A carbon tax should be used as a complement to Ukraine's emissions trading system (ETS), and economic modeling should be conducted to realistically assess how quickly Ukraine can apply carbon prices under the EU ETS.
These recommendations are contained in the report “Framework for Green Reconstruction. Towards Ukraine's EU Readiness in Carbon Pricing” prepared by Deloitte Germany in cooperation with Deloitte France.
First of all, the experts noted that investors need predictability in carbon pricing and stability in climate policy in order to plan investments in green reconstruction.
“Therefore, Ukraine should define and discuss the real trajectory of carbon pricing,” they say.
According to analysts, Ukraine should take the following steps:
- Define its economic and strategic interests, as well as what is achievable given the importance of developing a decarbonized economy.
- Discuss the resulting economic strategy with the EU to ensure that the approach is robust and compatible with EU accession.
- Conduct further economic modeling to assess how quickly Ukraine can realistically apply carbon pricing under the EU ETS.
In the course of this modeling, Deloitte experts recommended
- conduct an analysis of the energy system to get a better understanding of emission pathways in the energy and industrial sectors;
- consider reconstruction needs and different recovery scenarios, including policy options and the impact of carbon pricing on technology choices.
“This analysis can be used to determine the appropriate pathway to convergence with the EU ETS for Ukraine, for example, by negotiating a special regime for free allocation of allowances under the ETS,” the company says.
Foreign experts suggest that Ukraine will have the opportunity to negotiate on many aspects, including
- later integration into the ETS;
- other sectoral coverage;
- compensation through EU funds.
According to Deloitte analysts, free allowances are the most attractive option for Ukraine.
“Negotiating an approximation pathway for a later phase-out of free ETS allowances in Ukraine would allow the country to participate in the EU ETS applying the full market price with a margin, while reducing the profit impact on Ukrainian industry,” they said.
Carbon price for the period before ETS integration
Experts noted that ensuring predictable carbon price dynamics for Ukraine is likely to be a challenge if an emissions trading system is introduced from the outset. This task is significantly complicated by the lack of data on current emissions.
To ensure predictability and ambition, Deloitte suggests using a carbon tax based on the ETS monitoring, reporting and verification (MRV) methodology as a complement to emissions trading in Ukraine.
Use of budget revenues
Experts emphasized that an integral part of the carbon strategy should be a clear plan from the outset to use budget revenues from carbon credits to offset the burden on consumers and support companies' decarbonization efforts. Only then will this strategy be economically and politically viable, they say.
Separately, the authors of the study noted that Ukrainian stakeholders expressed little confidence in purely national funds and support mechanisms and called for increased cooperation with international stakeholders, especially the EU.
Preparation of a sound MRV regime
Here are the main recommendations from the experts of the consulting and auditing company:
- For the final application of the ETS, it is necessary to calculate the total number of emission permits (i.e., the cap) using data on past emissions. Currently, no such information exists.
- To help generate this data, a sound MRV is needed and is currently being considered as part of the roadmap for the implementation of the domestic ETS.
- Capacity-building requirements should not be neglected, but rather actively engaged as part of the recovery effort.
“In the short term, only the evolution of the conflict can determine the need to request a CBAM exemption. If the burden of the CBAM proves to be economically too heavy, Ukraine may request the application of Article 30.7 “Force Majeure”, which provides for temporary measures aimed at overcoming extraordinary circumstances,” Deloitte says.
Recently, EcoPolitic reported that according to the third report of the World Economic Forum's Net Zero Industry Tracker, greenhouse gas emissions are decreasing in sectors that are difficult to reduce, but will not reach zero by 2050.
We also reported that funding for Ukraine's Decarbonization Fund will almost double next year.
