There is no ideal candidate for NETS: experts’ views on the proposed draft laws

After the introduction of four separate draft laws regarding the National Greenhouse Gas Emissions Trading System (ETS), the situation surrounding the future model of Ukraine’s carbon market has become rather complicated and confusing. EcoPolitica has provided a detailed analysis of these proposed documents in a previous article.

To gain a deeper understanding of the topic, we asked experts which document could serve as a basis for reform, whether the timelines proposed by officials and members of parliament are realistic, and what risks current legislative initiatives might entail.

What Experts Are Saying

EcoPolitica reached out to and interviewed numerous experts. The general atmosphere is as follows: specialists do not understand what is happening and are awaiting some form of communication from the Ministry of Economy and the parliamentary environmental committee. Some experts have not had time to fully grasp all the proposed initiatives, while others refuse to publicly comment on the developments.

Currently, the base draft law No. 15386 has received the clearest public assessment. The European Business Association (EBA) stated that it does not support the document in its current form.

Among the main concerns are:

• the lack of legally defined references for quota pricing;

• too rapid a reduction in the free allocation of quotas;

• narrowing of support mechanisms for decarbonisation and reduced financial support for investment projects;

• directing revenues to the existing fund instead of creating a dedicated Modernisation Fund;

• concentration of regulatory and financial functions within a single authority.

Among those experts who agreed to provide a public comment to EcoPolitic, opinions on the proposed draft laws were divided.

Stanislav Zinchenko, Head of the Industrial Ecology and Sustainable Development Committee of the EBA, believes that the draft prepared by the ministry is currently the most technically and structurally developed, as a significant number of experts were involved in its preparation, and a range of important amendments were incorporated. In his view, it provides a solid foundation for further work.

Among the parliamentary initiatives, Stanislav Zinchenko highlighted draft law No. 15386-1 by Member of Parliament Olena Kryvoruchkina. He considers this particular document, among parliamentary proposals, worthy as a baseline, as it is focused on the primary objectives of the ETS-practical financing mechanisms for decarbonisation, including the creation of a dedicated fund and the use of additional instruments such as decarbonisation crediting certificates and others.

According to the CEO of Center for Ecology and Development of New Technologies LLC (CERNT) Vladyslav Antipov, the most viable model for Ukrainian conditions is the one set out in draft law No. 15386-2. The expert believes that this document, more than other registered drafts, takes into account the wartime and post-war burden on the economy, provides for a longer adaptation period, a mechanism for wartime adjustment of quota prices, broader opportunities to support modernization, and a more proportionate system of responsibility.

At the same time, the CEO of CERNT noted that this refers specifically to the most acceptable conceptual framework, not a final text ready for adoption. He emphasized that draft law No. 15386-2 still needs to address legal inconsistencies, clarify the timelines for transitioning between phases, permitting procedures, mandates of authorities, and sanction mechanisms. It is also crucial to introduce three fundamental changes before adoption:

1. From the beginning of the second phase, introduce free allocation based on product benchmarks for sectors at risk of carbon leakage and synchronize its reduction with CBAM.

2. Retain decarbonization certificate accounting, the voluntary carbon adjustment mechanism, and dedicated enterprise accounts, but introduce transparent evaluation of project costs and outcomes, independent verification, and a clear tax regime.

3. Remove legal contradictions, postpone the permitting launch, clearly delineate powers of authorities, and make sanctions proportionate – without halting enterprises for formal or technical violations.

The President of the Association of Environmental Professionals (PAEW) Lyudmyla Tsyganok does not consider any of the four versions of the draft law suitable for adoption without significant revision. She noted that the ministry's draft has an obvious strength: it was prepared specifically as a systemic document for creating the ETS, was submitted for public discussion, and forms the foundation for Ukraine's gradual alignment with EU climate legislation.

If we assess the parliamentary alternatives not only in terms of ETS market architecture but also by how much the ETS can actually serve as a source of genuine technological modernization for industry, then, in the expert's opinion, the approaches laid out in draft law No. 15386-1 deserve the most attention.

“This is a fundamental issue. Ukraine cannot simply set a carbon price for enterprises and expect that decarbonization will happen automatically. The metallurgy, cement, chemical industries, and energy sector require massive capital investment in new technologies. If the ETS takes financial resources from these sectors but does not create a sufficiently powerful mechanism to return funds for modernization, we will not get decarbonization but rather increased production costs,” stressed Lyudmyla Tsyganok.

The expert believes that Ukraine needs a consolidated version that would combine the legal systematics and the European integration logic of the ministerial project with sufficiently strong mechanisms for financing decarbonization. At the same time, she outlined three fundamental conditions for herself that the final version of the draft law must meet:

1. The revenues from the NETS must be applied to decarbonization and modernization of the economy.

“For Ukraine, it should not simply be a budgetary rule. There is a need for transparent financial instruments through which enterprises investing in actual emission reductions have access to co-financing for modernization,” the expert says.

2. The NETS must be fully compatible with CBAM.

“The Ukrainian model should be designed such that the carbon price paid in Ukraine can be effortlessly verified and credited when determining CBAM obligations for Ukrainian exporters. Otherwise, the issue will not be the mere existence of the NETS, but rather the incompatibility of the two systems,” explains Liudmyla Tsyhanok.

3. A transparent and balanced management system for the NETS is required.

“The quota market will involve significant financial flows, so the questions of who sets the rules, who administers the system, who supervises the market, who manages the revenues, and who provides oversight cannot be relegated to a secondary role. There must be a clear separation of functions, independent oversight, audit, public reporting, and maximum transparency in the use of resources,” the expert emphasized.

The development of a fundamental law for the country cannot be conducted behind closed doors

Stanislav Zinchenko emphasized that a key step before adopting any decision regarding carbon draft laws must be a change in the approach to the very process of their development. This involves the following steps:

1. Broad public and expert discussion. According to specialists, consideration solely at the level of the sectoral parliamentary committee is insufficient.

“An open dialogue with the involvement of industry, business, and international partners is necessary,” the expert is convinced.

2. Harmonization with the EU ETS. Complete transformation of the concept, taking into account the official comments of the European Commission to ensure future system compatibility.

3. Ensuring targeted use of funds. A clear mechanism for returning the funds accumulated from the sale of quotas directly for decarbonization measures at enterprises must be firmly established.

Liudmyla Tsyhanok also stressed the urgent need for dialogue with business:

“The NETS cannot be built solely within state institutions. Enterprises are not merely the objects of this regulation. They are the ones who must invest billions in new technologies, forecast the future carbon price, and make decisions about modernizing assets with a planning horizon of 10, 20, or more years.”

The expert also cautioned against haste and regulatory fragmentation. She fears that with the presence of several draft laws at the same time, there is a risk that a complex economic system may begin to be formed as a political compromise between texts, without comprehensive modeling of the consequences for sectors of the economy.

The expert set out the following quality criterion for the future law: every hryvnia of the carbon charge must bring Ukrainian businesses closer to decarbonisation, rather than simply making their products more expensive.

What about integration with the EU ETS?

We asked experts which of the documents most closely aligns with Directive 2003/87/EC establishing the greenhouse gas emission allowance trading system within the EU. According to Stanislav Zinchenko, it's still too early to assess overall compliance, but among the developed documents, the ministerial draft law is the closest to the provisions of this Directive.

“At the same time, it should be noted that the European Commission has already provided significant comments on the ministerial draft, and most of them relate specifically to the fact that the current version remains too far from and inconsistent with the European ETS,” the expert emphasized.

In the opinion of Liudmyla Tsyhanok, in terms of its structure, stated objectives, and preparation process, it is the ministerial draft that appears most directly aimed at implementing Directive 2003/87/EC. However, the expert stressed that a final conclusion regarding the level of legal compliance with the acquis requires a detailed article-by-article analysis of all texts, including the subordinate regulatory framework they envisage.

The president of PAEW also drew our attention to another key point: Ukraine is currently implementing not a static system, since the EU ETS itself is undergoing another major transformation. In July, the European Commission presented its proposal to revise the EU ETS, taking into account not only climate objectives but also the competitiveness of industry.

“The proposed changes concern, among other things, the pace of reduction of quota allocations, mechanisms for free allocation, and support for industrial transformation. Therefore, it is important for Ukraine not to mechanically copy a particular snapshot of the EU ETS, but to create a system compatible with the European model, which itself continues to evolve,” the expert noted.

Vladyslav Antypov agreed with the opinions of the previous experts that the ministerial draft law, which formed the basis for three parliamentary bills but was not itself submitted to the Verkhovna Rada, most fully reproduces the architecture of Directive 2003/87/EC.

Among the registered draft laws, the director general of CERN considers bill No. 15386-1 the closest to this model, primarily due to the separation of the functions of the competent authority and administrator, as well as the regulation of small installations, aviation, maritime transport, and investment mechanisms.

“However, formal similarity to the European model does not yet mean practical suitability for Ukraine. The Ukrainian system must take into account the war, capital shortages, the state of industry, and the need to prevent carbon leakage,” Vladyslav Antypov emphasized.

Will Ukraine be able to implement the ETS within the planned timeframe?

The issue of timing is one of the most debated both within the country and in negotiations with European partners.

Stanislav Zinchenko believes that all the implementation deadlines proposed in the draft laws look overly optimistic. The head of the EBA Committee is confident that the roadmap for launching the ETS should be much more pragmatic:

• After the war ends, the monitoring, reporting, and verification (MRV) system must function fully for at least three years. The infrastructure must be thoroughly prepared for this.

• Test mode: 2–3 years of pilot ETS operation without financial load.

• First phase of the ETS: only after successful completion of the previous stages.

“We must honestly admit: creating a fully functional, not just a formal, market in line with European standards will take no less than 15–20 years,” the expert says.

In fact, Ludmila Tsyhanok considers the implementation deadlines one of the key risks. She emphasized that it is impossible to genuinely launch the ETS simply by passing the law. Before a full-fledged market can emerge, the following must be operating stably:

• emissions monitoring, reporting, and verification;

• registry;

• verification system;

• quota allocation methodologies;

• auction mechanisms;

• market oversight;

• rules for using revenues;

• sufficient administrative capacity of the state.

The expert considers the phased launch envisaged by the government plan much wiser than attempting to move as quickly as possible to full financial load.

“European experience also shows that emissions trading systems require a learning period, accumulation of quality data, and adjustment of rules. Therefore, for Ukraine, the first stage of the ETS should not be a decorative pilot, but a real test of the entire system infrastructure.

We must answer very simple questions: do we trust the emissions data, are there enough verifiers, is the registry working, is the quota allocation methodology clear, and is business ready to plan investments based on these rules? If the answers are lacking, launching trading by itself will not create a market,” says the PAEW President with confidence.

In Vladyslav Antypov’s view, launching certain preparatory elements of the ETS in 2028 is possible, but a full-fledged cap-and-trade system by then looks unrealistic.

Like the previous experts, he also emphasized the critical importance of prior preparation:

• a stable MRV system, which will ensure high-quality verified data;

• a registry and auction platform;

• an established administrator;

• ensured market supervision;

• rules for free allocation;

• a sufficient number of trained specialists.

“Therefore, it is reasonable to consider 2028 as the beginning of the transitional or test phase. The mandatory requirement to obtain permits should be postponed at least until January 1, 2029, and full emissions coverage should be introduced only after the actual readiness of the entire ETS infrastructure,” the specialist emphasized.

Risks and Pitfalls

Stanislav Zinchenko pointed out the main conceptual threats accompanying the launch of the ETS in Ukraine:

1. Risk of formalism. An attempt to prematurely launch the market “on paper” without proper preparation threatens its functionality and the trust of European partners.

2. Non-compliance with EU requirements. Adopting the document in its current form without taking into account the comments of the European Commission will complicate future accession to the EU ETS and recognition of Ukrainian carbon units.

3. Excessive pressure on industry during wartime. The expert explains that the absence of a sufficiently long test period and postponement of full payments until after the war will deplete resources needed for rebuilding and actual decarbonization of enterprises.

Vladyslav Antypov and Liudmyla Tsyhanok agree that the main risk is the transformation of the ETS into an additional tax, effectively becoming just another source of budget revenue instead of a market tool for modernization. The CEO of the CER explained this will occur if enterprises are required to pay for allowances before the launch of a liquid market, free allocation, and accessible funding for decarbonization. The President of PAEW adds that carbon pricing should change the economics of investment, making low-carbon solutions more competitive, and the system’s revenues should help finance the transformation.

“It is also necessary to avoid the simultaneous payment of the environmental tax, ETS costs, and full CBAM burden,” the expert stressed.

Among other significant risks, he mentioned:

• excessive delegation of key parameters to secondary legislation;

• non-transparent allocation of fund resources;

• discretionary price setting;

• unregulated taxation of allowances and certificates;

• the possibility of inspections, permit cancellations, and suspension of operations due to procedural violations.

The expert is convinced that without eliminating these risks, a formally European system could undermine the competitiveness of Ukrainian industry before it creates incentives to reduce emissions.

Liudmyla Tsyhanok also highlights this point. She recalls that the EU ETS already generates tens of billions of euros annually, with funds directed to national budgets for climate and energy initiatives, the Innovation Fund, Modernisation Fund, and other transformation mechanisms.

“Therefore, to set a European level of requirements for Ukrainian industry without creating comparable transition financing instruments means laying the groundwork for structural inequality,” she notes.

In addition to those already mentioned, Liudmyla Tsyhanok identified three more risks:

1. Competitiveness of Ukrainian industry. The expert emphasized that the European Commission itself proposed the next EU ETS reform in July precisely under the banner of competitiveness and economically efficient decarbonization.

“That is, even the EU today is seeking a balance between the pace of emissions reduction and the ability of its own industry to undergo transformation. It would be strange if Ukraine, in wartime conditions, decided that it does not need such a balance,” she says.

2. Incorrect synchronization with CBAM.

“We need such an architecture for the Ukrainian system, in which the carbon price paid by a Ukrainian producer would legally, methodologically, and documentarily work when calculating CBAM,” emphasizes Liudmyla Tsyhanok.

3. Business confidence in the rules.

“There is a simple analogy that resonates with me: we can design an attractive ETS architecture, but before moving in, it is worth asking future residents whether the roof leaks,” the expert stressed.

Experts differed in their choice of the best legislative framework, but agreed on the main point: Ukraine needs not just a formal launch of the ETS, but a system compatible with the EU ETS that is supported by infrastructure, transparent governance, and real financing for modernization. Otherwise, instead of a market that reduces emissions, the state will gain yet another way to bill industry and ultimately collapse the country's economy.

It is possible to draft an attractive ETS on paper rather quickly, but launching and fine-tuning a system that simultaneously promotes industrial decarbonization and maintains the competitiveness of domestic producers requires much more time and effort. Are Ukraine's policymakers ready to consolidate efforts for the implementation of such a long-term project? We shall see.