Chapter 5. Towards better environmental regulations in Kazakhstan

Kazakhstan’s impressive economic expansion since the late 1990s relied on high rates of energy use and generated significant pollution. These rates are not sustainable, putting at risk the country’s development ambitions, while new international agreements add urgency to the need to reduce greenhouse gas emissions. This chapter shows how the current structure of Kazakhstan’s system of environmental regulation, permitting and assessment impedes energy efficiency and pollution control. The emphasis on reforming the application of environmental permit fees and penalties as a means of raising revenue rather than on creating incentives to reduce efficiently environmental impact, adds to the cost of investing and doing businesses in Kazakhstan with limited environmental benefit. Better regulation also means designing policies and laws so that they achieve their objectives at minimum cost. These recommended reforms mostly involve bringing the policy into line with the benchmark OECD approach. Kazakhstan’s emissions trading scheme presents a model of how the country can adopt effective mechanisms of environmental regulation to place the economy on a more sustainable development path, but it will be essential that this and other mechanisms are well implemented.

  

Kazakhstan’s strategic framework for the environment and a green economy

Kazakhstan has been one of the most successful transition economies. Notwithstanding the recent global financial crisis, the country’s gross domestic product (GDP) has doubled over the past decade. Export earnings have increased correspondingly over the same period. Yet much of this growth has depended on the extractive and heavy industries and on an intensive use of electricity produced from coal (Figure 5.1). Consequently, Kazakhstan is today one of the most energy-intensive countries in the world and the energy intensity has not improved during the last decade (Figure 5.2). The environmental damage inherited from the Soviet era has been exacerbated by the effects of energy production, accelerated extraction of oil, gas and other mineral resources, as well as pollution from heavy industry, from agriculture and from growing road traffic in urban areas.1

Figure 5.1. Electricity mix in Kazakhstan
Share of total electricity generation
picture

Source: IEA (2016).

 http://dx.doi.org/10.1787/888933445644

Figure 5.2. Energy intensity
TPES/GDP, tonne of oil equivalent per thousand 2005 USD PPP
picture

Source: IEA (2016).

 http://dx.doi.org/10.1787/888933445659

These imbalances pose serious risks to the country’s future development path. The strong focus on primary commodities as principal export goods exposes Kazakhstan’s export earnings to the high price volatility present in commodity markets. As these revenues mark a significant proportion of receipts of the state budget, that volatility introduces a high degree of uncertainty in medium and long-term budget planning. The recent external shocks of falling world oil and gas prices and shrinking export volumes have had an adverse impact on the economy of Kazakhstan. They add to significant internal vulnerabilities, including postponed investments, including those in large extractive projects. As a result average GDP growth in Kazakhstan has declined since 2014. The reliance on extractive industries also reduces the scope for innovative growth, as they offer limited scope for knowledge spill-overs to other sectors. Technology, human capital and knowledge from these industries tend to be highly sector-specific and may not be easily transferred to other productive uses. Adverse impacts of pollution from coal-based energy production and heavy industry have a cumulative long-term impact on the productivity of natural resources and result in significant negative impacts on the health of the population and excessive pressures on scarce water resources. For example, using monitoring station data from major cities in Almaty, Karaganda, Pavlodar and Ust-Kamenogorsk oblasts – on ambient air concentrations of total suspended solids – it was estimated that particulate matter pollution causes approximately 2 800 premature deaths and costs the economy over USD 1.3 billion annually (0.9% of GDP) in terms of increased health care costs (World Bank, 2013).

Given these challenges, Kazakhstan has undertaken steps to move towards a more sustainable model of development. These steps were outlined in two key strategic documents: the 2012 “Kazakhstan 2050 Strategy” and the 2013 “Green Economy Concept” (GEC). The 2050 strategy calls for widespread economic, social and political reforms to position Kazakhstan among the top 30 global economies by 2050. Among the important indicators of success were the acceleration of economic growth (GDP and per capita income); diversification of the economic structure, production and exports; increase in life expectancy; bolstering education parameters; as well as the adoption of an environmentally friendly and sustainable model of economic growth. The GEC outlined the path to ensure long-term growth based on climate-friendly technologies, energy efficiency measures, and the restoration and sustainable management of natural resources. The GEC also envisaged modernising deteriorating infrastructure, and set ambitious targets for the power sector, energy efficiency, water and agriculture. It stated that “. . .by successfully achieving these targets, the country will recover its water and land resources by 2030, and its resource productivity will largely be on par with the average indicators of the OECD members and other developed countries” (Box 5.1).

Box 5.1. Green Economy Concept

The Green Economy Concept (GEC) was adopted in May 2013 in response to the United Nations Conference on Sustainable Development (Rio+20) the year before. The GEC is an aspirational, high-level document, prepared in co-operation with a number of stakeholders. It recognises the economic inefficiencies and environmental danger that exist in Kazakhstan, and describes the harmful impact that pollution has upon human health and the environment. The GEC implicitly identifies the nexus between modernised environmental stewardship and economic growth; green growth is synonymous with a more robust economy. The changes envisioned in the GEC involve realignment of economic priorities and mechanisms that not only protect the environment but constitute more viable and effective means for economic development. The GEC has set the goal that its transition into the green economy will increase GDP by 3%, and create more than 500 000 new jobs by 2050.

The GEC focuses on social and regional development and the need for investment. It emphasises in particular: sustainable water use; achieving sustainable and high-performing agriculture; energy saving and energy efficiency improvement; power sector development; better waste management; reducing air pollution; and the preservation and efficient management of ecosystems.

The GEC envisions job creation in five industrial clusters: “green construction”, “agriculture”, “new technologies in the energy sector”, “waste management” and “closed-loop material handling”, as well as “public water supply and water management”.

The GEC set specific emission reduction and energy targets such as:

  • reducing the economy-wide energy intensity of GDP by 50% in 2050 compared to 2013;

  • ensuring that the share of alternative sources in electricity production is at least 50% by 2050;

  • reducing the CO2 emissions intensity of GDP in the production of electricity by 65% by 2050.

The GEC states that “. . .the total amount of investment required to implement the Green Economy Concept from now until 2050 will be on average USD 3-4 billion per annum.” It further states that “the largest share of these investments (slightly more than USD 90 billion or three quarters of the total investment over the whole period until 2050) will be used for implementing energy-efficient measures and developing renewable energy as well as establishing gas infrastructure. Measures aimed at developing agriculture, water and waste management will be less demanding in terms of financing.”

Source: Government of Kazakhstan (2013).

The commitments to achieving the GEC targets were reinforced recently in Kazakhstan’s Intended Nationally Determined Contributions (INDC) presented at the COP21 in December 2015 in Paris. The country intends to achieve an economy-wide target of a 15% reduction in greenhouse gas (GHG) emissions by 2030 compared to 1990, when emissions were at 389.5 million tonnes of CO2 equivalent (MtCO2e). Subject to international support, the government offered to raise this target to 25%. GHG emissions in 2012 stood at 303.6 MtCO2e, 22% below 1990 levels (UNFCCC, 2016a).

Implementation of the GEC has faced serious challenges, similar to those encountered in the previous attempts to mobilise support for greening economic growth. The previous attempts that have also faced challenges include the 2005 Concept on Kazakhstan’s Transition to Sustainable Development, the 2010-14 Zhasyl Damu (Green Development/Growth) Programme, or the 2012 National Green Growth Plan. These challenges include:

  • top-down and command-and-control approach based often on the Soviet standards of regulation, combined with frequent incidents of corruption to avoid heavy-handed non-compliance response;

  • limited use of market-oriented, compliance promotion and information-based instruments to incentivise companies to invest in pollution reduction and technology modernisation;

  • lack of willingness by local authorities to implement green reform because of fears of a decrease in the revenues from emissions payments or their reallocation away from local budgets; and

  • strong vested interests in the energy-intensive sectors, such as domestic electric power, mining or chemical industries, in not allocating their own resources to the improvement of their environmental performance.

Regulatory framework for environmental management and green growth

Environmental and natural resource use management laws

Since Kazakhstan gained its independence in 1991, the legislative framework for environmental protection has been continuously, albeit slowly, strengthened. The 1997 Law on Environment Protection established the basic principles of environmental protection management, introduced the provisions for strengthening environmental monitoring, environmental information and its disclosure, environmental accident prevention and management, and control (inspections) of environmental protection. The law was amended in 2004 to include waste management and in 2005 to introduce mandatory and voluntary ecological audits.

A major change to the regulatory framework was brought by the Environmental Code, drafted and approved in a short period of less than a year in 2006/7. The code incorporated major elements of the existing national environmental legislation as well as requirements from many of the international environmental conventions.2 It also outlined steps to move environmental management towards a more comprehensive and cross-sectoral regulatory framework based on a mix of regulatory, economic and information-based instruments (UNECE, 2008). Subsequently, Kazakhstan strengthened environmental protection in the energy sector with some new laws and amendments. The fundamental acts included the Law on Supporting the Use of Renewable Sources of Energy (2009), amendments to the Environmental Code to regulate greenhouse gas emissions (2011), and the Law on Energy Saving and Energy Efficiency (2012).

The adoption of the Green Economy Concept in 2013 stimulated yet another wave of regulatory reforms through the development of a Green Economy Law (GEL).3 It was signed into law by the president of the Republic of Kazakhstan in April 2016. However, the GEL does not have major substantive provisions in and of itself. Rather, the GEL is an umbrella legislative enactment, which contains only limited amendments to other laws – including the Environmental Code – on issues pertaining to waste, water and protection of habitat. During the regulatory review and approval process in the Majilis’s working groups provisions of the GEL were further weakened or eliminated. The draft of the GEL was left with very few concrete provisions and with an approach based on the principle of “no changes related to the economy, budget revenues and expenditure”. For example:

  • almost all provisions related to greenhouse gas regulatory reform and energy efficiency were removed from the GEL; these are, as noted above, areas which the GEC stated would require the greatest investment;4

  • the provisions on air pollution, waste, and the use of payments collected from violations for the environment were also removed;5 and

  • renewable energy legislation remained partially intact, albeit still too weak for incentivising renewable energy projects.

Environmental standards

Despite the important reforms brought about by the Environmental Code, environmental pollution is still managed through regulations that include traditional post-Soviet mechanisms. Very few more modern systems derived from OECD countries’ experiences are used in Kazakhstan. The basic instrument for pollution control is the system of environmental ambient quality standards (EQS), expressed through Maximum Allowable Concentrations (MACs).6 These in turn provide a basis for setting emissions limits values (ELVs) for each individual facility or source of emissions (“resource users”7) which are developed as part of an environmental permit. The EQS and MACs were derived in the 1980s from the academically sound scientific theory of maximum absorptive capacity of the environment and atmospheric diffusion of pollution, and are based on the concept of zero risk to humans and the environment during the worst possible circumstances (e.g. worst-case meteorological conditions; most vulnerable part of population). Transposing these academic approaches to the legislative and regulatory framework resulted in very strict ambient quality standards and requires investments by industries to comply, which may not be feasible for most companies (OECD, 2010; World Bank, 2013). For example, unlike in the OECD countries, Kazakhstan’s environmental standards for soil quality do not differentiate between different land uses and apply the same requirements for industrial use and the use of land for children’s playgrounds.

In OECD countries, ambient quality standards are also based on sound scientific data, but are derived from a scientific assessment of acceptable risk levels under precautionary conditions. The desired level of “quality” is not only a scientific prescription, but also a political and social decision. In OECD countries, air or water “quality objectives” and “standards” have a different meaning, for example:

  • water quality objectives are ambient thresholds to be maintained or achieved within a certain time period through phased pollution control requirements and water resources management measures. Objectives are set by a competent authority responsible for achieving them, in the context of territorial planning. It is, therefore, in the competent authority’s interest to define the objectives that it has a reasonable expectation of achieving. Surface water quality objectives can be expressed in a variety of ways, for example: i) water quality should be suitable for a specific water use (e.g. abstraction of drinking water, recreation, etc.); ii) water quality should be suitable for the support and reproduction of certain fish species; or iii) a water body should attain a specified predefined condition (or class) by a certain date

  • a surface water quality standard is a condition, expressed as a limit value for individual polluters, that a particular parameter is required to meet in order to achieve a surface water quality objective (OECD, 2010).

In Kazakhstan, as in many countries of the former Soviet Union, air or water “quality objectives” and “standards” (MACs) have been mistakenly interpreted to mean the same thing. In Kazakhstan, MACs are considered to be binding limits for all users of a given environmental medium. Individual limits of emissions (ELVs) to air, discharges to water and waste disposal are derived primarily from MACs. Any installation which emits, discharges or disposes of polluting substances is required by law to prove to environmental authorities that its incremental pollution will not lead to an infringement of the MAC.

The main purpose of ELVs is to ensure that the ambient EQS/MACs are not exceeded in the particular area as a result of emissions by individual sources. The calculation of ELVs for individual enterprises in a given region, or oblast, involves computer-based simulations of pollutants’ dispersion in the space. Theoretically, ELVs are set at levels to ensure that the aggregate amount of emissions from all sources of pollution in a given location together with the existing level of pollution do not cause pollution levels in that location to exceed the EQS. However, most of the EQS were established before 1990 and the lists of ambient quality parameters have not been revised or harmonised with international standards since then. The lack of reform has resulted in a system that remains overly ambitious, covers hundreds of pollutants and mandates very low ambient concentrations of pollutants. Since environmental standards are the determinant factor in setting emission limit values in permits for individual installations, their excessive stringency imposes requirements that cannot be achieved even by applying best available techniques (BAT). This hinders the reform of the permitting systems and the introduction of integrated permitting based on BAT. For example, compared with equivalent EU regulations, Kazakhstan applies more stringent standards to surface water quality for water bodies to be used for abstraction of drinking water, for protection/breeding of freshwater fish, and for recreation. This is primarily because the standards are determined on the basis of zero impact on human health and ecosystems. In determining the standard, consideration was not given to the technical or economic feasibility of meeting it, which often becomes a problem when the standards are translated into effluent requirements for individual pollution sources.

There is also a mismatch between the scope of regulation and government regulatory monitoring. Kazakhstan’s systems of surface water quality standards contain a substantially larger number of parameters regulated (over 1 000) than the equivalent EU directives but the number of parameters that is actually monitored is rather small. Notably, toxic pollutants are poorly covered in the current monitoring programmes. Moreover, laboratories are not always equipped to analyse monitored micro-pollutants at concentration levels corresponding to the MACs. At the same time, the EU Water Framework Directive Priority Substances are covered for about one-third of the parameters only.

There is now widespread recognition of the need to reform the EQS/MACs system in Kazakhstan. Some initial steps of the reform process have been taken, but new standards have not been introduced, so the old ones continue to be used for regulatory purposes such as setting effluent limits for individual polluters. The most serious obstacle to the reform comes from public authorities and stakeholders that benefit from the current system. For example, the general public is misled by the argument that more stringent standards lead to better health and environmental protection (health authorities insist that relaxation of some water quality standards would compromise public health), while environmental authorities are concerned about losing a part of revenues from pollution charges which are significant in case of non-compliance. The technical complexity of the subject matter and the lack of qualified specialists who would develop an alternative system are additional challenges. Finally, inadequate financial resources are devoted to perform the analysis of air or water pollution sources and impacts on their quality which are the necessary first steps in the implementation of a new environmental standard system.

Environmental permits

In Kazakhstan, resource-users can legally emit pollutants into the environment as long as they hold an environmental permit that sets the Emission Limit Values (ELVs).8 The permits are issued by competent environmental authorities at the national and regional level depending on the size of the operation. The objective of the permits, and the ELVs contained therein, is to ensure that the quality of the environment at the surrounding residential area or at the boundary of the so-called “sanitary zone”9 meets the hygienic requirements for air or water quality, taking into account the background pollution level.

Since Soviet times the permitting procedures have been administratively complex and time-consuming, but have been streamlined on several occasions. For example, since 2002 the competent authorities has issued one multimedia permit instead of three single-medium permits (for air, water, waste separately). In 2005-06, the scope of documents to be reviewed for the purposes of issuing permits was broadened to include self-monitoring programmes and so-called “plans of environmental protection measures”, which outline the measures that an enterprise would take to bring its production processes into line with environmental requirements.10 In 2007, the country’s permitting system underwent additional major changes, including the extension of the validity of permits from one to three years to decrease the administrative burden on the regulated community and the classification of enterprises into four classes of environmental exposure, with class I considered most hazardous and IV considered as least hazardous.11 The Environmental Code also introduced integrated permitting on a pilot basis, following benchmarks established by the European Union’s Integrated Pollution Prevention and Control (IPPC) Directive. However, as of early 2016 no applications had been submitted for an integrated permit.12 Moreover, although the government approved a list of technologies eligible for complex permits in 2008 the list of industries which apply the relevant technologies for an integrated permit is limited and does not include the oil and gas sector.

In 2011 and 2014, the government and parliament adopted two additional sets of amendments to the Environmental Code intended to reduce the administrative burden on business. For example, deadlines for reviewing emission permit applications have been reduced from four months to two for class I facilities, one month for class II facilities and ten business days for category III and IV facilities; the issuing authority has been mandated to make a first check of the application within 15 days, instead of one month as previously; and the list of documents to attach to the application has been shortened by half.13 Now, only the largest industrial facilities of class I apply for permits at the national level, while the rest of the industries can apply at the regional departments and a simplified procedure of permitting applies to class IV enterprises.14 Finally, the permit validity period has been extended to ten years for class I, II and III facilities and is not restricted by any time limit for class IV facilities (compared to once every three years and even once a year before for class I facilities). Moreover, a gradual transition to electronic document flow (a system of submitting environmental permit applications electronically through a special web-portal) is also underway and most of the permits are issued electronically via the state database “E-licensing”.

Despite improvements in the scope of permit conditions which brought the permitting system closer to the OECD standards, the permitting procedure is considered as administratively heavy and failing to guarantee a sufficient level of environmental protection (UNECE, 2008; World Bank, 2013). In practice:

  • emission limits in the permitting process are based on the level of historic pollution and background concentrations rather than on the basis of emission limits that an industry could achieve when applying BAT. The approved BAT in place today in Kazakhstan provide only specific technical emission limits and reference methodologies for three industrial processes which should be the basis for approved ELVs in permits. This is insufficient compared to a variety of processes used by industrial facilities. The reference documents for BATs also do not clearly specify emission standards for all basic pollutants.

  • although the ELVs should only be set for the pollutants for which the establishment of ELVs is mandatory, many of the environmental permit applications include ELVs for all identified emissions regardless of their quantities and potential hazard because of a lack of information about the mandatory list of pollutants for emission limits. This results in redundant paperwork both for responsible environmental specialists at industrial facilities and environmental regulators, without providing environmental/health benefits for industrial facilities and environmental regulators. It also leads to insufficient focus on the pollutants which cause most health impacts. In the European Union, ELVs are only set for the most hazardous emissions and based on emission limits that are possible to obtain when industries use BAT.

  • Kazakhstan’s industrial facilities typically obtain ELVs based on the highest level of emissions measured during the maximum production output. Although this offers a safety margin to ensure that the ELVs are not exceeded, it provides insufficient incentives to reduce the present level of emissions. Likewise, they can be based on the design capacity of process equipment, while in reality enterprises frequently do not work at full capacity which facilitates compliance without the improvement of technological processes, reduction of emissions and implementation of BAT. In addition, energy efficiency requirements have not been considered in permitting.

  • although facilities which do not use the approved BAT and receive ordinary emissions permits are required to undergo environmental examinations every ten years they need to reapply for a new emission permit on an annual basis. This applies specifically to gas flaring since the amounts of pollution which the operators are authorised to emit are approved for a one-year term only. As a result, many of these facilities cannot forecast the required levels of emissions for an extended time period.

In 2014-15, the Ministry of Energy renewed efforts further to simplify the permit issuance process, to support investment planning and remove obstacles to project development. The procedures for issuing integrated permits were regulated by legislation in January 2015 and a list of best available techniques was prepared. Under the amendments submitted by the government to parliament in mid-2015, the authorisation to operate facilities and generate emissions would have been granted on the basis of the conclusions of the State Environmental Experts’ Examination without requiring a separate emission permit. The proposed rules would have significantly reduced the time period required to obtain authorisation for emissions and perhaps made the established ELVs more justified. However, in June 2016 the Senate deleted the provisions regarding simplification of the emissions permits and shortening the procedures, thus undermining one of the main purposes of the legislation, and plans to launch a transition to integrated permitting have not been supported by the parliament.

There is an urgent need to optimise the present permitting and compliance control requirements. This should include shifting the focus of environmental requirements from “end-of-pipe” solutions to integrated pollution prevention and control. For the largest (“significant”) polluters there should be a shift away from the command-and-control approach, which just penalises non-compliance, and re-incentivise it through integrated pollution prevention and control. Integrated environmental permits are one of the most effective ways of achieving better pollution control since the permit is linked to specific techniques (i.e. BATs) which are associated with lower emissions. In addition, firms can realise certain cost savings through a more simplified (integrated) permitting process where separate permits for each type of emission are not required. In instances where integrated permitting is relatively unknown or not well-understood pilots would be required to demonstrate the effectiveness of these new regulatory tools (World Bank, 2013).

Environmental Impact Assessment

Environmental Impact Assessment (EIA) is an important procedure that ensures that environmental implications are taken into account before investment decisions are made.15 Consultation with the public is a key feature of these procedures to make them more effective and efficient. Facility-specific environmental permits are issued on the basis of a comprehensive EIA for both new and existing facilities. The EIA procedure is a two-phase process: the proper EIA, which is carried out by accredited private companies contracted by a developer, followed by the State Ecological Expertise Examination (SEEE) carried out by a competent government authority (Box 5.2).

Box 5.2. Environmental Impact Assessment (EIA) and State Environmental Expert Examination (SEEE) in Kazakhstan

New facilities are subject to an Environmental Impact Assessment (EIA) which is regulated by an Instruction for Conducting EIA Studies and a number of other regulatory documents establishing general requirements for this process. The Instruction lists the many documents that a resource-user must submit and establishes different requirements for EIA studies to be conducted in relation to facilities of each category of hazard. The environmental impact assessment must, among other things, include public hearings or discussions of the ecological aspects of the planned activities. The EIA procedure is performed before the permitting procedure and the developer has to attach the EIA report and the SEEE opinion together with the permit application.

There are different types of the EIA:

  • A “preliminary” EIA is required at the investment feasibility study stage (except for class IV facilities). For a large-scale project, field prospecting should be conducted at this stage. Environmental impacts are estimated but precise emission limits are not calculated. An approved “preliminary” EIA is a prerequisite to receive a loan for implementing the project.

  • A “fully-fledged” EIA, which is mandatory after the preliminary stage, requires very detailed information, including calculations of emission limit values (ELVs), emergency preparedness plans or monitoring programmes for all media.

Until 2011 a “post-construction” EIA was required for large projects with capital investments of over USD 50 million one year after the start of the operation. It aimed to confirm the environmental safety of the economic activity and to correct the plan of environmental protection measures.

Once the EIA study is completed, its results, together with other documents relevant to the planned activity, must be provided for the State Environmental Experts’ Examination (SEEE). The purpose of the SEEE is to assess project design, feasibility studies and other documents in relation to planned operations which may impact the environment (in the case of new facilities, the relevant documents must be filed together with the EIA). The SEEE also assesses the resource-user’s preliminary Emissions Limit Values (ELVs). During the SEEE the competent authority checks the documents’ quality, makes its own statement on them, and returns both to the developer. The statement takes into account the opinions and views expressed by the public and other authorities which have participated in the process. Currently, copies of minutes of public hearings and copies of the documents confirming the application in the media together with EIA materials have to be submitted for state environmental audit.

The whole procedure can take over two years (it should be noted that this does not include the permitting phase, which adds another one to two months). In practice, the timeframe for an SEEE has been reduced from three to two months for class I facilities, and up to one month for class II, III and IV facilities.* The number of required stages of EIA was reduced from five to three, through excluding an overview of the “status of environment” and “post-project analysis”.

Resource-users operating facilities that already are in operation are required to apply periodically for a new permit, and hence they, too, must periodically revise their preliminary ELVs.

For any facility for which the SEEE is required, a public association can request a Public Environmental Experts’ Examination prior to the completion of the SEEE. The state environmental experts must take the findings of the Public Environmental Experts’ Examination (PEEE) into account during their review and provide a report as to what findings were addressed by them and what findings they dismissed. However, the PEEE has rarely any impact as it is usually completed after the SEEE.

Once a positive opinion of the state environmental experts is obtained, a resource-user can submit its application for an emissions permit to the competent authority. The environmental authorities review the application and the accompanying documents, and may request additional materials. The environmental authorities then decide whether they accept the application for final review, or decline it because of an insufficiency of data provided with the application or because the application does not meet the requirements of Kazakhstan law.

* Timeframes have also been reduced for preliminary audits and repeated audits, respectively to five working days and one month for category I facilities.

Source: UNECE, 2008; World Bank, 2013.

Although the requirements for EIA were revised several times, procedures remain complicated and in need of further reform. Contrary to practice in the OECD or the European Union, an EIA in Kazakhstan is required, although to a different extent, for any project and facility, regardless of its size and the importance of its impact on the environment. The EIA has nonetheless been simplified for newly constructed industrial facilities. The stages of the procedures tend to repeat themselves and require provision of extensive volume of documentation to the authorities. Many of the documents tend to be voluminous, redundant and, in some parts, written in complex and overly technical language, impairing communication of the results of the EIA to the public and the responsible authority. Non-technical summaries of the results are not required. The EIA project developers typically outsource the preparation of EIA materials to specialised companies which must be licensed by the competent authority if they carry out the EIA for class I facilities. Licensing, however, is not a guarantee of quality: some 10% to 15% of EIA materials are declined because of poor quality (UNECE, 2008). There is anecdotal evidence that the EIA reports are falsified to fit the legislation requirements. Because of the increasing numbers of reviews, and therefore the increased administrative burden, most procedures are rather general, poorly enforceable and are made on the basis of theoretical estimates rather than in-depth analysis, particularly in the regions with the highest workload (e.g. Aktyubinsk, Karaganda, Pavlodar and North Kazakhstan oblasts).

According to the Environmental Code, all interested citizens and public associations are given the opportunity to express their opinion during the EIA procedures. The regulations approved in February 2016 require mandatory publication of the application for the EIA in the mass media by the project’s proponents. The conclusion of the EIA has to be placed on the Internet site of the local executive body in charge of environmental protection within five working days after the receipt. Currently, the Public Council, which is the consultative advisory and monitoring body set up to develop proposals for improving interaction and co-operation between the administration and non-governmental organisations (NGOs) and citizens, have been co-operating with the Ministry of Energy to further improve the public participation procedures.

Despite progress, in the view of some NGOs public consultations on EIA are not systematic and public hearings are often seen as a procedural burden rather than a legitimate policy-decision mechanism. Some NGOs also consider that the EIA procedure is in many cases window-dressing and difficult to check by the public. Although several specialised NGOs, such as Kazakhstan’s Green Salvation, are active in this area, further efforts by the public authorities are required to open the procedures to the public’s active participation, especially at regional and local levels.

Effectiveness and efficiency of pollution payments linked to a system of permits

One of the key functions of the environmental permit has been to stipulate emissions limits for authorised emissions (ELVs). The permit limits also determine payments by the resource user for emissions below the relevant ELVs and those that apply to emission releases above the established limits. The system originated before 1991 and continues to exist, in various forms, in the environmental laws of many other post-Soviet states. In Kazakhstan the emissions below relevant ELVs have been subject to pollution charges (later on replaced by taxes) while emissions of pollutants above the ELVs have been subject to three distinct types of payments: i) pollution charges or taxes as indicated above, but multiplied tenfold; ii) administrative penalties; and iii) monetary damages. The combined amount of all three payments imposed for above-ELV emissions is substantial, with monetary damages constituting the largest of the three.

Pollution charges/taxes

The payments for authorised (below-limit) emissions (so called pollution charges) were based on each enterprise’s ELVs for air and water pollutants and the volume of generated waste. There was also a large variation of base pollution charge rates (for emissions below the ELVs) among regions, reflecting the various patterns of economic activities and related differences in types and intensity of pollution. Air pollution charges per tonne of emissions from stationary sources varied by a factor of 20 between the oblasts with the highest (Atyrau) and the lowest (Karaganda) charge rates. Pollution charge rates were raised several times in line with the projected average annual inflation rate. The local authorities could further increase the rates discussed above.

In practice, the setting of pollution charges was for long guided by the desire to generate sufficient revenues for the support of regional or local budgets, and not to address environmental problems. A large number of air and water pollutants were subject to payment of emission charges which made the system quite complex and administratively onerous. The calculation of charges lacked transparency since there were no specific pollution charges for individual pollutants, only for aggregate emissions, measured in terms of so-called “notional tonnes”.16 The criteria for determining specific levels of pollution charges were obscure, and there appeared to be wide discretion in the application of the charges by the authorities (UNECE, 2008).

To address deficiencies in the system, the number of pollutants to be taken into account when determining emission limits for environmental permits and calculating emission charges was drastically reduced in 2008. The list distinguishes now only 16 types of air pollutants, including sulphur oxides (SOx), nitrogen oxides (NOx), volatile organic compounds (VOCs) and carbon monoxide (CO), and 13 water pollutants. The payment became subject to the provisions of the tax code as opposed to being regulated by administrative legislation in the past.17 The collection of the payments is now no longer included in the competences of the administration in charge of environment protection.

As before, the tax payments for authorised emissions are based on each enterprise’s ELVs. This leaves room for discretion in setting the ELVs, and is not in line with standard environmental tax principles which require a charge per unit of emissions, unless there is clear evidence of threshold effects. The tax code specifies the tax rates per kilogramme or per tonne (i.e. not notional tonne). Pollution tax rates are set as coefficients multiplied by the Kazakhstan monthly calculation index (MCI). The MCI is established by the government on an annual basis to take into account inflation and other factors and is then used to determine taxes, as well as penalties (as described below) and certain other payments.

Pollution tax rates for emissions within the ELVs in the permit are determined in a two-stage process. The tax code fixes the minimum or base tax rates which apply for each of the 16 regional entities (14 oblasts and two major cities, Almaty and Astana). Each oblast may then set a higher tax rate provided that such a rate does not exceed twice the base rate, with the exception of gas flaring by the oil and gas industry which may be subject to locally imposed tax rates 20 times the base rate. Most oblasts impose the highest possible rate of tax in each case. The proceeds of the emissions taxes are allocated to the budgets of the regions where the facilities are located.

For above-ELV emissions, the locally applicable rates are further multiplied by a factor of ten. For example, any gas flaring by the oil and gas industry in excess of ELVs in the oblast of Atyrau can be subject to tax at rate 200 times the base rate. Utilities and power plants are entitled to a reduction of emission tax rates by applying coefficients of 0.3 for air pollutants, 0.43 for waste water and 0.05 for ash.

With effect from January 2017, the tax code will be amended to remove the ten times multiplier applicable to emissions in excess of ELV. The base rates of tax for flaring by the oil and gas industry will be increased to and fixed at 20 times their current level; the oblasts will not have any discretion to change these tax rates. The base rates for other sources of emissions, the right of oblasts to increase the base rate twofold for other sources of emissions and the decreasing coefficients for utilities will remain in effect. As a consequence of these changes, the oil and gas industry will pay 67 times more per unit of emission than the heating and power plants.

Administrative penalties

While pollution charges/taxes are due for emissions or discharges both within and above the specified limits (ELVs), administrative penalties are imposed by authorities only for pollution exceeding the ELVs set in project documents and environmental permits (or in the absence of an environmental permit). Article 328 of the administrative code establishes that the penalty for emissions above the established ELVs for large businesses is in the amount of “1 000 % of the rate of the emissions payment (i.e. the tax code rates) for the excess amount of emissions.” However, there are problems with the interpretation of the approach to the payment calculation. The authorities interpret this to mean that the penalty should be calculated not only by multiplying the rate times ten, but also then by multiplying the product by the amount of the relevant emissions, i.e. the same way that the tenfold tax is calculated (tax rate times ten times amount of excess emissions). The language of the administrative code’s provision on administrative penalties does not clearly stipulate that the rate should also be multiplied by the amount of the relevant emissions, i.e. that the penalty is effectively equal to the tax amount for the excess emissions.

Monetary damages

In addition to taxes and administrative penalties, emissions of pollutants above the permitted ELVs are subject to monetary damages via a judicial system. Kazakhstan’s environmental code defines the economic value of environmental damage as the cost of environmental remediation that can be assessed directly or indirectly. The direct method of assessment aims to determine the expenditure (in market prices) necessary to restore natural resources and living organisms through “most effective engineering, management and technological measures” in accordance with a time-specific project. The environmental code gives “priority” for the remediation to be undertaken by the party responsible for the damage. It also provides for the engagement of independent experts whose fee must be paid by the responsible party.

However, unlike the practice in OECD countries, the Kazakhstan environmental authorities mostly use the indirect method which is easier to apply and usually results in much higher monetary damages.18 As in many Eastern Europe, Caucasus and Central Asia (EECCA) countries, this method determines the value of the “pollution damage” as a function of the current pollution tax rates and determines the “pollution damage” from each pollutant using a mathematical formula and then combines the resulting assessments of damage caused by each pollutant. The indirect method of calculating monetary damages relies on a pre-established formula and hence does not require measurements (or proof) of actual damage to the environment in determining the amount of compensation that must be paid.

A misconception of the Kazakhstan environmental code’s damages regime is that it is only the indirect method for calculating damages that departs from OECD standards. However, both the direct and indirect methods, stipulated therein, contradict OECD legal principles because environmental liability for “damages” arises upon the exceeding of a predetermined limit in an emissions permit. “Direct” and “indirect” are mere calculation methodologies employed after the liability arising from exceeding ELVs in the permit has been established. In OECD countries the permit plays no role; liability for damages arises only upon a claimant bringing physical evidence of actual harm. The assessment of environmental damages in OECD countries is primarily based on resource equivalency analysis to estimate the needs and costs of restoring affected resources or environmental services.19 The remediation scope may be mandated by law or left to the discretion of the competent authority, which determines specific measures using criteria such as technical feasibility, effectiveness and efficiency.

The OECD country experience shows that Kazakhstan should abandon fault-based concepts for damages that tie liability to exceeding a pre-determined limit in an emissions permit. It should instead adopt the strict liability/polluter-pays model based on evidence of actual harm to the environment. By contrast, environmental liability for pollution in Kazakhstan applies only if the emission permit limits have been breached (the fault standard), even in the absence of proof of environmental damage. Although some important legal changes are being introduced in other countries in the region, most notably in Russia, environmental liability in Kazakhstan remains focused on calculating and collecting monetary compensation for the state (essentially serving as a revenue-raising penalty) rather than on preventing and correcting the damage. There is very little regulatory guidance on how to assess the extent of the damage, needs and costs of remediation, and how to select clean-up measures.

Combined effect of the three pollution payments

The combined amount of all three payments (i.e. taxes, administrative penalties and damages) for the emissions above ELVs can be substantial, with monetary damages imposed by the courts constituting the largest of the three. For example, for 2013 payments for emissions within ELVs in the Atyrau region reached KZT 2 billion and KZT 34 billion in Kazakhstan overall. In the same year, the overall amount of charges for the emissions above ELVs including taxes, fines and damages was KZT 24.7 billion for Atyrau and KZT 31.4 billion for Kazakhstan (Kononenko et al, 2014).

The use of multiplied taxes and the indirect method for calculating monetary damages, with their focus on revenue raising, makes it impossible to gauge reliably the relation between pollution payments and marginal pollution reduction costs. A particularly acute illustration of the deficiency of Kazakhstan’s pollution liability system relates to the formula that the government has adopted for calculating damages from gas flaring at upstream oil and gas facilities. The indirect damages formula until recently contained different (higher) coefficients for calculating damages for gas flaring than for the same amount of emissions/pollutants emitted from other stationary sources where there is less or no foreign investment. In June 2016 the government introduced amendments to the regulations which eliminated the discrimination between the calculation of damages resulting from gas flaring in oil and gas facilities and emissions by other industries (including mining and metallurgical). The government should be applauded for this change. The statutory discrimination in coefficients used in the indirect damages formula was analogous to the still existing tax and penalty discrimination by which, as noted above, the local authorities can multiply the taxes for excess emissions of pollutants from gas flaring by 20 times, as opposed to two times for excess emissions of the same pollutants from other stationary sources. As of 1 January 2017, instead of the 20 times tax multiplier for gas flaring emissions applied by the local authorities, the base tax rates on pollutants emitted from gas flaring will be 20 times the base rates for the same pollutants emitted from all other stationary sources. Similarly, since as noted above administrative penalties are established based on the tax rates, administrative penalties for gas flaring are higher than administrative penalties for emissions of the same pollutants from other stationary sources. The largest environmental lawsuits are brought by the environmental authorities against the major oil and gas projects and concern the gas flaring claims. The recently concluded court cases required major oil and gas companies to pay hundreds of millions of dollars in environmental payments based on the damage liability calculations described above (Box 5.3).20

Box 5.3. Kazakhstan associated petroleum gas (APG) flaring reduction and damage payments

Crude oil extraction from onshore or offshore oil wells in Kazakhstan is associated, as in many other oil-producing countries, with the release of raw natural gas which is brought to the surface together with the oil. Petroleum-producing plants typically process this gas for sale, for fuel, or to re-inject into the reservoir for pressure maintenance. The venting of raw gas is potentially very hazardous (especially when high levels of hydrogen sulphides are involved). In cases of non-routine events such as start-up, maintenance, technical breakdowns or operating condition deviations, modern processing facilities are designed to flare the extracted gas because it cannot be stored or further processed until plant conditions have been normalised.

Strengthening the requirements for gas flaring reduction, as well as collection and processing of associated gas, have become important for the Kazakhstan government not only to prevent environmental pollution, but also to incentivise the enterprises to use this valuable resource. To achieve these goals, gas flaring and venting were prohibited in Kazakhstan in 2004 (“Law on Introduction, Modifications and Amendments in some Legislative Acts of the Republic of Kazakhstan concerning subsoil use and carrying out petroleum operations in the Republic of Kazakhstan”, No 2-III, 1 December 2004). Petroleum companies had received administrative notifications, issued by the central authorities requiring them immediately to start the full utilisation of the associated gas or otherwise face a reduction of production volumes, termination of previously concluded subsoil-use contracts or high penalties.

Abatement of gas flaring is a long-term process that requires proper investigation, comprehensive legislative insights and technological solutions, incurring major capital expenditure over many years. For many oil producers the ban created significant challenges and risks, including the inability to implement quickly gas transportation and processing programmes or obtain appropriate permits for treatment operations, attract sufficient financing and to adapt already approved permits and development plans.

Concerted appeals from the oil-producing companies resulted in the establishment of a new deadline of 2006 and the setting of the transition criteria to reduce gas flaring and venting by preparing a corresponding gas utilisation policy, analysing other countries’ experience and enacting required amendments and modifications to the primary and secondary legislation. Since the operators required retaining the option to flare gas as the safest option for recovering from plant outages and equipment failures the 2010 Law on Subsoil and Subsoil Use allowed for technologically unpreventable flaring under specified conditions and authorised by the Ministry of Oil and Gas.

Since then several large operators in Kazakhstan have successfully reduced their emissions to a relatively modest level, after a period of more intensive gas flaring during start-up. Growing domestic demand for gas for power generation, clarification and strengthening of anti-flaring/associated petroleum gas (APG) use regulation, planned construction of national and regional pipelines now spur an increase in APG use projects. For example, the Tengiz oil field was flaring approximately 6.8% of inlet (impure) gas in the period 2005-06, but reduced that amount to 0.86% of inlet gas in 2010-11. As reported in 2014, the Tengiz operator managed to eliminate virtually all continuous flaring from gas processing, leaving only purge and pilot light flaring, together with some non–continuous flaring for maintenance repairs and process safety. Similarly, the Karachaganak oilfield has successfully reduced gas flaring to 0.19% of total volume of gas produced in 2014. Overall Kazakhstan has made substantial progress towards a 5% flare rate (gas utilisation rate 95%), indicative of elimination of routine flaring, which is commonly set as a policy target for flaring.

Despite improvements, gas flaring continues to be the key target of the emission-focused liability system, and the associated fines and taxes are extremely large. In one of the biggest legal disputes the multinational consortium North Caspian Operating Company that developed the Kashagan oil field in the Caspian Sea was threatened with having to pay to pay KZT 152 billion (USD 845 million, using the prevailing exchange rate) in 2014 in taxes, fines and damages for alleged damage to the environment from flaring residual sour gas during start-up operations. In February 2016 Kazakhstan’s Karachaganak Petroleum Operating Company, which operates one of the largest fields in the world* was ordered to pay a fine of KZT 526 million (over USD 1.5 million) for releasing pollutants into the atmosphere. In 2011, fines equal to USD 11.5 million were imposed on the Tengiz oil field operator for gas flaring.

* The Karachaganak field located in the West Kazakhstan province accounts for 45% of the total volume of gas and 16% of liquid hydrocarbons produced in Kazakhstan.

Source: Carbon Limits, 2014, UNFCCC, 2016.

Oil and gas investors argue that the damages, taxes, and penalties result in assessments that significantly exceed gas flaring payments in OECD countries. They report that the largest environmental law suits concerning gas flaring claims are brought by the environmental authorities against the major oil and gas projects with foreign investment, adding discriminatory treatment of foreign investors by governmental conduct to statutory discrimination in the damages formula and tax multipliers. The operators also argue that the largest payments are imposed on emergency or technologically unavoidable gas flaring, while for Kazakhstan’s power and other heavy industries the ELVs are set below the emissions levels that are achievable given the low efficiency of the ageing facilities: something that, as a whole, does not provide equal incentives to local and foreign operators to reduce emissions.21

Regulation of greenhouse gas emissions and the emissions trading system

Kazakhstan’s obligations under international treaties to reduce its GHG emissions

Kazakhstan has been actively seeking ways to reduce emission of greenhouse gases (GHG), of which 83% come from the energy sector because of its heavy dependence on fossil fuel extraction and coal-based electricity generation (Figure 5.3). The country ratified the Kyoto Protocol in 2009 and submitted an economy-wide emissions reduction target of 15% compared with 1990 levels by 2020, under the United Nations Framework Convention on Climate Change (UNFCCC).22 At the 2015 Paris Conference of the Parties to the UNFCCC Kazakhstan submitted its Intended Nationally Determined Contributions, committing to a further 15% reduction in emissions by 2030 from a 1990 baseline, and as much as a 25% reduction contingent on availability of international financing (Government of Kazakhstan, 2015).23

Emissions trading scheme in Kazakhstan (KazETS)

Kazakhstan’s GHG reduction commitments have been reflected in the “Strategic Development Plan of the Republic of Kazakhstan to 2020”. A general framework for regulating emissions of greenhouse gases was created by the 2011 amendments to the Environmental Code. Along with several regulatory instruments, the amendments included the provisions for the creation of an emissions trading system (KazETS) under which emissions from the highest-emitting sectors and activities are capped and allocated via tradeable emission allowances (quotas) to individual enterprises. This market-based mechanism provides for any excessive amount of GHG emissions to be offset (or compensated) with the relevant amount of quota units (either saved because of implementation of special GHG emission reduction measures or created by implementation of projects for the reduction or absorption of GHG) that can be purchased at the commodity exchange.24 The quotas are allocated in the National Allocation Plan approved by the government and recorded in the quota certificates issued by the Kazakhstan competent authority.25

Figure 5.3. Greenhouse gas emissions in Kazakhstan
Million tonnes of CO2 equivalent, 1990-2012
picture

Note: Other sectors include Commercial/Institutional, Residential, and Agriculture/Forestry/Fisheries and other).

Source: UNFCCC (2016b).

 http://dx.doi.org/10.1787/888933445661

Nearly half of Kazakhstan’s GHG emissions are covered by the KazETS. The KazETS regulations cover companies in the oil and gas, power, mining and chemical sectors, which emit more than 20 000 tonnes of CO2 per year (IETA, 2015).26 Regulated entities must report and verify their annual emissions of CO2 (carbon dioxide), CH4 (methane), N2O (nitrous oxide) and perfluorocarbons (PFCs). Only CO2 emissions are currently capped under the KazETS, and discussions are on-going as to whether methane and other GHGs should also be capped by the scheme at a later date.

The KazETS was launched in 2013 with a pilot compliance period and was extended to the second phase (2014-15) in which 166 facilities participated. Allocations for phases I and II were provided for free, based on historic emissions (so-called “grandfathering”). For Phase III (2016-20), a National Allocation Plan was approved in December 2015 containing quotas for covered facilities, also based on grandfathering. The OECD country experience shows that a failure to move towards auctioning, or at least allocation less tied to historic emissions, usually weakens the environmental effectiveness of the system.

Even though the regulations and the rules for KazETS have been adopted, the KazETS has not yet been fully implemented. The government’s rules do not contain clear provisions for how quotas are to be allocated. For instance, one regulation calls for allocations to be based on a facility-specific baseline (an average of each facility’s actual emissions in the previous two years, as independently verified). Another regulation suggests that a baseline should be an average of similar facilities. Neither the Environmental Code nor the Rules for Allocation of GHG Quotas clearly provide how the obligations to reduce emissions for each year should be determined.

The Rules for Allocation of GHG Quotas provide that when the competent authority allocates quotas it should take into account voluntary measures to reduce greenhouse gases which were implemented in the three years preceding the quota year. However, the rules do not contain a specific mechanism or number of the additional quota units that the operator will receive. In addition, operators can keep or sell extra quotas only if they can demonstrate that GHG emissions have been reduced intentionally. If quotas were saved due to a decrease in production, even though the reductions would occur, they are expected to return unused quotas to the competent authority. This is an unusual practice for an emissions trading system.

The Administrative Code also provides that emissions of any amount of GHGs in excess of the quota (emissions not covered by allocated and purchased permits) shall result in a penalty. The penalty on the legal entities is the amount of five monthly calculation indices for each unit in excess of the quota which was not offset by purchased quota units.

The KazETS needs additional updates to bring it in line with international markets and prepare the system for future linking. In summary, the KazETS suffers from:

  • a lack of clear and consistent implementation of regulations, and regulatory authorities have limited capacity and resources to facilitate its successful application;

  • vaguely drafted, incomplete or inconsistent rules across regulatory documents, limited consistency or transparency regarding installation-level emissions, reduction activities, offset registration policies or procedures, which have led to an unclear carbon price;

  • lack of co-ordination at a ministerial level on legal amendments and data-sharing, as well as inconsistent advice provided to enterprises on reporting accreditation and verification procedures, making it challenging or impossible for entities to comply fully;

  • lack of verification regulations, standard and guidance to verifiers on how to conduct GHG verification activities, e.g. to apply risk-based approaches in the course of GHG verification; 27

  • errors in the existing emissions calculation rules that can overestimate emissions;

  • lack of links with the Green Economy Concept and the renewable energy and energy efficiency laws, and only weak links to the “Kazakhstan-2050” Strategy in the form of a GHG emissions target for the power sector. For example, the INDC submitted to the UNFCCC is the sole national policy document that identifies these various activities as tools for achieving Kazakhstan’s climate change goals.

Further reductions in emissions could be achieved if any KazETS revenues (e.g. from penalties or future auctioning) are reinvested in further GHG mitigation instead of being absorbed into the national budget.28

Ways forward

Observations and evaluations of errors and omissions in the many enactments regulating GHG emissions were aggregated in early 2014 from a variety of stakeholders. These included international donors, and were shared with the Ministry of Energy. The collective list contained approximately 200 comments (later consolidated into a sub-list of 70 comments) identifying incorrect definitions, missing provisions and inconsistencies in guidance between various sections of the Environmental Code. After numerous efforts to get these comments adopted as amendments to the Environmental Code, certain amendments were adopted by the parliament in March 2016 and signed by the president in April 2016.

Kazakhstan should be applauded for taking steps towards the implementation of a fully performant emissions trading system; and also commended for making commitments under international treaties to reduce its carbon footprint. Implementation will be critical in modernising the country’s economy and integrating it into the international community of developed countries. Unfortunately, consistent with the trend across all environmental reform initiatives in Kazakhstan, the state has not matched its ambitious commitments with real legislative reforms. The KazETS has witnessed significant resistance to its implementation in the ministries, the parliament, regional governments, and the domestic business community. Despite some efforts, authorities have not succeeded in clarifying the regulations and the competent authority in charge of the KAzETS has been resource-constrained in its ability to provide adequate training, clarification and guidance to entities regulated under the KazETS. Also, the KazETS lacks access to more dynamic trading and offsets that could help to manage the costs of compliance.

In December 2015, in his letter to the parliament the prime minister emphasised the importance of the KazETS in fulfilling international commitments to reduce its GHG emissions. He also noted that failing to adopt the KazETS amendments would jeopardise support from international donors for climate change programmes. At the same time, the letter noted that a number of elements in the current legislation on the KazETS do not function correctly. He proposed suspending the applicability of a few sections of the Environmental Code relating to the ETS until 2018 and using the intervening period to improve the system’s provisions, including the method of allocation of quotas; the creation and distribution of quotas from a reserve; certain definitions; and oversight of the carbon trading platform. This leaves uncertain what reductions will be required in 2018 by individual companies.29 More generally, it is unclear what impact the suspension will have on Kazakhstan’s ability to meet its national reduction commitments made at the various Conferences of the Parties (COPs) during the past few years. The suspension was signed by the president in April 2016 as part of an umbrella law on changing legislation on environmental issues.30

Companies lack the clear ability to comply with the KazETS requirements because of vague rules. Accordingly a risk exists that the KazETS could be reduced to another mechanism for penalising market participants for non-compliance rather than supporting the underlying environmental purposes of the programme.

The resistance in the governmental bodies and in parliament to make the necessary changes stems from domestic economic and social pressures. The implementation of the KazETS and other Green Economy programmes puts intense pressure on industries and the state to invest in modern infrastructure, thus reducing short-term profits and potentially disrupting economic and labour relations in communities that have for years relied upon Soviet-era factories. The KazETS already faced stiff resistance during the period of economic prosperity, but now with low commodity prices weakening the economy, local and national elites resist making the legislative and attitudinal changes needed to implement the KazETS as a tool that values environmental efficiency and sets Kazakhstan on a course to low emissions developments.

Conclusions and policy recommendations

Notwithstanding the recent global financial crisis, Kazakhstan’s GDP doubled over the past decade while export earnings increased correspondingly over the same period. Yet, much of this growth was based on the extractive and heavy industries and on the use of electricity which is mostly produced from coal. Consequently, Kazakhstan today is one of the most energy-intensive countries in the world and the energy intensity has not improved during the last decade. The environmental damage inherited from the Soviet era was exacerbated by the impacts from energy production, pollution from heavy industry, accelerated extraction of oil, gas and other mineral resources, as well as from agriculture and from growing road traffic in urban areas.

Kazakhstan has undertaken steps to move towards a more sustainable mode of development which were outlined in two key strategic documents: the 2012 “Kazakhstan 2050 Strategy” and the 2013 “Green Economy Concept” (GEC) which outlined the path to long-term growth based on climate-friendly technologies, energy efficiency measures, and the restoration and sustainable management of natural resources. The GEC, in particular, envisaged modernising deteriorating environmental infrastructure, and set ambitious environment-related targets for the power generation, mining, industry and agriculture sectors and for the energy, soil and water use. It stated that “. . .by successfully achieving these targets, the country will recover its water and land resources by 2030, and its resource productivity will largely be on par with the average indicators of the OECD members and other developed countries”.

However, the implementation of the GEC faces serious challenges, including:

  • “top-down” and “command-and-control” approaches based often on the Soviet standards or regulation, combined with frequent incidents of corruption to avoid heavy-handed non-compliance response

  • limited use of market-oriented, compliance-promotion and information-based instruments to incentivise companies to invest in pollution reduction and technology modernisation

  • lack of willingness by local authorities to implement green reform because of fear of the reallocation of revenue from environmental payments away from local budgets; and

  • strong vested interests in the energy-intensive sectors, such as the domestic electric power, mining or chemical industries seeking not to allocate their own resources in the improvement of their environmental performance.

In order to meet its ambitious targets, Kazakhstan urgently needs to develop and implement a set of measures and policies defined in the GEC and other key policy documents. Among many, one of the most important steps that could unlock vast green growth opportunities is the expeditious reform of a basic environmental regulatory framework. Despite recent progress, the uncoordinated implementation of environmental requirements together with the high volume of complex environmental regulations based on unrealistic assumptions has resulted in a regulatory environment that is complicated, burdensome and costly to both the administration and industry. What is more, the evidence suggests that it does not lead to actual environmental improvement. To address these fundamental flaws, further efforts to streamline and simplify these requirements are needed in a way that realistic objectives are set and environmental ambitions are not compromised. Better regulation also means designing policies and laws so that they achieve their objectives at minimum cost. Extensive preparations by the government of Kazakhstan for the upcoming EXPO 2017: Future Energy, the emphasis on green technologies and the overall business case for green economy are promisingly timed for new policy breakthroughs.

Box 5.4. Main policy recommendations to promote better environmental regulations in Kazakhstan
  • Environmental quality standards need to be revised in the light of international best practices and domestic capabilities to technically feasible and enforceable levels, striking a balance between what is desirable from an environmental point of view and what is feasible from a technical and economic standpoint. The government should make the best use of limited technical capacity and prioritise the provision of the financial and human resources to regulate effectively those polluting substances that pose the greatest risk to human health and/or the environment.

  • The present environmental permitting and compliance control requirements need to shift the focus of environmental requirements from “end-of-pipe” solutions to integrated pollution prevention and control. For the largest and “high impact” polluters there should be a shift away from the mentality of command-and-control regulation, which just penalises non-compliance, and re-incentivise it through integrated pollution prevention and control. Integrated environmental permits are one of the most effective ways in achieving better pollution control since the permit is linked to best available techniques (BATs) which are associated with lower emissions.

  • Building on the reform and improvements of Environmental Impact Assessments (EIA) and State Environmental Experts’ Examination (SEEE) there is a further need to simplify and shorten the procedures for medium and small-scale projects. Where possible the EIA/SEEE procedures should be combined with environmental integrated permitting. Further efforts are also needed by the public authorities to open the procedures to the public’s active participation, especially at the regional and local levels. This should assist in building the procedures for more regular reporting on environmental pollution (and their impacts) in a consistent and standardised format.

  • The OECD country experience shows that Kazakhstan should abandon fault-based concepts for damages that tie liability to exceeding a predetermined limit in an emissions permit and instead adopt the strict liability/polluter-pays model based on evidence of actual harm to the environment. By contrast, environmental liability for pollution in Kazakhstan applies only if the emission permit limits have been breached (the fault standard), even in the absence of proof of environmental damage.

  • Although some important legal changes are being introduced, environmental liability in Kazakhstan remains focused on calculating and collecting monetary compensation for the state (essentially serving as a revenue-raising penalty) rather than on preventing and correcting the damage, reducing emissions over time and incentivising the use of BATs. Credibility in the regulatory system needs to be restored by reforming the laws governing environmental taxes, fines and damages so that they are aligned exclusively and transparently on environmental policy objectives and the international commitments Kazakhstan has made. The state should eliminate discrimination against specific industrial sectors, set rates for taxes and fines, which are uniform for all industry sectors and set rules for assessing damages, which are also non-discriminatory. The rates applicable to taxes and fines should be realistic, consistent with international practice, should not punish emissions associated with normal industrial practices using BATs and should not function as a form of taxation. Enforcement should also be transparent and even-handed. More regulatory guidance should be provided on how to assess the extent of the damage, needs and costs of remediation, and how to select clean-up measures

  • Kazakhstan should be applauded for taking steps towards the implementation of a fully performing emissions trading system for the reduction of greenhouse gases (KazETS) and making commitments under international treaties to reduce its carbon footprint. Implementation will be critical to modernise the country’s economy and integrate it into the international community of developed countries. Consistent with the trend across all environmental reform initiatives in Kazakhstan, the state should match its ambitious commitments with real legislative reforms. Authorities should work jointly with relevant stakeholders to clarify the regulations. The competent authority in charge of the KazETS should be strengthened in order to provide adequate training, clarification and guidance to entities regulated under the KazETS.

Box 5.5. How could the scenarios affect the context of implementation of smarter environmental strategies?

For details of the scenario storylines, please see section: Anticipating trends and preparing for future challenges: scenarios for the future of Kazakhstan in Chapter 1.

The key recommendations in this report regarding environmental regulation relate to the alignment of environmental regulation with international best practice, including strengthening existing market-based mechanisms, the move from an environmental liability system focused on collecting monetary compensation towards one focused on preventing and correcting damage, and providing adequate incentives for the adoption of best available techniques.

Scenario 1: “The New Super Cycle”, would see increased profitability of extractive industries, especially in fossil fuels which may increase and reinforce environmental risks linked to new operations. At the same time, more profitable operations would be better able to upgrade technology, making the transition towards environmental regulation that provides incentives for the adoption of best available techniques (BATs) most relevant. Increased international energy prices would be an opportunity to achieve structural change in energy production and usage in Kazakhstan with the aim of reducing carbon intensity, in particular through a change in fossil fuel usage for heating and electricity generation. Since diversification would be more difficult in scenario 1, dynamic manufacturing industries are likely to remain among the most carbon-intensive (metallurgy, petroleum refinery, chemistry), highlighting the need to lower emissions in other key activities.

In Scenario 2: “The Great Dissipation”, proposed reforms would lower costs for compliant firms, by reducing the costs involved in the Environmental Impact Assessment procedures, in obtaining permits and by eliminating sector discrimination in the environmental regulation system. This would allow for an increase in competitiveness of firms in key sectors, including in green economy sectors, which would be potential new export sectors. On the other hand, in this scenario, choices to move away from revenue-generation views of environmental regulation may be more difficult in the light of tighter fiscal conditions.

Scenario 3: “New Silk road and Central Asia Resurgence” offers great opportunities for Kazakhstan which hinge on the development of transport corridors. These opportunities include greater trade integration with the Central Asia region and the world. Both large infrastructure projects and the ensuing higher transport activity are likely to impose environmental costs unless environmental regulation manages to limit risks and less polluting modes of transport, including rail, are further developed.

Scenario 4: “New Technology Solution” would offer great opportunity for advancing the regulatory agenda to accelerate the switch to low-carbon and low-emission solutions. Improved technologies would increase the value of integrating permitting approaches and incentivising the use of BATs. Importantly, this would necessitate that domestic price signals convey carbon costs, since otherwise, fossil fuel prices would fall in the medium term because of reduced global demand. Market-based mechanisms such as KazETS (the emissions trading scheme) would play an important role in ensuring that is the case.

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UNFCCC (2016b), GHG emission profiles for non-Annex I Parties, http://unfccc.int/ghg_data/ghg_data_unfccc/ghg_profiles/items/4626.php.

UNFCCC (2015) Report of the Technical Review of the First Biennial Report of Kazakhstan, UN Framework Convention on Climate Change, FCCC/TRR.I/KAZ, http://unfccc.int/resource/docs/2015/trr/kaz01.pdf.

World Bank (2013), Towards Cleaner Industry and Improved Air Quality Monitoring in Kazakhstan, Joint Economic Research Program (JERP), World Bank and Ministry of Environment and Water Resources of the Republic of Kazakhstan, http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2014/01/10/000461832_20140110182738/Rendered/PDF/839150WP0P133300Box0382116B00OUO090.pdf

Notes

← 1. For a detailed description of environmental challenges in Kazakhstan see OECD (2016), “Multi-dimensional Review of Kazakhstan - Vol. 1 - Initial Assessment”.

← 2. Three main laws (Law on Environmental Protection, Law on Ecological Expertise and Law on Air Protection) were abrogated subsequent to their integration into the Environmental Code. Moreover, some 80 normative legal acts were abrogated after the adoption of the Environmental Code.

← 3. The full name of the GEL is the Law on Amendments to Legislative Acts of the Republic of Kazakhstan aimed at Transition of the Republic of Kazakhstan to Green Economy. The amendments in the GEL are made to the Water Code, Land Code, Environmental Code, Law on Local State Administration and Self-Administration in the Republic of Kazakhstan, and certain other laws.

← 4. Some provisions that were removed from the original drafts were reinserted under discussion in the Senate or introduced into the Environmental Code by another umbrella Law about changing of legislation on environmental issues. Among them were provisions for removing obstacles to invest to the extraction of coalbed methane, indexing feeding tariffs by pegging them to the exchange rate of foreign currencies, improvements of the connection of alternative energy sources to the national electrical grid, and the creation of a “reserve fund” to guarantee payments for alternative electricity.

← 5. Provisions related to public access to environmental information were removed from Green Economy Laws but some of them were introduced into the Environmental Code by another umbrella Law about changing of legislation on environmental issues.

← 6. They may also be expressed as Potentially Safe Concentrations (PSCs).

← 7. According to the Kazakh legislation resource-users are individuals and legal entities that emit pollution into the environment or otherwise use natural resources as part of their economic activities.

← 8. Some greenhouse gas emissions (GHG) are included into the list of pollutants for which a resource user must obtain an emissions permit regulation of general pollutants. Since 2013 emissions of GHG are permitted as long as they have been allocated a quota under the Emissions Trading System (Section 3).

← 9. The application has to be approved by the State Sanitary Inspectorate, which mainly looks at the proposed emission limit values and quantities.

← 10. Currently, this document is still required to be prepared by the companies but is not reviewed by the authorities for the purposes of issuing an emissions permit.

← 11. The classification depends upon: (i) human health risks; (ii) production capacity; (iii) type of production; (iv) emissions and exposure; and (v) operational mode. In practice, however, environmental authorities classify production facilities with the use of sanitary norms and rules adopted in 2013 which distinguish and define the size of sanitary zone (in meters) for more than 450 industrial activities.

← 12. The provisions for the integrated (complex) environmental permit envisaged issuing it for an indefinite term to environmental users who comply with the best available technologies (BAT) unless the technologies applied or environmental use conditions specified in the environmental permit change. The government approved a list of technologies eligible for integrated permits in 2008.

← 13. The application no longer includes a description of technologies at use, draft regulations on atmospheric emissions, a notarised copy of the agreement of environmental insurance, and the environmental audit report for the design of the intended activities with a section dedicated to environmental impact assessment.

← 14. Class IV facilities are no longer required to renew their permits on a regular basis.

← 15. The International Association for Impact Assessment (IAIA) defines an environmental impact assessment as “the process of identifying, predicting, evaluating and mitigating the biophysical, social, and other relevant effects of development proposals prior to major decisions being taken and commitments made.” The EIAs are unique in that they do not require adherence to a predetermined environmental outcome, but rather they require decision makers to account for environmental values in their decisions and to justify those decisions in light of detailed environmental studies and public comments on the potential environmental impacts.

← 16. “Notional tonnes” were calculated by adjusting the volume of emissions for their maximum allowed (regional) concentrations.

← 17. Even though the list of pollutants subject to ELV was reduced there is a residual group of “other pollutants” that fall into specific hazard categories of MACs. Therefore, the enterprises are required to measure and keep records of a larger number of pollutants for statistical purposes.

← 18. Article 110 of the Environmental Code provides for the application of the indirect method for evaluation of economic damages in cases when “the direct method cannot be applied, namely for the discharges and emissions of pollutants into the atmosphere or excessive emissions when it is impossible to compensate the caused damage necessary for environmental rehabilitation, restoration of degraded natural resources and health improving of living organisms through the most efficient engineering, organisational, technical and technological measures”.

← 19. In most OECD countries, liability for environmental damage is understood as an obligation for the responsible party to bear the costs of restoring the environment. This obligation, under the strict liability regime which is applied in OECD countries, does not require proof of negligence or regulatory non-compliance. The remediation is usually conducted by the party responsible for the damage under an administrative or court order, in accordance with a specific clean-up project. In a public health or environmental emergency, public authorities can directly proceed with remediation and then recover the remediation costs from the liable parties.

← 20. The claims of above-norm gas flaring often pertain to technologically unavoidable gas flaring resulting from statistically predictable malfunctions of equipment. Sometimes they also pertain to maintenance flaring which the authorities had approved, but which was carried out in a different period from that indicated in the resource user’s pre-approved maintenance plan.

← 21. According to the information provided by the government in its submission to the Paris COP, fugitive emissions of CO2 emitted by the oil and gas industry fallen from 5.8 million tonnes in 1992 to 2.4 million tonnes in 2011. By contrast, the same source indicates that the energy industry in Kazakhstan reduced its emissions from 113 million tonnes of CO2 in 1992 to 93 million tonnes in 2011 Kazakhstan (UNFCCC, 2016).

← 22. Kazakhstan indicated that according to the updated “with measures” scenario total national GHG emissions in 2020 are projected to be 15.6% below the 1990 level. The projections show that Kazakhstan could reach its 15% emission reduction target by 2020 but these are not consistent with the GHG emission projections as reported in Kazakhstan’s sixth national communication (NC6), which indicate that Kazakhstan’s 2020 target under the Convention could not be achieved under the “with measures” scenario. The expert review teams recommends that Kazakhstan enhance the transparency of its reporting by providing the information on mitigation actions and their effects included in the updated “with measures” scenario in the subsequent biennial report.

← 23. But the goal to reduce emissions until 2030 does not mean further reduction of emissions before 2020.

← 24. The 2011 Environmental Code amendments contain a principle that only GHG emission reductions not due to a reduction in production can be sold on the market. In practice, procedures to ensure/verify the origins of such reductions were not clear. As of March 2016, this principle is expected to be removed as part of a pending package of amendments to the Environmental Code.

← 25. Kazakhstan aims periodically to determine the amount of “carbon units” based on the amount of units allocated under international treaties, the amount of units absorbed by Kazakhstan facilities or acquired in the international market. The Kyoto Protocol and the Environmental Code define this aggregate amount as the Established Quantity. Under Kazakhstan law, the Established Quantity is divided between the Established Quantity Reserve and the National Allocation Plan for Emissions of Greenhouse Gases (NAP).

← 26. Technically, the KazETS also cover GHG emissions from the agricultural and transport sectors, although in practice these sectors do not receive allocations and thus are not presently regulated. The inclusion of the agricultural and transport sectors is still being debated.

← 27. To date 15 companies have been accredited by the Ministry of Energy to perform these accreditations, and this list is published online. Companies are accredited by submitting an application and identifying personnel with experience in key industrial sectors or accreditation under an existing international carbon market. The threshold for being accredited is low by international standards, and there are no minimum requirements for training, testing, or conflict of interest. It should be noted that in April 2016 the competence for validation and verification of accreditations was transmitted from the Ministry of Energy to the Committee on Technical Regulation and Metrology under the Ministry of Investment and Development.

← 28. To date, revenue from the ETS has been relatively small, coming only from small penalties collected in 2015.

← 29. It should be noted however that despite the suspension of the KazETS until 2018, users of natural resources must submit reports on the greenhouse gas inventory to the authorised body.

← 30. The Law of the Republic of Kazakhstan of 8 April 2016, No.491-V, “On the Introduction of Changes and Additions to Several Legal Acts of the Republic of Kazakhstan on Environmental Issues”.