Business expects a reasonable synergy of fiscal and climate policies in Ukraine

22/ 07/ 2021

Yesterday, July 21, representatives of the European Business Association have emphasized the synergy of the fiscal and climate policies during the closed round table Towards Ukraines carbon neutrality: improving approaches to carbon taxation, which took place on the platform of the Tax Committee of the Verkhovna Rada. There was also a presentation of the study Ways to improve the tax on carbon dioxide emissions in Ukraine which was the subject of discussion for representatives of the Ministry of Environment, parliamentarians, the State Tax Service, the State Fiscal Service, and the business. EBA representatives noted certain positive aspects in the study, namely the understanding of the need for the targeted use of the environmental tax, as well as the fact that rising rates will not reduce CO2 emissions. Thus, the country needs other incentives. The first step in this direction is the revision of CMU Resolution №1147, initiated by the Ministry of Environment. This document regulates the list of measures that can be considered environmental and for which funds from the environmental tax can be spent. As the EBA experts consider that Ukraine can actually reduce carbon emissions by 60-55% from the level of 1990 (i.e., up to 40-45% by 2030) with $ 15-20 billion in investment, the development of appropriate financial mechanisms is needed. That is why businesses have proposed to include measures aimed at decarbonization and combating climate change in the list. Besides, the Association expressed its support for urgently reviewing Ukraines climate policy with regard to the introduction of the National Emissions Trading System (ETS) and improving approaches to CO2 taxation. In the opinion of EBA representatives, the unification of CO2 emissions payments in the form of an energy tax (as suggested in the study) with ETS is possible if the payers/participants are from different sectors. For example, the energy tax linked to CO2 emissions can be paid by the transport sector and households, while businesses can participate in ETS. First, there will be no double taxation of CO2 emissions for businesses. Secondly, due to the approach to emission measurement introduced by the Law on Monitoring, Reporting, and Verification (MRV), the objectivity of data will be significantly improved, and the accounting and taxation system will be simplified. Third, ETS includes the taxation of emissions that are related to production processes, but not directly related to fuel combustion. Therefore, there will be no such problem that part of CO2 emissions not related to fuel combustion is not being taxed. Fourth, the sale of CO2 emission permits within ETS, in particular in European countries, provide revenues that can be used for projects to reduce carbon emissions, reduce energy consumption, increase energy efficiency, increase the use of alternative and renewable energy source. That is, on the one hand, the price of emissions increases the costs associated with activities that cause pollution, and on the other - ETS encourages companies to reduce emissions. This experience is more eloquently presented in the EU, where the main payers of environmental taxes are households, not businesses. Thus, in 2018, the share of corporations in the total amount of revenues from environmental taxes was 46.7%, while in terms of revenues from energy taxes, the business contribution does not exceed 50%. Thus, the structure of tariffs for the population includes an ecological component, which allows consumers to gain more awareness of their impact on the environment. At the same time, linking the level of costs to the consumed number of natural resources encourages a more responsible approach to energy management. Also, somewhat contradictory in the study is the statement that the return of funds from the environmental tax is contrary to the principle of polluter pays , according to which the company that pollutes the environment must compensate for the damage. This conclusion is not entirely correct, because the company that produces the emissions, in any case, pays for them - through contributions to the budget, where these funds will be dissolved, or through investments in environmental measures. As the study shows, this is a real practice for some EU countries, if applied reasonably, to help industries with high GHG emissions, and sensitive to international competition and those that create high added value for the economy and provide a large share of employment, reduce the risk of production loss and competitiveness. It is worth recalling that in the crisis of 2020, the total costs of enterprises for environmental projects decreased by 9% compared to 2019 - up to 41.3 billion UAH. However, in general, allocations for air protection and climate change have increased in all sectors. At the same time, if the state stimulates business by returning the share of the eco-tax, these investments will increase. And then it will be easier for the country to meet its environmental goals and prevent pollution, which is more important than paying for the actual damage. After all, if we proceed from the logic of compensation for damage and replenishment of the state budget then it appears that the state, on the contrary, is interested in increasing emissions and deteriorating the environment, because then revenues will be higher. But we still hope that is not the case. The European Business Association also supports the setting of a zero CO2 tax rate for biomass plants. First, it is in line with the ETS Directive 2003/87 / EC, which states that when calculating greenhouse gas emissions for stationary installations, the emission factor for biomass is zero. Secondly, it should also be borne in mind that Directive 2003/96 / EC on the restructuring of taxation on energy products and electricity provides for the possibility for the EU Member States to introduce full exemptions or reduced rates of taxation on energy products produced exclusively on biomass or on components manufactured from biomass. Third, according to the recently introduced MRV system, CO2 emissions from biomass, including those that are part of the mixed fuel/material, are not taken into account for the purposes of monitoring and calculating greenhouse gas emissions. This rule applies to installations for which the fuel is biomass, mixed fuel, or mixed material based on the total carbon content, consisting of the biomass fraction, and the fossil fuel fraction. That is why this Draft Law needs to be revised at the moment. In conclusion, EBA thanks for the conducted study and hopes that the comments and suggestions of the business community will also be taken into account in the development of future regulations in the field of CO2 taxation. For reference: The round table was organized within the framework of the project Ukraine in Europe: Parliamentary Dimension, conducted by the Center for Liberal Modernity in partnership with the East Europe Foundation with the support of Germanys Federal Foreign Office. The round table was also co-organized by the Committee of the Verkhovna Rada of Ukraine on Ukraines Integration into the European Union.

Yesterday, July 21, representatives of the European Business Association have emphasized the synergy of the fiscal and climate policies during the closed round table “Towards Ukraine’s carbon neutrality: improving approaches to carbon taxation”, which took place on the platform of the Tax Committee of the Verkhovna Rada.

There was also a presentation of the study “Ways to improve the tax on carbon dioxide emissions in Ukraine” which was the subject of discussion for representatives of the Ministry of Environment, parliamentarians, the State Tax Service, the State Fiscal Service, and the business.

EBA representatives noted certain positive aspects in the study, namely the understanding of the need for the targeted use of the environmental tax, as well as the fact that rising rates will not reduce CO2 emissions. Thus, the country needs other incentives.

The first step in this direction is the revision of CMU Resolution №1147, initiated by the Ministry of Environment. This document regulates the list of measures that can be considered environmental and for which funds from the environmental tax can be spent. As the EBA experts consider that Ukraine can actually reduce carbon emissions by 60-55% from the level of 1990 (i.e., up to 40-45% by 2030) with $ 15-20 billion in investment, the development of appropriate financial mechanisms is needed. That is why businesses have proposed to include measures aimed at decarbonization and combating climate change in the list.

Besides, the Association expressed its support for urgently reviewing Ukraine’s climate policy with regard to the introduction of the National Emissions Trading System (ETS) and improving approaches to CO2 taxation.

In the opinion of EBA representatives, the unification of CO2 emissions payments in the form of an energy tax (as suggested in the study) with ETS is possible if the payers/participants are from different sectors. For example, the energy tax linked to CO2 emissions can be paid by the transport sector and households, while businesses can participate in ETS. First, there will be no double taxation of CO2 emissions for businesses. Secondly, due to the approach to emission measurement introduced by the Law on Monitoring, Reporting, and Verification (MRV), the objectivity of data will be significantly improved, and the accounting and taxation system will be simplified. Third, ETS includes the taxation of emissions that are related to production processes, but not directly related to fuel combustion. Therefore, there will be no such problem that part of CO2 emissions not related to fuel combustion is not being taxed. Fourth, the sale of CO2 emission permits within ETS, in particular in European countries, provide revenues that can be used for projects to reduce carbon emissions, reduce energy consumption, increase energy efficiency, increase the use of alternative and renewable energy source. That is, on the one hand, the price of emissions increases the costs associated with activities that cause pollution, and on the other – ETS encourages companies to reduce emissions.

This experience is more eloquently presented in the EU, where the main payers of environmental taxes are households, not businesses. Thus, in 2018, the share of corporations in the total amount of revenues from environmental taxes was 46.7%, while in terms of revenues from energy taxes, the business contribution does not exceed 50%. Thus, the structure of tariffs for the population includes an ecological component, which allows consumers to gain more awareness of their impact on the environment. At the same time, linking the level of costs to the consumed number of natural resources encourages a more responsible approach to energy management.

Also, somewhat contradictory in the study is the statement that “the return of funds from the environmental tax is contrary to the principle of” polluter pays “, according to which the company that pollutes the environment must compensate for the damage.” This conclusion is not entirely correct, because the company that produces the emissions, in any case, pays for them – through contributions to the budget, where these funds will be dissolved, or through investments in environmental measures. As the study shows, this is a real practice for some EU countries, if applied reasonably, to help industries with high GHG emissions, and sensitive to international competition and those that create high added value for the economy and provide a large share of employment, reduce the risk of production loss and competitiveness.

It is worth recalling that in the crisis of 2020, the total costs of enterprises for environmental projects decreased by 9% compared to 2019 – up to 41.3 billion UAH. However, in general, allocations for air protection and climate change have increased in all sectors. At the same time, if the state stimulates business by returning the share of the eco-tax, these investments will increase. And then it will be easier for the country to meet its environmental goals and prevent pollution, which is more important than paying for the actual damage. After all, if we proceed from the logic of compensation for damage and replenishment of the state budget then it appears that the state, on the contrary, is interested in increasing emissions and deteriorating the environment, because then revenues will be higher. But we still hope that is not the case.

The European Business Association also supports the setting of a zero CO2 tax rate for biomass plants. First, it is in line with the ETS Directive 2003/87 / EC, which states that when calculating greenhouse gas emissions for stationary installations, the emission factor for biomass is zero. Secondly, it should also be borne in mind that Directive 2003/96 / EC on the restructuring of taxation on energy products and electricity provides for the possibility for the EU Member States to introduce full exemptions or reduced rates of taxation on energy products produced exclusively on biomass or on components manufactured from biomass. Third, according to the recently introduced MRV system, CO2 emissions from biomass, including those that are part of the mixed fuel/material, are not taken into account for the purposes of monitoring and calculating greenhouse gas emissions. This rule applies to installations for which the fuel is biomass, mixed fuel, or mixed material based on the total carbon content, consisting of the biomass fraction, and the fossil fuel fraction. That is why this Draft Law needs to be revised at the moment.

In conclusion, EBA thanks for the conducted study and hopes that the comments and suggestions of the business community will also be taken into account in the development of future regulations in the field of CO2 taxation.

For reference: The round table was organized within the framework of the project “Ukraine in Europe: Parliamentary Dimension”, conducted by the Center for Liberal Modernity in partnership with the East Europe Foundation with the support of Germany’s Federal Foreign Office. The round table was also co-organized by the Committee of the Verkhovna Rada of Ukraine on Ukraine’s Integration into the European Union.