Carbon Units: International and National Trade Systems under the Law of Kazakhstan

Kazakhstan and foreign investors are becoming ever more focused on the legislative regulation of trade in carbon units. This analysis of the legislation of the Republic of Kazakhstan deals with the main aspects of regulated and voluntary carbon trading markets in the current realities of Kazakhstan.

The development of the carbon units market originates from the adoption of international climate change agreements: the Kyoto Protocol that extended the UN Framework Convention on Climate Change dated 11 June 1992 was ratified by Decree of the President of the Republic of Kazakhstan No. 2260 dated 4 May 1995.

The growing potential of the carbon market drives the interest in investing in wind and solar energy projects, as well as afforestation and other projects aimed at increasing absorption and/or reducing greenhouse gas emissions.

Moving towards prevention of the negative climate change and environmental harm, we are witnessing the consolidation of efforts by businesses and states in developing the potential of carbon trading, reducing harmful emissions into the environment, and Kazakhstan does not remain aloof from the activities of the progressive world community. Kazakhstan is the only EAEU country where an emissions trading system has been operating since 2013.

There are currently two types of carbon unit markets in the world: voluntary and regulated markets. Within this analysis, we will consider in more detail the issues of their regulation from the perspective of the legislation of the Republic of Kazakhstan (“RK”).

Regulated market of carbon units in Kazakhstan

Carbon markets are an economic mechanism for reducing greenhouse gas emissions. They are designed for a systematic business transition to environmentally friendly technologies. In the RK such a mechanism operates through an carbon unit trading system.

According to the RK’s legislation, a carbon unit is an accounting unit of a carbon quota or carbon offset equal to one ton of carbon dioxide equivalent. A carbon unit is a commodity permitted for turnover between the participants of the RK’s carbon market, which include:

1. quota subjects
2. individuals and legal entities involved in carbon offsets trading; and
3. the operator of the carbon unit trading system

To date, the regulated carbon market framework is set out in Chapter 20 State Regulation of Greenhouse Gas Emissions and Removals of the Code of the RK No. 400-VI Environmental Code of the Republic of Kazakhstan dated 02.01.2021. Greenhouse gas emissions and removals are regulated by the state using the following tools:

1) setting a carbon budget

2) allocating carbon quotas

3) administering plant operators, i.e., determining actual greenhouse gas emissions and removals during the reporting period

1. Carbon Budget

The carbon budget is the maximum allowable amount for the carbon balance of the RK for the carbon budgeting period. The RK’s carbon balance for the carbon budgeting period should not exceed the carbon budget established for such a period.

2. Carbon Quotas

The approved carbon budget is the basis for carbon quotas allocation – the establishment by the state for the carbon budgeting period of a cap for the total volume of quota-based greenhouse gas emitted by quota-based facilities (a facility with a quota of greenhouse gas emissions exceeding 20,000 tons of carbon dioxide per year) in the following sectors of the economy:

• Electric power
• Oil and gas
• Mining
• Metals
• Chemicals
• Manufacturing (production of cement, lime, gypsum and bricks)

The operator of the quota-based facility is recognized as the quota subject. Its account in the state register of carbon units is credited with the quantitative amount of quota-based greenhouse gas emissions established for the quota facility for the period of validity of the National Carbon Quota Plan. This amount represents the carbon quota. A quota-based facility may not be operated without carbon quotas obtained.

In the RK, the number of quota subjects is quite limited, which minimizes the ability of other companies to reduce their carbon footprint as well.

The quota subject has the following rights:

1. carry forward the outstanding carbon quota units to other reporting periods within the period of validity of the National Carbon Quota Plan. Unused (outstanding) carbon quota units are not carried forward to the next National Carbon Quota Plan;
2. sell or buy carbon quota units, with the exception of units generated by reducing the capacity of the quota-based facility;
3. compensate for the deficit of a carbon quota with purchased carbon units, an additional carbon quota and/or offset units;
4. apply to the competent authority to obtain an additional carbon quota if there is no or insufficient volume of the main carbon quota when the capacity of the quota-based facility is expanded.

The validity period of the carbon quota units is limited and determined by the legislative requirements.

3. The National Carbon Quota Plan

A document establishing the total number of carbon quota units to be distributed among the quota subjects  for the regulated sectors of the economy, as well as the volume of the reserve of carbon quota units. The National Plan is valid during the carbon budgeting period.

The carbon quota units are allocated among the quota subjects on the terms of their free distribution and sale by auction within the limits of the volumes determined by the National Carbon Quota Plan.

4. Carbon Offset

Carbon offset means a reduction of greenhouse gas emissions and/or an increase in greenhouse gas uptake achieved through the activities in any sectors of the RK’s economy aimed at reducing greenhouse gas emissions and/or increasing greenhouse gas uptake.

A reduction in the quota emissions of greenhouse gases from a quota-based facility cannot be recognized as a carbon offset.

The implementation of a carbon offset is the basis for obtaining offset units, i.e., carbon units used for the purpose of carbon offset calculation. The carbon offset is implemented and approved by the government agencies in accordance with the procedure provided for by law.

To date, examples of approved carbon offsets are:

• Astana Expo-2017 Wind Power Plant
• A 50 MW solar power plant at the Burnoye site in the Zhambyl region
• Fort Shevchenko wind farm with a capacity of 43.6 MW in the Mangystau region
• Improved boiler equipment and low-power electrical equipment in secondary schools of the Zhelezinsky district, the Pavlodar region
• Small hydroelectric power station on the Karakystak river in the Zhambyl region

The offset units are introduced into circulation by the operator of the carbon unit trading system by their transfer to the account of the project (carbon offset) applicant in the state register of carbon units.

Offset units are permanent, except in cases when their validity term is limited at the time of adoption. 

The project applicant has the right to sell offset units in accordance with the procedure provided for by law. The quota subject has the right to reduce the repayment of carbon quota units by the amount of offset units received (acquired). 

5. Carbon trading system (CTS)

The CTS consists of primary and secondary markets, which are regulated by the Carbon Units Trading Rules, approved by Order No. 221 of the Acting Minister of Ecology, Geology and Natural Resources of the RK dated 29 June 2021 (“Carbon Units Trading Rules”).

1) In the primary carbon market, the CTS operator sells carbon quota units from the corresponding reserve category of the National Carbon Quota Plan to carbon market entities on auction terms.

The trading regime is determined by the commodity exchange in accordance with the Rules of Exchange Trading approved by Order No. 280 of the Acting Minister of National Economy of the RK dated 30 March 2015 (“Rules of Exchange Trading”). In addition, the issues of auctions are also regulated by the Carbon Units Trading Rules. The annual auction calendar is approved by the operator of the carbon units trading system and published on its Internet resource no later than 1 December of the previous year.

2) In the secondary carbon market, the subjects of the carbon market trade in carbon units among themselves through direct transactions or through a commodity exchange.

The commodity exchange where carbon units are traded is determined by the competent authority on a competitive basis. The order of exchange trading in carbon units is regulated by the Rules of Exchange Trading.

The quota subject, the project applicant has the right to sell carbon quota units and offset units through direct sale under a purchase agreement at a price not lower than the level of the exchange quotation of the carbon quota unit and the offset unit on the transaction date. If there is no exchange quotation for a carbon quota unit or an offset unit on the commodity exchange on the transaction date, the price is determined based on the most recent available quotation for a carbon quota unit or an offset unit.

As for the international trade, the trade in carbon units issued in the RK on the carbon market of a foreign state, as well as trade in carbon units issued in a foreign state on the carbon market of the RK is regulated by the international treaties of the RK. To date, there are no relevant agreements.

Voluntary market of carbon units and its legal regulation in the RK

The functioning of the voluntary market of carbon units is not regulated by the RK’s legislation. In general, this is similar to the operational practices of the voluntary markets of carbon units in other countries rather than specific only to the RK – the corresponding carbon units often cannot be used within the framework of carbon quotas.

The voluntary carbon market is usually regulated by independent private programs (standards) that ensure equal access to the market, guarantee the quality of carbon offsets provided and are aimed at driving the participation in the trades. Some of the most famous programs are Verra and Golden Standard.

In May 2023, the first Kazakhstani Voluntary Carbon Certificate (standard) was announced, it was developed by the Qazaq Green Renewable Energy Association together with the Caspian Commodity Exchange JSC.

At the same time, each of the programs can independently determine what is meant by carbon units, and on what terms and conditions they are acquired and adopted.

Conclusion

Now, the RK has the legislative framework for regulating carbon units trading. In the context of increasing and strengthening attention to environmental problems, and the emergence of new carbon footprint control mechanisms, including the European Carbon Border Adjustment Mechanism (CBAM), businesses are encouraged to follow more closely the news and changes in the environmental legislation of the RK for a harmonious and constructive restructuring in favor of greater benefits for their activities. In view of this, the carbon trading system is aimed at maintaining a balance between the interests of business and the interests of the public in the framework of cooperation to reduce the carbon footprint. 

Authors:

• Dinara Tanasheva, Partner, Head of Tax & Law Practice in Kazakhstan and Central Asia
• Gaukhar Kudaibergenova, Director, Tax & Law Services Department