The start of the market for trading greenhouse gas emissions will take place no earlier than 2026

Recently, the Cabinet of Ministers adopted three resolutions at once, designed to create mechanisms for the implementation of a system for monitoring, reporting and verifying greenhouse gas emissions. The documents are aimed at fulfilling Ukraine’s obligations under the Association Agreement with the European Union. And, ultimately, to ensure the launch of a market for greenhouse gas emissions in the country.

The market for greenhouse quotas should become an alternative to the environmental tax on CO2 emissions. Experts believe that trading in quotas is a more advanced tool for stimulating the environmental modernization of enterprises in comparison with the eco-tax. At what stage of implementation is the project, what risks for the industry are the new rules and when the market can fully start working – GMK Center understood.

Normative base

At a meeting on September 23, the government accepted three long-awaited by-laws aimed at establishing a system for monitoring, reporting and verifying greenhouse gas emissions in the country:

  • “On Approval of the Procedure for Monitoring and Reporting on Greenhouse Gas Emissions”;
  • “On approval of the list of activities, greenhouse gas emissions resulting from which are subject to monitoring, reporting and verification”;
  • “On Approval of the Procedure for Verification of an Operator’s Report on Greenhouse Gas Emissions”.

“The adopted laws will ensure the launch of a monitoring, reporting and verification system for greenhouse gas emissions from 2021. This step brought Ukraine as close as possible to the creation of a system for trading greenhouse gas emissions. After the launch of this system, we can assume that our country has fulfilled its obligations to implement Directive 2003/87/EC,” notes Vladislav Antipov, Director General of the Center for Ecology and Development of New Technologies (CEDT) .

From 2021, Ukrainian industrial enterprises determined by the Cabinet of Ministers will prepare plans for monitoring greenhouse gas emissions and approve them in the Ministry of Environmental Protection and Natural Resources. Reports for the following year must be submitted by March 31, 2022. The reports will be checked by independent experts in accordance with established procedures, and then submitted for approval to the Ministry of Ecology.

Recall that now the country has an environmental tax on CO2 emissions in the amount of 10 UAH per ton. However, enterprises calculate their volume using different methods, and the data they provide is not verified.

Pilots take off

In 2018, three enterprises of the mining and metallurgical complex implemented pilot projects to introduce the DRM system: Zaporizhstal, Zaporizhkoks and Tsentralny GOK. And the “pilots” were introduced by enterprises in the energy sector.

“In 2018, as a preparatory stage for the implementation in Ukraine of the national scheme for trading greenhouse gas emissions, DTEK Zaporizhzhya TPP introduced a pilot project to develop a standard MOV plan for thermal generation enterprises,” recalls Olga Semkiv, head of the Ecology Department at DTEK .

At the moment, according to Olga Semkiv, DTEK’s enterprises, which are subject to the MOV law and which are likely to be included in the greenhouse gas emissions trading system, are actively preparing to start monitoring carbon dioxide emissions from January 1, 2021. In particular, the development of emissions monitoring plans in accordance with the new legislation has begun and training of workers is ongoing.

“Our company has implemented pilot projects within the framework of the Partnership for Market Readiness project at the largest industrial enterprises in Ukraine. Not everything went smoothly, but in general we can say that our industry is ready for a new system for estimating greenhouse gas emissions. The biggest questions now are the readiness of metrological services and laboratories. However, I think that all shortcomings will be eliminated in the first year of the system’s operation,” Vladislav Antipov is sure.

If we talk about the readiness of Ukrainian enterprises for the full implementation of the MOU, then the best conditions are for companies that have set themselves the goal of doing their “homework” in 2020. Namely: bring the technical documentation in line with the current state of the enterprise, develop a monitoring plan and documentation to confirm data on greenhouse gas emissions.

“At the same time, enterprises would be more prepared to implement a monitoring system if all the Law No. 377-IX by-laws were approved on time. Even now, despite the fact that three main resolutions have been approved by the Cabinet of Ministers, only one of them has been published. The rest are still unavailable for study. The same applies to the procedure for state registration in the Unified Register of installations that produce greenhouse gas emissions. This document has not been published anywhere, and registration is the first step that companies will need to complete. Thus, enterprises run the risk of being without the necessary tools. This will call into question the effectiveness of the monitoring system itself,” says Olga Boyko, coordinator of the Committee for Industrial Ecology and Sustainable Development of the European Business Association .

Implementation practice

CO2 emission data are submitted by enterprises in the mandatory form of the State Statistics Service “No. 2-tp (air)”. Currently, there is no approved methodology for calculating greenhouse gas emissions in Ukraine.

“Each enterprise estimates CO2 emissions in their own way, so the data can be very different. After the implementation of the MOV, the enterprises will submit annual emission reports (operator reports, according to the law). And an approved calculation method will appear,” explains Vladislav Antipov.

It turns out that only with the introduction of a system for monitoring, reporting and verification of greenhouse gas emissions, the country will receive clear data on the real volume of emissions.

“Now each MMC enterprise has its own conditional coefficient for calculating greenhouse gas emissions. And it can vary greatly from company to company. This is not some kind of fraud, this is a historical fact. But in 2021, everything will come to a single coordinate system, and changes are possible both in one direction and in the other. Moreover, they are significant: the figure for the volume of emissions can change by 1.5-2 times only due to a change in the calculation method. It is difficult to say how this will affect the market for trading in quotas as a whole. The price of the quota and, consequently, the cost and price of the goods produced will depend on the volume of emissions,” earlier in an interview with GMK Center pointed out Vladislav Varnavsky, head of Environmental Protection Department, Metinvest Group.

According to Vladislav Antipov, certain risks associated with the introduction of a system for monitoring, reporting and verifying greenhouse gas emissions are currently visible.

1. Risks for system implementation

To date, there are practically no risks for launching the system – the entire regulatory framework has been adopted. The only risk remains the possible unwillingness of the authorized body (so far it is the Ministry of Ecology) to start coordinating monitoring plans from January 1, 2021. This can happen if for some reason there is a shortage of staff.

2. Risk for enterprises:

  • enterprises are now calculating the amount of CO2 emissions as they wish. And with the introduction of the MOU system, they will be considered conditionally correct. And there may be tax claims if emissions increase greatly. It turns out that they have underpaid the ecotax for CO2 for all the years;
  • unavailability of metrological systems (balances, gas flow meters) and laboratories for determining the carbon content in materials to meet the requirements of the MOV system in terms of accuracy/error.

Trade in law

The introduction of the MOV system is the first step towards launching the national greenhouse trading market. According to Andrey Glushchenko, GMK Center analytics, this market represents alternative to environmental tax, which is levied on CO2 emissions. Emissions trading is a more advanced incentive tool than the eco-tax. After all, it gives enterprises the opportunity to sell excess quotas, creating interest in the modernization of production.

However, the market for trading in quotas will not be launched without the adoption of a relevant law, which is not yet even in draft form.

“As far as I know, there is no draft law on the greenhouse gas emissions trading system yet,” confirms Vladislav Antipov.

By and large, it is too early to write the text of the law on a completely new mechanism for Ukraine. After all, it is first necessary to understand how this system will function in our conditions.

“When I worked at the Ministry of Energy and Energy, all the experts with whom I spoke noted that you first need to get the results of the MOV nalyze them, and only then pass the law. After the launch of the MOV system, we have to monitor enterprises for two years in order to accumulate data and a certain information base. If you make a mistake, then the Ukrainian system of trading in quotas will be ineffective,” emphasizes Alexey Ryabchin, adviser to the Deputy Prime Minister for European and Euro-Atlantic Integration, adviser to the Minister of Environmental Protection and Natural Resources .

According to him, Ukraine should launch a full-fledged emissions trading system in about five to six years.

“We need to decide whether our system will be separate or connected to the European one, find out how our integration into the European energy market (ENTSO-E), etc. will affect this. There are still a lot of uncertain and changeable factors, including international ones, that can affect the final look Ukrainian system of trading in quotas. This issue must be approached seriously. We still have time, but it is already necessary to start consultations with business,” adds Alexey Ryabchin.

According to Vladislav Antipov, when creating an emission trading market in Ukraine, it is necessary to focus on the European model of the Emission Trading System (ETS).

“I hope that we, as experts in this market, will be involved in the development of this bill. Moreover, Ukrainian experts have shown their effectiveness in creating the MOV system,” emphasizes the CEDT General Director.

Ecology vs economics

The emission monitoring and emissions trading system is only one of the elements of the environmental impact on the economy, and not the most potentially dangerous one.

“If Ukraine does not introduce a gas emission accounting system in a timely manner, then businesses that will pay additional taxes to export their products may suffer,” declared previously prime minister Denis Shmygal.

We are talking about the introduction of a tax on carbon dioxide emissions (Carbon Order Adjustment, CBA). It is a fee charged when goods are imported into the European Union based on CO2 emissions during their production. In the event of the introduction of CBA, payments by Ukrainian companies when exporting to the EU could grow by €566.3 million in year. Almost 94% of this amount will have to be paid to mining and metallurgical and energy companies.

“Most domestic companies with experience in international markets are aware that the market for trading in quotas is still better than an additional tax on exports to the EU countries. That is why the companies that are members of our Association support this initiative and are ready to actively cooperate,” says Olga Boyko.

Ukrainian power engineers are also actively involved in these processes. The main goal of the cap-and-trade system is to reduce CO2emissions, including from the combustion of fossil fuels. That is, the impact on thermal generation will be significant.

“However, we look forward to cooperation and coordination with the Ministry of Ecology and other stakeholders to ensure a fair transition to low-carbon energy for consumers, the population of coal regions and enterprise workers,” emphasizes Olga Semkiv .

Europe is still thinking about the design and content of the CBA mechanism. A potentially correct MOV mechanism and an quota trading system could form the basis for a dialogue with the EU on exempting Ukrainian exporters from paying AIA. However, such options for easing the environmental requirements of the European Union for Ukrainian business at least three. Specific possible mechanisms will be the subject of discussion with the EU.

“Our negotiating position is to prepare the necessary documents and proposals for the participation of our country in the EU green policy, initiating a dialogue as a structured mechanism for making joint decisions at a high level on these issues and developing a road map for Ukraine’s participation in the Green Deal and etc. We expect that all this will allow us to have a strong negotiating position, in particular, regarding the mitigation of the influence of CBA on Ukrainian business, – Alexey Ryabchin sums up. – You should also remember the Association Agreement, which provides for obligations not only for Ukraine, but also for Europe. We don’t want to have additional carbon frontiers between us and EU countries”.