Ancillary Benefits of Reducing Greenhouse Gas Emissions in Transitional Economies

World Development Vol. 31, No. 10, pp. 1759–1769, 2003 Ó 2003 Elsevier Ltd. All rights reserved Printed in Great Britain 0305-750X/$ - see front matter

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doi:10.1016/S0305-750X(03)00139-6

Ancillary Benefits of Reducing Greenhouse Gas Emissions in Transitional Economies DAN DUDEK, ALEXANDER GOLUB and ELENA STRUKOVA * Environmental Defense, Washington, DC, USA Summary. — The paper presents the results of an ancillary benefits study in Russia, including the health benefits of reducing conventional pollutants as well as the economic benefits of saving fuel achieved by controlling greenhouse gas emissions. We present illustrative examples of the ancillary benefits in the forestry sector. Our findings show that the benefits from conventional pollution reduction and savings in fuel are significant and institutional reforms are needed to capture them. The ‘‘aggregated’’ approach, using a crosscountry macroeconomic model, contains some uncertainties, but the assumptions required for our analysis did not compromise this study, which is the first of its kind for Russia. Ó 2003 Elsevier Ltd. All rights reserved. Key words — Russia, Eastern Europe, transitional economies, GHG emissions, ancillary benefits, energy and the environment

1. INTRODUCTION Ancillary benefits are the positive effects of a particular public policy, although they are not the policy’s primary objective. In other words, ancillary benefits are serendipitous consequences. A policy may also have ancillary costs. Together, ancillary benefits and ancillary costs are sometimes referred to as ancillary impacts. Ancillary impacts have methodological importance when analyzing the net cost of a policy and its alternatives. Analysts should be able to isolate the objective of the policy in order to distinguish between the desired impacts and the ancillary impacts that may result. This process is made difficult dealing with climate change by the many overlapping factors in climate, energy, and air pollution. Thus, any policy that addresses one issue is likely to affect the others. The Intergovernmental Panel on Climate Change, in its Third Assessment Report, makes a subtle distinction between ancillary benefit and co-benefit (IPCC, 2001). Ancillary benefit refers to policies that are exclusively designed to mitigate climate change, whereas co-benefit is used for policies that are implemented at the same time but for more than one purpose. We consider aggregated ancillary benefits for Russia in this paper. Policies to reduce greenhouse gas emissions (GHGs) can have both ancillary benefits and

costs for public health, ecosystems, land use, and the like (OECD, 2000, p. 9). Of great concern is a possible loss of macroeconomic growth, primarily as a result of an increased cost of fuel. In the 2001 IPCC report, losses in gross domestic product (GDP) for various industrialized countries were estimated to range from 0.2% to 2.1% (IPCC, 2001, p. 514). But such costs could be completely or partially offset by the ancillary benefits of a GHG reduction policy, in particular (a) a concurrent reduction of other common pollutants, resulting in health benefits for local populations, and (b) the additional ecological and economic benefits from carbon sequestration projects. The balance between the negative and positive results of reducing GHG emissions varies, depending on both the country’s resources and the current state of its environmental management. Transitional and developing countries may be able to expand their economies and at the same time reduce their GHG emissions by choosing less carbon-intensive technologies. But, the main barriers to implementing such low and ‘‘negative’’ cost measures and directing economic development toward low carbon emissions are immature capital markets and a lack of relevant institutions.

*

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Final revision accepted: 25 March 2003.

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Direct economic benefits should provide the strongest incentives for reducing GHG emissions. Such benefits could come from fuel savings or greater productivity on agricultural lands. Other economic ancillary benefits could also result from the creation of new institutions and the implementation of new market instruments such as emissions trading. Trading of emissions credits alone could produce some revenue, beneficial for the economy. The most important ancillary benefit, however, is an improvement in human health. One likely result of GHG management is a reduced use of carbon-intensive fuels, such as coal, which are notorious for harmful health effects. In this paper, we present an aggregated estimate of possible benefits in order to illustrate the general results of a countrywide GHG reduction policy. Our main analytical tool was the input–output model described in ‘‘Impacts of Russian Energy Subsidies on Greenhouse Gas Emissions,’’ by Gurvich, Golub, Mukhin, Uzyakov, and Ksenofontov (1997). We computed GHG trajectories for (i) businessas-usual, (ii) carbon-intensive growth, and (iii) aggressive GHG reduction policy scenarios and then estimated the amounts of the most common pollutants produced in these scenarios. For each scenario, we calculated the ancillary benefits of reducing the emission of greenhouse gases. The principal ancillary benefits that Russia could gain from a policy to mitigate climate change are better health for its citizens, a more efficient use of energy and fuel, and better forest management. To make fully informed decisions on greenhouse gas policy, these ancillary benefits should be assessed on a national, regional, and project level. The internalization of these ancillary benefits on all levels could further motivate the implementation of GHG reduction policies and projects. 2. BASIC SCENARIOS AND CO2 PROJECTIONS The kind and extent of ancillary benefits depend on the specific policies and investments made, and the resulting reduction of carbon emissions. That is, the various benefits are linked to different means of reducing CO2 emissions, which in turn are dependent upon the macroeconomic factors in the transition process. For better results, we introduced into the model a detailed description of the transi-

tion period, including the structural changes in GDP, replacement of the old technological structure with a new one, and changes in the consumption of natural resources in response to market liberalization. We then used these three factors, both separately and in combination, to determine the evolution of CO2 emissions in Russia over the next decade. (a) Description of the model To analyze the ancillary benefits of CO2 emission reduction in Russia, we used the most recent results of air pollution projections presented in Golub and Strukova (2003b), and Dudek, Golub, and Strukova (2000). These projections were calculated from an input– output model designed for economies in transition created by Gordon Hughes and adjusted for the Russian economy by Gurvich and Golub. This model has been used in Russia since 1995, as well as in an OECD study of energy subsidies and the environment (Gurvich et al., 1997), a Harvard Institute for International Development (HIID) study of pollution fees in Russia (Golub & Gurvich, 1997), and the Russian National Strategy study of GHG emissions reduction policy. A comprehensive executive summary of this last study was published by the World Bank (Golub et al., 1999). In addition, this analysis was used in a synthesis study that reviewed national strategy studies for Russia and other countries in transition (see Klarer, Kolehmainen, & Swisher, 1999). The model uses the following assumptions about Russia’s economic development: (i) Russia’s GDP will grow by an average of 4–4.5% per yr during 2000–12. (ii) The structure of its GDP will not change significantly from what it was in 1999. (iii) Industrial production will shift slightly toward agriculture, light industry, and food production, and the share of metallurgy, energy, and chemicals will decline slightly. (iv) Russia’s population will not change significantly. (v) The technological basis of the Russian economy will change. The model calibration was first done in 1995 in a study on energy subsidies elimination. The study results were published (Gurvich et al., 1997). Some additional adjustments were done later for The World Bank national strategy study (Golub et al., 1999). In this study (Golub et al., 1999) different scenarios were presented,

ANCILLARY BENEFITS OF REDUCING GHG EMISSIONS

constructed through the combination of the exogenous parameters of the model. The authors analyzed in detail the relationship between pollution dynamics and exogenous variables such as GDP, energy prices and pollution fees. In this paper we look at two scenarios described below, which constitute the upper and lower boundaries of the corridor for CO2 emissions and the conventional pollution related to them.

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principal determinants of health risk in Russia. The general impact of PM10 is that it causes death from cancer, bronchitis (both chronic and acute), and other respiratory illnesses. SO2 emissions produce both respiratory symptoms and changes in pulmonary function. Therefore, because reducing the emissions of GHGs also reduces these pollutants, the primary ancillary benefit is a lower health risk. The first scenario would give Russia a GHG emission allowances surplus of more than three billion metric ton (MT) of CO2 . But in the second scenario, the projected CO2 emissions would be dramatically increased, and Russia would face a deficit of as much as 200 million MT of CO2 equivalent in the first budget period (2008–12). Figure 1 compares the CO2 scenarios and emissions targets. The scenarios look as follows:

(b) CO2 emissions scenarios In this paper we concentrate on two ‘‘marginal’’ scenarios that could determine Russia’s CO2 emissions. The first scenario illustrates the positive impacts of market reforms and the influence of incentives created by emissions trading. This scenario corresponds to the significant reduction of greenhouse gases emissions. The second scenario describes Russia’s economic development based on old technologies, an increase in electricity exports, and negative changes in the energy balance, for instance, the substitution of natural gas with coal. This scenario is described in Golub and Strukova (2003a) and represents the upper limit of CO2 emissions growth estimated in this paper. From these scenarios we estimated potential emissions of CO2 and the resulting emissions of particulate matter (PM10) and sulfur dioxide (SO2 ) over 2008–12. These pollutants are the

(i) Scenario 1 Market liberalization and higher prices for primary energy resources create additional incentives for speeding up technological modernization. We assumed that a capital market was in place and that businesses could find investment projects with normal economic returns. In the model, this is a gradual transition from the ‘‘old’’ to the ‘‘new’’ input–output matrix. We further assumed that the market creates incentives to switch to ‘‘new’’ technologies and that the capital market is well-developed enough to serve that technological renovation. In

3000000000

CO2 emission MT

2500000000

2000000000

1500000000

NO NT Tr - 10 Target

1000000000

500000000

0 1

2

3

4

5

Time1+Y2008

Figure 1. CO2 emissions for two scenarios (CO2 emission 2008–12).

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addition, we assumed that AAUs, i.e., GHG emission allowances established by the Kyoto Protocol, 1 could be sold on the carbon market for $10–$15 per MT of CO2 . The results of this simulation look encouraging for Russia’s participation in GHG emissions trading in the global carbon market. There are however, certain preconditions for its implementation, the most important of which is the success of market reforms. (ii) Scenario 2 The second scenario represents a less significant influence of market reforms on business behavior. This scenario acknowledges that all the prices for Russia’s energy resources are still not real market prices. Even if subsidies were to be formally eliminated, consumers would not pay the ‘‘full market price’’ because of the common default problem. In a transitional economy, consumers cannot afford the ‘‘full market price’’ right away because they are constantly in debt. In Russia, this is a problem that was caused by the Soviet economic system, which heavily subsidized all energy prices. In fact, the stated price of energy is still considerably lower than its actual cost, thanks to continuing subsidies described by Gurvich et al. (1997). In reaction to lower energy prices, the replacement of old technologies by new ones has been slowed, and at the same time, the demand for energy resources has relatively increased. Low energy prices, though, cannot be the only reason for a delay in technological innovation; a shortage of capital may also be responsible. In addition, in this scenario we also assumed negative changes in the balance of energy, owing to a partial replacement of natural gas with coal. The emissions of CO2 in Russia are very uncertain. By 2012, the gap between the first and the second projection is about 750 million MT of CO2 equivalent, or about 30% of Russia’s annual emissions budget. The principal reason for this divergence is the uncertainty of the essential economic indicators that determine long-term economic development. If our primary goal is to predict GHG emissions, then this conclusion would be discouraging. If, however, our primary goal is to identify the forces that push GHG emissions down as far as possible, we should be satisfied. Although the lack of appropriate market institutions and constraints on investment in new technologies increases the likelihood of the second scenario, the incentives created by emissions trading

should encourage technical innovation and make the first scenario more likely to occur. 3. ANCILLARY BENEFITS OF REDUCING CO2 EMISSIONS (a) Health benefits of reducing CO2 emissions The main health benefits of reducing GHGs are linked to corresponding reductions of the most common pollutants. According to the results of a HIID health risk analysis conducted in Russia during 1996–98 (see, e.g., Larson et al., 1999), the most important factor for improving health outcomes is reducing the PM10 fraction of the total suspended particulates (TSP). One ton of TSP contains about 0.6 tons of PM10. Up to 95% of Russian cities are affected by this pollutant. This kind of analysis can also apply for other pollutants that damage health, such as nitrogen oxide (NOx ) and sulfur dioxide (SO2 ). The model we used for carbon emissions projections provided profiles of TSP, SO2 , and NOx for both scenarios. We then calculated the risk to human health that was avoided as a result of implementing an aggressive policy to reduce GHG emissions. This assessment of health risk may also be used to estimate environmental health costs. We analyzed the cost of both medical treatment and loss of GDP. Our estimate is considered to be a conservative calculation of the actual costs, because we ignored other cost categories, including the cost of suffering from disease and the willingness of individuals and households to pay to avoid risk. Although we are aware of the difficulties, both ethical and methodological, of translating human health impacts into a monetary measure, to illustrate the main point of this paper, we use this approach. (i) Estimating the baseline impact in Russia This paper offers a very preliminary estimate of the additional mortality associated with emissions of TSP, SO2 , and NOx in Russia. We used the characteristics of the baseline burden to determine how to reduce the risks associated with different GHG reduction policies for various pollutants. According to Bobulev et al. (2000), the baseline mortality from air pollution in 1999 was 44 per 100,000 (see Table 1). Although this study considered a population’s morbidity and mortality only in regard to respiratory diseases and neoplasm, the actual

ANCILLARY BENEFITS OF REDUCING GHG EMISSIONS

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Table 1. Estimates of morbidity and mortality from air pollution Air pollution

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Morbidity, 1 per 1,000 Mortality, 1 per 100,000

33.7 33.5

35.2 34.1

29.0 36.5

31.0 43.4

28.4 47.0

29.6 44.9

26.7 42.5

29.9 41.3

28.3 40.8

30.4 44.2

Source: Bobulev et al. (2000).

incidence of disease exceeded the registered incidence by a factor of at least three (UK Water Industry Research, 1999). When assessing health risks, we took into account this underestimation of the actual morbidity. Our analysis of current morbidity and mortality was based on data from the State Committee on Environmental Protection and the State Committee on Statistics regarding the mortality and morbidity of adults and children in Russia. In 1999 in Russia, 44.2 persons per 100,000 were estimated to be at risk of dying from air pollution, and 30.4 persons per 1,000 were at risk of getting sick. Using these figures as a starting point, we calculated the possible changes in health risk in 2010 in relation to changes in the emissions of the most common pollutants. (ii) Health benefits of a CO2 reduction policy Based on model simulations, we calculated the emissions of PM10 and SO2 in 2010 for the two scenarios of CO2 emissions previously described (Tables 2 and 3). In accordance with the model’s projections for air emissions in Russia, we calculated the incidence of environment-related morbidity and mortality. We considered 1999 emissions as 100% and then analyzed the change over the period until 2010. Table 4 shows that economic development based on old technologies (scenario 2) would lead to a serious increase in air pollution and the number of deaths resulting from it. Table 2. Estimation of PM10 emissions, 2010 Emissions of PM10 in 2010 as % of 1999 Scenario 1 Scenario 2

69 133

Table 3. Estimation of SO2 emissions, 2010 Emissions of SO2 in 2010 as % of 1999 Scenario 1 Scenario 2

94 130

Table 4. Deaths resulting from air pollution in 2010 (1 per 100,000) Number of deaths in 2010 Scenario 1 Scenario 2

30 59

The difference in the number of deaths is almost 30 per 100,000; i.e., the ‘‘side effect’’ of aggressively reducing carbon pollution would be to cut the health risk in half, saving about 35,000 lives each year. (iii) Economic value of health benefits We estimated the economic cost of damage from environmental pollution using benefittransfer methodology. All estimates are in 1990 US dollars converted from rubles with the coefficient of purchasing power parity, thereby avoiding any local price differentials between Russia and the United States. We determined the value of statistical life in Russia according to the United States estimate (about $3.6 million for 1990) (see Industrial Economics Inc., 1992), which is based on wage differential studies. We recalculated the value based on GDP per capita in Russia and the loss of work time due to lower life expectancy. We used the lower estimation of ($300,000) per statistical life. Scenarios 1 and 2 follow the same trend except that the number of deaths in the first scenario is twice as high as in the second. For Russia, an aggressive GHG reduction policy (Scenario 1) would save as many as 29 lives per 100,000. This difference in the number of deaths caused by conventional pollutants means that 30,000–40,000 lives would be saved annually by 2010, depending on population growth and the share of the population exposed to the pollutants. If we use a discount of 10% along with the lower figure for the statistical value of life in Russia ($300,000), then over 2010–15, health benefits would be valued at about $7 billion annually, or $60 for each ton of CO2 eliminated (about $16 per ton C). This estimate is in the range of the OECD (2000, pp. 104–105).

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This reduction in health risk is not the only potential ancillary benefit from improving local air quality. But, the reduction in health risk is substantial enough to support reduction of GHGs. Unfortunately, though, even the potential health risk reductions will not automatically prompt private businesses to reduce their GHG emissions, as this benefit is external to them. Therefore, Russian national and regional authorities must create incentives to remedy this situation. (b) Other benefits of a CO2 reduction policy in Russia (i) Energy savings Reducing emissions of CO2 would greatly help transitional economies. Because of the ineffectiveness of central planning and the energy market that resulted, cutting emissions in countries with a transitional economy compared with cutting the same emissions in developed countries would save as much as $1.5 billion per yr during 2005–20. In other words, delaying such policy implementation until 2020 would mean a loss of as much as $37 billion (Econergy International Corporation, 1997). Table 5 shows that in Russia emissions per dollar of GDP is almost five times higher than in the United States, 10 times higher than in the European Union, and slightly less than 8.5 times higher than in OECD countries. To produce electricity Russia emits 30–40% more CO2 than these countries. Thus, the potential savings in energy combined with reduction of CO2 would be substantial in Russia, and would have a significant effect on global reduction of GHG emissions. Countries with energy-intensive economies, such as those in eastern Europe and Russia, already have shown an interest in using efficiency measures to cut costs and restructure their industries. Russia is now spending $450

million on energy-efficient equipment and services in all sectors of its economy. Energy-efficiency programs and financing could expand this market and also provide new customers for Western manufacturers. Moreover, facilitating the transfer of existing energy-efficient technologies could reduce emissions even in those countries which are not willing to ratify the Kyoto Protocol. In addition, technology transfer programs would be an important precedent in addressing existing nontariff barriers; for example, even if technologies are available, a lack of financing or information may prevent those countries, where they would have the greatest impact, from buying them. For Russia, emissions trading is seen as an alternative to environmentally unfriendly practices. Not only would emissions trading help solve existing environmental problems, but it would also help prevent further increase in GHG emissions. We compared fuel consumption under two different scenarios. Both are calculated starting from the current fuel consumption structure in Russia. They are as follows: Scenario 2 ‘‘slow market reforms and old technologies,’’ and Scenario 1 of market reforms and ‘‘emissions trading.’’ These scenarios were simulated with the model described in Section 2 of this paper. During 2000–12, we estimated that with emissions trading, the total savings for fuels would be 1,700 million tons of oil equivalent (toe), or about 330 million toe of coal, plus 1,000 million toe of natural gas, and about 370 million toe of oil products. This translates into an annual discounted average of $16 billion in fuel savings, or $21 per 1 ton of CO2 reduced (about $6 per ton C). Most of the benefits from fuel savings are internal and, nevertheless, they are not sufficient to radically improve energy efficiency since a high discount rate in transitional or developing economies. Because emerging businesses look

Table 5. CO2 emissions per dollar of GDP and electric power use in Russia, United States, European Union, and OECD, 1994 Indicators

Russia

United States

European Union

OECD

GDP (billion $US) Electric power use (billions MW h) CO2 emissions per dollar of GDP, kg CO2 /$US CO2 emissions per unit of electric power use, kg CO2 /kW h

377 855 4.403

6,642 3,313 0.761

7,313 2,285 0.436

20,525 7,891 0.518

1.941

1.526

1.397

1.348

Source: UNDP (1997) authors’ calculations.

ANCILLARY BENEFITS OF REDUCING GHG EMISSIONS

for short-term benefits, they do not always appreciate long-term savings. 4. ANCILLARY BENEFITS FOR SUSTAINABLE FOREST MANAGEMENT (a) Description, classification, and evaluation of ancillary benefits for sustainable forest management Reforestation projects for additional carbon allowances, like sequestering carbon, could generate a variety of indirect benefits, such as protecting biodiversity, creating nontimber forest products, protecting watersheds and soil, and reclaiming land. The ancillary benefits for Russian forests depend on various factors, but could easily exceed the total cost of projects (Vincent, Foellmi, & Strukova, 1998, p. 49). Some experts estimate $110 per ha/yr in additional benefits from planting 1 ha of forest (Lampietti & Dixon, 1995, p. 23). More conservative estimates are around $20 ha/yr, although including the creation of additional jobs could raise this value to $194 ha/yr (Markandya et al., 1999, p. 17). Such ancillary benefits might make local authorities consider helping finance such forest projects. According to the approach developed by Lampietti and Dixon (1995), benefits other than those from timber are extractive values (plants and hunting), nonextractive values (recreation, watershed protection, carbon sequestration), and preservation values. Nontimber product values for Russian forests were estimated at about $100 per ha at a 10% discount rate, or $4 per yr (Vincent et al., 1998, p. 49). This figure is very low and is based on low market prices for berries and other plants, as well as lack of transportation, labor resources, and inefficient procurement and processing facilities. Many Russian forests have been officially designated for hunting. Although the value of hunting has never been estimated, we could use Lampietti and Dixon’s median estimation (1995), which is $5 per ha/yr. The most important nonextractive value of Russian forests is protection of watersheds and fisheries, which has never been directly estimated. But there are different ways to estimate it indirectly, and here we use the alternativecosts approach for the Samara Oblast region. In 1997, about 60 ha were planted in Samara to protect agricultural land from erosion. The

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average planting costs were about $250 per ha, a total of about $15,000 annually. As a result, that same year, about 1,000 ha of agricultural lands were reclaimed, with reclamation costs of about $15 per ha/yr (see Goskomstat, 1998). The recreation values of Russian forests have likewise not been estimated, so we assigned them half a median value, in accordance with Lampietti and Dixon (1995), or $6 ha/yr. The value of conservation is the most controversial. Because of social problems and the economic crisis, Russians are not enthusiastic about paying to conserve biodiversity. Lampietti and Dixon proposed a median estimation of $16 per ha/yr, so we use half this estimation. (b) An example of activities and ancillary benefits under Kyoto Protocol Article 3.3 Let us consider a hypothetical afforestation/ reforestation project for 1 ha of Russian boreal forest eligible under Article 3.3 of the Kyoto Protocol (see Table 6). On average, this represents about $50 of ancillary benefits per ton of CO2 , or $14 per ton of carbon sequestered. This example shows that even a conservative calculation of the potential value of reforestation/afforestation is much greater than the cost of planting. The difference would be even greater if, instead of planting, efforts were aimed at natural regeneration (the one-time cost for this option is very low). This example shows that it is very important for Russia to begin implementing reforestation projects, with a focus on natural regeneration, which will be eligible under Article 3.3 of the Kyoto Protocol. An estimation of ancillary benefits and their correct accounting would create a basis for their partial internalization. (c) An example of activities and ancillary benefits under Kyoto Protocol Article 3.4 In 1999, an in-depth study of ancillary benefits from sustainable forest management was conducted for Samara region in Russia. This is the only study of the kind in Russia. We used this study to present a numerical example of ancillary benefits under Article 3.4 of the Kyoto Protocol. In Samara region, the annual growth of timber is greater than the amount harvested each year, tipping the total annual carbon balance in a positive direction. The valuation of forests in Samara Oblast is shown in Figure 2. Timber accounts for only about 19% of the

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WORLD DEVELOPMENT Table 6. Valuation of a hypothetical afforestation/reforestation project for 1 ha of Russian boreal forest

Benefits/costs

Description

$ Value (present value)

Degree of internalization (ability to capture the benefit)

Remarks

From 90 to 160 tons

$200–$1,600b

100% under Kyoto Protocol

Laws are needed to enforce measures

$100

Close to zero

Additional jobs

$1,500

Hunting value

$50

Conservation value Nonextractive forest values (watershed protection, etc.) Planting costa Operating costa

$80 $110

Some could be internalized regionally and could offset major part of onetime planting costs Partly through hunting licenses Close to zero Close to zero

Value of ancillary benefits depends on location of plot and density of population A one-time benefit Could be organized as public works

Sequestered carbon in tonnes of carbon equivalenta Nontimber forest productsc

$300/ha, one time $100 ha

a

Based on Golub (1999). The AAU price is equal to $40 per ton of carbon equivalent. The highest net present value of carbon (planting aspen) corresponds to the lowest total sequestration. Aspen grow faster than other kinds of trees but also stops growing much sooner. For a net present value calculation with a 10% discount rate, however, only the first 20 years matter. For spruce and larch, the total carbon sequestration is equal to 160 tons, but the net present value is only $200–$300. c There may be overlapping and double counting, and some of the plots offer only some of the benefits listed in the table. b

11%

19%

8%

Timber Extractive values Watershed protection Carbon sink

13%

Recreation Preservation value

28% 21%

Figure 2. Structure of forest value in Samara Oblast.

total forest value in Samara Oblast, even based on the world price of timber. Protecting the forest’s watershed in Samara Oblast has at least the same or a slightly higher value than timber. Carbon flow, calculated at $40 per ton, is about 30% of the forest’s value.

The forest carbon sequestration potential in Samara Oblast can be calculated directly. We took into account the stock of wood in 1994, forest growth, logging, and loss due to fires, insects, and the like. We then figured the closing stock of wood each year. Opening stock can

ANCILLARY BENEFITS OF REDUCING GHG EMISSIONS

be converted to carbon stock by means of conversion factors (see Zamolodchikov, Utkin, & Korovin, 1998). The change of carbon stock each year produces a carbon flow that we evaluated using specific assumptions about the price of carbon. We assumed it to be $40 per ton of carbon. From this we obtained $400 per ha for the capital value of carbon flow in Samara Oblast, or about $20 ha/yr. 5. INTERNALIZATION OF ANCILLARY BENEFITS AND CREATION OF INCENTIVES TO IMPLEMENT GHG REDUCTION PROJECTS Internalization of ancillary benefits would generate the incentives for investment required to launch technological innovation and keep a relatively high share of natural gas in the energy portfolio. There are several ways to internalize ancillary benefits: some benefits, such as those accruing from sustainable forest management, could be internalized relatively easily, but other benefits, such as health benefits, are public goods and require government intervention to achieve them. Using the Kyoto Protocol, the Russian Federation could catalyze collateral investments into GHG reduction activity, aimed at the same time to reduce local pollution. The rhetorical question ‘‘How do Russian people benefit from the Kyoto Protocol?’’ could be answered in a constructive way. The Russian government may use carbon allowances to generate investments in GHG reduction projects with collateral health benefits, though the forward price for allowances may stay low for the next few years. But, Russia has a large potential for low-cost and no-regret options to reduce GHG emissions. To mobilize the required investment resources, the Russian government may consider the creation of a revolving carbon fund. This financial institution would use part of the Russian emission budget (theoretically up to four billion tons of CO2 equivalent) to generate core capital. Since most GHG reduction projects have a multibenefit effect, the fund may also facilitate collateral investments. Different groups are looking for different elements of these benefits. Institutional changes are needed to help them combine their efforts and implement multibenefit projects. For traditional businesses, an investment fund may be considered as a way to operate in

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the Russian capital market. They could contribute to the fund, and allow the fund to invest. Alternatively, they may consider the fund as a partner and participate in project implementation together with the fund, on an equity or collateral basis. Thus, we have two different approaches. For businesses looking for carbon benefits, the fund would arrange a diversified portfolio of carbon emission reduction projects and would facilitate the conversion process of ERUs into GHG emission allowances from the Russian Kyoto budget. There are other institutions looking for global and local environmental benefits. Those institutions could contribute to the fund in the different forms including forgiveness of Russian debt with the condition of conversion of this debt into a contribution to the fund and a cancellation of some of the emission allowances. The fund would primarily incorporate ancillary benefits evaluations into the project cycle to ensure local environmental and health benefits. Proper project implementation and assessment is required as well, with the key requirement being reinvestment (recycling) of ‘‘carbon revenues’’ with their prioritization with regard to ancillary benefits. 6. CONCLUSIONS In this paper, ancillary benefits from GHG emission reduction policies were analyzed on a macrolevel for a country with a transitional economy, with Russia taken as an example. This paper examined two basic scenarios based on an input–output model of the Russian economy for 2001–10. The first has Russia maintaining a low carbon emissions trajectory for GHGs, which potentially could be reached if Russia successfully implements market reforms, and if international cooperation on climate change creates some additional incentives for Russian industry to reduce GHGs. The second scenario represents the worst possible case, when economic growth is mainly based on the use of old technologies and negative shifts in the energy portfolio (increasing the share of coal while exporting natural gas). According to the estimations presented in Dudek et al. (2000), the difference between the two scenarios in 2012 is about 750 million MT of CO2 . The difference in conventional pollution is also significant. Translated into human health risk, this difference is up to 35,000 cases of mortality risk per year.

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The most important ancillary benefit is the improvement in human health. One of the possible by-products of greenhouse gas management is less use of carbon-intensive fuels such as coal. Coal combustion, particularly when it does not use an advanced post-combustion control system, is associated with emissions notorious for harmful health effects. On a national level, the consideration of health damages alone in this more comprehensive analysis strongly justifies aggressive policies for GHG regulation because the contingent reduction in conventional pollution is significant. According to conservative economic estimations, this fraction of ancillary benefits is equal to $16 per ton of carbon. Fuel savings add another $6 per ton of carbon. Together, these benefits are much greater than the average cost for carbon reduction. But most of these benefits in the Russian economy are external, i.e., they are difficult for industrial emitters to capture for themselves. More important, the existence of these benefits does not create direct incentives for businesses to reduce GHG emissions. These benefits should however encourage policymakers to implement aggressive GHG reduction policies. To make fully informed decisions on greenhouse gas reduction strategies, those principal

ancillary benefits that Russia could gain from a policy to prevent climate change (such as health benefits, a more efficient use of energy and fuel, and better forest management) should be assessed. Internalization of these ancillary benefits on all levels would provide further motivation to implement GHG reduction policies and projects. Russia’s forests are one of the country’s major sources of carbon allowances. Our calculations may persuade local authorities and businesses to consider the various revenues to be gained from forests. We used a bottom-up approach in this part of the paper, because for forests, local support is more important than federal intervention. Finally, to mobilize the required investment resources and to effectively manage revenues from AAU trading, the Russian Government should consider the creation of a revolving carbon fund. Such a financial institution could use part of the Russian emission budget to generate core capital. Since most GHG reduction projects have multiple benefits, the fund may also search for investors who would benefit from the ancillary results of GHG emission reduction, and who would be prepared to share investment costs.

NOTE 1. AAUs or assigned amount units represent emission budget for allowed GHG emissions, estab-

lished by Article 3 and Annex B of the Kyoto Protocol.

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