What Ukrainian business can expect from the largest “green” reform in Ukraine

What is happening in the EU now, and how has green policy changed due to the war and energy crisis?

Currently, the EU is not changing its plans and ambitions and, on the contrary, is strengthening the green energy transition.

Here are some important examples:

• 7 European countries (France, Germany, Austria, Belgium, the Netherlands, Luxembourg, and Switzerland) have committed to shutting down all coal and natural gas power plants by 2035 to decarbonize their energy systems;
• In 2023, the capacity of solar power plants in the EU increased by 55.9 GW, i.e. up to 263 GW;
• In 2022, biomethane output in Europe increased by almost 20%, and the production of combined biogas and biomethane reached 21 billion m3, which is 6% of natural gas consumption in the EU;
• In 2023 alone, the EU approved state aid in the form of grants and subsidies of more than €10 billion for the decarbonization of the largest European steel companies, including ArcelorMittal, ThyssenKrupp, Salzgitter, Stahl-Holding-Saar.

These are just examples from the energy and steel sectors, and there are many other programs and more and more of them. Investments and financing of infrastructure, energy, and industry with the support of national and European governments in the form of grants, subsidies, and specialized programs are being strengthened and have a systematic approach. EU countries have long since moved from developing plans to implementing large investment projects with the support of the European Commission, national governments, and local authorities.

What are the main challenges facing Ukraine in terms of green industrial policy?

Unfortunately, Ukraine lacks the necessary institutional capacity, particularly in comparison to the EU, which has dedicated the past two decades to developing institutions, mechanisms, tools, and competencies for implementing a green energy transition. In Ukraine, the Ministry of Environmental Protection oversees many licensing procedures for economic activities, prioritizing environmental and natural resource protection. However, other ministries not involved in green industrial policy lack such functions and competencies. The Ukrainian government faces the challenge of developing the necessary competencies and effective mechanisms to align with those in the European Union. A notable instance is establishing a greenhouse gas emissions trading market similar in principle and operation to the EU ETS. While the Minister of Environmental Protection asserts that Ukraine could initiate emissions trading by 2025-2026, doubts persist among market participants and experts.

Why does Ukraine need this system, and what are the goals of the EU?

The launch of the ETS is a requirement of the EU-Ukraine Association Agreement. Given Ukraine’s prospective membership in the European Union, the launch of the ETS becomes mandatory. We have already lost almost 4 years during which we could have prepared for its development and implementation. And now, as usual, the government will turn on the “turbo mode.”

The EU ETS covers CO2 emissions in 27 EU countries. The European Free Trade Association countries (Iceland, Liechtenstein, Norway), power plants in Northern Ireland, and from 2020 will be combined with the Swiss ETS.

The EU ETS operates on the cap and trade principle. The system sets an upper limit on emissions, which is constantly decreasing by the emission reduction targets.

Enterprises covered by the EU ETS must annually transfer to a designated account the number of permits that fully cover emissions for the reporting period.

In simple terms, it is a system for generating investment funds for energy and industry decarbonization. In 2022. the EU ETS generated €38.5 billion in revenue from the sale of emission allowances. On average, member states allocated 74.4% of their emissions revenues to climate change and energy-related climate goals. The EU ETS revenues fully fund the work of the Innovation Fund and the Modernization Fund, which have a total budget of €87 billion. These funds provide financing for decarbonization projects.

Who does this concern in Ukraine? Which businesses and industries will be participants in the system?

Potential participants in the Ukrainian ETS include electricity, gas, steam, and air conditioning suppliers, metallurgical production, coke, petroleum products, chemicals and chemical products, cement, lime, gypsum mixtures, paper and glass products. The list of ETS participants may be supplemented by companies from other industries based on their annual greenhouse gas emissions. GMK Center estimates that the Ukrainian ETS could cover about 30% of greenhouse gas emissions (as of 2021).

Is it true that the EU has a price of EUR 100 for emissions, and everyone pays it, and Ukrainian companies will also have to pay it?

No, it is not. This is a classic manipulation! Most European companies with carbon-intensive production do not pay for all their emissions, receiving free allowances that exceed the actual emissions during all the years of the EU ETS.

In the metallurgy industry, only about 6% of emissions are covered by purchasing allowances, meaning that the rest are free allowances. In the cement industry, allocated free allowances are often less than actual emissions. For example, CEMEX (Czech Republic) purchased 5% of the required allowances on the market, HeidelbergCement Ennigerloh (Germany) – 25%, and Cementos Balboa (Spain) – 38%.

By issuing free allowances, the EU is counteracting the problem of carbon leakage, when companies may decide to move production to countries with less stringent environmental regulations due to high CO2 prices. The EU cares about protecting its economy and industry and supports local businesses. The Ukrainian government should do the same!

What is the current state of reform in Ukraine? What changes can we expect shortly?

Minister of Environmental Protection Ruslan Strilets stated that the ETS will commence a trial run in 2025 and be fully operational in 2026. Can Ukraine launch the ETS in 2-3 years, considering the EU’s ongoing 17-year development? Our expert business community believes the ETS can only start after 3 years of a fully operational greenhouse gas emissions monitoring, reporting, and verification system (MRV).

The Ministry of Environmental Protection has not disclosed the concept or roadmap for the future ETS, so we do not yet see any realistic timeline. However, we estimate that Ukraine will be able to launch the ETS in at least 12-15 years.

I am skeptical about “turbo modes” and “ambitious goals.” Establishing an emissions trading market in Ukraine and joining the European one is a lengthy and intricate way to go. Consider the energy market creation – it has been launched, but everything hasn’t smoothly functioned within just 2 years. There’s an ongoing dialogue among business, government, and experts, introducing new tools and adjusting the system. This is a meticulous and time-consuming process, similar to launching the ETS.

Why is the Ministry of Environment engaged in this reform if it concerns energy and traditional industry, the basis of our economy and exports?

Traditionally, the Ministry of Environment, primarily designated for water, forests, and natural resources protection, is assigned all matters related to green economic transformation. In my opinion, this contributes to one of our challenges, reflected in the European Commission’s low assessment of our progress – a “D.” From our standpoint, active involvement from the Ministries of Economy, Energy, and Finance is essential. A plausible solution could involve establishing a dedicated body or a Ministry focused on Green Economic Transformation, given that nearly 99% of the issues are about economic and market mechanisms. Notably, 61% of industry-related CO2 emissions stem from energy (including transportation), making it logical to base the reform on the Ministries of Economy and Energy.

The primary issue lies not in the ministry’s nomenclature but in its priorities and competencies. The Ministry of the Environment, housing approximately 300 staff members, includes a climate policy management department with 13 specialists. However, part of the ministry’s work involves more than 70 permitting procedures and numerous licenses. Perhaps this focus is why little progress has been made in advancing this crucial reform since 2018.

What should industrial companies do to prepare for the ETS launch?

Build and develop new European systems for monitoring and reporting emissions at the enterprise, study European reporting standards and the work of enterprises in their industry under the EU ETS, look for partners to help with emissions verification, and train staff to develop competence. The carbon tax on EU imports and global carbon market development presents new challenges for production and exports, requiring readiness in the Ukrainian economy.

EBA Industrial Ecology and Sustainable Development Committee is a crucial expert platform for discussing reform implementation with the government and ministries. We combine practical expertise and advocate for the interests of the business community.

What positive effects can we expect from the ETS introduction in Ukraine?

If the system is built in a quality and expert manner and not in a hurry to achieve “turbo results,” the main positive will be Ukraine’s accession to European funds to finance decarbonization and green industry transformation.

This is contingent on the Ukrainian system closely mirroring the EU system. Based on our calculations, the Ukrainian ETS might lack the capacity to generate sufficient funds for financing green transformation projects due to our relatively small economy. Therefore, accessing European funds and executing decarbonization projects at pivotal enterprises in the energy, metallurgy, cement, and other sectors will be pivotal for Ukraine to attain European standards.

As a candidate for EU membership, Ukraine qualifies for various programs to finance its accession process. We anticipate government officials will safeguard Ukrainian economic interests, ensuring industrial enterprises access EU green funds. Investing in the green transformation of Ukraine’s economy aligns with the EU’s climate goals of reducing carbon emissions.