Authors: Saniya Perzadayeva, Dinara Yskakova

Solving the problem of climate change is one of the key tasks of the XXI century. Taking into account the widespread trend towards decarbonization of the economy, various ways to combat greenhouse gas emissions have been developed. One of these techniques is the introduction of such a market instrument as emissions trading.

 Carbon credits are part of the greenhouse gas emissions trading system, which has been operating since 2005, influencing industry and energy companies. This mechanism works according to the general principle cap-and-trade. The Government or an international organization sets an upper limit on permissible greenhouse gas emissions into the atmosphere(cap) in the form of quotas, which are provided to producers for free or for a fee, and companies use them and, if emissions are less than the permissible limit, they can sell their surpluses to other companies (trade).

Carbon credits are a quota for the allowable amount of emissions into the environment. A carbon credit is equivalent to one ton of carbon dioxide. Each country is given a certain quota for emissions of gases into the atmosphere, which is further distributed among the companies of the country. If company exceeds the established threshold, it must either pay a fine or buy a carbon credit on the open market. A company or a country that has not fully used its quota can sell its carbon credit. As a result, the buyer company does not have to pay a fine, and the seller contributes to the greening of the environment. At the same time, due to the gradual reduction of the issued quotas, the amount of greenhouse gas emissions is reduced. Companies resort to buying carbon credits when they do not have the opportunity to change quickly the technology and significantly reduce greenhouse gas emissions.

 International experience in the implementation of carbon credits

 One of the countries that has successfully implemented a quota trading system is China. In 2021, China launched a national carbon emissions trading market. It is reported that about 2000 companies have already joined the chosen system, producing together about 4 billion tons of carbon dioxide emissions per year, which makes this market the largest in the world [1]. The pilot sector of the economy covered by the system in the first year is the thermal power industry with its coal and thermal power plants. The entities of the system will include enterprises with an annual volume of greenhouse gas emissions equal to 26 tons. In case of a decrease in this indicator for two consecutive years, such companies are removed from the list of entities.

Another example of the implementation of quota trading system projects is the Republic of Korea, in which about 60% of greenhouse gases are already covered by the proposed mechanism. The Korean model of the quota trading system is divided into three stages, which made it possible to implement this mechanism efficiently and smoothly. At the first stage (2015-2017), all permits were issued free of charge, gradually introducing a system of auctions at which 3% of quotas were sold first at the second stage (2018-2020), and up to 10% of quotas that will be auctioned at the third stage (2021-2025)[2].

 Carbon market in Kazakhstan

 Within the framework of the Paris Agreement, Kazakhstan presented its nationally determined contribution and committed to reduce greenhouse gas emissions by 15% by 2030, and the emissions trading system was one of the decarbonization mechanisms contributing to achieving this goal. It should be noted that in 2013 [3] Kazakhstan became the first country in Eastern Europe, the Caucasus and Central Asia to launch such a system [4].

 In accordance with amended Environmental Code of Kazakhstan dated January 2, 2021, a carbon unit is an accounting unit of carbon quota or carbon offset, equal to one ton of carbon dioxide equivalent, and is a commodity allowed for turnover between carbon market entities [5].

The carbon unit trading system in the Republic of Kazakhstan consists of primary and secondary carbon markets. In the primary market, the operator of the carbon units trading system sells carbon quota units from the corresponding reserve category of the National Quota Plan on auction terms. In the secondary carbon market, subjects purchase and sale carbon units among themselves through a direct transaction or through a commodity exchange [6].

 Kazakhstan's quota trading system operates according to the following scheme: there is a list of companies producing more than 20,000 tons [7] of greenhouse gases [8] per year, which are required to report annually and reduce emissions. Let us assume that Company A and Company B produce 30,000 tons of _CO2 each (together 60,000 tons of _CO2). Their combined emissions need to be reduced to 50,000 tons of _CO2. As a result of the allocation of quotas, 25,000 carbon units (25,000 tons of _CO2) were allocated to each company. However, in fact, Company A could not reduce emissions and still produces 30,000 tons of _CO2 per year, and company B, in turn, produced only 20,000 tons of _CO2. Since company A needs an additional 5000 quotas, and company B has unused quotas, then the trade is carried out between these companies. As a result of such a transaction, Company A, actually emitting 30,000 tons of _CO2, and company B – 20,000 tons of _CO2, jointly produced 50,000 tons of _CO2, which made it possible to achieve the goal of reducing carbon dioxide emissions by 10,000 tons.

The exceeding the quota entails administrative liability in the form of a fine for each unit of the quota above the established volume comes [9]. To avoid this penalty, the quota subject buys a carbon credit from another company that has not exceeded its volume. At the same time, carbon quota units resulted from reducing the capacity of the quota installation are not subject to purchase and sale. A decrease in capacity is understood as a decrease in the annual volume of mining, production, processing and (or) transportation of products. The carbon units obtained in this way must be returned to the reserve of the National Carbon Quota Plan in accordance with the procedure established by the rules of state regulation in the field of greenhouse gas emissions and removals. It should be noted that the National Plan for 2022-2025 [10] and the Rules of State Regulation in the field of greenhouse gas emissions and removals [11] have not yet been adopted and are under consideration.

 The National Carbon Quota Plan is a document that establishes the total number of carbon quota units to be distributed among the subjects of quotas for regulated sectors of the economy, as well as the amount of the reserve of carbon quota units [12]. In order to fulfill the obligations to reduce greenhouse gas emissions, the number of carbon quotas is gradually decreasing. In accordance with the draft National Plan for 2022-2025, Kazakhstan plans to reduce the volume of carbon quotas from 151 million quotas in 2022 to 125 million quotas in 2025.

Carbon quota allocation

 The distribution of carbon quota units among the quota subjects is carried out on the terms of their free distribution and sale through an auction within the volumes determined by the National Carbon Quota Plan. In order to credit carbon quota units, the quota subject opens an account with the state register of carbon units in accordance with the rules [13]. Carbon quota units within the scope of the National Plan may be transferred from one reporting period to another.

 Problems of the quota trading system in Kazakhstan

 One of the problems of the system in Kazakhstan is the low cost of the carbon quota. The recent quota auctions on the electronic platform of the Caspian Commodity Exchange JSC were held on August 11, 2021. According to the platform, the cost of one quota at the last auction from May to August 2021 amounted to 500 KZT ($1.1) [14]. The low price of carbon quotas hinders the promotion of decarbonization of production: it is easier for companies to buy carbon quotas than to reduce greenhouse gas emissions. According to experts, the minimum cost of the quota required for the implementation of environmental projects should be at the level of 15 euros ($17) [15]. According to the draft resolution of the Government of the Republic of Kazakhstan "On approval of nationally determined contributions of the Republic of Kazakhstan", the price of a carbon unit should increase from $1.1 in 2021 to $50.8 per ton in 2026-2030 [16]. Such prices will make the quota trading system profitable for companies that have an excess of quotas, and will make the practice of not reducing emissions unprofitable for those who prefer to simply buy quotas.

 In addition, there is a lack of transparency of quota trading. In particular, trading operations and prices are indicated on the platform of the Caspian commodity exchange, but no information about buyers and sellers is provided [17].

 Conclusion

 The carbon unit trading system is an effective market tool in the fight against greenhouse gas emissions and allows for the introduction of a phased decarbonization process. However, of particular note is the existing problems of the carbon market in Kazakhstan, which require solutions. Solving these problems will make it possible to build a highly organized emissions trading system, which is particularly relevant in connection with Kazakhstan's ambitious commitments to reduce greenhouse gas emissions by 15% by 2030.