The Issues of Carbon Pricing in the Russian Federation: The Local and International Perspectives Under the Cost Approach and the Role of Afforestation Projects

Abstract

This paper discusses the role of afforestation projects and other climate technologies in the green agenda for Russia and aims to justify the anchoring of jurisdictional carbon pricing in the cost approach to valuation, specifically, with reference to the cost economics for afforestation projects given their centrality to the agenda. Through that, and due to the inchoate state of carbon pricing in the study jurisdiction, this paper aims to advance price discovery for national carbon credits in both compliance and voluntary schemes. The cost approach framework, moderated by international market comparisons, indicates the fair price of carbon in Russian jurisdiction at the level of USD 20–25 per tonne of CO₂-eq, which is close to the global median but is more than double the amount of carbon levies set under the Sakhalin GHG quota experiment. It is argued that unless such a fair price for carbon is set in the country, the national carbon credits market will not achieve viable growth, nor will sustainable development be advanced, and funds for it be adequately collected. This represents a relevant contribution to the literature on the development of the national carbon credit markets.

1. Introduction

Sustainable development requires the nexus of investments in green technologies with suitable funding arrangements. In line with the “polluter pays” principle, the latter often originated through the taxation of air polluters (e.g., through carbon levies), with an increasing focus on atmospheric pollution through greenhouse gas emissions. Greenhouse gas polluters can avoid payments of statutory carbon levies if they themselves invest in climate projects and qualifying sustainable technologies in recognition of which they receive formally authorized carbon credits (called “carbon units”) to be used as offsets for carbon tax liabilities (or sold to third parties for the same use). The issuance of such carbon credits requires the measurements of committed, or averted, carbon footprint, which is administered by carbon emission validators and verifications.

The institution of carbon project validation and verification was introduced in the Russian Federation in 2022 by the Law on Limiting Greenhouse Gas Emissions. Legal entities and individual entrepreneurs can be verifiers and validators of greenhouse gas (GHG) emissions. The system of accreditation for greenhouse gas verifiers and validators is set out in the recently introduced Rosaccreditation manual, which details the provisions of Government Resolution No. 707 “On approval of the Rules for the submission and verification of reports on greenhouse gas emission”, although the accreditation of verifiers itself has been carried out by the national Rosaccreditation Agency since 2022.

The national GOST R ISO 14065-2022 standard [1] provides definitions of validation and verification processes conducted by the verifiers of greenhouse gas emissions. Effectively, those definitions mean that validation is an activity on prospective (expected) estimates of emissions for projects, while verification is the actual accounting and certification of committed or averted emissions. It is as a result of the emission verification process that carbon units for climate projects and quota fulfillment units are created. In the Russian legal context, carbon credits are usually referred to as “carbon units”, which we will continue to use interchangeably throughout the text. The legal and accounting status of carbon units as financial assets in Russia is explained in [2].The institution of emissions validation is important in the context of climate project certification, while the institution of emission verification is important both in the context of issuing carbon units for offset (climate) projects and in the context of compiling annual reports on actual annual GHG emissions by qualifying pollutants. Presently, there are about 20 nationally accredited validators and verifiers of GHG emissions recorded in the Rossacreditation registry [3]; however, the GOST/ISO standards they use for their activities are not differentiated by project types, unlike the more extensive and internationally recognized Gold/Verra standards of carbon emissions, which poses a big challenge for the international compatibility of emission records certifiable by the validators and their relevance to the CBAM initiatives in the European Union. “Climate projects” is a reference to a subset of sustainable and environmental projects/technologies, the avowed aim of which is to reduce the ongoing emission of GHG gases into the atmosphere or capture those gases from the atmosphere, sequestering them into “carbon sinks” in order to combat anthropogenic global warming.

As of November 2024, the National Registry of Climate Projects and Carbon Units set up in 2023 listed 39 climate projects registered in the Registry, for which 32.5 mln. carbon units have already been emitted, and 82 mln. more are planned to be emitted [4]. Most of those projects relate to the improvement in efficiency of boiler plants (seven projects) and gas and oil pipelines (six projects). The rest are mostly industrial technology projects in the extractive and oil refinery industries, but there are also three renewable energy projects recorded in the Registry and three forestry projects to plant new forests in the countryside in order to capture and sequester carbon from the atmosphere.

The issuance of carbon units in Russia, to date, is mostly based on the voluntary schemes that entice emitters to burnish their green image on the ESG agenda, whereas the big unresolved problem is the exclusive national scope of the carbon units registry set up in Russia, and it is unclear whether the emitted units will be recognized in the framework of such schemes as EU CBAM mechanism (effective from 2026), or whether there will be any recognized equivalency drawn between the Russian GOST ISO—based carbon units and the international units recorded in such registries as those administered by Verra/Gold Standard networks. The idea is to allow the use of carbon units recorded in the National Registry for offsets under the national carbon emission quota system. However, as of now, such a system has been deployed as an experiment only in the Sakhalin region of the country, and it remains to be seen whether it will go into the nationwide mode (which will not happen earlier than 2029). The lack of international recognition for national carbon units also forces companies with global aspirations to have their projects registered with international verifiers instead, thereby undergoing double the verification burden. For example, Sibur Inc., the largest petrochemical producer in Eastern Europe, reports about its plans to start issuing carbon units outside of Russia after filing an application to register a solar energy project through the Qatar-registered verifier Global Carbon Council (GCC) [5]. So far, only the minuscule amount of 3749 national carbon units have been offset for national GHG compliance purposes, even though these days, the offsetting party can be different from the carbon unit emitter, and there is even no need to open an account with the Carbon Registry in order to be able to offset the third-party carbon units (the third party itself can initiate such an offset) [6]. Despite the immediate third-party consent option for offsetting carbon units dispensing with any need for their formal sale, there are aspirations to launch a formal carbon unit trading exchange in Russia. Such an initiative has been taken by the National Commodity Exchange (NCE) in 2022–2023; however, the sporadic nature of carbon unit auctions at the Exchange hinders the process of actual market-based price discovery. For example, a notional auction that took place at the NCE on the 30th of November 2023 (and involved the Sakhalin District as the seller of the units) registered the price of about RUB 700 (USD 8) for the tonne of carbon [7].

The law and by-laws on the Sakhalin GHG quota experiment stipulate the imposition of quotas on the regional emitters of CHGs and impose a carbon levy (the levy serves like a regional carbon tax and enters the budget of the Sakhalin District) of RUB 1000 (USD 11) per tonne of carbon emitted above the quota in any reporting period [8]. The levy will not be imposed in case the GHG emitter offsets the excess of emissions above the period’s quota by using (retiring) carbon units or the units of quota performance. The fixed rate of carbon levy of RUB 1000 per tonne of CO₂-eq. established for the Sakhalin experiment by the Federal government since 2022, as will be argued in this paper, represents a serious under-valuation of carbon costs for Russia. It has the potential to do much harm to the economic viability of voluntary carbon projects presently undertaken; by anchoring the cost of carbon at this level, the levy will only serve a notional purpose and will dis-incentivize any sustained long-term investments into carbon abatement technologies and afforestation projects. It will engender such an economic calculus that will make it cheaper to shell out on carbon levy payments that will just dissolve on the expense side of the state budget, instead of minding the real object of carbon-induced technological transition to sustainable technologies and incurring its costs. This paper will support these arguments through reliance on the conventional theory of valuation as, for example, encapsulated in the International Valuation Standards.

In our view, setting a fair statutory price on carbon and meaningfully and efficiently pricing carbon units is key to funding and advancing sustainable technologies at the heart of the Climate agenda. Price discovery of any asset or liability is aided, in fact, by valuation theory and the related institutional standards. The International Valuation Standards 2022 [9] distinguish between the three approaches to valuation: the cost approach, the (market) comparison approach, and the income approach. By relying on asset valuation theory [9,10], this paper attempts to close a research and policy gap on the much-neglected use of the cost approach in carbon-related pricing schemes and their design, thereby advancing the aims of efficient carbon pricing in the selected jurisdictional area tailored to the mix of climate projects prevalent in it.

The literature review indicates that optimal jurisdictional carbon price regimes exist and are feasible. Thus, from the macroeconomic perspective, Ploeg et al. [11] developed a tractable rule for the optimal price of carbon emissions under the framework of a DSGE model. Schubert et al. [12] contended about the existence and singularity of an optimal jurisdictional carbon tax, exploring the temporal interrelationships between the carbon tax and carbon price under the conditions of decentralized equilibrium, with applications to the European Energy policies. Savin et al. (2024) [13], using feedback received from a questionnaire sent to climate scientists and eliciting 789 responses, summarized perceived weaknesses of carbon pricing, including the perceived risk of unacceptability of high carbon prices, identifying a research gap in this domain.

Döbbeling-Hildebrandt (2024) [14], in the first quantitative meta-analysis of ex-post carbon pricing evaluations, found robust evidence of a positive correlation between carbon prices and effectiveness in reducing GHG emissions, noting that carbon pricing caused significant emission reductions ranging from −5% to −21% in those jurisdictions where the effect was noted.

Other researchers also attempted to develop alternative carbon price models relying more on the micro-economic perspective. They capitalized on econometric models of carbon price predictions, ranging from plain autoregressive GARCH [15] to Principal Component Analysis [16] and even modern ensemble machine learning methods [17]. However, the link of carbon pricing to the conventional cost approach to valuation based on the realization of climate projects at feasible costs and profits remains under-explored in the literature despite the availability of global climate project databases (e.g., [18]).

2. Methodology

This paper analyses carbon pricing issues for Russia from the top-down, pursuing instrumental methodology based on the current objective status of the green agenda in Russia: bootstrapping accessible technological advances principally in energy-generation sectors, such as gas-powdered, nuclear, hydrogen, and petrochemical technologies, as well as furthering the speed of their adoption [19]. The teleological vector of all this, apart from maintaining the R&D potential, is the continuing modernization of the national industry on the principles of comparative high-tech advantage and searching for additional funds for conducting the same. The latter is a top priority under conditions of continuous strain from other quarters on the consolidated budget. Additionally, the afforestation agenda of making the land green and pleasant again looms large in the mix of registered climate projects and whenever the pricing of credits generated by them is discussed.

Having this high-level teleology of industrial development and afforestation in view for the national climate project stimulation agenda, this paper adopts the usage of two classical valuation approaches borrowed from the valuation theory—the cost approach to the valuation of carbon units, supported additionally by the arguments derived from the (market) comparison approach. The cost approach is predicated on the classical economic logic that over the long term, and in efficient markets, the prices of assets converge on the reproduction costs to create the assets (allowing for the entrepreneurial inducement markup) [9]. If prices for the asset are less than the costs to create them, there will be little or no inducement to generate an asset by producers/project initiators.

Such a logic of the cost approach is equally applicable to carbon units, as they essentially represent derivative financial assets to fund underlying real economic investment projects having to do with the ultimate implementation of climate technologies. As such, the investment costs of such technologies are meant to be recovered through the issuance of carbon units, especially for exclusively socially-oriented projects, such as long-term forest plantations, lacking other means of investment cost recovery [20]. In this context, financial or intangible assets can indeed be valued by reference to the cost approach [2,9]; that is, the cost economics of associated climate projects can be expressed on a per tonne basis of carbon emissions abated through them, and the result can be used as a baseline pricing estimate to make the issuance of carbon credits viable under the projects. An analogous situation, for example, holds for the pricing of ecosystem services—which are capable of being valued on the cost approach principles, even though they also create flows of benefits to the public independent of their reproduction costs [21].

On the other hand, the (market) comparison approach to asset valuation (also known as the market approach or comparable sales approach) is a classical valuation method commonly used to estimate the value of assets and relying on the principles of substitution and market arbitrage, which assume that the value of an asset can be inferred by comparing it to similar assets that have recently been sold or are currently represented on the market. In our context, “similar assets” would be carbon credit assets of equivalent functionality (utility) traded in carbon pricing schemes developed in alternative jurisdictions [9]. Then, the final valuation conclusion is arrived at the nexus of the cost approach and market comparison approach valuation results, through the process known as the coordination of approaches doctrine [10]. In our analytical framework, instead of a formal coordination process, we prioritize the arguments based on the cost approach, using the diagram of international comparisons for a credibility check (which is the technique likewise espoused in the International Valuation Standards [9]).

Therefore, in the framework of the cost approach to valuation, it is important to analyze investment costs of different climate-related environmental technologies (on a per tonne of carbon avoided basis), as well as value-based proportions in which the projects are expected to enter the macro-economic boundary, in order to be able to deduce the fair price of carbon and carbon units/credits for Russia. In that, we also adopt the equilibrium reasoning that the price of carbon in compliance schemes for Russia (presently evidenced by the Sakhalin experiment carbon levy) should be close to value-weighted unit investment costs of implementing climate projects. In other words, in terms of the normative implications, compliance carbon prices should be set nationally at a level high enough to encourage the implementation of priority climate projects.

But before such an analysis is conducted, we furnish some (market) comparison approach evidence to serve as a credibility check for the ensuing cost approach findings.

3. Results

3.1. Arguments Under the Comparative Approach to Valuation

To put national-level carbon prices and pricing in an institutional and global context, as well as to adduce comparative pricing arguments, we should note that carbon pricing is implemented in the form of either carbon tax or emission-trading (ETS) systems, or both. The World Bank [22,23] and Bloomberg [24], based on emission-weighted methodologies of carbon pricing [25], post the following reviews of different carbon pricing mechanisms across the world in terms of observed carbon prices (see Figure 1 and Figure 2).

3.2. Price of Carbon in Compliance Schemes

As can be seen, the median carbon price in the carbon compliance schemes presented in Figure 1 is about USD 20 per tonne of CO₂-eq., which, according to the current estimates [26], is at least ¾ short of stimulating the achievement of curbs on the temperature rise assumed under the Paris agreement [26,27,28]. It is also less than the estimates of internal carbon prices reported in the academic literature [29,30] for corporations and used by them for capital budgeting and in the costing of climate projects (an average of USD 37 in 2017 [29]). Interestingly enough, earlier research by Nordhaus (2014) [31] estimated the social cost of carbon at just about USD 20 per tonne. However, even this state of carbon pricing has succeeded in generating global revenues from carbon that, for the first time, have breached through the USD 100 billion threshold in 2023—among the carbon schemes tracked by the World Bank [22].

Currently, slightly less than half of all carbon pricing schemes in operation around the world allow the use of existing carbon units from climate-related projects to offset payments under the schemes. This is the situation also envisaged under the Sakhalin carbon quotas experiment that permits the offsets of imposed GHG quotas with domestically generated carbon units from voluntary carbon projects or “units of quota fulfillment” associated with the over-fulfillment of quotas by the emitters. This latter type of carbon units, which are not generated by any prior registered carbon projects but should become available for sale by emitters when they over-fulfill their quotas, is still new, and hardly any such units have been issued as yet since the Sakhalin quotas went into effect for the year 2023 for the first time.

3.3. Price of Carbon Credits in Voluntary Schemes

Global trends in prices for carbon credits/units in exchange-traded voluntary trading schemes are presented in Figure 3.

MSCI market-wide carbon-credit price index indicates that from 2020 till the present, the volume-weighted average carbon credit price on the tracked markets slid from USD 7 down to USD 5 per tonne of CO₂-eq. [32] In terms of such trend drivers, there is some evidence of causality stretching from global energy prices to carbon credit prices on the market [33].

According to Senken [34], the average price of USD 7 per project credit they reported for 2023 can be misguided in terms of what companies should pay for the credits—as much depends on the type and carbon predictability of climate projects involved and the vintage of the credits. The overhang of lower-quality carbon units exerts a significant downward impact on the mean exchange-traded price of the credits, while for higher-quality credits, the average price observed might have been closer to the range of USD 30–50 per tonne in 2023. Right now, the price of carbon credits is settled low due to the recently observed over-supply of credits. Thus, Senken [34] envisages growth in supply will exceed 8GtCO₂e by the year 2050, noting that over 3/4 of this supply will arise from nature-associated avoided deforestation, reforestation, and agriculture projects. However, the global supply of carbon credits on climate-related projects has been reducing over the past 2 years [35], and the consensus forecast is that of the pick-up in the global demand for the credits in the mid-term future, as EU CBAM and other cross-border carbon adjustment schemes become fully operational. Indeed, beginning in 2017, the global market has witnessed almost a five-time increase in demand for carbon credits coming from the private sector. The Taskforce on Scaling Voluntary Carbon Markets (TSVCM) estimated in 2021 that the global demand for carbon credits may sustain an increase by more than 15 times by 2030 and by a factor of up to 100 by 2050, suggesting that the market for carbon credits would be worth in excess of USD 50 bln. in early 2030s [35]. This also suggests that the incremental cost of supply will rise as the market volumes increase, with 40–60% of carbon credits expected to cost more than USD 50 per tonne of CO₂-eq. by the year 2035 [36]. However, some later estimates are more pessimistic, suggesting that the forces of supply and demand will balance off in the foreseeable future, leaving the carbon credit prices mostly unchanged. Thus, Bloomberg [24] envisages the expected global carbon credit price of USD 20 per metric tonne of CO₂-eq. by 2030 under a “high-quality” scenario, noting that it can even be less—as low as USD 13 per tonne—if the global carbon credit verification standards are not agreed and the markets continue operating “without rigorous standards and greenwashing and integrity concerns drive companies away from offsets (i.e., the use of carbon credits)”.

The above analysis of secondary data in the comparative valuation approach framework indicates that the pricing of carbon in compliance mechanisms (carbon taxes and ETS) vs. voluntary mechanisms (climate project-related carbon credits/units) is seriously misaligned, as observed on the global level. This has numerous implications, as will be discussed later.

For Russia, there is a scant discussion of carbon prices in the literature, as the recent market for carbon units is sporadic and has a directive–affiliative character, as indicated by the imposition of the rate of carbon levy in the Sakhalin experiment from above by the central authority. If anything, the industrialists argued in 2022, referencing the experience of China alone, that the price of carbon imposed in the Sakhalin region (RUB 1000, or USD 11 per tonne of CO₂-eq.) is too high for the needs of the industry [37]—a contention not reflected in rather insubstantial increases in environmental levies posted for the Sakhalin budget in 2023. (hardly noticeable increases, in fact, as the total amounts of environmental levies that have accrued to the budget of Sakhalin District in 2023 were in excess of RUB 5 bln. (USD 55 mln.), whereas the carbon levy rates, being their subset, even if applied to the entirety of the area’s goal reduction in GHGs of about 1 mln. tonnes per year, would have generated revenues under RUB 1 bln.).

3.4. Arguments Under the Cost Approach to Valuation

To prepare the ground for the cost approach analysis of carbon credit pricing in the jurisdiction of the study, we first discuss, from the long-term perspective, the value-weighted structure of investments into climate-related investment projects for Russia. As evidenced by the record of projects in the National Registry of Carbon Units, most of the projects relate to the improvements in industrial boiler construction (transition to smart gas burners), as well as gas and oil refining and transportation technologies. This is followed in terms of importance by the afforestation projects.

Compared to the global perspective, where afforestation and fuel/housing efficiency projects are expected to be at the top in terms of the value of carbon credits issued by 2030 (more than half of about 10 gigaton projected volume of potential annual supply in carbon credits around that date is expected to come in connection with avoided nature loss and nature-based sequestration/afforestation projects), this also suggests the substantial refocusing of climate project efforts in this direction for Russia. (Even now, forestry and land use, jointly with energy efficiency/fuel switching projects, account for close to 50% of global carbon credits issued in 2023, with forestry projects alone claiming a 25% share of the supply. The rest of the supply is due to renewable energy and industrial processes credits issued. World Bank (2024) [22]).

It is known based on meta-studies [38] that, depending on the yield class, deciduous and coniferous afforestation projects can sequester 3–12 t of CO₂ per acre per year, with the average of 5 t per year at growth cycle peak (see Figure 4, [38]). To achieve this, CAPEX investments in northeastern Europe and the United States projects principally made up of land lease, site preparation (USD 2000–3000 per ha), seedling (on average, 10–20 US cents per seedling), weed control, and planting costs have the relative breakdown, as illustrated by Figure 5. Therefore, in Western jurisdictions, this investment cost structure translates into the central tendency for the relative cost of carbon capture in afforestation projects on the order of USD 50 per tonne of CO₂ (allowing for an 8% threshold IRR return from the projects, net of the cost of end-of-lifecycle timber). The recovery of such costs, therefore, requires that the carbon credit prices be sustained globally in the range of USD 10–100 per tonne of CO₂ [39].

In the Russian Federation, due to nominally cheaper land leases and fuel and labor inputs, CAPEX costs of afforestation projects are expected to be less, generating an absolute advantage for the country in terms of the conduct of afforestation projects. Therefore, of key importance to carbon pricing are the estimates of unit costs of afforestation for Russia, which we are reporting based on the ranges of project costs with our involvement (the analysis of three deciduous projects (based on the predominant mixture of birch and oak trees) commissioned over 2021–2023, with the total acreage of 37,000 ha located in the Western temperate zone of Russia (Voronezh and Lipetsk areas)—see

Table 1. Unit costs for sequestration of 1 t of CO₂-eq. for select afforestation projects in the Western temperate zone Russia.

Line	Afforestation Financials (on an Undiscounted Basis)—in USD Based on 87 USD/RUB Market Exchange Rate	Min.	Max.
1	Baseline scale of plantations, ha	10,000	10,000
2	Costs of plantations, RUB/ha	140,000	220,000
3	Costs of plantations, USD/ha	1609	2529
4	Land leases (upfront and for 10 years), USD/ha	0.253	2.023
5	Costs of developing project documents, USD/ha	40	45
6	Registration of an afforestation project of 10,000 ha in size in the carbon credits registry under the Gold Standard protocol, USD/ha	25	25
7	Re-verification, USD/ha	3.0	4.0
8	Monitoring plan costs and exchange quotation fees, 0.2–0.4 USD/tonne CO2-eq	0.2	0.4
9	Annual absorption of carbon by the forest, tonnes CO2-eq/ha	6	8
10	Absorption period, years	10	10
11 = 9 × 10	Cumulative absorption over 10 years, tonnes CO2-eq/ha	80	60
12 = 3 + 4 + 5 + 6 + 7 + 8	Total primary investment costs, USD/ha	1678	2607
13 = 12/11	Total primary investment costs per tonne of CO2-eq absorption over the lifetime of the project, USD/tonne CO2	20.98	43.4
14	Payback period for investment costs assuming the offset of CO2-eq. absorption for the entire project period, years	3.8	6.6

Source: author estimates based on [40,41].

. As can be seen from the Table, which is based on the applicable biomass growth models and market costs [40], as well as the forestry planting guidelines (called the Normative technological maps [41]) scaled to projects of 10,000 hectares in size, the key CAPEX investment in the jurisdictional setting is represented by the seedling and planting cost, including the cost of labor for the same. As indicated in the forestry rule requirements [41], the CAPEX investment is apportioned over the period till the initial harvesting represented by the first thinning (usually after 10 years).

This order of estimates for afforestation projects is also supported by the Roslesinforg estimator, which additionally contains an analysis of primary afforestation costs for more costly and less compact non-deciduous forest coverage [42]. As expected, we find the central tendency of these estimates in dollar terms to be somewhat (30–40%) lower than those reported in international databases, for example, those coming from the US, where the cost of lease payments is notably higher [43,44,45,46]. The problem of further statistical treatment for the estimates, though, is compounded by the lack of specific climate project standards for Russian forestry, and this is something that the experience of afforestation projects currently launched in the Sakhalin Peninsula intends to remedy [47].

As a rule, other climate projects apart from forest plantings are more costly per 1 t of CO₂ equivalent, so that the price of carbon units in association with other projects is proportionally more expensive. According to the estimates presented by the President of the Russian Union of Industrialists and Entrepreneurs, A.N. Shokhin, voiced at the Climate Forum on 17 February 2023, reducing emissions of 1 t of greenhouse gases through renewable energy sources costs Russia several times more than through forest-related climate projects and projects related to landfill gas management and modernization of traditional energy generation sources. Even more expensive are projects to capture carbon dioxide and produce green hydrogen: their cost is more than USD 100 per 1 ton of CO₂ equivalent [19].

This view is borne out by the analysis from other sources. IEA (2021) [48] estimates that the costs of carbon dioxide capture systems (CCUS) can vary widely depending on the source of CO₂: from USD 15–25/tCO₂ for industrial processes producing “clean” or highly concentrated CO₂ streams (such as ethanol production or natural gas processing) to USD 40–120/tCO₂ for processes with “dilute” gas streams such as cement production and power generation (see Figure 6).

Thus, unit costs for industrial-related climate projects per tonne of CO₂-eq. start at levels comparable to afforestation projects (see Table 1) but can reach beyond five times their cost. The same situation is observed to hold for renewable energy generation technologies (see

Table 2. Costs of preventing 1 t of CO₂-eq. emissions in renewable energy technologies compared to the coal-based generation baseline.

Technology (Estimated Based on Technologies to Be Launched in 2022)	Cost Estimates (in USD 2017/tonne CO2)
Onshore wind	24
Natural gas combined cycle	24
Utility scale photovoltaic cells	28
Natural gas with carbon capture and storage	42
Modern nuclear	58
Coal retrofit with carbon capture and storage	84
New coal burners with carbon capture and storage	95
Offshore wind	105
Solar thermal	132

Source: Gillingham and Stock (2018) [45].

based on the secondary data), proving the point that unit costs of carbon in afforestation projects should be regarded as a baseline for pricing carbon credits.

Minding the fact that any allowance for normalized profit margins in all such projects (that the usage of the cost approach to valuation requires [9]) can be offset by considerations of purchasing power parity adjustments when translating price levels to the local currency of Russia (the rouble), these figures can be generally analyzed at the market-based exchange rate context when considered in terms of the domestic price level for Russia. (It is hard to estimate the exact purchasing power adjustment for the exchange rate of the Russian rouble in the industries associated with the issuance of carbon credits, including for reasons of wide disparities in production conditions and the international exposures of those industries, but it can be safely claimed that such a PPP adjustment should be much less than that based on consumer prices that registers a 60–90% undervaluation in the market exchange rate of the rouble (see [49]).

4. Discussion

We have presented evidence in favor of pricing carbon at a level corresponding to the cost anchor for afforestation projects. Afforestation projects globally make up a principal share in the structure of climate projects being undertaken every year, accounting for more than 25% of initiations in such projects and the rethinking of the green agenda following the political and economic developments in Russia over the last 3 years also weighs heavily in favor of the increased share of such projects since they depend less on the sanctioned technology imports. Additionally, national forests already account for sinking about 30% of nationally generated gross GHG emissions from the atmosphere [50], so their importance as a climate project technology cannot be exaggerated.

In the process, we prioritized the cost approach to adduce evidence in favor of the argument to anchor the price discovery for national compliance and voluntary carbon schemes in the economics of afforestation projects. The cost approach to valuation represents a long-term analysis that grounds the pricing of assets in tangible reproduction processes and projects. In that sense, its application is superior to the alternative comparative approach, which analyses pricing in more positivistic terms—in terms of the balance of supply and demand—but requires a strong assumption of market efficiency. The application of the cost approach is specifically relevant in the context of Russia, where the compliance market for carbon pricing instruments is under-developed since the national-level upscaling of the Sakhalin carbon pricing experiment will most likely imply the usage of the fixed-rate carbon levies (the carbon tax model). These levies should have some economic justification as they will de facto serve as the upper cap on the price of offsetting carbon units (i.e., when breaching CO₂ quotas, the emitters will find it more economical for themselves to regularly pay the carbon levies to the government than to shell out on the purchase of offsetting carbon units if the latter are costing more to them). In other words, the statutory price of carbon, once set at the national level or in a regional differentiation, will determine which climate projects can be viably undertaken on economic grounds and which ones cannot. This matter will be specifically sensitive for public projects with no other sources of immediate income except for the sale of carbon units, such as afforestation projects.

Thus, with reference to the cost approach anchored in agenda-setting afforestation projects, we are able to determine the viable price of carbon for Russia at the level of at least USD 20–25 (RUB 2000–2500 at the year 2023 prices) per tonne of CO₂-eq. This price is advised for statutory compliance instruments such as carbon levies. Simultaneously, the equilibrium price of offsetting carbon units should be expected to be somewhat less to make their acquisition for levy offsets economically viable (right now, we can speak of the equilibrium “price” for carbon units, not “prices”, as carbon units in Russia are not differentiated by type and are uniformly issued under the GOST ISO standards mentioned in the introduction to this paper. Should such differentiation of carbon units by type become a fact in the country—apart from the already instituted distinction between carbon units and the “units of quota fulfillment”—many of the premises and conclusions of this paper will need to be modified.

The above estimate of carbon price exceeds by about two times the amount of carbon levy envisaged in the ongoing Sakhalin experiment and is closer to the global median of carbon prices observed in [22]—see Figure 1. A more lenient carbon-pricing regime will only be a part-ways solution to the problem of funding the afforestation and technology transition drives in a non-inflationary way. In that sense, the low price of carbon still observed in China, to which the Russian industrialists often refer as a model, is a poor benchmark since banks in China and even state budgets are strongly involved in the business of funding innovative industrial development at low interest rates. In Russia, this funding solution for the technological transition will not be viable due to the prevailing high interest rates that banks charge on investment loans and other commitments on the budget. However, the above-mentioned scale of carbon pricing does not imply the creation of inflationary shocks by overnight transition to the use of escalated carbon levies. Since their implementation at the nationwide scale is not expected to happen sooner than 2029, the economy will have plenty of time to adjust to the expectation of fair carbon pricing.

Given these projections for the carbon price (RUB 2500 per ton of CO₂-eq.), and taking into account that the Russian greenhouse gas Registry annually inventories about 1.2 billion tons of CO₂-eq. emissions (or 59% of the total emissions estimates according to the older GHG Cadastre) [51], as well as assuming that the carbon pricing system will eventually cover 40% of the national GHG emissions (which is the average scope of GHG emissions coverage by global carbon pricing systems, see Figure 1. The produced estimates of carbon-related funds accruing to the state in the form of carbon levies should also be reduced by the amount of carbon unit offsets used, the extent of which is not yet fully known at present),we can estimate that the consolidated state budget will be able to receive about RUB 1 trillion in carbon funds per year (USD 10 bln., or about 0.7% of the current GDP of the country, with this figure obtainable as: 1.2 bln. tonnes in recorded annual CO₂ emissions*40% (coverage)*USD 25 per tonne CO₂ ≈ USD 10 bln. in annual carbon proceeds). This will serve as a significant source of funds for financing modern energy and sustainability technologies commonly associated in Russia with the sixth techno-economic paradigm [52], including climate technologies (for the financing of which it is desirable to direct more than 1% of GDP in order to match the pace of transition to the sixth techno-economic paradigm in the OECD group of economically developed countries).

5. Conclusions

We have analyzed the problems of carbon pricing in the Russian jurisdiction, which is responsible for emitting about 2 gigatonnes of GHGs a year. Public estimates indicate that Russia aims to spend some RUB 19 trln. (about USD 19 bln.) on the climate agenda by 2030 [53]. This money can only be well-spent and properly funded if the national fair price for carbon is established. Since our findings highlight the key importance of afforestation projects for the current green agenda in Russia, and these projects lack other sources of income to make them viable, using the cost approach as a baseline pricing instrument in the context has enabled us to shed some light on the level of a fair price for carbon in Russian jurisdiction. Further research would be required in case carbon units, issuable by climate projects, evolve to become differentiated by type and vintage in national trading practices. Additionally, we advocate creating a central-level management databank for afforestation projects that will, inter alia, present project benefits and aggregate the unit costs of afforestation per tonne of carbon in a rigorous, analytical manner, allowing for crowdfunded and public subscription to those projects on top of their funding via carbon credit mechanisms.