"Now the color of investments is green": why does Ukraine need ETS and what should it be?

"Now the color of investments is green": why does Ukraine need ETS and what should it be?

Katerina Belousova

Ukraine can join the EU ETS in 12 years, but it is necessary to start now

The European integration of Ukraine is, first of all, integration with European markets. The carbon market is one of them, and here we are already 18 years behind the Europeans. Since 2005 in the EU, the system of trading quotas for greenhouse gas emissions (EU ETS) began to be implemented. And we still haven't developed even a clear vision of the Ukrainian STV. On September 12, members of the Industrial Ecology and Sustainable Development Committee of the European Business Association (EBA) presented the study "The concept of building a system of trading emissions quotas in Ukraine. The path to sustainable development, a step towards the EU." The concept from the point of view of business determines the possible main stages and features of the introduction of quota trading in Ukraine. We at EcoPolitics have collected the main proposals for the establishment of ETS and caveats regarding them.

Why does Ukraine have a quota trading system?

The emissions trading system (ETS) is a market in which companies buy emission allowances that allow them to carry out economic activities. As part of this market, enterprises also receive additional incentives for decarbonization due to the implementation of these quotas.

According to EBA statistics, the quota trading system covers 17% of emissions in the world, and 55% of the world economy is created by countries where the ETS operates.

When preparing for the implementation of ETS in Ukraine, first of all, you need to decide – why do we need it. If for the countries of Europe the answer to this question is clear: to reduce emissions, then for us it is not really relevant at the moment. As a result of the war in Ukraine, production and, with it, emissions decreased significantly. As a result, our country has already exceeded both the first (НВВ1) and the second (НВВ2) nationally determined contributions to the Paris Agreement.

However, some experts are convinced that over time the problem of reducing emissions for Ukraine will become more relevant. As Volodymyr Buzhan, head of the Energy and Climate Department of the Center for Economic Recovery, notes: "If we fully restore territorial integrity by 1991, our emissions will increase. There are still a large number of coal-fired installations and industrial enterprises located in the occupied territories obsolete state. I am based on the Recovery Plan of Ukraine. We calculated the indicators there and the growth is in the range of 310-360 million tons."

But regardless of the situation, the introduction of ETS is still important for Ukraine. Emissions control will make production more energy efficient and promote economic growth, which is important at the stage of post-war recovery.

"Our economy is currently almost completely dependent on partner countries. They help us with weapons and resources for social payments, but this will not always be the case. The post-war restart of the economy is the same guarantee of security as the army or geopolitics. Long-term sustainable development of the country is possible only under the conditions of a green transition. And the emission quota trading scheme is a central element of climate policy, which determines its success," says Olga Boyko, coordinator of the EBA industrial ecology and sustainable development committee.

Of course, Ukraine already has a tax on CO2 emissions , he is well known to business and the state. But ETS is a more flexible mechanism. Due to the limitation of the upper limit of emissions, as well as the opportunity to sell excess quotas, enterprises are motivated to carry out energy modernization much more than simply by paying a tax. In addition, since the price of quotas will be shaped by the market, this will reduce the regulation and manual management of this area, which the business community has recently complained about.

"We understand that without green goals, without ETS, without measurable results, we will not receive investments. Now the color of investments is green. It was like that even before the war and the energy crisis in Europe has not changed it", – emphasizes the Chairman of the Committee on Industrial Ecology and Sustainable Development development of the European Business Association Stanislav Zinchenko.

After all, the creation of the ETS is Ukraine's obligation under the association agreement with the EU.

What can be the stages of launching ETS?

EU ETS has passed 4 phases of launch and adjustment of work. In each of these phases, the number of gases subject to quotas increased, the list of sectors of the economy whose emissions should be limited by quotas was expanded, the upper limit of emissions and the percentage of quotas that are distributed free of charge were reduced. Also, new states were constantly added to the system.

The EBA emphasizes that the system for monitoring greenhouse gas emissions must work properly in order to launch ETS in Ukraine. It is also necessary to update the objectives of the third nationally determined contribution to the Paris Agreement. Therefore, the experts of the association suggest planning the launch of the Ukrainian ETS no earlier than 2026, dividing it into the following 3 stages:

  1. Test (2 years, 2026-2027): This stage involves working out the procedures necessary for the operation of the ETS. In the EU ETS, a similar phase lasted three years.
  2. Targeting an economically justified price (4 years, 2028-2031): The stage will take into account the dynamics of the development of the Ukrainian economy and the permissible level of burden of enterprises with carbon payments. Targeting will allow to gradually increase the price of SO 2 without significant pressure on the competitiveness of enterprises.
  3. Adaptation to the prices operating in the EU ETS (6 years, 2032-2037): The stage is responsible for achieving the overall goal of the Ukrainian ETS to adapt the Ukrainian economy to the European price level. The third stage should be the longest to avoid shocks to the economy.

Integration of the Ukrainian ETS with the EU ETS is possible as early as 2038. In general, the transition to ETS in Ukraine can last 12 years. In Europe at one time it took 17 years, but experts are convinced that using the experience of our partners we will be able to cope faster.

At the same time, in the opinion of the deputy director of the GIZ project "Support for the implementation of the greenhouse gas emission quota trading scheme (GHG) in Ukraine", Pavel Masyukov, 2038 is too far a horizon, considering that Ukraine plans to join the EU in a shorter time frame.

What should the ETS cover?

In Ukraine, there are two main groups of industries that create almost all CO2 emissions : energy industry – 46.5% and processing industry 45.7%. These industries were included in the EU ETS in the first phase, and experts propose to include them in the Ukrainian ETS in the first stage.

According to European practice, aviation, maritime and road transport, as well as other industries should be included in the ETS at later stages.

According to the EBA, the Ukrainian ETS can cover up to 30% of greenhouse gas emissions in this way. This is close to the result of the EU, where the level of coverage is 38%.

Also, according to the EBA, the Ukrainian ETS should cover the same gases as the EU ETS (CO, N2O, PFC). However, at the first stage, it is advisable to focus on CO2 emissions.

What should be the upper limit of emissions?

In the EBA's opinion, it would be appropriate for the upper limit of emissions to be set on the basis of the updated nationally determined contribution (NDC3), taking into account the post-war recovery of the economy. To do this, it is necessary to revise the formation of the goals of the HBB. In particular, they should not be determined "from above" – ​​from the state, but "from below": first, collect information about emissions from enterprises, and then determine the national goal, taking into account the opportunities to reduce emissions.

Pavlo Masyukov here emphasizes that in the conditions of military aggression, the data on emissions in 2022 or 2023 will not be representative, besides, they are currently not being collected properly.

"Based on the available information, I would not reject the option of evaluating the cap," he says and advises to take the national inventory for the pre-war period for evaluation.

How to allocate emission quotas?

The EBA proposes to preserve the European experience and distribute part of the quotas for free, and part – at auctions. After all, different industries have different potential to reduce emissions and prevent "carbon leakage" (transfer of enterprises to countries with lower CO2 prices and less strict environmental regulation).

In Ukraine, taking into account the prospects of European integration, benchmarks (calculated on the basis of the emissions of the most efficient industry players) can be used for the distribution of free quotas, but using adjusting coefficients. For example, you can start with a coefficient of 1 and gradually decrease to 0.

"This approach is more flexible, because the correction factor can be used, in particular, as an intervention tool, if the targeted target price for emissions is not met," says Olga Boyko.

How to form the price of emission quotas?

According to the EBA, the price of emissions should change at each stage of system implementation. At the first stage, it will not be of decisive importance, and one of the possible pricing tools can be the principle of economically justified price, when the level of tax burden of carbon payments is copied to the level of GDP of each country or the EU.

From the third stage, it will be expedient to switch to the price level for quotas, which is equal to the price level in the EU at that time.

What should be the management structure of the Ukrainian ETS?

This issue is the most debatable for experts. After all, there is still no consensus on whose subordination the Ukrainian ETS should be in general.

The EU ETS is a fairly liberal system. Participating countries independently choose: the administrator of this system at the national level; the administrator of the national part of the pan-European register; person responsible for conducting auctions; a platform for conducting auctions; bodies responsible for issuing permits for greenhouse gas emissions, etc. Therefore, we are free to choose for the Ukrainian ETS.

As for who could be involved in the administration of this system, the EBA has as many as three options. First of all, this is the Ministry of Environmental Protection and Natural Resources. A similar system operates in most European countries (Bulgaria, the Czech Republic, Estonia, France, Ireland, Iceland, Norway, Portugal, Switzerland and others). In other EU countries, there are also examples where the central competent authority for EU ETS issues is an institution that is part of or subordinate to the local ministry of ecology. So, in Germany, the German Emissions Trading Authority, which is part of the German Environment Agency, is responsible for the implementation of the requirements of European legislation on ETS.

But here it is important to understand that the European ministries of ecology are not equal to the Ukrainian one and have significantly more institutional capacity. Also, in the conditions of the Ukrainian management system, such an administration structure creates corruption risks and a conflict of interests in the goals of economic development and industrial recovery. In addition, the Ministry of Environment lacks goals related to the introduction of ETS, as well as the necessary competencies to launch this system.

Option two – it can be a separate specialized institution within the structure of the Ministry of Economy, whose activity is aimed at economic development, which corresponds to the purpose of the Ukrainian ETS. At the same time, this ministry has no goals related to combating climate change.

It is also possible to create an independent institution for administration. This is exactly what Malta and the Netherlands did, transferring ETS functions to separate independent bodies – the Malta Resources Authority and the Netherlands Emissions Authority, respectively. However, in Ukraine, this will complicate the already complex system of state regulation.

The administrator does not have to be alone. These functions can be shared by several organs. Therefore, in the opinion of the EBA in Ukraine, it is most expedient to transfer the functions related to the administration of the system to the Ministry of Economy, ensuring that it sets climate goals in its activities. And also create a separate institution that will administer ETS.

Control over the entire system should be carried out by a specialized Supervisory Committee, which will provide a system of counterweights.

Volodymyr Buzhan supports the idea of ​​EBA and emphasizes that if the Ministry of Environment can still deal with the development of ETS, then the Ministry of Economy should manage the system itself, because it is an economic issue.

At the same time, according to the senior project manager of the Office of Reforms of the Cabinet of Ministers of Ukraine Maryna Denysiuk, giving the Ministry of Economy functions in terms of green transformation is somewhat premature and for now this issue should be left in the competence of another structure:

"In the government of Ukraine, the issue of the green rate was dealt with by the vice-premier for European integration... In the part of the green rate, there is not only the issue of CO2 emissions, but also the issue of pollution (both industrial and post-war restoration of ecosystems). These are huge funds that Ukraine will not have in the post-war period. Therefore, this is still a more global European integration story, which should be stimulated by money."

According to Maryna Denysiuk, the question of creating a separate body will be blocked by both the EU and domestic Ukrainian political leaders for several years after the war.

"We need to reform our state system first, and then create something new," she says.

How to use the funds received from the sale of quotas?

The emission tax system in Ukraine received the most criticism during its existence precisely because of the misuse of the funds received from it. We at EcoPolitics have repeatedly written about such cases. For example, about million-dollar estimates for "paper" work in Dnipropetrovsk region or the use of funds for a festival with pole dancing in Khmelnytskyi region.

Targeted use of funds is an important element of supporting the work of ETS. In the EU, in particular, they fill the Innovation Fund, which promotes green transformation, and the European Social Fund, which reduces its impact.

According to European practice, countries have a certain freedom in how to use the received funds, but the specifics of regulation in our country, on the contrary, require targeted use: 100% of the received funds must go to the climate fund, says Boyko.

"Given the insufficiency of funds for financing the green transition, we consider it expedient to direct the mandate of the special climate fund to compensation of interest rates on loans, or coverage of credit guarantees (for green transition projects, – author)," the expert emphasizes.

As early as 2021, Ukraine began to develop the law "On the system of trading quotas for greenhouse gas emissions". But the question: what exactly the UkrainianETSSTV should look like is still a subject of discussion. The scenario from the EBA also does not offer a single recipe for the creation of an ETS, but rather calls for a discussion to find the best option. For now, one thing is clear, no matter what this system is, the main thing is that it becomes a mechanism of cooperation to achieve better results on the way to green transformation and integration into the EU.

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