The Importance of the US-Russia 123 Agreement

The Agreement between the Government of the United States of America and the Government of the Russian Federation for Cooperation in the Field of Peaceful Uses of Nuclear Energy (also known as the 123 Agreement) serves not only non-proliferation, but also the commercial interests of both countries.  Signed in Moscow in May 2008 and submitted to the U.S. Congress the same month, the Agreement was withdrawn after the Russia-Georgia military conflict in August 2008.  At the July 2009 Moscow Summit, Presidents Obama and Medvedev issued a joint statement  repeating earlier U.S. and Russian support for the 123 Agreement.  Opposition in Congress to the Agreement has been primarily linked to Russia’s stance on Iran’s nuclear program, particularly its past reluctance to support crippling sanctions against Iran. 

However, in the transmittal message to the U.S. Congress, President Obama noted that the United States and Russia “have significantly increased cooperation on nuclear nonproliferation and civil nuclear energy” in the last year.  The President urged the Congress to give the proposed Agreement favorable consideration because of Russia’s expressed support for a new United Nations Security Council Resolution on Iran, the April 2010 signing of the START Treaty and the Protocol to amend the 2000 U.S.-Russian Plutonium Management and Disposition Agreement, as well as Russia’s support for other non-proliferation initiatives, such as the establishment of an international nuclear fuel reserve in Angarsk, Russia.

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The United States and Russia are leading players in the nuclear energy global market.  Nuclear power accounts for approximately 20 percent of electricity generation in the U.S. and 17 percent in Russia. (Nuclear power is used by 31 countries and accounts for about 16 percent of the world’s electricity generation.)  In absolute terms, however, the U.S. produces five times more electricity from nuclear power than Russia does.  Looking ahead, both countries face a growing demand for electricity and pressure for energy efficiency.  Moreover, their commitment to halting nuclear weapons proliferation in the world gives them an additional incentive to limit the use of materials that could be used for weapons fabrication. 

At present, civilian nuclear cooperation between the United States and Russia is very limited, tied primarily to proliferation concerns and conversion of nuclear stockpiles.  Broadening civil nuclear cooperation will depend in large part on the 123 Agreement for peaceful nuclear cooperation entering into force.  (This Agreement, signed by the Bush Administration in May 2008, was resubmitted to the Congress by the Obama Administration on May 10, 2010.) 

The three-part series on this topic explores the present state of U.S.-Russian nuclear cooperation, the important role the 123 Agreement can play in fostering cooperation, and efforts in both countries to promote research and development of fast neutron reactors.

Part I:  U.S.-Russian Cooperation in Nuclear Energy: More to Be Done

Ongoing US-Russian nuclear cooperation has two dimensions: a broad focus on enhancing nuclear security and a more limited development of commercial activities.  Various activities have been undertaken under Congressionally-funded threat reduction programs to reduce the likelihood of nuclear materials falling into the wrong hands, including U.S. funding for security upgrades at Russian nuclear warhead storage sites to improve “protection, control, and accounting of” Russian nuclear weapons and materials.

The development of cooperation dates back to the signing of a February 1993 agreement under which Russia agreed to blend down highly enriched uranium (HEU) from Soviet nuclear warheads and to sell the resulting low enriched uranium (LEU) for use in the U.S. civilian nuclear industry.  The HEU Purchase Agreement, which established the 20-year, $8 billion Megatons to Megawatts program, provided for such one-way trade until 2013.  As of the end of 2009, Tenex, a Russian government-owned entity, had sold approximately 72 percent of the total amount of LEU that both sided agreed to be sold over the lifetime of the agreement to USEC, the program’s executive agent for the United States. (USEC is now a privately-owned corporation.)  This program has met a significant share of U.S. nuclear fuel needs, contributing to the generation of about 10 percent of electricity output in the United States.

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According to a recent European Commission press release, greenhouse gas emissions reported by European industrial facilities subject to the EU Emissions Trading System (EU ETS) declined by 11.6% on a CO₂-equivalent basis from 2008 to 2009.  Verified emissions from the 12,622 facilities now covered by the EU ETS totaled 1.87 billion tons in 2009, down from 2.12 billion tons in 2009.

The EU ETS is currently in its second trading period, or “Phase II,” which runs from January 1, 2008 to December 31, 2012.  Phase II coincides with the period during which the EU is obligated, under the Kyoto Protocol to the U.N. Framework Convention for Climate Change, to reduce its greenhouse gas emissions to 2.08 billion tons annually.  With the EU-wide decline in emissions from 2008 to 2009, the EU easily met its Kyoto Protocol obligation for 2009.

Under the EU ETS, covered facilities must surrender one EU emissions allowance, or EUA, for each ton of CO₂ or equivalent emissions.  During Phase II of the EU ETS, covered facilities are allocated EUAs for a portion of their historical emissions levels at no cost; if their emissions exceed that level, they must purchase EUAs on the market.  Covered facilities may also surrender, in lieu of EUAs, international emission reduction credits provided through the Kyoto Protocol’s “flexible mechanisms.”  However, such credits accounted for only 4.3% of all surrendered allowances for 2009 emissions.

The sharp decline in EU-wide greenhouse gas emissions in 2009 appears to be attributable to a number of factors.  The main factor seems to be a substantial reduction in industrial activity triggered by the global financial crisis.  Another factor appears to be the relative pricing of natural gas and coal in 2009.  Natural gas prices were exceptionally low during much of 2009, prompting many facilities covered by the EU ETS to shift from coal to natural gas, which emits lower levels of greenhouse gases when burned.  A third factor may be the price of EUAs, which could have triggered efficiency improvements and other changes in the behavior of greenhouse gas-emitting facilities required to purchase them to cover total emissions.  EUAs currently trade near €15 per ton, but during much of 2009 were priced at roughly half that level.

The rate and direction of change from 2008 to 2009 of verified emissions levels among EU member states varied tremendously.  One state, Luxemburg, experienced a slight increase in emissions for its 15 covered facilities, from 2.10 million tons in 2008 to 2.18 million tons in 2009.  Norway, with 115 covered facilities, experienced only a slight decline in emissions, from 19.34 million tons in 2008 to 19.22 million tons in 2009.  In contrast, Germany, which accounts for 1,971 covered facilities - by far the largest number in the EU - experienced a nearly 10% decline in emissions, from 472.67 million tons in 2008 to 428.18 million tons in 2009.  Spain, with 1,108 covered facilities, had an even greater decline of about 16%, from 163.46 million tons in 2008 to 136.93 million tons in 2009.

With Europe’s continuing but erratic recovery from the global financial crisis, it remains to be seen if the EU will be able to stay within its Kyoto Protocol emissions target for 2010.  However, it is clear, with EUAs trading at roughly twice their 2009 price, that the cost of compliance for those covered facilities that must purchase them is increasing.

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On April 1, 2010, the new mandatory CRC (formerly known as the Carbon Reduction Commitment) energy efficiency emissions trading scheme came into force in the UK.

The aim of the CRC Energy Efficiency Scheme (CRC) is to reduce CO₂ emissions and increase the energy efficiency of those large businesses and public sector organizations that the UK government believes are responsible for an estimated 10 percent of the UK’s overall greenhouse gas emissions.  It is expected that the implementation of the CRC, through the CRC Energy Efficiency Scheme Order 2010, will contribute significantly towards achieving the UK’s target, under the Climate Change Act 2008, of reducing its greenhouse gas emissions by 80 percent before 2050 (compared to 1990 levels).  This, in turn, will assist the UK in achieving its international targets under the Kyoto Protocol and other EU CO₂ reduction targets and is aimed at putting the UK at the forefront of the green technology revolution on the international stage.  The CRC runs alongside, and is intended to conform with, the EU Emissions Trading Scheme-the former dealing with large non-energy intensive businesses and public sector organizations on a UK national level, while the latter deals with energyintensive industries (such as manufacturing and refining) on an EU-wide basis.

The CRC is divided into seven Phases beginning on April 1, 2010, each of which lasts for approximately seven years, (except for the first Phase, which will last three years and be known as the Introductory Phase).  There is also a deliberate two-year overlap between each Phase at the beginning and the end of each Phase.  Each of the seven Phases is further divided into “Compliance Years,” which run from April 1 to March 31.  During the Introductory Phase, the UK government will sell an unlimited number of Allowances at a fixed price of £12 per ton of CO₂, while, in subsequent Phases, the UK government will auction a limited number of Allowances annually to encourage participants to reduce their CO₂ emissions.  The Allowances may also be bought and sold by participants in the secondary market.  Participants will be required to buy in advance the amount of Allowances that they expect to require to cover their emissions in any relevant Compliance Year and ultimately to surrender those Allowances to the Environment Agency, the administrator of the CRC.

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Last year, Swedish Company Vattenfall announced its plans to go on-line with a major pilot program to test carbon capture and sequestration at a coal-fired power plant.  The company recently acknowledged that permitting snags fueled by local opposition render it unable to commence geologic sequestration of captured CO2.  Vattenfall intended to begin capturing CO2 at its 30-megawatt Schwarze Pumpe facility, located in Spremberg, Germany, and sequestering it in the nearby Altmark depleted gas field by March or April 2009. Residents of the host-city, however, have expressed concerns about the safety of geological sequestration, preventing the final permitting approval for the site and creating questions about when - or if - the site could be available for any CCS operations. 

Vattenfall’s experience at this project is not an isolated incident.  Vattenfall reported delays in obtaining approvals for one of its Danish storage projects pointing, in part, to public opposition by local stakeholders.  In June, German news sources reported that activists were protesting plans by electric utility RWE to transport captured CO2 by pipeline from a powerplant near Cologne to a sequestration site on Germany’s North Sea Coast.  The Wall Street Journal also reported in April that Royal Dutch Shell had run into challenges siting a sequestration facility in Barendrecht, Netherlands, due to grass roots opposition from local residents. 

Public opposition is likely to be a critical strategic and legal consideration for US projects.  On Friday, August 21, Battelle, the lead partner in a Midwest Regional Carbon Sequestration Partnership project announced that it was abandoning plans to participate in a $92 million public-private demonstration project to site a geological sequestration project in Western Ohio.  While the partner cited only “business reasons” for its decision, the reported public opposition to the project could not have helped. 

These setbacks illustrate the significant challenges that the siting and permit-approval process can pose, particularly in the face of public opposition, to an otherwise promising project.  This will be particularly true during the early stages of a CCS deployment.  US policymakers and investors would do well to watch and learn from these early case studies, and to ensure that they devote the legal, political and community relations resources needed to ensure that proposed projects move forward in a realistic and timely fashion.

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This post initiates a series that will examine emerging problems in the European Union’s carbon market—by far the world’s largest—and the broader policy implications of those problems.  We turn first to the recent collapse in the value of European Union Allowances (EUAs), each of which represents the right to emit one ton of greenhouse gases within the EU’s annual emissions caps.  Since the second half of 2008, the price of EUAs has dropped precipitously—from over €30 ($38) per ton to below €8 ($10) per ton. While in recent weeks the price has increased again slightly, and currently stands near €12 ($15) per ton, the overall pattern is of a decline in price.  What is behind the drop, and what does it mean for the health and sustainability of the EU’s Emissions Trading Scheme (ETS)?

For some market observers, the decline evinces a market working properly, with supply and demand finding a new balance.  Some point to sharply declining industrial output in the EU, which has left many emitting facilities long on EUAs, driving prices down.  As noted by Hernkir Hasselknippe of Point Carbon, an energy consultancy, the rational response for companies in this position is to sell credits.  “If they are emitting less then they do not need the credits so much and the price of carbon will fall.”  Other observers see the declining value of EUAs as a manifestation of the credit crisis, with holders of EUAs eager to sell them to raise cash.  Notwithstanding decreased demand for EUAs, current trends suggest that the total volume of EUAs traded within the EU ETS will continue to grow significantly this year.  According to Point Carbon’s projections, the volume traded in the ETS in 2009 could reach 3.8 gigatons of CO₂ equivalent this year, up from 3.1 gigatons in 2008.

Other market observers, however, attribute the decline in the value of EUAs at least in part to ETS design flaws.  A recent Deutsche Bank analysis identifies two problematic features of the ETS:  first, that the EU has fixed the supply of EUAs through 2020 (the end of the third commitment period in the EU ETS, for which legislation was just enacted); and second, that many EUAs to date have been provided to emitting facilities free of charge, leading to a glut.  Due to these factors, the Deutsche Bank analysts contend that the real prospect of future EUA shortages, as the EU emissions caps decline, are inadequately reflected in today’s EUA prices.  These analysts are also concerned that sustained price weakness for EUAs in the months leading up to the U.N. Copenhagen Conference in December 2009 could call into question the viability of the EU ETS as the foundation for a post-Kyoto Protocol global emissions trading system.

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On December 17, 2008, the European Parliament approved a comprehensive climate and energy package for the EU, hailed by the European Commission’s President, José Manual Barroso, as a green “new deal” for Europe.  A core component of the package is a Directive on the Promotion of the Use of Energy from Renewable Sources, which mandates the increased use of biofuels in the EU in order to achieve, by 2020, at least a 20% share for renewable energy and at least a 10% share for biofuels in road transport.  While some EU Member States already produce significant quantities of biofuels, the Directive is expected to increase imports of biofuels and biofuel feed stocks into the EU, as well as spur substantial new investment in biofuel production capacity.  For now, however, the Directive and a series of EU and Member State measures are generating uncertainty in European biofuel markets—particularly in the case of biodiesel.

One source of market uncertainty is the Directive’s provisions specifying “sustainability criteria” that biofuels must meet in order to count towards the renewable fuel targets specified in the Directive.  Chief among these is the requirement that any biofuel production pathway represent at least a 35% greenhouse gas (GHG) savings over the relevant fossil fuel comparator.  For many existing biofuel production pathways, an annex to the Directive specifies a deemed level of GHG savings.  For example, rape seed biodiesel (one of the principal production pathways in Europe) is deemed to represent a 38% level of GHG savings, while soybean diesel (one of the principal production pathways in the U.S.) is deemed to represent a 31% GHG savings level.  The Directive’s 35% GHG savings threshold is likely to impact the relative market values of biofuels falling on either side of this threshold, and therefore affect trade and investment flows.

Other sustainability criteria in the Directive will also likely affect trends in biofuel markets.  For example, to count towards the Directive’s renewable fuel targets, a biofuel must not have been produced from feedstock obtained from land with a high biodiversity value or land with high carbon stocks.  Similarly, it must not have been produced from feedstock obtained from peatland.  The Directive sets forth detailed guidelines for the application of these sustainability criteria.  It also provides mechanisms for review of the effectiveness of these criteria, as well as enforcement provisions to ensure compliance by individual economic operators.  Further, reflecting the 2008 global spike in food inflation and the controversy surrounding the impact of biofuel production on food prices, the Directive calls for occasional review of the Directive’s “social sustainability,” particularly as to its impact on developing countries, and possible future revision of the Directive if warranted.

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 During a meeting of the European Union Council last month, Environmental Ministers from European Union (EU) companies met to establish the EU’s position on a post-Kyoto international climate change policy and reviewed the status of the EU’s own package of climate change legislative proposals.  While the climate policy issues were largely prospective in nature, the meeting indicated that European Ministers do not appear to be letting the current financial turbulence undermine their support for a robust post-2012 climate agreement.

Preparing for Post-Kyoto Treaty Negotiations

The next round of negotiations under the United Nations Convention on Climate Change (UNCCC) is scheduled for December 20, 2008 in Poznan, Poland.  During the EU Council meeting discussions related to that meeting, the parties reiterated the importance of achieving worldwide consensus by the end of 2009, to ensure a replacement regime for the Kyoto Protocol by the end of 2012.  Among the EU Council’s key conclusions and statements on upcoming negotiations, the Council:

• Reaffirmed its commitment to the Bali Roadmap, with a goal of completing the successor agreement to the Kyoto Protocol at the scheduled talks in December 2009 in Copenhagen, Denmark.
• Stated that any post-2012 agreement would need to limit global average temperature increase to not more than 2°C above preindustrial levels” - a limit that would require 50 percent reductions in global emissions from 1990 levels by 2050, with emission levels peaking and starting to decline by 2020.
• Called on developed countries to propose economy-wide, medium-term emission reduction targets at a “comparable level of effort” to the commitments made by the EU.
• Noted that “the least developed countries should not be subject to obligatory emission constraints” but encouraged them to link sectors, where appropriate, to the international carbon markets.
• Stressed the importance of reducing emissions from deforestation and forest degradation.
• Discussed the importance of energy efficiency and the transfer of clean technology.
• Recognized the threat to competitiveness posed by carbon leakage, and the need to achieve a level playing field between industrialized and developing countries.

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Last week, the European Commission voted to include aviation emissions in the European Union Emissions Trading System (EU-ETS), beginning in 2012.  The decision means that air carriers - of passenger and freight - landing in or taking off from the European Union must obtain and surrender emission allowances. 

Notably, aviation emissions will operate under a cap that is separate from other industries captured by the EU-ETS.  The initial cap will be set at 97% of the average emissions of 2004 through 2006.  Beginning in 2013, when the EU-ETS enters its third phase, the cap will drop another 2%.  Initially, 85% of the allowances will be distributed to carriers for free, and only 15% will be auctioned.  The European Union has the option of changing the allocation percentages once the airlines begin trading emission allowances. 

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In the run-up to the fourth session of the Ad Hoc Working Group on Long-Term Cooperative Action (AWG-LCA), China, India and Brazil have sharply reiterated their views that the burden of reducing greenhouse gas (GHG) emissions lies, in the first instance, with developed countries.  The AWG-LCA, convened as part of the U.N. Framework Convention on Climate Change (UNFCCC) Bali Action Plan of December 2007, is charged with facilitating agreement on principles for long-term action to reduce GHG emissions, extending beyond the current Kyoto Protocol obligations, which are set to expire in 2012.  This agreement on principles is, under the Bali Action Plan, expected to be reached in time for the December 2009 UNFCCC Copenhagen summit.  In preparation for the fourth session of the AWG-LCA, scheduled to occur in Poznan, Poland during the first two weeks of December 2008, governmental parties to the UNFCCC are currently staking out their negotiating positions in formal submissions to the AWG-LCA.

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