling fee is a subject of a dispute being

resolved through the WTO’s Dispute Settlement Body (box 3.2).

While an eff ort to develop a recycling system following the principle

of extended producer responsibility with fees based on projected

or actual costs of recycling per product category is a positive step,

developing of the appropriate infrastructure to enable treatment

is associated with signifi cant investments and implementation

challenges.

Economic Incentives

Although the market instruments of regulating business impact on

the environment have not become widespread in Russia, some of

them have been formalized in the existing environmental protection

laws. Chapter 4 of Federal Law on Environmental Protection describes

economic incentives for environmental protection, such as:

§ Tax breaks and other privileges for using best available

techniques, nonconventional types of energy, secondary

resources, for recycling wastes and for taking other eff ective

environmental protection measures in compliance with the

Russian Federation laws;

§ Support for entrepreneurial, innovation and other types of

activities (including environmental liability insurance) aiming

at environmental protection.

Other federal and regional legal acts with economic incentives for environmental protection are listed in table 3.2.

CERTIFICATION AND VOLUNTARY COMPLIANCE, ECO LABELING

The GOST R ISO 14000 standards series adopted in 1998 serve as

the basis for ecological certifi cation in the Russian Federation.

Environmental management systems and products which are

potentially hazardous for the environment at any stage of their

production and use are subject to ecological certifi cation regime.

Ecological certifi cation is carried out within the framework of

certifi cation systems registered under the established procedure

with the issue of ecological certifi cates of conformity, ecological

24



declarations of conformity and eco-labeling. Russian companies

have started to introduce international corporate-management

and environmental-effi ciency standards. As reported in 2008, Russia

ranks fi fty by the number of ISO 14000-compliant Environmental

Management Systems certifi cates.47 Compared with other countries

Russia lags behind with only 267 certifi cates issued compared to

other BRIC countries (India ranks twelfth with 2,640 certifi cates, and

Brazil fi fteenth with 1,872 certifi cates. This is negligible in compari-

son with China (1st place, 30,489 certifi cates) or Japan (2nd place,

27,955 certifi cates).

Based on the rules codifi ed in the WTO Agreement on the Use of

Sanitary and Phytosanitary Measures, Russia will have to organize an

47 “Overview of Russia Environmental Management System. Directions for Its Modernization,” 2000, World Bank.

institutional system (at the government and nongovernment lev-

els) for voluntary and mandatory certifi cation and rating of product

quality in keeping with environmental requirements. The already

operating segments of ecological certifi cation and rating system

will also have to be adjusted in accordance with these rules.

Environmental audits are a fast-growing area in business opera-

tions used by corporations as a mechanism for environmental

management in market conditions. An environmental audit is

defined by the Federal Law on Environmental Protection as “an

independent, comprehensive and documented evaluation of

compliance by business and other entities with requirements,

including norms and regulations, in the sphere of environmen-

tal protection, the requirements of international standards, and

development of recommendations to improve such activi-

ties.” Conversely, the Federal Law on Auditing does not define

“environmental auditing.” A number of by-laws, however, can be

considered to establish an enabling framework for implemen-

tation, for example, the provision on environmental audit in

the Classifier of Legal Acts (110.010.100). As an instrument for

voluntary compliance a voluntary environmental audit removes

administrative barriers to organizations’ market entry. Following

an environmental seal of approval of legitimate certification

authority, the producer is able to receive an environmental cer-

tificate for its product, that is, to make it competitive not only on

the home market, but internationally, which is in tune with WTO

processes.

Russia is slowly introducing other voluntary market-based “green”

mechanisms (for example, publication of nonfi nancial reports

verifi ed by an independent third party, among others). In particu-

lar, Russian banks or investment companies could join the Equator

Principles or the UN Principles of Responsible Investment (http://

www.equator-principles.com/), the most widespread mechanisms

for assessing environmental and social responsibility of fi nancial

institutions. Opening the fi nancial sector to support environ-

mentally responsible operations might pay off in the short run to

support the competitiveness of Russian industry and meeting the

national sustainability agenda.

Today, a number of Russian ministries and agencies are already

developing their own industry-specifi c systems of voluntary

TABLE 3.2: Economic Incentives for Environmental Protection Embedded in National and Regional Legislation

LEGAL ACT TYPE OF INCENTIVE

Federal Law No. 52, On

the Animal World, April

24, 1995

• tax breaks and other privileges for legal entities and individu-

als ensuring the protection, reproduction and stable use of

fauna, as well as the protection and improvement of their

habitat;

• easy credits to legal entities for fauna protection and reproduc-

tion projects;

Federal Law No. 261, On

Saving Energy and Energy

Effi ciency, November

23, 2009

• reimbursement of interest expenses on loans, drawn from

Russian lending institutions, for investments in energy conser-

vation and energy effi ciency;

• long-term tariff regulation methods for natural monopolies

and public utility organizations. Tariff s will be established for

3 years or more, along with companies’ obligations to ensure

energy effi ciency;

Law No. 9 of the City

of Moscow on the

Comprehensive Use of

Nature, March 2, 2005

• privileges for application of BATs, low-waste and waste-free

production, utilization of secondary resources, and also other

eff ective measures to protect the environment and restore the

local natural assets.

Law No. 35 of the City

of Moscow on Energy

Conservation, July 5, 2006

• tariff (price) diff erentiation, and privileged (reduced) tariff s for

certain consumers of energy resources;

• tax breaks to organizations undertaking energy conservation

projects and R&D and experimental design projects in energy

conservation;

Water Code of the Russian

Federation (74-FZ), June

3, 2006

• water protection expenditures are being taken into account

when water use charges are calculated;

Tax Code of the Russian

Federation, August 5,

2000 (Part One No. 146-

FZ, Part Two No. 117-FZ)

• tax incentives to support innovations, R&D and experimental

design, to retrofi t operators towards protection of the environ-

ment from pollution;

• expenditures for maintenance and operation of fi xed assets

intended for nature protection are considered as ‘material

expenses’ for purposes of profi t tax calculation;

• fees and other payments for excess emissions of pollutants

into the environment are not considered as expenditures in

determining the tax base.

Source: Geyts (2013).

25



eco-certifi cation and are preparing to implement the requirements

of the Federal Law on Technical Regulation. Russia’s Standardization

Committee and its territorial offi ces initiated a series of seminars for

producers to educate them on Russia’s accession to WTO and com-

pliance with its requirements. While regulation of mandatory certifi -

cation is not in eff ect the existing legal framework makes it possible

to establish voluntary eco-certifi cation systems, conduct such pro-

cedures and use logotypes of compliance with the ISO-14000 stan-

dards on par with the Green Seal in the US. Eco-certifi cation based

on the fi ndings of environmental audits can become a strong eco-

nomic mechanism for protecting the environment and improving

the environmental situation in Russia.

Information-based instruments apply directly to the product and

are used as an alternative to direct control and to provide incen-

tives to reduce pollution. For example this could be through

requiring public disclosure of environmental information—or

through building capacity in the regulated community—such as

providing training in specifi c issues. Eco-labeling or environmental

product declaration measures that aim to infl uence consumer

behavior, issuing high-profi le awards for desired performers, and

promoting R&D and demonstration programs are other examples

of information-based instruments. Eco-labeling has been most

successful in the Nordic countries because eco-labels had turned

out to be popular with consumers and most large producers vol-

untarily followed suit.

Russia’s already functioning segments of an eco-certifi cation and

eco-labeling system will have to be adapted in accordance with

the WTO rules on labeling, since in practice a number of diffi culties

arise due to the ‘blurry’ borderlines between mandatory (technical

regulations) and voluntary (standards) eco-labeling.

27


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

Chapter 4 INTRODUCTION OF CLEAN TECHNOLOGIES

CURRENT LIMITATIONS

Introduction of eco-effi cient technologies, ensuring ecologically-

oriented economic growth and introduction of eco-effi cient inno-

vation is anchored in the “Fundamentals of Government Policy

for Environmental Development of the Russian Federation until

2030.” The penetration of clean technologies in Russia is one of

the key expected positive results from the WTO accession. Yet,

current environmental policy instruments have shortcomings,

which should be addressed in order to enable technology trans-

formations to actually take place. While WTO is one of the avenues

for countering “age-long economic backwardness of the Russian

industry,” there are relatively simple measures that could reap

and augment these benefi ts. There is vast potential in the area of

renewable energy where China, Brazil, Indonesia, and Turkey are

making impressive leaps in developing renewable technologies.

In January 2009, the Russian Government passed a decree to

increase the share of renewable energy up to 4.5 percent by 2020.

A number of ambitious projects are under implementation such

as Rosnano project creating a vertically-integrated company in the

area of solar energy. While the beginning is promising—the 4.5

percent target will not be met with the current legal and regula-

tory framework.48 Regardless of the positive initiatives the pace of

replacement rate of obsolete technologies in industry has been

slow. For instance, in 2007 some 45 to 56 percent of material assets

were fully depreciated in key sectors such as mining and process-

ing, power, water supply, and construction.

Financial constraints: Broader introduction of best available

techniques (BATs) is held back primarily by the huge fi nancial cost

48 “Renewable Energy Policy in Russia: Walking the Green Giant,” IFC Green paper, 2011.

of retrofi tting old industrial facilities in operation for decades. Even

though from an economic perspective it is more expedient to close

such enterprises than to retrofi t and modernize them the social

impact of closings (for example, unemployment, social exclusion,

migration and crime) will be a deterrent in regions where pollut-

ing industries dominate. Underdeveloped economic incentives to

effi cient environmental protection also contribute to slowing down

industrial modernization rates. At the same time, an analysis of

national practices of government regulation of environmental pro-

tection shows that it is precisely the economic incentives that are

most eff ective for promoting broader application of best available

techniques by industries using natural resources.

Gaps in the legal and regulatory framework: The Federal Law

on Environmental Protection provides a general defi nition of best

available techniques (BAT), and describes their use as a basic prin-

ciple for environmental protection. It promotes their development

through economic incentives and scientifi c research which need

to be supported by enabling institutional and fi scal environment,

meaning that regulatory frameworks for environmental protection

have to provide further guidance on the use of BATs and invest in

the development BAT reference documents. However, in practice,

the defi nition of BAT has faced challenges in legal interpretation,

leading to ambiguity and a general lack of enforceability. To close

the gap in the legal interpretation—Russia could develop a set of

guidelines much like that in the EU (box 4.1).

The experience of European countries, implementing BATs (and

BAT References [BREFs]) for a long time, shows that this tool is

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

regulated. These challenges are primarily linked to the case-specifi c

28



implementation procedures that require continual dialogue

between the regulated and the regulator, allocation of responsi-

bilities among various public agencies, and inadequate capacities

of public organizations. Learning from this experience would be

useful for the Russian policy makers.

Lack of innovation: Russia’s scientifi c and technological potential

in environmental protection is lagging far behind that of foreign

countries: in 2008 Russia spent on research in that sphere just

1 percent of the total research expenses, whereas in Austria the

fi gure was 8.2 percent, in Mexico 7.8 percent and in South Africa

4 percent. The share of business in fi nancing R&D in the sphere of

rational use of natural resources in Russia is less than 25 percent.

Public procurement: Russia could consider introducing energy-

and environmental-effi ciency requirements for goods and services

BOX 4.1: BREFs in The EU and Its Role

In the EU to prevent and minimize pollution and to achieve a high level of protection for the environment as a whole, the Industrial Emission Directive (IED) entered into force in January 2011 and has to be transposed into national legislation by Member States by January 2013. Seven existing Directives related to industrial emissions, including the Integrated Pollution Prevention and Control (IPPC) Directive, the Waste Incineration Directive (WID), the Large Combustion Plants Directive (LCP) and the Solvent Emissions Directive (SED) were to be combined into a single, clear and coherent legislative instrument. The IPPC System in EU aims to protect the environment as a whole and avoid shifting pollu-tion from one medium to another. It aims addresses the preven-tion or reduction of air emissions; water emissions; production of waste; odor and noise, consumption of energy and natural re-sources. The Industrial Emission Directive is the law in the EU and the specifi c recommendations are contained in BREFs: which defi ne the Best Available Techniques (BAT).

What is a BREF and who are its main users?BAT-Reference Documents (BREFs) are a result of information exchange. They provide guidance to decision makers involved in the implementation of the IPPC Directive. BREFs are used by operators of installations (during application preparation for the IPPC Permit), the Environmental Authorities (Permit writers, Policy makers) and the public in general.

BREFs are a series of reference documents covering, as far as is practicable, the industrial activities listed in appendix 1 to the EU’s IPPC Directive. BREFs have a central role in the implementa-tion of the IPPC Directive. They provide descriptions of a range of industrial processes and for example, their respective operating conditions and emission rates. They are a result of the informa-tion exchange between Member States and Industry in Europe level; provide information on best available techniques; provide for each BAT associated emission levels (BAT-AELs); provide infor-mation on reference plants; and are available on the internet for all users including the public (http://eippcb.jrc.es). Member States

are required to take these documents into account when deter-mining best available techniques generally or in specifi c cases under the Directive.

BREFs are guidance documents only. They do not have legal status and they are meant to give guidance to industry, mem-ber states and the public on achievable emission and consump-tion levels when using specifi ed BAT techniques. In every case the local conditions shall be taken into account when decid-ing the emission limit values and other conditions. In specifi c cases, the emission limit values might be higher or lower. Environmental quality standards in water and air may mean more strict values—or even zero emission/discharge. There also could be cases where the emission limit values are less strict—to comply with the “best for environment as a whole” principle.

How BREFs are prepared?The European IPPC Bureau in Seville, Spain, facilitates the draft-ing of the BREFs. For each BREF, a Technical Working Group (TWG) with representatives of Member States, industry and nongovern-mental organizations (NGOs) is set up. BREFs are revised regularly (approximately every 3 years). Appendix 7 contains a list of sectors for which BREFs have been adopted, under discussion or are in draft.

How BREFs are applied by EU member states?In Austria, Emission limit values for iron and steel production are laid down in installation permits issued by local authority and are based on BAT and other standards or state-of-the-art technology.

In the Netherlands, in order to operate in compliance with the IPPC Directive, Dutch industrial installations must have a li-cense based on the Environmental Management Act and a license based on the Pollution of Surface Waters Act. Combined, these two licenses comply with the conditions of the IPPC Directive.

Source: EC IPPC Directive.

29



procured by federal, regional and municipal authorities. Such mea-

sures could act as a trigger to provide for the economies of scale

required for modernization and “greening” of domestic industries

and business processes. In this context, Russia could benefi t from

international experience. Since government expenditure con-

stitutes a large portion of GDP, public procurement could drive

“greening” and increase the demand for energy effi cient products.

Such requirements, could for instance, be for goods which contain

certain percentage of recycled inputs. A useful reference is the EU

standard for public procurement policies, Directive 2004/17/EC from

March 31, 2004. Implementation of green procurement policies has

been adopted by WTO member countries such as Austria, Belgium,

United Kingdom, Germany, Greece, Denmark, The Netherlands, and

France. The United States, Canada, Japan, New Zealand, Mexico, and

many other countries have similar practices.

Introduction of market-based instruments (MBIs) in Russia

could create a platform for win-win outcomes, thereby stimulat-

ing compliance and better environmental performance. To this

end, the development of pilot emission trading scheme (ETS) for

industrial sector covering major emissions, like CO2 or NOx, could

bring signifi cant public health benefi ts. The approximate benefi ts

and costs of such a scheme were explored in the modeling sec-

tion. If carefully crafted, such schemes could assist the sustainable

long-term growth of industry. Equally important, such initiatives

could provide highly valuable experience to the country and help

build capacity that will become increasingly important in light of

industrial competitiveness and managing greenhouse gas emis-

sions. Introduction of other MBIs, such as earmarked taxing sys-

tems for selected emissions can also be considered. These tools

can be developed based on holistic and rigorous analyses of the

legal and technical requirements in order to avoid the promotion

of unintended outcomes countering WTO rules. Some successful

examples of MBIs have been implemented in the USA (SO2 emis-

sions trading, see box 4.2) and Sweden (tax and rebates for NOx,

see box 4.3).

In view of Russia’s accession to the WTO, the question of a “road-

map” for business is particularly relevant. According to a survey

by Kommersant Publishers, only 6 percent of Russian companies

have designed strategies of adaptation to WTO membership. As

many as 48 percent of those surveyed expected to take some

BOX 4.2: Tradable Permits Led to More Cost Effi cient and Environmentally Eff ective Innovation to Control Sulfur Dioxide Emissions and Acid Rain in The United States

U.S. electric power plants emit sulfur dioxide (SO2), which has been a major cause of acid rain in the Midwest and Northeast of the United States and in Canada. Starting in 1971, the United States used a form of “command and control” regulation by re-quiring power plants to install “scrubbers” that remove sulfur from the smokestacks of electric power plants. Technological innovation led to the reduction in the cost of scrubbers, but not to their environmental effi ciency, since the regulation did not provide an incentive for power companies to demand envi-ronmentally effi cient scrubbers. Further, power companies had no incentive to take other steps to emit less sulfur dioxide. For example, Western coal (for example, from Utah) has much low-er sulfur content than coal from Appalachian states like West Virginia, Kentucky and Pennsylvania; but the regulation provid-ed no incentive to switch to lower sulfur content coal that pro-duces less acid rain. Although the system was ineffi cient from several perspectives, it did bring about a reduction in acid rain.

With the Clean Air Act Amendments in 1990 the U.S. Environmental Protection Agency shifted to a system of tradable permits for sul-fur dioxide and nitrogen oxide emissions. Power plants that re-duce their emissions below the number of allowances they hold may trade allowances with other units in their system, sell them to other utilities on the open market or through EPA auctions, or bank them to cover emissions in future years. Utilities now reduce emissions by employing energy conservation measures, increas-ing reliance on renewable energy, reducing usage of coal, em-ploying pollution control technologies, switching to lower sulfur fuel, or developing other alternate strategies. Given the incentive to reduce emissions in a tradable permit system, technological innovation since 1990 has led to environmentally more effi cient scrubbers, not just cheaper scrubbers. And trades among power companies mean that the emissions reduction occurs where the marginal costs of abatement are the lowest.

Compared to the “command and control” system of requiring scrubbers, the tradable permit program has been assessed as a success in meeting the targeted reduction in emissions and doing so at least cost to utilities. Further, since the power companies are given the property rights to a number of allowances, the system does not entail a tax payment to the government, and this helps with the political economy problem of addressing opposition from industry to regulatory systems that impose substantial costs.

See Organization for Economic Cooperation and Development (2008), “An OECD Framework for Eff ective and Effi cient Environmental Policies: Overview,” Paris: OECD. Available at: http://www.oecd.org/env/tools-evaluation/40501159.pdf.

Source: OECD.

30



individual measures, while 34 percent were not going to draft

any strategies whatsoever. Small and medium-sized businesses,

for which it is harder to devise successful development strate-

gies under the conditions of WTO membership, are a special risk

group.

In order to increase the respect to environmental laws in Russian

society, it is important to increase the business community’s

awareness on environmental protection, the rational use of natural

resources and raise the priority of protecting public health, each of

which supports sustainable development in Russia.

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 in January 1992, Swedish fi rms that produce more than a given amount of energy from boilers, stationary combustion engines and gas turbines had to pay a tax of 40 Swedish kroner per kilo-gram of nitrogen oxide produced. Plants that produced less than 25 gigawatt hours per year were exempted from the tax.

In order not to provide a competitive advantage to the plants ex-empted from the tax, the total collected taxes on the NOx emis-sions (less administrative costs) are distributed back to the fi rms. Importantly, the rebates are based on NOx emissions per unit of energy produced. Lower polluting fi rms are the winners and high polluting fi rms are the losers, but the system is revenue neutral for the government.

The system has led to signifi cant technological innovation. Emissions per unit of energy produced have been reduced by

more than 50 percent, with total emissions falling by about 30 percent. Since there is not net tax burden on industry, the sys-tem also addresses the political economy problem of opposi-tion from industry to regulatory systems that impose substantial costs.

See Organization for Economic Cooperation and Development (2008), “An OECD Framework for Eff ective and Effi cient Environmental Policies: Overview,” Paris: OECD. Available at: http://www.oecd.org/env/tools-evaluation/40501159.pdf. For a more detailed analysis see Swedish Environmental Protection Agency (2006), “The Swedish Charge on Nitrogen Oxides—Cost Eff ective Emission Reduction.” http://www.naturvardsverket.se/Documents/publikationer/620-8245-0.pdf.

Source: OECD.

31


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

Chapter 5 ENVIRONMENTAL POLICIES AND WTO RULES49,50

49 WTO (2011).

50 WTO (2004).

Russia has developed most of the policy attributes in order to

increase the competitiveness of its industry while implementing the

WTO accession rules and meet the national environmental protec-

tion objectives. The Russian Constitution refers to the protection of

the environment. A framework law and a series of specifi c laws or

codes are in place to protect the environment and its various ele-

ments. Ensuring consistency and coherence between environmen-

tal laws and other sector laws is an unfi nished task. Similarly, at the

level of detailed regulations, these are nominally comprehensive in

terms of subject but are increasingly layered and patchy with often

confl icting and inconsistent requirements. Public inputs and con-

sultation on legislative and regulatory acts is practiced in Russia but

would benefi t from broadening and wider engagement of various

stakeholders. Regulatory monitoring performed at diff erent levels

needs to be modernized to meet the international monitoring stan-

dards. The current modernization eff ort to simplify and make the

Russian environmental monitoring system more effi cient is com-

mendable. Improvements will be needed in respect of public access

to environmental monitoring information.

Two basic elements of “The Fundamentals of Government Policy for

Environmental Development of the Russian Federation until 2030”

are: (i) toughening environmental protection requirements for indus-

trial, commercial, social and cultural facilities, and (ii) encouraging

the development of resource-saving technological solutions. Since

the fuel and energy sector is one of the largest sources of pollution,

improving the energy effi ciency of the Russian economy through

modernization of production and introduction of new processes is

a foremost priority. To remove barriers and realize its energy saving

potential it would be necessary to reduce the energy intensity of gross

domestic product by at least 40 percent by 2020 compared to the

2007 level. Resolution No. 1662-r On the Concept of Long-Term Socio-

Economic Development of the Russian Federation Until 2020, dated

November 17, 2008, stipulates that encouragement of the introduc-

tion of advanced oil and gas production and processing technologies

will become a priority development target in the oil and gas sector.

At the regional level, appropriate conditions for modernization of

production facilities through encouragement of application of

high-tech machinery, foreign technologies, and resource-saving

techniques have been put in place. For example, Article 3 of Law

No. 42-RZ of the Republic of Komi, dated May 14, 2005, restricts the

use of oil products and other fuels that pollute the atmosphere, and

encourages production and application of eco-friendly fuels and

other energy carriers. The Republic of Tatarstan has developed its

Republican Standard of Tatarstan Resource-Saving Management

Systems (RST RT SUR 64-31/1) and own Industry Standard Resource-

Saving Management System in Health Care Institutions and

Organizations of the Ministry of Public Health of the Republic of

Tatarstan (approved in 2002 by Order No. 1283 of the Minister of

Public Health of the Republic of Tatarstan).

While WTO rules on the environment are still incomplete and provide

little guidance on what to do, below is an outline of some aspects

that can inform national polices and instruments that are aligned

with the multilateral trade regime and its fundamental principles.51

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 fair and equal competitive conditions for market access, and predictabil-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 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 specifi c treatment is given to good and services of one country, it must be given to all WTO member countries. No one country should receive favors that distort trade.

32



ENVIRONMENTAL REQUIREMENTS

Environmental requirements (in the form of product and produc-

tion method specifi cations, voluntary and mandatory requirements,

labeling requirements and conformity assessment procedures) are

signifi cant determinants of access to foreign markets, especially for

countries which are on a path to “greening” their economies. At the

same time environmental requirements may aff ect international

trade, if they have a discriminatory nature. The design of national

measures in terms of transparency and harmonization with interna-

tional norms determine the level of recognition, and consequently

the potential for concerns and disputes.

The Agreement on Technical Barriers to Trade (TBT Agreement) is

the main WTO instrument dealing with environmental regulations

and standards. The rules of the TBT Agreement aim at ensuring that

such measures do not create unnecessary obstacles to international

trade. WTO members are encouraged to use international standards

as a basis for their own regulations and standards, in recognition of

the fact that environmental requirements can create trade barriers

when they diff er from country to country.

ENVIRONMENTAL CHARGES AND TAXES

The design of environmental charges and taxes is a sig-

nifi cant cost factor for producers and service providers, and

hence can aff ect trade relations. A green tax, trading scheme

or price/cost adjustments may confl ict with the WTO nondiscrimi-

nation principle.52 Likewisethe national treatment principle may

be triggered when an environmental tax is applied diff erently to

domestic and foreign producers; the most-favored nation treatment

(MFN) principle becomes relevant where an environmental tax is

applied diff erently to producers from various exporting countries.

The imposition of a price on environmental damage at the

domestic level can raise concerns that polluting industries

will relocate to countries with less strict environmental

regulations (for example, pollution haven). To minimize this

risk, adjusting the environmental cost at the border is one widely

debated option. However, such adjustments would need to avoid

52 GATT, Article I on most-favored nation treatment and Article III on national treatment.

adverse impacts on international trade without undermining the

intended environmental benefi ts of the taxes and trading schemes.

Border adjustments do not apply for “process” taxes and charges (for

example, a tax on the energy consumed in producing a ton of steel

cannot be applied to imported steel). Since environmental taxes

and charges are equally process-oriented as product-oriented, WTO

members are very sensitive about the competitiveness implications

of environmental process taxes and charges applied to domestic

producers.

ECO-LABELING

Concerns about eco-labeling have been raised based on the

growing complexity and diversity of environmental label-

ing schemes, which could be misused for the protection of

domestic markets. Another diffi cult issue is the Processes and

Production Methods (PPM) for labeling. WTO Members disagree

over the WTO consistency of measures based on PPMs which

leave no trace in the fi nal product (for example, cotton grown

using pesticides, with there being no trace of the pesticides in the

cotton).

The nondiscriminatory and transparent character of mandatory

eco-labeling, used by governments as an environmental protec-

tion measure, is discussed in the TBT Agreement. The main princi-

ples of voluntary labeling are formulated in the WTO Code of Good

Practice for Preparation, Adoption and Application of Standards,

and the national standardizing authorities (governmental and non-

governmental bodies) must follow them. The Code includes norms

for the preparation, approval and application of voluntary eco-

labeling standards in the member countries. In particular, it stresses

the need for giving the WTO notice of any standards adopted by

countries, for the publication of information about any newly intro-

duced eco-labeling standards and the rates of payment for eco-

labeling services that are available to both domestic and foreign

producers.

GOVERNMENT SUPPORT

Government support for “green” goods and technologies (for

example, non-repayable grants, preferential credit guarantees,

preferential tax treatment, and price support measures) aff ect the

33



price and production of such goods. As a result, it may be harder

for other countries’ exporters to compete in the subsidizing coun-

try, or make the exports of the subsidizing country more competi-

tive abroad. Some countries may also support domestic fi rms with

the installation of more environmentally friendly technologies,

thus enabling these fi rms to maintain international competitive-

ness. Unlike support linked to production, government support

for consumption will not aff ect international trade provided that

it does not distinguish between domestic and imported goods or

services.

The Agreement on Subsidies and Countervailing Measures (SCM

Agreement) establishes the conditions under which WTO mem-

bers can use subsidies, and regulate the remedies (countervailing

duties) that may be taken against subsidized imports. Provided

certain rules are respected, the Agreement leaves members room

to encourage green technologies. In addition, the WTO Agreement

on Agriculture contains a category of permissible “green” subsidies,

which could allow countries to pursue green economy policies in

agriculture.

“Green” public procurement is encouraged as an important vehicle

to make contribution to sustainable consumption and production.

The WTO Agreement on Government Procurement (GPA) provides

disciplines on nondiscrimination and transparency in procurement

of covered goods and services by designated governmental enti-

ties. Participation in the GPA, a plurilateral agreement within the

WTO framework that applies only to parties that have accepted

the Agreement, provides legal guarantees of access to the parties’

covered government procurement markets by the goods, services

and suppliers of all parties. The forthcoming revision of the text of

the Agreement will explicitly state, for greater certainty, that parties

and their procuring entities may prepare, adopt or apply technical

specifi cations to promote the conservation of natural resources or

protect the environment. Parties may also evaluate off ers received

based on environmental characteristics set out in notices or tender

documentation.

Appendix 6 summarizes WTO Rules relevant to environmental poli-

cies in more detail.

35


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

Chapter 6 EVIDENCE OF POTENTIAL FOR EFFICIENCY GAINS AND CLEANER TECHNOLOGY ADOPTION IN RUSSIA

Russia’s production processes will require massive modern-

ization if they are to eff ectively compete in the domestic and

international markets. WTO will act as one motivating force for

fi rms to consider in deciding the speed and level of required invest-

ments—in both hard physical infrastructure and softer investments

in greater human resource capabilities. Many of these investments

will result in effi ciency savings to the fi rm—so it is crucial to identify

and prioritize these potential opportunities.

This section showcases some important, and ongoing, survey work

with industry in tracking resource use, identifying potential cost sav-

ings and ultimately investing in effi ciency improvements. Russia’s

production is concentrated in selected sectors and regions—so

it is important to benchmark these areas and gain some insights

of where, and in which sector, resource savings can be realized. To

get a sense of this potential—the fi rst section below summarizes

sector and regional results of one of the most comprehensive envi-

ronmental surveys in Russia. Interfax-ERA (Moscow) regularly under-

takes annual enterprise surveys on resource use (for example, water,

energy, electricity) and although it is only a sample of industry—it

still yields very important insights on the resource use intensity of

Russian production.

The second and third studies below summarize ongoing work

by the IFC is currently working with industry to identify potential

resource-use effi ciency gains. The fi rst study was conducted in

collaboration with the foundry industry—known to be an intensive

user of natural resources. The second study was with the automo-

tive sector, and as a sector, it is anticipated to be directly aff ected by

WTO accession.

RUSSIA’S CURRENT RESOURCE USE PROFILE

The structure of Russia’s economy is heavily weighted towards the

extractive industries such as oil, gas and metallurgy. This focus can

also be seen when we look at various indicators of natural resource

use (see fi gure 6.1 through fi gure 6.5). For example, the energy sec-

tor is the largest consumer of energy and water and also contributes

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Source: Interfax-ERA (2013).

36



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FIGURE 6.2: Water Use (‘000 m3)/mln Rubles


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FIGURE 6.3: Contaminated/Industrial Wastewater (‘000 m3)/mln Rubles


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FIGURE 6.4: Air Emissions (Tons)/mln Rubles


37



signifi cantly to wastewater and air emissions. The metallurgical sec-

tors contribute signifi cantly to pollution emissions (air, water, waste),

and the housing sector (that is, households) are large water users

and the largest in terms of wastewater generation.

Regionally, consumptive energy and water use is highest in the north

and eastern districts (for example, Ural, Siberian and Far Eastern).

Access and supply to these natural resources is less constrained in

these districts so there appears to be less incentive to conserve or

improve effi ciency from a supply-side argument. Meanwhile these

areas also tend to be associated with higher pollution emissions,

which may also refl ect the use of older (dirtier) technologies in

production.

The trends in pollution tell a bit of a more positive story (see fi gure

6.6 through fi gure 6.8). While resource use intensity per value of

0.02.04.06.08.0

10.012.014.016.018.0

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FIGURE 6.5: Waste Generation (Tons)/mln Rubles


0

20

40

60

80

100

120

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

EnergyOil productionGasCoalFerrous metallurgyNon-ferrous metallurgyHousing

FIGURE 6.6: Change in Air Emissions/mln Rubles (2000 = 100)

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Energy Oil productionGas CoalFerrous metallurgy Non-ferrous metallurgyHousing

FIGURE 6.7: Change in Industrial Wastewater/mln Rubles (2000 = 100)

38



production may be high in absolute terms, many of the resource-

intensive sectors have observed a decline in their pollution intensity

since the year 2000, with the exception of the coal industry which

doubled its contaminated wastewater intensity.

REGIONAL IMPACTS OF ENERGY SECTOR REFORM

Sector reform—whether induced through the impacts of WTO

accession, policy or otherwise—will impact the regions of Russia

diff erently. Given the focus of this paper on the energy and metal-

lurgical sectors, the fi gures below indicate the share of these sectors

in Gross Regional Product (GRP) (see fi gure 6.9 through fi gure 6.11).

Darker shades indicate that particular sector is more important to

the regional economy.

Eastern districts rely more heavily on the production of energy

(power) and coal, whereas oil and gas are more signifi cant for the

central districts. The metals sectors are more evenly divided among

0

20

40

60

80

100

120

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

EnergyOil productionGasCoalFerrous metallurgyNon-ferrous metallurgyHousing

FIGURE 6.8: Change in Waste Generation/mln Rubles (2000 = 100)


60

55

50

45

40

60

55

50

45

40

60 80

1200.8–2.7%2.7–3.2%3.2–4.3%4.3–5.47%5.7–12.4%

60 80

1200.08–0.3%0.3–0.5%0.5–0.8%0.8–1.5%1.5–15.0%

FIGURE 6.9: Share of Power and Coal Production in GRP (Percent)

60

55

50

45

40

60

55

50

45

40

60 80

120

60 80

1200.02–0.4%0.4–2.1%2.1–4.0%4.0–10.0%10.0–58.0%

0.01–0.04%0.4–0.16%0.16–0.8%0.8–1.5%1.5–15.0%

FIGURE 6.10: Share of Oil and Gas Production in GRP (Percent)


39



selected districts in the west and east—with steel in the west and

non-ferrous metals in the east. This illustration is provided to inform

policy makers in these regions on the possibilities to use the policy

synergies between trade liberalization and environmental policies

described in the report.

POTENTIAL EFFICIENCY SAVINGS IN RUSSIA’S FOUNDRY INDUSTRY

The potential for natural resource and effi ciency savings in the

Russian foundry industry is tremendous. A recent study of 26 manu-

facturers of ferrous metal castings (foundries), conducted by the

IFC,53 identifi ed numerous process areas—that if modernized to EU

standards to use more effi ciently the natural resources—could save

up to RUB100 billion ($3.3 billion) annually, and improve individual

foundry profi tability by up to 15 percent. Some of the main fi ndings

are summarized in box 6.1.

The study benchmarked industrial processes against compa-

rable operations in the European Union according to seven key

53 The Resource Effi ciency in the Ferrous Foundry Industry in Russia: Bench-marking Study (2010) was prepared under the IFC Cleaner Production Program in Eastern Europe and Central Asia and in close cooperation with GEMCO Engineers B.V., together with its sister company Knight Wendling GmbH, count for well over 30 years of experience in the foundry industry and off er dedicated foundry solutions for iron, steel, aluminum, and all other castable metals. It was fi nanced by the Free State of Saxony (Germany), the Netherlands’ Agency for International Business and Cooperation (EVD, a branch of the Ministry of Economic Aff airs of the Netherlands), the Ministry of Employment and the Econ-omy of Finland, and the IFC. Available at: http://www.ifc.org/ifcext/climatechange.nsf/Content/CleanerProduction

60

55

50

45

40

60

55

50

45

40

60 80

120

60 80

1200.01–0.09%0.1–0.19%0.19–0.51%0.55–2.16%2.23–10.19%

0.02–0.1%0.1–0.5%0.5–1.1%1.1–3.3%3.3–12.7%

FIGURE 6.11: Share of The Steel and Non-Ferrous Metals Industry in GRP (Percent)


• Russian foundries use three times more energy, 160 times more water, nearly four times more sand, and 14 percent more metal per ton of high-quality fer-rous castings product in comparison with European foundries, while the average production volume per Russian employee is nearly four times lower than in the European Union.

• If Russian foundries were able to match the effi ciency of the best-performing EU plants, the energy saved would be suffi cient to power a typical Russian city of 1.5 million people.

• Matching EU standards in water effi ciency would save enough to supply more than 3.5 million Russian citizens for one year.

• In terms of competitiveness, the Russian foundry indus-try lags signifi cantly behind Europe—between 1.5 and four times less competitive.

• Russian foundries use 14 percent more metal to produce one ton of fi nished product. Source: Low production effi ciency means producing one ton of good-quality castings takes 60 percent longer (in man-hours) in Russia than in Europe.

• Operational effi ciency at Russian foundries is currently only 50 percent of capacity.

• Despite prices of major resources being as much as half of those in Europe, ineffi ciency erodes any cost advan-tage Russian foundries may have.

Source: IFC (2010), Resource Effi ciency in the Ferrous Foundry Industry in Russia: Benchmarking Study, International Finance.

BOX 6.1: Benchmarking Russian Foundries

40



performance indicators (KPIs) that heavily infl uence operating costs

and profi ts:54 (1) process yield, (2) production effi ciency, (3) capac-

ity utilization, (4) energy use, (5) fresh water consumption, (6) fresh

sand consumption, and (7) labor productivity. Recommendations

were then provided how to improve resource effi ciency, competi-

tiveness, and profi tability. The results were organized around several

key questions:

1. Why is resource effi ciency so important for Russia’s fer-

rous foundry industry? Russian foundries have enjoyed a highly-

competitive cost advantage in comparison with Western European

countries (for example, Germany) with lower energy costs (54 per-

cent lower), labor costs (92 percent), and overhead and service costs

(71 percent). However, these cost advantages have not translated

into more competitive prices for fi nished products.

The fi rst reason is that low labor productivity (it takes 3.3 times

as many human resources to produce an equivalent amount of

product) and high volumes of energy consumption (for example,

Russian smelting uses twice as much energy) negate any of the

above cost savings. The second reason stems from the current poor

quality of castings that are denied access to export markets, while

falling demand puts even local markets at risk. Only a few Russian

foundries have any experience in exporting beyond countries of

the Commonwealth Independent States (CIS). Foundries producing

54 The study did not cover issues relating to the strategic development of the foundry sector as a whole (that is, in terms of industry-wide trends, government policy, or incentives to promote innovation or to support specifi c sub-sectors).

goods for domestic customers, or for export to customers in the

CIS, have never been subject to the more stringent quality controls

enforced in the international markets.

Domestic and international pressure for product quality improve-

ments are necessary and if undertaken could result in higher

value-added throughout the market—leading to higher profi t

margins. An important part of this shift will be to increase effi -

ciency in resources management (particularly in containing raw

material and energy consumption and costs, as well as in improv-

ing labor productivity).

2. Where does the greatest potential for better resources

management rest? Matching the effi ciency of the best-

performing EU plants would save enough energy to power

a typical Russian city of 1.5 million people: and matching EU

standards in water effi ciency would result in savings equiva-

lent to total residential consumption in the Netherlands. On

the basis of Russia’s current annual production of 6.1 million tons,

matching the effi ciency of European plants would save 19,882 giga-

watt hours (GWh) of energy, 5.7 million tons of sand, and 879 million

cubic meters of water, per year.

Russia’s ferrous foundries could save up to $3.3 billion per

year. Effi ciency gains in the assumed cost base of raw materials,

energy, labor, equipment, and overheads could reduce costs up to

29 percent if performance were to match that in Europe. This would

amount to a sector-wide savings of $3.3 billion annually and reduce

CO2 emissions by up to 4.5 million tons a year.

EU

3.4%

Russia

13.4%

4times

FIGURE 6.13: Defect Rates in Russian and EU Foundries

Source: IFC.

EU

100% 96% 64%

Russia Russia at EUefficiency level

FIGURE 6.12: Costs of Russia Foundries in Comparison with EU

Source: IFC.

41



Matching the effi ciency of the leading Russian enterprises

could achieve savings in the order of 19 percent across the

sector, while individual enterprises could increase opera-

tional profi tability by up to 15 percent. While KPIs for the best

Russian enterprises currently only match average effi ciency stan-

dards in Europe, achieving these standards could, in addition to

raising the overall effi ciency of the Russian ferrous foundry industry,

result in cost savings in the order of 19 percent—or RUB65 billion

per year. Even on the basis of current operating costs and profi t

margins, better resource effi ciency could potentially increase the

operating profi t of individual enterprises by up to 15 percent.

3. How can the benefi ts of better resource effi ciency be

optimized? More than half of the resource effi ciency savings

and benefi ts could be achieved through better management

practices and various low-cost initiatives alone, with no need

for major capital expenditure. Of the total potential for better

resource effi ciency in the Russian foundry sector, around 57 percent

could be achieved solely through the implementation of low-cost

initiatives and improved management practices: less than half (43

percent) would require any capital expenditure or refurbishment.

For example, in the moulding process, more gross castings could be

produced within the same amount of time if losses due to excessive

downtime were avoided.55 These losses could be avoided through

modest monitoring and quality control programs that would

reduce the number of rejected (or inferior) castings. Another simple

55 Downtime (measured at the moulding line) can be due to a variety of reasons including: mechanical and electrical stoppages, waiting periods and delays for metal or sand, a high number of pattern changes, opera-tional and/or organizational ineffi ciencies, and poor scheduling.

area for reducing energy costs is to avoid holding and treating metal

for long periods of time in melting furnaces. This practice is unnec-

essary and cost savings could be realized through simple changes

in the melting procedure.

Closing the resource-effi ciency gap on European standards

will require Russian foundry owners and management to

commit to improving operational performance and chang-

ing their business model. Better energy effi ciency in the melting

process could reduce total costs by as much as fi ve percent. While a

degree of capital investment may be required (in the replacement

of outdated equipment with a more energy-effi cient plant) a num-

ber of savings might also be achieved through organizational initia-

tives. Minimizing energy costs will become increasingly important

as energy prices continue to rise. Improved labor productivity could

result in a saving of up to four percent on total costs: much of it

achievable without the need for any fi nancial investment, through

organizational initiatives such as reducing overmanned and

administrative processes. This will become increasingly important

as wages rise in line with Russia’s developing economy. Businesses

should also further specialize and focus on a core set of products

(as is done in Europe) rather than trying to be a one-stop-shop

for all castings. This old business model is expensive to maintain.

Russian foundries have opportunities to increase their international

competitiveness if performance is improved and cost advantages

exploited and maintained. But only when the quality of castings

is improved will Russian foundries be able to increase production

volumes signifi cantly, and on a sustainable basis. This should then

be coupled with more ambitious sales and marketing strategies and

Russia bestRussia average Europe average Europe best

$3.3 blnUSD

$3 blnUSD

$2.13 blnUSD

100%

–19% –26% –29%

FIGURE 6.14: Russia Ferrous Foundry Industry Gains Via Resource Efficiency

Source: IFC.

Russia average Europe best

$3.3 blnUSD

Low cost andmanagement

practices Capitalinvestment

–57%

–43%

FIGURE 6.15: Measures to Optimize Resource Efficiency in Russian Foundries

Source: IFC.

42



customer-service skills directed at developing both domestic and

international markets

WHAT DO FOUNDRIES THINK OF WTO?

A survey among members of the foundry industry was conducted to

gauge their perception of the potential impacts of WTO accession.56

Overall, the survey demonstrates a rather skeptical attitude toward

the consequences of WTO accession. There appears to be some

uncertainty about the future based on (a) a lack of understanding

of concrete changes related to WTO accession, and (b) a lack of

knowledge on current environmental legislation and its provisions

for economic incentives for modernization. This confi rms one of the

fi ndings in chapter 4 that information and awareness-raising are key

factors to overcome the current constraints for introducing clean

technologies.

§ Two-thirds of the respondents believe that the reduction in

import tariff s or barriers to foreign-service providers would

not result in an increase in imports of clean technologies,

and consequently, would not lead to modernization of their

production technologies. At the same time, the majority of

respondents expect that the market will shift towards more

technologically-effi cient and competitive foreign suppliers,

which would become a problem for local foundries.

§ All of the respondents assume a negative overall impact on

their companies due to Russia’s WTO accession.

§ The most common explanation of the negative impact of

the WTO accession are related to the expectation of

additional costs (due to higher energy prices and upgrading

requirements), the shift of the market in favor of modern

production processes, and the lack of fi nancial resources and

aff ordable credit resources.

§ Two-thirds of respondents did not implement measures for

energy effi ciency in 2011–12. More than half of them believe

that the State should provide incentives for such invest-

ments. Despite the existence of some environmental laws

(see chapter 3)—enterprises indicated that the regions in

which they locate do not have the relevant environmental

laws or incentives.

56 Eleven representatives of the foundry industry were interviewed—with a combined annual turnover of 32.4 billion rubles in 2011.

§ Respondents mention the following measures could create

conditions for the implementation of cleaner production

technologies:

ú Encouragement of industry modernization

ú Development of “road maps” to improve the foundries

ú An investment fund for the implementation of measures

to reduce environmental pollution

ú A system of incentives (including subsidies) to fi nance

green technologies

ú Stricter requirements for environmental protection,

including strengthened penalties for emissions and waste

ú Regulation of tariff s on energy

POTENTIAL EFFICIENCY SAVINGS IN RUSSIA’S AUTOMOTIVE INDUSTRY

In Russia, the automotive industry represented 2 percent of GDP in

2011–12 however from 2012–15 its annual growth rate is expected

to exceed 10 percent.57 The components industry is also expected

to grow at 13 percent per annum reaching $62.52 bln by 2015.58 It

employs up to 13 percent of the Russian population in some regions.

Most products manufactured in Russia involve complex technologi-

cal processes with wide scope for more effi cient production, greater

resource effi ciency and instituting environmental programs. Firms

vary widely in their resource intensity and quality control is a large

issue (for example, 0.06 percent of production is recalled—300

times higher than in Europe).59 See box 6.2 on page 44.

The automotive industry is poised to undergo signifi cant changes

and one of the drivers is Russia’s WTO accession. But how will the

sector be aff ected? This was one of the main questions of a recent

survey by the IFC in the Samara60 region. The survey identifi ed areas

such as resource effi ciency (requirements from original equipment

manufacturer [OEMs] and suppliers; major production challenges;

major capacities, technology vintage and plans to modernize).

57 Sources: Autostat, Rosstat, Ernst & Young. Auto components market was estimated at $38.72bn in 2011 and $41.84bn in 2012. Russian GDP was $1860bn in 2011 and $2079bn in 2012.

58 Ernst & Young.

59 Bazel, IFC team’s own research.

60 The Samara region was defi ned 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 (Samara region association of auto-component producers) and 47 from NAPAK (National association of auto-component producers).

43



The IFC concluded that resource efficiency schemes for supply

chains are new to the industry, but crucial for OEMs and suppli-

ers’ sustainability. Given the growth potential of the sector, and

in light of WTO, identifying inefficiencies and improving quality

should be the major focus. A number of findings support this

conclusion:

§ High spending on resources and fi nancing issues are a

challenge. At the same time, fi rms ranked ecological fees for

pollution and waste a very low priority.

§ Low levels of automation in plants can be explained by less

need for resource effi ciency over the past few years and

greater dependence on orders from one OEM could be

3.03.6

2.83.3

2.83.0

2.02.5

1.41.9

1.31.7

Investments in new/additional equipment

Replacement/modernization of equipment

Incorporation of resource tracking system

Creation of JV with foreign components producers

More efficient and less polluting technologies

Creation of R&D centres and laboratories

Large Small

FIGURE 6.16: Investment Priorities Among Russian Automotive Firms

Source: IFC (2013).

Russia Samara region

High share of resources in the cost structure 3.7

2.83.3

2.72.6

2.62.7

2.52.7

2.43.2

2.42.4

2.33.1

2.22.8

2.03.2

1.8

1.8

1.6

2.6

1.72.1

4.0

Insufficient funds for CAPEX

Financing: insufficient working capital

Long time to complete orders

Low level of process automatization

Low level of diversification

Difficulties with integration into supply chain

Personnel: low qualification or unavailability of people

Quality

Project management: no working groups

High ecological fees for pollution and waste

Reclamation of products: (refusal by clients)

No ISO certification

FIGURE 6.17: Major Issues in the Production Process in Russia and Samara Region

Source: IFC (2013).

44



§ Good quality for price matters along the supply chain, with

the actual price following a close second in importance. A

proper price for quality off er from suppliers is expected. If

the quality is in doubt, OEMs can switch to other lower-tier

suppliers.

§ Still the issue of old equipment is coupled with lack of

financing: half of the primary equipment is older than

10 years. When defining areas of investments, firms

target investing in new and modernized equipment,

though more efficient and less pollutant technologies

were ranked as 1.9 by small firms and 1.4 by large firms.

It demonstrated that small companies (revenue below

$100 mln) that each type of investment being of greater

necessity for them.

With Russia now in the WTO, a key implication for industry will be the

entrance of foreign suppliers to meet demand from foreign OEMs

in Russia. As of 2011, the industrial assembly in Russia is regulated

by Decrees 166 and 566. In the case of imported components, the

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

and reach target level of localization (up to 60 percent) in 5 years to

import auto-components without tariff s.

In terms of modernization needs—national producers still need to

recognize that old equipment and entrance of advanced technolo-

gies from foreign suppliers will be the driving factors in the sectors’

transformation.

factors to explain low level of automation; low qualifi cation

and unavailability of people; poor project management for

an average company in Samara region.

§ Large companies tend to measure resource consumption

at separate stages of production reasoned by larger scale of

production. Smaller companies may have one single stage

of production. The most popular type of certifi cation is

ISO9001, followed by ISO/TS 16949.

BOX 6.2: IFC Support to the Auto Industry

ZMZ-DAIDO, Russia: IFC support of $5 million with overall project size of $20 million. Daido metal Co. acquired LLC ZMZ-Bearings. The project impact was the effi ciency improvement through technology transfer from a Tier 1 manufacturer and served as a catalyst for other investments in the region.

IFC project fi nancing for Ford’s factory in St. Petersburg: The project helped Ford’s potential Russian suppliers meet their commitments to Ford Motor Company for low-cost and high-quality production. Three of the 4 client suppliers were able to sign production contracts with Ford.

Engineering and production quality improvements at Zavolzhski Motorni Zavod (ZMZ): The project identifi ed and improved engine defects and new parts engineering for a Euro-3 compliant engine. The IFC worked with ZMZ and 3 other suppliers to improve operations through more effi cient pro-duction. The project also facilitated fi nancial support through donor funding.

Source: IFC.

45


C H A P T E R 7 — K E Y F I N D I N G S

Chapter 7 KEY FINDINGS

Public concerns of environmental quality have led the Russian

Government to contemplate regulatory policies for a cleaner envi-

ronment. Overall, Russia has developed most of the policy instru-

ments needed to meet national environmental objectives, increase

the competitiveness of its industry, while implementing WTO acces-

sion rules. These policies, however, will need further strengthening

and realignment with sector policies to take account of productivity

changes triggered by Russia’s WTO accession. Focusing on selected

policy measures that can help recoup the potential increase of in-

dustrial emissions and simultaneously infl uence behavioral change

towards the use of more energy effi cient and cleaner technologies,

would be a win-win approach that, on one hand, will help address

the pending trade-off s between economic growth and pollution

triggered by trade liberalization, and, on the other, complement the

eff ective implementation of WTO rules. In order to increase Russia’s

environmental policy eff ectiveness while modernizing industry and

trade, of no lesser priority will be to neutralize the negative ecologi-

cal consequences from past economic activities. Furthermore, an

important step will be to align environmental policy and practice

with international norms and standards as well as to combine en-

vironmental and economic levers to infl uence polluters’ behavior.

Several policy areas, which if implemented consistently, could rein-

force in a positive way the long term impacts on the sustainability

profi le of Russian industry. These include:

§ Reform the current system of pollution charges by introduc-

ing coeffi cients that capture meaningful economic incen-

tives for adoption of best available techniques (BATs);

§ Extend (and simplify) opportunities for temporary tax breaks

and privileges for industries that are fi scally-neutral from

public fi nance point of view, and encourage improved ef-

fi ciency and technology upgrading in the long run;

§ Strengthen the economic incentives and government sup-

port for nature protection activities for businesses which

undertake BAT investments through tax credits;

§ Explore market-based instruments as a tool for achieving

targets among polluters—at lower cost (for example,

marketable emissions permits);

§ Tighten the relationship between multilateral environmen-

tal protection agreements and the WTO principles across

industrial sectors.

The impact of WTO accession on the output of diff erent sec-

tors 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 inter-

mediate 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 generally, export-intensive sectors such as

ferrous metals, non-ferrous metals and chemicals are the manufac-

turing sectors are most likely to expand, while light industry, food

industry and construction materials are sectors that most likely to

contract (the scale eff ect of output). Since the expanding sectors are

more pollution-intensive and natural resource using than contract-

ing sectors, the sector reallocation of output could have negative

impact on the environment (the composition eff ect). However the

policy scenarios simulated by the modeling suggest that if counter-

measures are undertaken to reduce pollution or increase energy ef-

fi ciency, the corresponding productivity improvements could off set

the negative impacts of the scale and composition eff ects above.

There are substantial opportunities for potential gains

from WTO accession to improve environmental quality in

46


C H A P T E R 7 — K E Y F I N D I N G S

many regions by introducing energy effi ciency standards,

and emissions pricing levels that would push adoption of

clean technologies. Russia will reap substantial gains from WTO

accession with widespread benefi ts 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 “greening” and win-win outcomes, thereby

stimulating compliance and better environmental performance.

In fact, Russian environmental protection policies refer to BATs as a

way to make more eff ective 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 fi rms with higher costs of abatement to trade with fi rms with

lower costs to achieve the better level of environmental quality in

a movement toward BATs. To address political opposition to envi-

ronmental abatement policies among fi rms, mechanisms could be

designed that are broadly revenue neutral, that is, there could be tax

incentives provided for fi rms that adopt clean technologies at the

same time there are charges for pollution.

Increased access to foreign suppliers of environmental

goods and services61 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. At the same time trade and

foreign direct investment liberalization will improve the incentives

for exporters62 to innovate, will also increase the opportunities for

wealth creation which they can use for environmental improve-

ments and effi ciency gains. Scale eff ects of trade liberalization will

most likely lead to increase in emissions. “Greening” policies and ef-

fi ciency standards could control emissions triggered by productivity

gains of WTO accession and augment the benefi ts of the technique

eff ect, and most importantly they can trigger structural changes

in favor of less-polluting industries and trigger a decomposition

61 Services include: sewage, refuse disposal, sanitation, cleaning services of exhaust gases, noise abatement, nature and landscape protection, and environmental impact assessment.

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 depreciated real exchange rate improves the incentives to exporters.

eff ect towards decarbonization. Russia’s commitment to imple-

ment its Climate Doctrine is another venue for operationalization

of the modernization agenda in the industry, transport and hous-

ing sectors. Trade liberalization will increase the opportunities for

innovation, using renewable and energy effi cient technologies. By

implementing more rigorous policy reforms to maximize the ben-

efi ts from the WTO gains Russia will increase the opportunities to

meet its target of reducing greenhouse gasses (GHG) emissions by

25 percent compared to 1990s’ levels by the year 202063 as well as

augment Russia’s contribution to the international eff ort to mitigate

climate change impacts. WTO presents a strategic win-win oppor-

tunity for modernization and decarbonization of industry if envi-

ronmental and sector policies are tailored to infl uence this process

along the way.

There is evidence of an untapped potential cost savings

from adoption of cleaner, more effi cient, technologies in

the Russian production sectors. The cases of the foundry and

automotive sectors have shown that there is enormous cost savings

potential. For example, given the low costs of labor, energy, and raw

materials, Russia’s ferrous foundry industry could potentially real-

ize a 36 percent cost advantage over its international peers. More

than half of the resource effi ciency savings and benefi ts 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 effi ciency, and a lack of focus on

quality, this advantage is entirely lost. Factory audits of foundries

revealed that improvements in resource effi ciency could result in a

cost savings of up to $3.3 billion annually to the sector.

The main fi nding of this overall analysis is that productivity increases

from Russia’s WTO accession and trade liberalization are large. While

trade liberalization may induce more pollution, the welfare gains are

large enough to pay for industrial greening in terms of CO2 emission

reduction and energy effi ciency improvements, and thus increase

environmental quality in regions with high concentration of pollut-

ing industries. Trade and environment thus might not be viewed as

antipodes but rather as mutually benefi cial in the spirit of “green”

growth.

63 Decree of the President of the Russian Federation from September 30 2013, No. 752 “On Reduction of GHG Emissions.”

47


R E F E R E N C E S

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49


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 CO M M I T M E N T S

Appendix 1 RUSSIAN FEDERATION AND WTO COMMITMENTS64

64 http://www.wto.org/english/thewto_e/minist_e/min11_e/brief_russia_e.htm.

From the date of accession, the Russian Federation has committed

to fully apply all WTO provisions, with recourse to very few a transi-

tional periods.

Market access for goods and services: As part of the accession

Russia concluded 57 bilateral agreements on market access for

goods and 30 on market access for services.

On average, the fi nal legally binding tariff ceiling for the Russian

Federation will be 7.8 percent compared with a 2011 average of

10 percent for all products: The average tariff ceiling for agriculture

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-

cent vs. the 9.5 percent average today on manufactured imports.

Russia has agreed to lower its tariff s on a wide range of products.

Average duties after full implementation of tariff reductions will be:

§ 5.2 percent for chemicals (current applied tariff 6.5 percent)

§ 12.0 percent for automobiles (current applied tariff 15.5

percent)

§ 6.2 percent for electrical machinery (current applied tariff 8.4

percent)

§ 8.0 percent for wood and paper (current applied tariff 13.4

percent)

The fi nal bound rate will be implemented on the date of accession

for more than one third of national tariff lines, with another quarter

of the tariff cuts to be put in place three years later.

The Russian Federation has made specifi c commitments on 11 ser-

vices sectors and on 116 sub-sectors. On telecommunications, the

foreign equity limitation (49 percent) would be eliminated four years

after accession. Foreign insurance companies would be allowed to

establish branches nine years after Russia accedes. Foreign banks

would be allowed to establish subsidiaries. There would be no cap

on foreign equity in individual banking institutions, but the overall

foreign capital participation in the banking system of the Russian

Federation would be limited to 50 percent (not including foreign

capital invested in potentially privatized banks).

On transport services, the Russian Federation made commitments

in maritime and road transport services, including the actual trans-

portation of freight and passengers.

On distribution services, Russia would allow 100 percent foreign-

owned companies to engage in wholesale, retail and franchise sec-

tors upon accession to the WTO.

Quantitative restrictions on imports, such as quotas, bans, permits,

prior authorization requirements, licensing requirements or other

requirements or restrictions that could not be justifi ed under the

WTO provisions would be eliminated and not (re) introduced.

The Russian Federation would apply all its laws, regulations and

other measures governing transit of goods (including energy), in

conformity with GATT and WTO provisions.

Export duties: Export duties would be fi xed for over 700 tariff lines,

including certain products in the sectors of fi sh and crustaceans,

mineral fuels and oils, raw hides and skins, wood, pulp and paper

and base metals.

Government Procurement Agreement: The Russian Federation

intends to join the WTO Government Procurement Agreement

(GPA) and would notify this intention to the WTO Government

Procurement Committee at the time of accession. Russia would

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 CO M M I T M E N T S

become an observer to the GPA and would initiate negotiations for

membership within four years of its accession. Russian government

agencies would, upon accession, award contracts in a transparent

manner.

Industrial subsidies: The Russian Federation would eliminate all

its industrial subsidies programs or modify them so that any sub-

sidy provided would not be contingent upon exportation or upon

the use of domestic over imported goods. The Russian Federation

would notify its subsidies to the WTO and would not invoke any

of the provisions of Articles 27 and 28 of the WTO Agreement on

Subsidies and Countervailing Measures.

Pricing of energy: Producers and distributors of natural gas in

the Russian Federation would operate on the basis of normal com-

mercial considerations, based on recovery of costs and profi t. The

Russian Federation would continue to regulate price supplies to

households and other noncommercial users, based on domestic

social policy considerations.

Sanitary and Phytosanitary Measures (SPS) and Technical

Barriers to Trade (TBT): All SPS measures would be developed

and applied in the Russian Federation and the Custom Union, in ac-

cordance with the WTO Agreement. The Russian Federation would

develop and apply international standards on SPS measures through

membership and active participation in the Codex Alimentarius, the

World Organization for Animal Health (OIE) and the International

Plant Protection Convention.

Except in case of serious risks of animal or human health,

Rosselkhoznadzor, the Federal Service for Veterinary and

Phytosanitary Surveillance, would not suspend imports from estab-

lishments based on the results of on-site inspection before it had

given the exporting country the opportunity to propose corrective

measures. Rosselkhoznadzor would send preliminary report to the

competent authority of the exporting country for comments.

The Russian Federation would ensure that all legislation related

to technical regulations, standards and conformity assessment

procedures, complies with the WTO TBT Agreement. The Russian

Federation would use international standards for the development

of technical regulations unless they were an ineff ective or inappro-

priate means for achieving the pursued objectives.

The Russian Federation would regularly review its lists of products

subject to obligatory certifi cation or declaration of conformity, as

well as all the technical regulations applied on its territory (Custom

Union and Eurasian Economic Community included) to ensure that

they remained necessary to achieve the Federation’s objective, in

accordance to the WTO TBT Agreement.

Trade-related investment measures: The Russian Federation

would ensure that all laws, regulations and other measures related

to the Agreement on Trade-Related Investment Measures would be

consistent with the WTO provisions. All WTO-inconsistent invest-

ment measures, including preferential tariff s or tariff exemptions,

applied in relation to the existing automobile investment programs

and any agreements concluded under them would be eliminated

by 1 July 2018. No other trade related investment measures in-

consistent with the WTO Agreement may be applied after Russia’s

accession to the WTO.

51


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 CC 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

Appendix 2 EXCERPT FROM REPORT OF THE WORKING PARTY ON THE ACCESSION OF THE RUSSIAN FEDERATION

Part II—Schedule of Specifi c 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

(CPC 9409*)—none;

– for environmental impact assessment services

(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

(CPC 9409*).

(4) Unbound except as indicated in Part I “Horizontal commitments”. (4) Unbound except as indicated in Part I “Horizontal commitments”.

Modes of supply:

(1) cross-border supply

(2) consumption abroad

(3) commercial presence

(4) presence of natural persons

53


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

Appendix 3 TRADE AND THE ENVIRONMENT—A BRIEF LITERATURE REVIEW

Impact assessment of the North American Free Trade Agreement

(NAFTA) in the early 1990s stimulated theoretical and empiri-

cal analysis on the environmental impacts of trade liberalization.

In their seminal papers, Grossman and Krueger (1993) as well as

Copeland and Taylor (1994, 1995) decomposed the overall impact

into three eff ects—changes in scale, composition and technique

(see introduction). In the environment-trade literature the economic

drivers for changes in scale, composition and technique are most

commonly captured through the classical model of comparative

advantage which explains the pattern of international trade through

the relative cost diff erences between countries (see Rauscher 1997

and Dean 1992, 2002 for overviews). The theory of comparative

advantage gives rise for two complementary views on the environ-

mental impacts of trade liberalization (Antweiler et al. 2001). The so-

called Factor Endowment hypothesis suggests that—as countries

specialize according to their traditional comparative advantages—

freer trade leads to a further concentration of those industries that

employ the relatively abundant production factor: if emissions

are linked to capital-intensive industries then trade liberalization

would lead to an expansion of these industries in relatively capital-

abundant countries and thereby also increase emissions. The

so-called Pollution Haven hypothesis, suggests that trade liberaliza-

tion will make countries with less stringent environmental regula-

tions dirtier as they possess a policy-induced cost advantage.

While the traditional theory of comparative advantage indirectly

captures scale and technique eff ects, it mainly refers to composition

eff ects through specialization. The new trade theory pioneered by

Dixit and Norman (1980), Helpman (1981), or Krugman (1981) puts

more emphasis on the role of the scale and technique by introduc-

ing imperfect competition and increasing returns to scale (IRTS) in

the standard trade models (which usually adopt the assumption of

constant returns to scale (CRTS) and perfect competition). Relaxing

the assumption of CRTS and perfect competition, increased com-

petition in oligopolistic industries would tend to lower price-cost

mark-ups and lead to exploitation of scale economies—so-called

rationalization gains. If trade liberalization leads to an expansion

of capital-intensive industries subject to IRTS technology, such as

refi neries, base metals and chemicals—that are also very energy-

intensive—pollution problems will be exacerbated due to the scale

and composition eff ects compared to a CRTS reference. On the other

hand, the technique eff ect could be off setting. Productivity changes

may emerge through trade liberalization due to rationalization gains

or as the number of product varieties and technologies increase

thereby rendering those sectors more productive, resulting in less

resource use per unit of output and less pollution (formally repre-

sented in models of monopolistic competition with Dixit-Stiglitz

varieties (Dixit and Stiglitz 1977). Romer (1994) emphasized that the

impact of trade liberalization via new or higher quality products can

be much more important quantitatively than improved resource

allocation. Finally, the new trade theory initiated by Melitz (2003)

provides yet another source for productivity changes through fi rm

heterogeneity. Trade creates competitive pressure which improves

resource allocation across fi rms within the very same industry. High

productivity fi rms expand output and export while low productiv-

ity fi rms drop out of the market, increasing aggregate productivity.

The intra-industry reallocations of market shares and productive

resources add to eff ects associated with inter-industry reallocations

that are driven by comparative advantage.

A more specifi c strand of the trade-environment literature deals

with the implications of Foreign Direct Investment (FDI). Analogous

to trade in goods and services the impacts of FDI are decomposed

in scale, composition and technique eff ects—yet, the focus is

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 eff ect. From an aggregate per-

spective, FDI provides better access to capital, thereby decreasing

capital cost and increasing productivity. The optimistic micro view

is that FDI supports knowledge transfer and market-penetration

of innovative technologies which allow fi rms to reduce energy-/

pollution-intensity of production and consumption with the poten-

tial of leapfrogging, that is, the possibility to bypass environment-

intensive developments (Gentry 1999; Mielnik and Goldemberg

2002). The prospects of FDI-induced environmental improve-

ments in host countries through better technologies and higher

environmental standards are referred to as “pollution halo” hypoth-

esis (Zarsky 1999). This contrasts with the more popular “pollution

haven” hypothesis that fears environmental degradation through

the relocation of fi rms to countries where environmental standards

are laxer.

On theoretical grounds, the scale, composition and technique ef-

fect can have positive or negative signs. Given this ambiguity, there

is the need for empirical analysis to quantify not only the magni-

tude but also the direction of the individual and the composite en-

vironmental impacts. One rigorous empirical analysis is provided by

Antweiler et al. (2001) who estimated the magnitudes of the scale,

composition and technique eff ects for the case of sulphur dioxide

concentrations in more than forty countries. According to their

econometric regressions, a strong negative technique eff ect domi-

nated the positive scale eff ect leading to a decrease in emissions

(the technique eff ect, however, was mainly due to stricter environ-

mental regulations after trade liberalization). Another econometric

assessment has been undertaken by Cole et al. (1998) on the emis-

sion impacts of trade policy changes suggested by the Uruguay

Round. In their analysis the composition eff ect increased emissions

for industrialized countries whereas for most developing countries,

emissions associated with the composition eff ect declined. Trade

liberalization induced an expansion of energy-intensive industries

in industrialized countries and an expansion of labor-intensive

manufactures in developing countries thus suggesting that in their

analysis the Factor Endowment hypothesis dominates the Pollution

Haven hypothesis. More recent empirical work (Frankel and Rose

2005; Kellenberg 2008) highlights the complex interplay between

the Factor Endowment hypothesis and the Pollution Haven hy-

pothesis and the need for country-specifi c analysis to determine

which eff ect is dominating based on real data (see also the mixed

evidence on environmental impacts through FDI in Esty and Gentry

1997 and Smarzynska and Wei 2001). Econometric estimates on the

technique eff ect of trade liberalization are scarce in part because

of limited data availability. One exception is Martin (2012) who as-

sesses the implications of trade openness on greenhouse gas emis-

sions by India’s manufacturing fi rms. Martin fi nds that reduction in

import tariff s led to improved fuel effi ciency as fuel effi cient manu-

facturing fi rms gained market share whereas fuel-ineffi cient fi rms

lost market shares—within the manufacturing sector, improved

capital access tends to reduce fuel-intensity rather than increase

it because of technological (energy-saving) progress embodied in

new vintages.

A substantial part of the applied literature on trade-environment

linkage is based on computable general equilibrium analyses. Most

applications focus on the mutual eff ects that trade policies and CO2

reduction policies can have on each other. Examples are Babiker et

al. 1997 and Kuik and Gerlagh 2003, who use standard multi-region

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

and technique eff ects (they use a small open economy model). They

identify a dominating composition eff ect in favor of clean industries

which leads to a decrease of China’s greenhouse gas emission.

55


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 MA P P I N G TO O B L A S T S )

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,

Invanovo Region, Kaluga Region, Kostroma Region, Kursk Region, Lipetsk

Region, Oryal Region, Ryazan Region, Smolensk Region, Tambov Region,

Tver Region, Tula Region, Yaroslavl Region

bel, bry, vla, vor, iva, kal, kos, krs, lip, orl, rya, smo, tam,

tve, tul, yar

South sou Sarativ Region, Republic of Adygeya, Republic of Dagestan, Republic of

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

sar, ady, dag, ing, kab, klr, kar, sev, kdk, sta, ast, vlg, ros

Far east far Aginsky Buryatsky Autonomous District, Chita Region, Khabarovsk Territory,

Amur Region, Sakhalin Region, Maritime Territory, Jewish Autonomous

Region

agi, chi, hab, amu, sao, pri, eao

Northwest vgd Vologda Region, Kaliningrad Region, Novgorod Region, Pskov Region vol, klg, nov, psk

North nor Komi-Permyatsky Autonomous District, Nenetsky Autonomous District,

Republic of Karelia, Komi Republic, Arkhangelsk Region, Murmansk Region

kpa, nen, krl, kom, arh, mur

Urals and near east url Republic of Marity El, Republic of Mordovia, Republic of Tatarstan, Republic

of Udmurtia, Rupublic of Chavashia, Kirov Region, Nizhny Novgorod Region,

Penza Region, Ulyanovsk Region, Orenburg Region, Samara Region,

Republic of Bashkortostan, Perm Region, Kurgan Region, Sverdlovsky

Region, Chelyabinsk Region

mar, mor, tat, udm, chv, kir, niz, pen, ulo, ore, sam, bas,

per, krg, sve, chl

Siberia sib Republic of Altai, Republic of Buryatia, Republic of Tyva, Republic of

Khakassia, Altai Territory, Irkutsk Region, Kemerovo Region, Novosibirsk

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

alr, bur, tyv, hak, alt, kem, nvs, tom, oms, tai, kra, sah,

ust, eve, kor, chu, irk, kam, mag

Tumenskaya oblast tmn Tyumen Region, Khanty-Mansiysky Autonomous District kha, yam, tum

Appendix 4 LIST OF REGIONS INCLUDED IN THE MODEL (WITH MAPPING TO OBLASTS)

57


A P P E N D I X 5 — M O D E L S T R U C T U R E

Within each region a representative agent receives income from three

primary factors: labor, capital, and fossil-fuel resources. There are three

fossil resources specifi c to respective sectors, namely, coal, crude oil

and gas. Fossil-fuel resources are specifi c to fossil fuel production sec-

tors in each region. For the short- to mid-run impact assessment of

policy shocks labor is treated as perfectly mobile between sectors

within a region, but not mobile between regions; likewise, capital is

inter-regionally immobile and in part sector-specifi c.65

PRODUCTION

Production of commodities in each region, other than primary fossil

fuels, is captured by multi-level constant elasticity of substitution

(CES) cost functions describing the price-dependent use of capital,

labor, energy and materials (fi gure A5.1).

At the top level, a CES composite of non-energy intermediate mate-

rial demands trades off with an aggregate of energy, capital, and

labor subject to a constant elasticity of substitution. At the second

level, a CES function describes the substitution possibilities between

intermediate demand for the energy aggregate and a value-added

composite of labor and capital. At the third level, capital and labor

substitution possibilities within the value-added composite are

captured by a CES function. The aggregate energy input is defi ned

as a CES function of coal and the composite of electricity, oil, and

gas. At the fourth level the composite of electricity, oil and gas is a

CES function of electricity and a CES aggregate of oil and gas. The

production of electricity slightly diff ers with respect to the nesting

of the energy composite. Here, electricity trades off with a CES com-

posite of coal and a combined CES good of oil and gas.

65 For the mid- to long-run impact assessment these assumptions can be relaxed towards factor mobility across regions.

Appendix 5 MODEL STRUCTURE

In the production of fossil fuels (coal, crude oil and natural gas), all

inputs, except for the sector-specifi c fossil fuel resource, are aggre-

gated in fi xed proportions (fi gure A5.2). This aggregate trades off

with the sector-specifi c fossil fuel resource at a constant elasticity of

substitution. The latter is calibrated to refl ect empirical evidence on

fossil fuel supply elasticities.

FINAL CONSUMPTION

In each region a representative household maximizes consump-

tion welfare subject to a budget constraint. Total income of the

representative household consists of net factor income and trans-

fers. Consumption 1 is given as a CES composite that combines

σS

σMσKLE

σENσVA

σpETR

GAS

Non-energy goods

OIL

ELE

COL

K L

FIGURE A5.1: Production of Goods Other Than Fossil Fuels and Electricity

σid

η

Non-resource inputs

Resource

FIGURE A5.2: Production of Fossil Fuels

58



consumption of composite energy and an aggregate of other (non-

energy) consumption goods (fi gure A5.3). Inputs to the non-energy

composite trade off at a constant elasticity of substitution. The en-

ergy composite in fi nal demand corresponds to a CES aggregation

of electricity and a CES composite of fossil fuels. Within the latter,

electricity trades off with a CES aggregate of oil and gas at a con-

stant elasticity of substitution. Investment demand is exogenous

and determines savings of the representative household.

GOVERNMENT

Government demand across all regions is fi xed at exogenous real

levels. The government receives taxes to fi nance public expendi-

tures. Public surpluses or defi cits are balanced through lump-sum

transfers with the representative households in each region.

TRADE

Bilateral trade between regions is specifi ed following the Armington

(1969) approach, which distinguishes goods by origin.

All goods used on the domestic market in intermediate and fi nal

demand correspond to a CES composite that combines the domes-

tically produced good and the imported goods from other regions

and the rest of the world (fi gure A5.4). Regions are assumed to be

price takers in world market—that is, the representation of the rest of

the world is reduced to perfectly elastic import demand and export

supply functions (export and import prices from the rest of the

world are exogenous). Each region has a balance of trade constraint

FIGURE A5.4: Armington Production for Intermediate and Final Demands

σS

σD

σR

DMKT

WMKT

RMKTs

FIGURE A5.5: Transformation of Domestically (Regionally) Produced Goods

DMKT

Output

WMKTRMKTs

� = 4

so that any change in the value of imports (either from the rest of the

world or another regional market within Russia) is matched by an

increase in the value of exports. Russia as a whole, represented as an

aggregate of the regional markets, must satisfy a typical economy-

wide balance of the trade constraint. The real exchange rate adjusts

to assure that any change in the aggregate value of regional imports

from the rest of the world, is matched by an equal change in the

value of aggregate exports to the rest of the world. On the export

side, goods produced within one region are supplied to the domes-

tic market, to regional markets and to the world markets subject to a

constant elasticity of transformation (fi gure A5.5).

PRODUCTIVITY IMPACTS OF TRADE LIBERALIZATION

Trade liberalization induces productivity changes due to effi -

ciency gains (rationalization)66 or an increasing number of product

66 As imports enter the domestic market, fi rms with the least-productive technology may see their profi ts become negative. Import competition forces them to exit the market. As a result, the number of domestic fi rms in the market declines, which in turn implies that the demand for each of the remaining fi rms in the market increases. This leads to a higher level of production by the remaining and more effi cient domestic fi rms. In the presence of economies of scale, this leads to lower prices and therefore further gains from trade associated with rationalization.

FIGURE A5.3: Production of the Final Consumption Composite

σS

σM

σENRG

σFUEL

σREFR

GAS

Non-energy goods

OIL

ELE

COL

59



varieties and technologies. Such productivity impacts are formally

represented in models of monopolistic competition with Dixit-

Stiglitz varieties (Dixit and Stiglitz 1977). The core computable

general equilibrium (CGE) model is specifi ed as a perfect competi-

tion constant-returns-to-scale (CRTS) model but can be adjusted to

external productivity changes. In our integrated CGE framework the

latter are computed by means of a “twin” model where additional

product varieties in imperfectly competitive goods sectors with

increasing returns to scale (IRTS) can occur due to trade liberaliza-

tion. The more complicated marked conduct in the “twin” model

developed by Rutherford and Tarr (2010) goes at the expense of

details on energy demand structures that characterize the perfect

competition model version. Building on the same data, as well as

identical sector and regional disaggregation, the combined model

accommodates the integration of productivity impacts from trade

liberalization in a rather detailed energy-economy CRTS model.

DATA

Model parameterization followed a standard calibration procedure

in applied general equilibrium analysis. The base-year input-output

(IO) data determines the parameters of functional forms (that is, cost

and expenditure functions) such that economic fl ows represented

in the data are consistent with the optimizing behavior of economic

agents. The responses of agents to price changes are determined by

a set of elasticities pertinent in the econometric literature.

Model calibration is based on the economic dataset for Russia previ-

ously compiled by Rutherford and Tarr (2006). The core IO data at the

national level for the year 2001 comes from the national statistical of-

fi ce (Rosstat 2002 and 2003) and was expanded from 22 to 30 sectors

to include more details on service industries (table 2.2). At the region-

al level we distinguish 10 jurisdictions based on satellite data from

the 88 oblasts—the derived input-output tables for the ten regional

markets are aggregates of the input-output tables of oblasts in their

respective regional markets. Bilateral trade fl ows (trade intensities) are

adjusted to assure that oblast exports and imports in aggregate are

consistent with national import and export values.

Tariff rates that characterize trade barriers before WTO accession

are taken from Shepotylo and Tarr (2008) and tariff reductions from

WTO accession are calculated from the work of Shepotylo and Tarr

(2012). With WTO accession, Russia will have improved rights under

antidumping and countervailing duty investigations in its export

markets. Consequently, Russian exporters in sectors which have

been subject to antidumping actions in Russia’s export markets will

see improvement in their terms of trade ranging from 0.5 percent or

1.5 percent (Rutherford and Tarr 2006). Environmental data is taken

from the SUST-RUS project67 with sector-level information on pol-

lutants (emissions) at the national level which then is split down to

the oblast level based on a symmetry assumption. Table 2.3 reports

economy-wide emission levels for the diff erent pollutants in the

base year 2001.

67 The SUST-RUS Project aimed to develop an integrated spatial-economic-ecological modeling approach, which represented diff erent areas of economic, transport, resource-use linked to environmental eff ects 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/.

61


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

Appendix 6 REFERENCE ON WTO RULES RELEVANT TO ENVIRONMENTAL POLICIES68

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

cannot result in discrimination:

(i) between “like” products from diff erent trading partners, and

(ii) between its own and like foreign products

Certain environmental measures (such as bans) may violate the GATT Article XI, which provides,

among other things, that restrictions on the importation or sale of products from other WTO

members are prohibited.

A number of WTO Agreements have provisions for environmental measures:

The General Agreement on Tariff s 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 unjustifi able 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 certifi cation 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 specifi cations 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 unjustifi ably 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 AgricultureIn 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 eff ects or eff ects 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 ProcurementThe Agreement on Government Procurement (GPA) provides disciplines on nondiscrimination and transparency in procurement of covered goods and services by designated governmental

entities. Article XXIII specifi es that exceptions to the Agreement apply, if necessary to protect human, animal or plant life or health. Parties may also evaluate off ers 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

63


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 DATA )

Appendix 7 STATUS OF BEST AVAILABLE TECHNIQUE REFERENCE DOCUMENTS (BREF) FOR SPECIFIC SECTORS (EU DATA)

BREF OR REF, DOCUMENT FORMALLY ADOPTED BY THE EUROPEAN COMMISSION UNDER THE IPPC DIRECTIVE

BREF DOCUMENT HAS BEEN PUBLISHED BY THE EUROPEAN COMMISSION

UNDER THE IED (POST 2010). UNDER ADOPTED DOCUMENT

BOTH THE BREF AND THE RELATED BAT CONCLUSIONS

CAN BE FOUND

WORK ON BREF HAS STARTED BUT A DRAFT IS NOT YET

AVAILABLELATEST DRAFT OF BREF

WHICH IS AVAILABLE

WORK ON BREF IS PLANNED TO COMMENCE IN THE YEAR

SHOWN BUT HAS NOT YET STARTED

Ceramic Manufacturing Industry

BREF (08.2007)

Iron and Steel Production

BATC (03.2012) BREF (03.2012)

Ferrous Metals Processing Industry

BREF (12.2001)

Review started

Common Waste Water and Waste Gas

Treatment/Management Systems in

the Chemical Sector

BREF (02.2003)

D2 (07.2011)

MR (06.2008)

Food, Drink and Milk Industries

BREF (08.2006) 2014

Emissions from Storage

BREF (07.2006)

Manufacture of Glass

BATC (03.2012)

BREF (03.12)

Large Volume Organic Chemical

Industry

BREF (02.2003)

BREF (03.2012)

Intensive Rearing of Poultry and Pigs

BREF (07.2003

D2 (08.2013)

MR (06.2009)

Surface Treatment Using Organic

Solvents

2014

Energy Effi ciency

BREF (02.2009)

Production of Cement, Lime and

Magnesium Oxide

BATC (04.2013)

BREF (04.2013)

Waste Treatments Industries

BREF (08.2006) 2013

Large Combustion Plants

BREF(07.2006)

D1 (06.2013)

MR (10.2011

Waste Incineration

BREF (08.2006) 2014

Industrial Cooling Systems

BREF (12.2001)

Tanning of Hides and Skins

BATC (02.2013) BREF (02.2013)

General Principles of Monitoring

REF (07.2003)

Review started

Non-ferrous Metals Industries

BREF (12.2001)

D3 (02.2013)

MR (09.2007)

Wood and Wood Products

Preservation with Chemicals

2014

Large Volume Inorganic

Chemicals—Ammonia, Acids and

Fertilisers Industries

BREF (08.2007)

Wood-based Panels Production

D1 (07.2013)

MR (11.2011)

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)

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 DATA )

BREF OR REF, DOCUMENT FORMALLY ADOPTED BY THE EUROPEAN COMMISSION UNDER THE IPPC DIRECTIVE

BREF DOCUMENT HAS BEEN PUBLISHED BY THE EUROPEAN COMMISSION

UNDER THE IED (POST 2010). UNDER ADOPTED DOCUMENT

BOTH THE BREF AND THE RELATED BAT CONCLUSIONS

CAN BE FOUND

WORK ON BREF HAS STARTED BUT A DRAFT IS NOT YET

AVAILABLELATEST DRAFT OF BREF

WHICH IS AVAILABLE

WORK ON BREF IS PLANNED TO COMMENCE IN THE YEAR

SHOWN BUT HAS NOT YET 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 Eff ects

BREF (07.2006)

Agriculture and Environmental Services (AES)1818 H Street, NWWashington, DC 20433 USATelephone: 202-473-1000Internet: www.worldbank.org and www.worldbank.org/en/region/eca