Financing for Ukraine: why we are losing more than 4.5 billion euros on green economic transformation
The last two years have demonstrated the inextricable link between Ukraine and the European community. On June 23, 2022, Ukraine gained the status of a candidate for accession to the European Union. On November 14 of the past year, the EU announced the start of negotiations with Ukraine.
The experience of other countries shows that accession to the EU usually requires considerable effort and time from candidate countries, especially in terms of economic and regulatory reforms. Thus, the national economy will face profound transformations related to the EU requirements and standards implementation.
The “green” energy transition and achieving carbon neutrality are among the most significant issues that have always required significant financial resources. And in the context of war, along with constant shelling and logistical constraints, the cost of each green project for business increases significantly.
The business community has explored potential opportunities for financial assistance to Ukraine on its path to European integration. Olga Boiko, Coordinator of the EBA Committee on Industrial Ecology and Sustainable Development, told Mind what advice the business community recommends the government use in its daily regulatory activities and negotiations with the EU.
1. Access to funding programs for EU candidate countries
Since 1989, the EU has had special pre-accession assistance instruments (pre-accession programs). Their main goal is to help restructure the most problematic sectors and regions in line with EU requirements and standards.
Pre-accession programs are a training ground for local governments, civil society, and businesses to acquire skills in using EU funds; they require participants to contribute and quickly acquire modern management competencies.
For example, Poland has had access to three pre-accession programs, under which it received assistance worth EUR 5.8 billion:
- The PHARE program (Poland Hungary Assistance for Restructuring their Economies). During 1990-2006, Poland received approximately EUR 4 billion from this fund. In particular, in 1990-1996, the average annual receipts amounted to 198 million euros (almost 0.2% of Poland’s 1995 GDP). The funds were provided as non-repayable grants and were used for infrastructure (construction of roads, sewage facilities, etc.), private sector development, support for enterprises, environmental protection, reform of public administration and state institutions, growth of social protection and employment, and health care.
- SAPARD (Special Accession Program for Agriculture and Rural Development), from which Poland received 170 million euros annually in 2000-2006. These funds were intended for the modernization of agricultural farms, processing of agri-food products, and rural infrastructure.
- The ISPA (Instrument for Structural Policies for Pre-Accession) program, from which Poland received a total of €600 million in 1990-2003 for the implementation of large investment projects by local governments in the field of infrastructure development, environmental protection, and transport networks.
Since 2007, the European Commission has been allocating funds through the Instrument for Pre-Accession Assistance (IPA). In 2007-2013, the budget of this instrument amounted to 11.5 billion euros. In 2014-2020 – 12.8 billion euros, and in 2021-2027 – almost 14.2 billion euros. The recipients of these funds include Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, Serbia, and Turkey. At the same time, Ukraine, which has the status of a candidate for EU membership since June 2022, is not on this list. This needs to be changed.
2. Maintaining the funding line under the Association Agreement
In the EU, the amount and direction of funding are represented by the Multiannual Financial Framework (MFF). This includes financial instruments for member states, candidate countries, as well as partner regions or individual states outside the EU. In 2021, the MFF for 2021-2027 was agreed upon.
As part of the MFF, a separate seven-year plan (Multi-annual Indicative Program, MIP) was approved for Ukraine as a signatory to the Association Agreement with the EU. It focuses on sustainable economic development, the rule of law and security, environmental and climate resilience, digital transformation, and a sustainable, gender-equal, fair, and inclusive society. In 2021, the EU allocated €141 million to Ukraine for these reforms. However, in the spring of 2022, these funds were redirected to the EU’s Emergency Support Program for Ukraine as a result of Russian armed aggression.
In 2023, the EU allocated €585 million for MIP for Ukraine. The estimated MIP budget for Ukraine for 2021-2024 is €640 million, of which we have already received more than 90%. The total budget for 2027 is 2.6 billion euros. But we may not receive these funds if the Ukraine Facility is launched.
3. Include support for the “green” transition in the Ukraine Facility
In June 2023, the European Commission published a draft Regulation on the launch of the Ukraine Facility. The document proposes to create a new instrument to finance the restoration, reconstruction, and modernization of Ukraine by providing €50 billion in financial assistance in 2024-2027. On October 17, 2023, the draft Regulation on the Ukraine Facility passed its first reading in the European Parliament.
In fact, the Ukraine Facility is one of the updates to the EU’s MFF, which should complement existing mechanisms to support Ukraine on its path to the EU. It is expected that 78% of the funds will be allocated to the state budget to ensure macro-financial stability, and 16% will be used to create an investment instrument to cover risks in priority sectors. Only 5%, or €2.5 billion, will be allocated to support reforms and economic transformations necessary for European integration, including environmental and climate protection.
At the same time, the EU plans to replace some other support programs with the Ukraine Facility. As a result, not only will Ukraine not receive €923 million for green transformation under the MIP, but it may also forget about €3.5 billion in aid it would have been eligible for under the IPA until 2027.
Therefore, it is advisable to consider supporting the green transition of the Ukrainian economy within the Ukraine Facility, for example, in the form of grants or other forms of co-financing for projects in leading industries. This would be in line with the established practice of supporting EU candidate countries, which is planned to be restricted to Ukraine.
Also, in the process of implementing joint projects, the European Commission will receive a positive signal about our country’s steps toward harmonizing the economic and climate goals of Ukraine and the EU. The experience of European institutions in supporting the “green” transformation of the economy will contribute to the development of similar financing instruments in Ukraine.
4. Exemption from the Carbon Border Adjustment Mechanism (CBAM)
In May of this year, the EU approved the CBAM Regulation. On October 1, the CBAM transitional period began, during which the importer only reports on the CO2 emissions embedded in the import of goods subject to CBAM taxation without charging the corresponding fee.
Starting from January 1, 2026, the mechanism will be fully operational, namely the manufacturer of the goods subject to CBAM, when importing them into the EU, must pay for the CO2 emissions released as a result of their production by purchasing the corresponding number of CBAM certificates at the market price formed in the EU Emissions Trading System (EU ETS).
The CBAM will initially cover iron, steel, aluminum, cement, organic chemicals, fertilizers, electricity, and hydrogen. By 2030, the CBAM is expected to cover all sectors that are currently participating in the EU ETS. This means that producers of glass, pulp, and paper, as well as air and sea transport, will have to pay the tax.
Even before the war, the EU had identified Ukraine as one of the countries that would be most affected by the CBAM. According to various estimates, the additional burden on imports from Ukraine will range from €300 million to €1.2 billion annually. In the current environment, such a financial burden will be unbearable for Ukraine’s struggling economy.
That is why it is necessary to start negotiations on the activation of Article 30 of the CBAM Regulation, which allows for special conditions for the export of goods from Ukraine in 2026, where exceptional and unprovoked events have had devastating consequences for the economy and industrial infrastructure. This will help reduce the financial burden on businesses and partially accumulate resources for the necessary environmental and climate protection reforms.
5. Targeted use of funds from the CO2 eco-tax
According to the State Treasury, in 2021, Ukraine received UAH 1.18 billion from the CO2 eco-tax. In 2022, this figure reached UAH 1.63 billion, and in January-September 2023, it was UAH 1.48 billion.
In the spring of this year, the state budget created a special section called the State Fund for Decarbonization and Energy Efficient Transformation. Starting in 2024, 100% of the proceeds from the CO2 emissions tax will be allocated to this fund. The money from the Decarbonization Fund will be used to implement measures and state target programs in the field of energy efficiency, increase the use of renewable energy sources and alternative fuels, reduce carbon emissions, as well as to compensate, reimburse, and reduce the cost of obligations of individuals and legal entities under loan and leasing agreements in these areas.
However, the use of the Decarbonization Fund must be carried out by the procedure approved by the Cabinet of Ministers. However, for 9 months, its draft was not even made public for public discussion. This means that the budget will receive money for environmental and climate measures, but it will be impossible to use it.
In this context, in addition to the prompt development of a document that will allow the use of funds from the CO2 eco-tax, it is advisable, as in the EU, to provide for their allocation to the implementation of the most promising decarbonization projects in the main carbon-intensive industries. For example, this could include support in the form of grants, concessional lending, and other instruments to reduce emissions from existing industrial enterprises and to build new green facilities. By supplementing the CO2 eco-tax with a system of its targeted use, Ukraine will be able to create a decarbonization financing system similar to the one in the EU, where the sale of CO2 emission quotas fills the relevant decarbonization trust funds.
What can Ukraine change now?
At first glance, it may seem that everything is going according to plan – Ukraine has been granted candidate status and is about to have access to a separate fund of financial assistance for the implementation of European integration reforms.
But in reality, Ukraine is closing the door to almost €10 billion in assistance for candidate countries and a multi-year support program, of which €4.5 billion is earmarked exclusively for financing the “green” transformation. Ukraine could receive these funds as early as 2024.
The situation is also aggravated by the inability to use the proceeds from the CO2 eco-tax for EUR 36 million annually.
And with additional annual payments of €300 million of carbon tax on imports to the EU under the CBAM, Ukraine will obviously have to pay for the “green” transformation of European enterprises.
On the one hand, this is understandable, since with an expected budget deficit of almost €40 billion in 2024, even if Ukraine receives €12.5 billion annually under the Ukraine Facility, these funds will be used to address the urgent needs of a country at war, where the “green transition” and environmental modernization are definitely not a priority.
On the other hand, no one has canceled the Green Deal, and Ukraine is subject to the same conditions as the rest of the world, whose residents know about life during the war only from the news.
That is why the position of Ukrainian negotiators on EU membership should include not only confirmation of readiness to implement environmental and climate policies and regulations but also mandatory access to financial instruments, which should at least be proportional to the amount of aid to other countries.
We sincerely hope that the position of the business community, which has withstood and has continued to provide significant economic support to Ukraine and fill the EU budget for two years, will be heard.