Business has identified 4 key conditions for effective climate policy in Ukraine

16/ 05/ 2024

Recently, a public discussion of the draft Strategy for the Implementation of the Greenhouse Gas Emissions Trading System in Ukraine until 2033 and its Operational Plan was held. The business community welcomes this and other government initiatives in the field of climate policy. It is worth noting that since the beginning of 2024, the Government has taken significant steps to develop climate regulation. In particular, four important draft regulations were published for public discussion: The Strategy for the Formation and Implementation of State Policy in the Field of Climate Change for the Period up to 2035 and the Operational Plan for its Implementation for 2024-2026; Draft law on the basic principles of state climate policy; National Energy and Climate Plan; The Strategy for the Implementation of the Emissions Trading System (ETS) until 2033 and the Operational Plan for its Implementation for 2024-2026. The EBA experts conceptually support these initiatives, but at the same time draw attention to some points that will make them ineffective or even remain on paper. First, we urge the Government not to rush into the ETS implementation and to ensure a regular dialogue with business on the parameters of the future ETS launch and operation. The ETS is a European obligation of Ukraine, defined in both the Association Agreement with the EU and the Ukraine Facility Plan. At the same time, neither of them sets a timeframe for when the ETS should start operating in Ukraine. According to the business community, the governments proposed launch of the pilot phase in 2026 is not realistic, as there is no data on actual CO2 emissions from enterprises, which are the basis for building the system and its key elements. The fact is that reporting on CO2 emissions under the MRV system has been suspended for the period of martial law. Mandatory reporting is planned to resume only in 2025-2026 (the EU requires it to be done by the end of Q2 2025), but such a resumption poses a number of organizational challenges, including the complexity of verification at enterprises located in close proximity to combat zones and subject to attacks by Russian troops. The expert community (international projects, business) has repeatedly emphasized that in order to qualitatively determine such ETS parameters as quota allocation and emissions cap, it is necessary to have at least three years of emissions data from enterprises. We remind you that this instrument should help businesses to reduce CO2 emissions in an economically rational way, and therefore business readiness, including its financial health, is key to success. Secondly, the introduction of the ETS will not exempt Ukrainian producers exporting to the EU from the need to pay CBAM (Carbon Border Adjustment Mechanism) and will lead to a significant increase in the cost of all products. Today, there are at least ten national emissions trading systems in the world, eight of which are in countries outside the EU, but only Switzerland was able to obtain an exemption from paying СВАМ due to its ETS. According to a study by the Kyiv School of Economics, the burden on export-oriented industries as a result of the ETS implementation may be many times higher than the financial effect of the СВАМ. Therefore, the ETS should be considered separately from the ETS, and attempts to implement the ETS in time for the start of the ETS financial obligations in 2026 may lead to a collapse of preparations for both the ETS and the ETS, given the limited resources of government agencies and businesses. This could jeopardize the success of efforts to reduce greenhouse gas emissions and requires careful planning and a balanced approach. In addition, the introduction of the ETS will lead to significant challenges for further economic recovery, not only because of the increased financial burden on producers, but also because of the increased cost of electricity, cement, steel, and a number of other product groups that are critical during the war and recovery. For example, the introduction of an ETS during martial law will significantly increase the cost of building fortifications and increase state budget expenditures. Third, Ukraine should promote the application of the CBAM to Ukraine on a declarative basis. The current CBAM regulation allows the EU to take into account exceptional and unprovoked events that have caused devastating consequences for the economy and industrial infrastructure of a country exporting goods covered by the CBAM to the EU. One approach could be to apply a declaratory approach to goods imported from Ukraine to the EU and covered by the СВАМ. In other words, it would be essentially the same approach as for other countries, but without charging emission fees. This will reduce the financial burden on business and help companies accumulate resources to partially restore production levels affected by the hostilities. In this context, a new organizational mechanism should be developed for negotiations with the European Commission, as the current Working Group established by the Government in 2021 has not developed a consolidated position of the Ukrainian side on the approach to the application of the СВАМ. Fourth, the Ministry of Economy should start developing a Ukrainian СВАМ mechanism for imports of products from third countries. As Ukraine seeks to implement the European Unions climate governance architecture, a border carbon adjustment mechanism similar to the one introduced in the EU should be a mandatory element. This will help protect domestic producers and ensure equal conditions for all market participants in Ukraine (producers and importers), as well as speed up and simplify the process of integrating the Ukrainian market into the EU market after Ukraine becomes an EU member state. At the same time, since Ukraine already has an environmental tax on CO2 emissions, the implementation of the above mechanism should be carried out as soon as possible, in particular, before the introduction of the ETS and before Ukraines potential EU membership, given the expected duration of these processes. The European Business Association looks forward to taking into account the position of business and will continue to provide expert support to lawmakers.

It is worth noting that since the beginning of 2024, the Government has taken significant steps to develop climate regulation. In particular, four important draft regulations were published for public discussion:

The Strategy for the Formation and Implementation of State Policy in the Field of Climate Change for the Period up to 2035 and the Operational Plan for its Implementation for 2024-2026;
Draft law on the basic principles of state climate policy;
National Energy and Climate Plan;
The Strategy for the Implementation of the Emissions Trading System (ETS) until 2033 and the Operational Plan for its Implementation for 2024-2026.

The EBA experts conceptually support these initiatives, but at the same time draw attention to some points that will make them ineffective or even remain on paper.

First, we urge the Government not to rush into the ETS implementation and to ensure a regular dialogue with business on the parameters of the future ETS launch and operation.

The ETS is a European obligation of Ukraine, defined in both the Association Agreement with the EU and the Ukraine Facility Plan. At the same time, neither of them sets a timeframe for when the ETS should start operating in Ukraine. According to the business community, the government’s proposed launch of the pilot phase in 2026 is not realistic, as there is no data on actual CO2 emissions from enterprises, which are the basis for building the system and its key elements.

The fact is that reporting on CO2 emissions under the MRV system has been suspended for the period of martial law. Mandatory reporting is planned to resume only in 2025-2026 (the EU requires it to be done by the end of Q2 2025), but such a resumption poses a number of organizational challenges, including the complexity of verification at enterprises located in close proximity to combat zones and subject to attacks by Russian troops. The expert community (international projects, business) has repeatedly emphasized that in order to qualitatively determine such ETS parameters as quota allocation and emissions cap, it is necessary to have at least three years of emissions data from enterprises. We remind you that this instrument should help businesses to reduce CO2 emissions in an economically rational way, and therefore business readiness, including its financial health, is key to success.

Secondly, the introduction of the ETS will not exempt Ukrainian producers exporting to the EU from the need to pay CBAM (Carbon Border Adjustment Mechanism) and will lead to a significant increase in the cost of all products.

Today, there are at least ten national emissions trading systems in the world, eight of which are in countries outside the EU, but only Switzerland was able to obtain an exemption from paying СВАМ due to its ETS. According to a study by the Kyiv School of Economics, the burden on export-oriented industries as a result of the ETS implementation may be many times higher than the financial effect of the СВАМ. Therefore, the ETS should be considered separately from the ETS, and attempts to implement the ETS in time for the start of the ETS financial obligations in 2026 may lead to a collapse of preparations for both the ETS and the ETS, given the limited resources of government agencies and businesses. This could jeopardize the success of efforts to reduce greenhouse gas emissions and requires careful planning and a balanced approach.

In addition, the introduction of the ETS will lead to significant challenges for further economic recovery, not only because of the increased financial burden on producers, but also because of the increased cost of electricity, cement, steel, and a number of other product groups that are critical during the war and recovery. For example, the introduction of an ETS during martial law will significantly increase the cost of building fortifications and increase state budget expenditures.

Third, Ukraine should promote the application of the CBAM to Ukraine on a declarative basis.

The current CBAM regulation allows the EU to take into account exceptional and unprovoked events that have caused devastating consequences for the economy and industrial infrastructure of a country exporting goods covered by the CBAM to the EU. One approach could be to apply a declaratory approach to goods imported from Ukraine to the EU and covered by the СВАМ. In other words, it would be essentially the same approach as for other countries, but without charging emission fees. This will reduce the financial burden on business and help companies accumulate resources to partially restore production levels affected by the hostilities. In this context, a new organizational mechanism should be developed for negotiations with the European Commission, as the current Working Group established by the Government in 2021 has not developed a consolidated position of the Ukrainian side on the approach to the application of the СВАМ.

Fourth, the Ministry of Economy should start developing a Ukrainian СВАМ mechanism for imports of products from third countries.

As Ukraine seeks to implement the European Union’s climate governance architecture, a border carbon adjustment mechanism similar to the one introduced in the EU should be a mandatory element. This will help protect domestic producers and ensure equal conditions for all market participants in Ukraine (producers and importers), as well as speed up and simplify the process of integrating the Ukrainian market into the EU market after Ukraine becomes an EU member state. At the same time, since Ukraine already has an environmental tax on CO2 emissions, the implementation of the above mechanism should be carried out as soon as possible, in particular, before the introduction of the ETS and before Ukraine’s potential EU membership, given the expected duration of these processes.

The European Business Association looks forward to taking into account the position of business and will continue to provide expert support to lawmakers.