CLIMATE CHANGE – NEW OPPORTUNITIES FOR SUBSOIL USERS

Yerzhan Yessimkhanov

Director, Subsoil Use Department

Grata Law Firm

1

Kazakhstan

• Is taking steps to counter global warming and to pursue a number of economic objectives by participation in the Kyoto Protocol’s flexible mechanisms;

• Ratified the Kyoto Protocol on 26 March 2009;• Introduces important amendments to Kazakhstani

laws which will influence subsoil users in all areas of the country’s economy.

2

Flexible Mechanisms

The Protocol provides for three so-called ‘flexible mechanisms’ designed to encourage economic measures on the reduction of greenhouse gases (GHG). Kazakhstan is planning to participate in two mechanisms out of three:

- JOINT IMPLEMENTATION (JI);

- EMISSIONS TRADING

Joint Implementation (JI)

Major Elements of Classic Structure

4

funds

reduction units

red

uctio

n u

nits

Investor

Buyer of Emission Reductions

Owner(Kazakh Company)

Emissions Trading

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Ministry of EnvironmentalProtection

allowances

Company 1 Company 2 Company 3

Prospective Amendments to Kazakhstani Laws

• In November 2010, the new Law “On Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan Relating to Environmental Issues’ was introduces to the Parliament;

• The Law on Amendments will amend the Environmental Code, the Tax Code, the Budget Code, the Code on Administrative Offences, the Criminal Code and many other laws;

• The Law on Amendments is considered by Mazhilis at present time.

The Law on Amendments

• Divides subsoil users into categories depending on the level of their emissions;

• Excludes GHG emissions from the scope of mandatory environmental licensing procedures in order to facilitate implementation of JI projects in Kazakhstan;

• Establishes general rules of emissions trading;• Established liability for GHG emissions above the

limit defined in an allowance certificate.

Categories of Subsoil Users

• (i) entities with overall annual emissions exceeding 20,000 tons of CO2 (‘Major Emitters’);

• (ii) entities with overall annual emissions not exceeding 20,000 tons of CO2, called in the Law on Amendments the “subjects of administrative regulation” ( ‘SARs’).

Categories of Subsoil Users (cont.)The Major Emitters:

• The Law on Amendments prohibits activities of the Major Emitters in the areas of industry, oil and gas, energy, mining and metallurgy, the chemical industry, agriculture and transport, without obtaining allowances for GHG Emissions

• Allowances will be allocated to the Major Emitters on the basis of the National Plan for Allocation of Allowances for GHG Emissions starting from 1 January 2012.

• Major Emitters that need to increase their emissions can buy allowances from those who keep their emissions level below the level allocated in their certificates.

SARs:

• will not be allocated GHG Emissions allowances and will not be able to participate in the emissions trading system

• will be obliged to make payments (the so-called ‘carbon fee’) to the state budget in accordance with the rates to be established by the Tax Code.

Amendments to Environmental Licensing Procedures

GHG emissions will not be subject to:

• Environmental Impact Evaluation;• State Environmental Expert Examination;• Permits for Emissions into the Environment; • Environmental Audit.

Emissions Trading

Three levels of emissions trading:

• Level 1: trading of domestic allowances between KZ companies;

• Level 2: trading of certified emission reductions (CERs) on the basis of Kyoto flexible mechanisms between KZ and foreign companies (subject to inclusion of Kazakhstan to Annex B to the Kyoto Protocol);

• Level 3: trading of assigned amount units (AAUs) allocated to Kazakhstan under the Kyoto Protocol between countries and their legal entities (subject to inclusion of Kazakhstan to Annex B to the Kyoto Protocol).

Emissions Trading (cont.)

Trading of domestic allowances:

• Only the Major Emitters will have a chance to participate;

• Allowances will be traded through special exchanges – or existing exchanges will be used;

• It is not clear how emissions trading will be taxed (shall VAT apply?);

Any Questions?