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MARKET READINESS PROPOSAL Under the Partnership for Market Readiness Programme

UKRAINE

State Environmental Investment Agency

Kiev, 2014 Not for reproduction, circulation or distribution

Market Readiness Proposal of Ukraine

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Table of Contents

1. General Information & Executive Summary ............................................................................. 8

1.1 PMR contact point ................................................................................................................. 8

1.2 MRP Development Team ....................................................................................................... 8

1.3 Executive Summary ................................................................................................................ 9

2. Building Block 1: The Big Picture. Country Context ................................................................ 16

2.1 General information about Ukraine ......................................................................................... 16

2.2 GDP and Information about Economic Sectors ........................................................................ 18

2.2.1 GDP of Ukraine ...................................................................................................................... 18

2.2.2. Mapping of Existing Sectors of Economy ............................................................................. 18

2.3 Historical and Projected GHG Emission Trends, and Key Drivers ............................................ 23

2.3.1 Historical GHG Emission Trends ............................................................................................ 23

2.3.2 Energy and GHG Intensity ..................................................................................................... 25

2.3.3 Projected GHG Emission Trends ............................................................................................ 26

2.4 Climate change mitigation objectives ..................................................................................... 27

2.5 Institutional Arrangements ...................................................................................................... 31

3. Building Block 2: Policy Landscape, Objectives and Preparatory Work to Support and Inform Policy Decisions .......................................................................................................... 33

3.1 Policy-mapping to Develop a Comprehensive Picture of Inter-dependent Policies Affecting Climate Policy Objectives ..................................................................................... 33

3.1.1 Mapping of Existing Domestic Climate Policies .................................................................. 33

3.1.2 Experience with the Use of Market Based Approaches ........................................................ 35

3.2 Climate Sectoral Policy Objectives ....................................................................................... 38

3.2.1 Low Carbon Strategy for Key Sectors .................................................................................... 39

3.2.2 National Energy Strategy till 2030 ......................................................................................... 41

3.2.3 Renewable Energy and Energy Efficiency Policy ................................................................... 42

3.2.4 Air Quality and Environmental Tax ................................................................................... 42

3.3 The Main Drivers for Introducing MBIs in Ukraine .............................................................. 43

4. Building Block 3: Core Technical and Institutional/Regulatory Market Readiness Component ............................................................................................................................. 45

4.1 Ukraine’s Current System for Estimating GHG Emissions.................................................... 46

4.1.1. National GHG Emission Inventory System of Ukraine .......................................................... 46

4.2 Assessment of the Current Regulatory Framework for GHG Monitoring and Reporting ... 48


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4.2.1. The dialogue of Ukraine’s authorities with the private sector with regards to the proposed MRP activities ...................................................................................................... 49

4.2.2. Working Group on MRV Law Development ......................................................................... 49

4.2.3. Draft Law for Facility-level GHG Monitoring, Reporting, and Verification........................... 51

4.3 Sectors to be Considered for Coverage by the MRV System ............................................... 55

4.4 Threshold Levels for Inclusion into the MRV System .......................................................... 57

4.5 Additional Regulatory Needs for MRV System Implementation ......................................... 59

4.5.1 Relevant Methodologies and Guidelines for MRV System Implementation ........................ 60

4.6 Institutional and Technical Needs for Implementation and Operation of MRV system ..... 61

4.7 Target/Goal Setting for Market Instruments ....................................................................... 62

4.8 ToR(s) and Proposed Budget ................................................................................................ 62

5. Building Block 4: Planning for a Market-Based Instrument .................................................... 65

5.1 PART I - Assessment of Market Readiness ........................................................................... 66

5.2 PART II - Needs Assessment for MBI(s) ................................................................................ 70

5.2.1 Ongoing and Planned Technical Assistance of Relevance to MRP ...................................... 70

5.2.2 Needs Assessment for Development of MBIs in Ukraine .................................................... 75


6. Building Block 5: Organization, Communication, Consultation and Engagement .................. 80

6.1 Organizational Framework for MRP Activities and Decision Making Process ..................... 80

6.2 MRP Implementation Team ................................................................................................. 81

6.3 Stakeholder Coordination and Consultations ...................................................................... 82

6.4 Outreach and Communication Strategy .............................................................................. 83


7. Building Block 6: Summary of Activities, Timeline and Budget .............................................. 88


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LIST OF TABLES

Table 1. Summary of the activities and PMR funding for activities identified in the MRP ................ 14

Table 2. GDP in Ukraine ...................................................................................................................... 18

Table 3. GDP, GHG Emissions and Carbon Intensity, 1990-2030 ....................................................... 26

Table 4. GHG Emissions by sources (without LULUCF), 1990-2030, million tСО2e............................ 27

Table 5. Uncertainty levels for the sectors energy and industrial processes .................................... 46

Table 6. List of key source categories based on GHG emission level in 2011 .................................... 56

Table 7. Detailization of threshold levels of electricity generating facilities ..................................... 58

Table 8. Detailization of threshold levels for district heating facilities .............................................. 58

Table 9. Preliminary estimation of number of facilities falling under the MRV scheme ................... 59

Table 10. Deliverables for BB-3 .......................................................................................................... 62

Table 11. Deliverables and Budget for BB-3....................................................................................... 64

Table 12. Key outputs of ongoing TA projects in Ukraine of specific relevance to MRP ................... 74





Table 17. Timeline, total budget and PMR budget identified in BB-3, BB-4 and BB-5 ...................... 90


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LIST OF FIGURES

Figure 1. Geographical location of Ukraine ........................................................................................ 16

Figure 2. Administrative-territorial division of Ukraine ..................................................................... 17

Figure 3. Oil Transportation System of Ukraine ................................................................................. 19

Figure 4. Gas Transportation System of Ukraine ............................................................................... 20

Figure 5. Sold industrial products by activities in 2011 ..................................................................... 22

Figure 6. Metal production in Ukraine and other countries by types ............................................... 23

Figure 7. Total GHG Emissions in Ukraine (without LULUCF), 1990-2011, million tСО2e .................. 24

Figure 8. Total GHG emissions in Ukraine by sectors, 1990-2011, million tСО2e .............................. 25

Figure 9. GHG Emission Projections (in % from base 1990 year)....................................................... 27

Figure 10. Actual and projected emissions in Ukraine ....................................................................... 29

Figure 11. Total energy potential of renewable energy sources in Ukraine ...................................... 40

Figure 12. Organization chart of the National GHG Inventory System in Ukraine ............................ 47

Figure 13. Flow diagram of authority of the central bodies of executive power in implementation and operation of the MRV system in Ukraine .......................................... 53

Figure 14. Flow diagram of the MRV system operation .................................................................... 54

Figure 15. Overview of planning and implementation of MBIs in Ukraine ....................................... 65

Figure 16. Steps towards establishment of MBIs (adapted from the EBRD PETER project) ............. 75

Figure 17. Organizational chart for implementation of MRP activities in Ukraine ............................ 80

Figure 18. Structure of the SEIA ......................................................................................................... 82

Figure 19. MRP Timeline .................................................................................................................... 88


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Abbreviations

AA Association Agreement

AAUs Assigned Amount Units

BB Building Blocks

Bcm billion cubic metres

CHP Combined Heat and Power Plant

CMU Cabinet of Ministers of Ukraine

EBRD European Bank for Reconstruction and Development

EC European Commission

EC LEDS EC Low Emission Development Strategies

EF Emission Factor

ERU Emissions Reduction Units

EU European Union

ETS Emission Trading Scheme

FEC Fuel and Energy Complex

GDP Gross Domestic Product

GHG Greenhouse Gases

GIS Green Investment Scheme

ICCC Inter-Agency Commission on Climate Change

IEA International Energy Agency

IET International Emission Trading

IPCC Intergovernmental Panel on Climate Change

IPS Integrated Power System

ITWG Interagency Technical Working Group

JI Joint Implementation

MBIs Market-based Instruments

MECI The Ministry of Energy and Coal Industry

MENR The Ministry of Ecology and Natural Resources

MERP Municipal Energy Reform Project

METD Ministry of Economy and Trade Development

MRP Market Readiness Proposal

MRV Monitoring, Reporting and Verification

NASU National Academy of Sciences of Ukraine

NCA National Coordination Authority

NCV Net Calorific Value

NGOs Non-governmental Organizations

NPP Nuclear Power Plant

ORP Oil Refinery Plants

PA Partnership Assembly

PaMs Policies and Measures

PJSC Public Joint Stock Company

PMR Partnership for Market Readiness


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PSAs Public Service Announcements

PSPP Pumped Storage Power Plant

QA/QC Quality Assurance/Quality Control

REDS Resource Efficient Development Strategy

RES Renewable Energy Sources

SEGS Solar Electric Generating Station

SEIA State Environmental Investment Agency of Ukraine

SSSU State Statistics Service of Ukraine

tce Ton of Coal Equivalent

TFOE Ton of Fuel Oil Equivalent

TPP Thermal Power Plant

USAID US Agency of International Development

UNDP United Nations Development Program

UNFCCC United Nations Framework Convention on Climate Change


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1. General Information & Executive Summary

1.1 PMR contact point

Name Mr. Mykhailo Koval

Organization State Environmental Investment Agency of Ukraine (SEIA)

Title First Deputy of Head of SEIA

Address 35, Vasylya Lypkivskogo st., Kyiv, Ukraine

Telephone +380445949110

Fax +380445949115

Email [email protected]

Website www.seia.gov.ua

Name Ms. Natalya Parasyuk, PhD

Organization State Environmental Investment Agency of Ukraine

Title Project Manager

Address 35, Vasylya Lypkivskogo st., Kyiv, Ukraine

Telephone +380503307121

Fax +380445949115

Email [email protected]

Website www.seia.gov.ua

1.2 MRP Development Team

Name Organization

Ms. Irina Trofimova SEIA, General Consultations, BB4

Ms. Olga Yukhymchuk SEIA, Technical Support

Mr. Igor Kachan Expert, BB1-2

Mr. Vladimir Laskarevsky Expert, BB3

Ms. Irina Nesterova Legal Expert

Ms. Sofia Mogutova Expert, BB5

Mr. Yugen Vorobyov Energy Expert, BB4

Mr. Oleg Gerasimov Financial Expert, BB6

Mr. Denis Gnatenko PM Assistant

Representative Experts UNDP, EBRD, USAID, EC TA Projects

Representative Experts Working group on MRV Law Development

mailto:[email protected]

mailto:[email protected],


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1.3 Executive Summary

Ukraine is an Annex I Party to the United Nations Convention on Climate Change (UNFCCC) and Annex B Party to the Kyoto Protocol (KP). Under the KP, Ukraine committed to keeping its greenhouse gas (GHG) emissions at the base year (1990) level during the first commitment period 2008 - 2012. Ukraine meets its KP 1st commitment period target. GHG emissions in 2011 amounted to 401.58 million tCO2e (without LULUCF) and decreased by 56.8% between the base year and 2011.

In 2009, in the run up to the Copenhagen summit, Ukraine pledged to reduce emissions by 50% from 1990 levels by 2050. This target would require maintaining the GHG emissions in 2050 at roughly today’s levels, implying a net zero growth in emissions between now and 2050 despite an expected economic growth.

In the Copenhagen Accord, Ukraine put forward a conditional target of 20% emissions reductions below the 1990 level by 2020. After the Kyoto Parties in Durban (December 2011) agreed upon the extension of the KP into the second commitment period (CP2), Ukraine joined the negotiated text of the Protocol with 24% reduction target and the intention to remain in the Kyoto Protocol.

Ukraine’s long-term mitigation vision

Achieving Ukraine’s 2050 GHG emissions target depend critically on substantial broadening and deepening of the structural reforms implemented to date to foster a shift to cleaner fuels and more efficient technologies. As around 76% of the national GHG emissions stem from the energy sector, Ukraine is setting priorities in energy and climate-related policies to increase the use of renewable and nuclear energy as well as efficiency in fuel and energy consumption.

In 2011, the Parliament of Ukraine approved introduction of the tax on CO2 emissions from stationary sources. The tax level is currently UAH 0.24 per ton of CO2. The carbon tax covers all stationary sources of CO2 emissions, mainly power sector enterprises and processing industry, including metal and coke production, chemical and petrochemical, cement, and food industries. As the current tax rate does not provide sufficient incentive to reduce emissions, Government of Ukraine (GOU) has aspirations to raise the current tax rate and introduce more stringent MRV requirements in connection with it.

Recognizing the need to improve facility-level reporting to support the preparation for introduction of market-based instruments (MBIs) in Ukraine, the Government of Ukraine has initiated process of developing a reliable system of monitoring, reporting, and verification of GHG emissions of individual companies and enterprises (MRV). In May 2011, the Cabinet of Ministers of Ukraine mandated the State Environmental Investment Agency of Ukraine (SEIA) to “develop and submit to the Cabinet of Ministers for approval draft acts providing for functioning of the system for state recording, monitoring, reporting, and reliability checks of data related to anthropogenic GHG emissions”. Pursuant to the National Plan, the SEIA has elaborated a draft law for introduction of a system for greenhouse gases monitoring, reporting and verification (Draft MRV Law).

Ukrainian President Petro Poroshenko signed the ASSOCIATION AGREEMENT BETWEEN THE EUROPEAN UNION AND THE EUROPEAN ATOMIC ENERGY COMMUNITY AND THEIR MEMBER STATES, OF THE ONE PART, AND UKRAINE, OF THE OTHER PART (for short, Association Agreement or AA) on 27 June 2014. The signing is a milestone.


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The agreement commits Ukraine to an agenda of economic, judicial and financial reforms

and to gradual approximation of its policies and legislation to those of the European Union. Ukraine has also committed to take steps to gradually conform to technical and consumer standards upheld by the European Union. In exchange, the European Union will provide Ukraine with political and financial support access to research and knowledge, and preferential access to EU markets.

According to the Association Agreement implementation of provisions of the Directive 2003/87/EC establishing a scheme for GHG emission allowance trading within the Community and amending Directive 96/61/EC as amended by Directive 2004/101/EC (for short, the Directive) shall be implemented within two years of the entry into force of this Agreement. However, the actual period of implementation of the Directive depends on the date of its ratification by Ukraine and the date of receipt the Union's notification on the completion of the procedures, indicating the parts of the Agreement that shall be provisionally applied, and whether Annex 30 of the AA will be provisionally applied.

The cornerstone of all areas recorded in the Agreement (p.50, ANNEXES OF TITLE V: ECONOMIC AND SECTOR COOPERATION), namely:

Adoption of national legislation and designation of competent authority/ies; Establishment of a system for identifying relevant installations and for identifying GHGs

(Annexes I and II); Development of a national allocation plan to distribute allowances to installations (art. 9); Establishment of a system for issuing GHG emissions permits and issuance of allowances to

be traded domestically among installations in Ukraine (art. 4 and 11 - 13); Establishment of monitoring, reporting, verification and enforcement systems and public

consultations procedures (art. 9, 14 – 17, 19 and 21);

is implementation and operation of the MRV system.

Thus currently Ukraine is considering developing a mixed market-based scheme, starting with the improvement of a fiscal instrument and development of MRV system, and then the introduction of domestic GHG emissions trading scheme (ETS).

Policy-wise, the introduction of a domestic ETS would facilitate reaching important policy objectives of Ukraine, including:

Preparation for implementation of the post-2020 international climate agreement;

Reduction of the carbon and energy intensity of the Ukrainian economy, paving way for

securing Ukraine’s energy security;

Economic stimulus to the industry for capital investments to the energy-saving

technologies;

Fulfillment of the European integration goals of the GOU and preparation for compliance

with the EU-Ukraine Association Agreement.


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Ukraine in the PMR process

At the first stage of Preparation Phase of the Partnership for Market Readiness (PMR) Ukraine conducted a round table “On the way to creation of emission trading system in Ukraine” in October 2011. Its main purpose was the public discussion with governmental institutions, NGOs, industries, private sector and research institutes.

Ukraine has submitted its Organizing Framework to the PMR Secretariat, and presented it for consideration by the Partnership Assembly (PA) in October 2011. By Resolution # PA 2/2011-4 at the Second meeting of the Partnership Assembly in Istanbul, October 27-28, 2011 the decision as to appropriate funding to Ukraine for the second stage of Preparation Phase “Development of Market Readiness Proposal” was taken.

Ukraine has submitted a draft Market Readiness Proposal (MRP) to the PMR Secretariat on in March 2014 and presented it to the PA at the PA9 meeting in Cologne in May 2014.

On 12 August 2014 Ukraine has asked PMR Secretariat for approval of Ukraine’s MRP and for implementation phase funding allocation through electronic means due to several very important issues. Ukraine has very strong justification for early approval, namely:

a. Upcoming elections to the Parliament, on 26 October 2014. Ukraine has the

Parliamentary-Presidential Republic. One of the most important functions of the Parliament is to form a ruling coalition, which in turn forms the Government. So, non-signing the agreement now (until October) between the World Bank and the Government of Ukraine may delay the process until December 2014 or January 2015.

b. According to the Association Agreement the provisions of the Directive 2003/87/EC and amending Directive 96/61/EC as amended by Directive 2004/101/EC shall be implemented within two years of the entry into force of this Agreement.

Ukraine has submitted a final version of MRP to the PMR Secretariat on 29 August 2014. Differences between the draft MRP and final MRP are highlighted in green.

The MRP focuses on two key issues of improving Ukraine’s market readiness:

I. The development of the Monitoring, Reporting, Verification of facility-level GHG emissions in Ukraine, and

II. Preparation for an informed decision making process on the use of market-based instruments for MRV covered/not covered sectors.

In the analytical process that supporting the development of the MRP, the following considerations have featured prominently:

MRV system is required as a critical prerequisite for selection and implementation of the

GHG reduction instruments, both fiscal and market-based, because the MRV system is the

basis of the emissions trading scheme, and verified emissions data should constitute the

basis for achieving fairness and transparency in carbon taxation.

Implementation of Ukraine's national emission trading system is stipulated by the

Association Agreement with the European Union.


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Verified emissions data, provided by the MRV system, should give a more comprehensive

picture to decision makers concerning the achievable scale of Ukraine’s commitments for

the post-2020 period and mitigation actions to be undertaken without prejudice to the

national interests of Ukraine.

Verified emissions data along with the modeled MBIs implementation results should

provide information for determination of optimal ways of low-carbon development to

ensure energy and environmental security of the people, society and the state.

Ukraine is considering a mixed market based scheme, starting with the input of a fiscal

instrument and development of MRV system, and the introduction of domestic GHG ETS.

MRP’s Six Building Blocks (BBs)

The BB1 provides an overview of climate change policies and measures in Ukraine, with an analysis for GHG emission sources, historical and projected GHG emission trends and key drivers. The block also includes data on GDP and economic information; an overview of participation of Ukraine in the flexible mechanisms, namely Joint Implementation (JI) projects and Green Investment Scheme (GIS).

In the BB2, a comprehensive general and sectoral policy mapping analysis on climate change has been performed in order to account for the current situation and identify the gaps and needs for a successful implementation of market-based instruments (MBIs). This block also includes the organizational framework for the implementation of climate change policies, climate sectoral policy objectives; air quality, environmental and carbon taxes.

The BB3 describes the existing GHG data management system in Ukraine, focusing on

the current GHG inventory system of Ukraine. A detailed description of the proposed MRV system is provided, including description of a draft MRV Framework Law that constitutes “the basis for development and implementation of the MRV system for GHG emissions”, as well as secondary and complementary MRV regulations needed for data monitoring, development, and approval of methodologies, accreditation and certification, etc. The block also includes assessment of institutional and technical needs for data management system. The main outputs of the BB3 are

(1) to establish requirements and procedures at installations level for developing monitoring plan, preparing reports on monitoring GHG emissions, and verification of reports on GHG emissions monitoring by an independent expert organization;

(2) to develop methodologies for each of the types of activities included in the MRV system, monitoring and reporting templates, and comprehensive guidelines for the operators;

(3) to develop the MRV database, including inventory of installations and GHG emissions and initial support of its operations; and

(4) training of NCA personnel in maintenance of the GHG emissions database, training and capacity building activities for stakeholders on MRV.

To perform all the tasks in this section, the total required funding is USD 2.8 million. Ukraine requests from the PMR 1.9 million to perform the following tasks:

Development and approval of the relevant regulatory framework and methodological guidance for MRV system operation;

Development and support of the MRV database, including inventory of installations and GHG emissions;


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Training of NCA personnel in maintenance of the GHG emissions database; Collection, verification and approval of GHG emission monitoring plans and reports

on monitoring, organization of a service/department for installations operators support;

Archiving and storage of monitoring and verification reports.

The BB4 provides a comprehensive assessment of options to establish market-based instruments, including a gap analysis of market readiness components and modelling needs. Part-I of this BB gives an overview of market readiness and a policy-mapping analysis. Part-II covers an assessment of needs required to facilitate decision-making on the implementation of market based instruments. Given Ukraine’s circumstances, the main objective for BB-4 is to identify market-based options and share these options with relevant government decision-makers in order to facilitate a decision on a market instrument. Based on roundtables, meetings and inter-agency discussions, the research funded by PMR and other donors is expected to clarify the appropriate policy options and mitigation strategies for Ukraine. Conclusion of the policy deliberations will enable finalization of the choice of carbon pricing instruments and broad decision on their design and implementation frameworks. The main outputs of the BB4 are

(1) an assessment of outstanding design options for on ETS, focusing primarily on methodological and design issues for benchmarking and auctioning;

(2) recommendations on selection of appropriate mechanism(s), such as offset mechanism and new market mechanisms considered under the UNFCCC for sectors not covered by the MRV system in the initial phase (transport, waste, agriculture, LULUCF and others);

(3) modeling of the various MBI options for sectors covered by the MRV system as well as not covered by the system with regards to economic impacts; and

(4) development of Carbon Pricing Policy Decision Document for stakeholders. Such document shall provide regulatory legal and economic assessment of the identified options as required by the Ukrainian law and shall be the essential tool for decision-makers on MBIs Ukraine.

To perform all the tasks in this section, the total required funding is USD 1.15 million.

Ukraine requests from the PMR 0.5 million to perform the following task:

ETS Design Options Study. An assessment of outstanding design options for on ETS that require consideration by Ukrainian government will be performed under this work package. The activities will be primarily focused on analysis of benchmarking and auctioning options for Ukraine, including methodological and design recommendations, data requirements and preliminary allocation suggestions. A small portion of requested funding will be kept for topical research into other design issues that might need clarification over the course of three years of MRP activities in Ukraine. Such issues could include e.g. market oversight, registry regulation, target/cap setting, allocation approach, timeframes, etc., as needed, can be provided under this work package.

The BB-5 provides an organizational structure for the decision making body of the PMR

activities in Ukraine and an assessment of needs and plans for stakeholder’s consultation and engagement processes throughout the implementation phase. The block also includes the information on the MRP Implementation Team, which will have the responsibility of


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coordination for the full range of activities identified in the MRP and help strengthen the Government’s limited technical capacity and expertise on MRV systems. The main outputs of the BB5 are

(1) establishment of a Team for smooth implementation and coordination of activities and works identified within this MRP;

(2) capacity building activities especially for related public institutions, sector representatives and other stakeholders through conferences, workshops, study visits, etc.;

(3) holding sufficient number of meetings, round-tables, seminars with private sector representatives and public institutions in order to ensure successful MRV system development and preparation of appropriate analysis/reports for MBIs; and

(4) media activities, publications, promotional films/materials, broad public education and awareness raising activities.

To perform all the tasks in this section, the total required funding is USD 1.05 million.

Ukraine requests from the PMR 0.6 million to perform the following task:

Establishment of the MRP Team for smooth implementation and coordination of activities and works identified within this MRP.

The BB-6 summarizes and explains Ukraine’s MRP timeline and budget for activities

identified under building blocks 3, 4 and 5 in details. The relationship between building blocks is also presented. The overall timeline of the MRP implementation is estimated to be about 3 years through the end of 2017.

Ukraine needs USD 5 million funding for the implementation the MRV system in Ukraine. However, Ukraine understands and accepts the reasons why it cannot receive full funding from the PMR. Ukraine clearly comprehends the criteria for such funding (i.e. nature of funded activities between 3, 5, or 8 millions) and therefore requests USD 3 million based on the activities listed in Ukraine’s MRP. Also Ukraine would like to stress that one of the main criterion is co-funding. In this case, Ukraine is currently negotiating with the USAID and the EU the possibilities of co-financing to meet the full MRP’s objectives and tasks. Ukraine has changed the budget from USD 5 000 000 to USD 3 000 000, which is presented in the final MRP. The tasks in green lines in the budget table are planned to be negotiated with other donors.

Table 1. Summary of the activities and PMR funding for activities identified in the MRP

BB Activity PMR Funding, USD Total Funding, USD

BB3 Core Technical and Institutional/Regulatory Market Readiness Components

1 900 000 2 800 000

BB4 Planning for a Market-Based Instrument 500 000 1 150 000

BB5 Organization, Communication, Consultation and Engagement

600 000 1 050 000

TOTAL 3 000 000 5 000 000


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Conclusion

Meeting the challenges of establishing the MRV system, its launch and preparation of an informed decision concerning the selection of instruments to reduce GHG emissions is currently quite urgent and extremely important for Ukraine. Completeness, consistency, accuracy, and transparency of the monitoring and verification system promote trust towards the results of reporting on emissions at installations. The entry into force of the Draft MRV law and its implementation is fully determined by the availability of the elaborated and ready-to-use additional regulations on modalities and rules for monitoring, reporting and verification of GHG emissions and operation of the MRV system, as well as relevant methodologies. Development and approval of such additional regulations needs strong support, including technical expertise, from the PMR. Finally, preparation for an informed decision making process on the use of market-based instruments for sectors covered and not covered by the proposed MRV system would allow to take the outputs of the MRV system to the next level, facilitating Ukraine’s transition towards its long-term low carbon economy vision.

Thus, the launch of MRV system in Ukraine is a critical prerequisite for the ETS. The sooner Ukraine is implementing a PMR project, the faster the process specified in the AA, including a national allocation plan and GHG emission permit system. I.e. without a valid operating MRV system the development of a national allocation plan and GHG emission permit system will not be feasible. The overall incremental funding needs for the activities included in this MRP are estimated to be USD 5 million. Ukraine clearly comprehends the criteria for such funding and therefore requests USD 3 million based on the activities listed in Ukraine’s MRP.


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2. Building Block 1: The Big Picture. Country Context

2.1 General information about Ukraine

Ukraine is a country in Eastern Europe. It has an area of 603 628 km2, making it the largest country entirely within Europe. Ukraine became independent when the Soviet Union dissolved in 1991. Its capital is the city of Kiev.

Figure 1. Geographical location of Ukraine

The Dnipro lowland is in the central part of the country. Other lowlands extend along the shores of the Black Sea and the Azov Sea in Southern Ukraine. The Carpathian Mountains extend across Western Ukraine for more than 240 km. The climate in Ukraine is temperate continental, and Mediterranean only on the southern Crimean coast. The winters vary from being cool along the Black Sea to cold farther inland, and the summers are warm across the greater part of the country, and hot in the south.

According to the Constitution, Ukraine is a sovereign, independent, democratic, social and legal state. Ukraine is a republic. State language of Ukraine is Ukrainian. The country is administered through a structure of 24 oblasts, one autonomous republic, Crimea, and two municipalities with oblast status, Sevastopol and Kyiv (Figure 2).

The total population in Ukraine was last recorded at 45.7 million people in 2012. The population of Ukraine represents 0.66% of the world´s total population. Although Ukraine is one of the largest countries in Europe, the recent demographic indicators show trends towards decreasing of total population, especially in the working age, combined with increasing aging of population. Between 1990 and 2012, the population of Ukraine decreased by 6 million people mainly due to fertility reduction and mortality increasing. There is also noticeable shifting of population from rural to urban areas.


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Figure 2. Administrative-territorial division of Ukraine

Natural Resources

The belt of mixed forest and steppe running east-west across south-central Ukraine has rich black soils; their intense cultivation has established the country as a major producer of winter wheat and sugar beets. Other crops include sunflower seeds, maize, potatoes, grapes, oats, rye, millet, and buckwheat. Fruits and vegetables are grown on the outskirts of cities, and cattle and pigs are raised throughout the country.

Ukraine has rich reserves of iron ore, bituminous and anthracite coals, and manganese-bearing ores located in close proximity to each other in the east-central Ukraine, which is the industrial heartland of the country and one of the major heavy-industrial and mining-metallurgical complexes of Europe.

Ukraine also produces natural gas and petroleum, though reserves are now in many cases depleted. Nevertheless, there are good prospects for the discovery and development of additional petroleum and shale gas resources. The Ukrainian economy largely depends on heavy industry and agriculture. Besides its basic mining industries, the Donetsk Basin has ferrous-metal industries that produce iron and steel in large quantities. Durable goods manufactured in the Donetsk Basin include mining and metallurgical equipment, automobiles, and tractors.


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2.2 GDP and Information about Economic Sectors

2.2.1 GDP of Ukraine

The economy of Ukraine is an emerging free market. Ukraine as a sovereign state since 1991 has gone through complex transformations in its economy. Formerly a major component of the economy of the Soviet Union, the country's economy experienced a deep recession during the 1990s, including hyperinflation and a drastic fall in economic output. In 1999, at the lowest point of the economic crisis, Ukraine's per capita GDP was about half of the per capita GDP it achieved before independence. GDP growth was first registered in 2000, and continued for eight years. In 2007 the economy continued to grow and posted real GDP growth of 7%. In 2008, Ukraine's economy was ranked 45th in the world according to 2008 GDP (nominal) with the total nominal GDP of 188 billion USD, and nominal per capita GDP (current prices) of 3,900 USD.

Ukraine was greatly affected by the economic crisis of 2008 and as a result a 15.1% decrease in Ukraine's GDP took place over 2008 and 2009. However, already in 2010 and 2011 exceeded the pre-crisis GDP figure for 2008 (Table 2). Inflation slowed in July 2009 and stayed at about 8% in 2011. Deflation was just avoided in 2012. The Ukrainian economy recovered in the first quarter of 2010. Ukraine's real GDP growth in 2010 was 4.3%, leading to per capita (based on purchasing-power-parity) GDP of about 6 700 USD.

Table 2. GDP in Ukraine

Index 2005 2008 2009 2010 2011

GDP, mln. UAH 441 452 948 056 913 345 1 082 569 1 302 079

GDP per capita, UAH 9 372 20 495 19 832 23 600 28 488

GDP, bln US dollars* 263.007 336.851 291.264 307.252 330.099

GDP per capita (based on purchasing-power-parity), US dollars*

6 525.91 7 347.28 6 324.41 6 698.04 7 222.38

*Source: www.imf.org

Ukraine has a highly emissions-intensive economy. Many sectors are characterized by low levels of energy efficiency, and institutional and regulatory arrangements limit incentives to invest in abatement technologies.

2.2.2. Mapping of Existing Sectors of Economy

Energy and fuel

Fuel and energy complex of Ukraine (FEC) includes mining and production of all types of energy - coal, natural gas, petroleum, electricity and heat energy. Today, FEC of Ukraine provides approximately 47% of the country’s primary energy resources. Electricity demand in Ukraine, taking into account the balance of imports and exports, is met by domestic production. But a significant dependence on imported oil, gas and nuclear fuel negatively affect the state’s energy security and creates tension in the economy and the political sphere.


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Oil and gas transportation

There are significant proven reserves and potential resources of oil and natural gas in the country; Ukraine has a developed system of transportation and refining these fuels. The oil transport system of Ukraine consists of 5 main pipelines, as well as the newly built Odessa-Brody pipeline, which effectively combined these systems into a single network (Figure 3).

Figure 3. Oil Transportation System of Ukraine

The Ukrainian gas transmission system (Figure 4) is closely linked to systems of neighbouring European countries - Russia, Poland, Belarus, Slovakia, Romania, Moldova, and Hungary. It is the main transportation hub of Russian gas to Europe –about 120 billion m3 of Russian gas flows through Ukraine to Europe, accounting for almost 90% of the total volume of Russian gas exports to Europe.


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Figure 4. Gas Transportation System of Ukraine

Coal

Ukraine owns 3.5% of global coal reserves. Given the shortage of domestic production of oil and gas, coal serves as a reliable source of energy. The share of coal production in the primary energy consumption is more than 25%. However, 90% of active mines are characterized as high risk due to high coal methane content, and 60% of mines are considered high risk from coal dust explosions.

In 2011, Ukraine produced 84.6 million tons of coal (in 2012. - 86.9 million tons), which is 10.2% more than the same period of 2010 (in 2012, 2.6%). Thermal coal, used for electricity production, was mined 59.0 million tonnes (in 2012 - 25.1 million tons). Compared with the corresponding period of 2010, production rose by 12.9% (in 2012 by 4.6%). Coking coal was mined 25.6 million tonnes (in 2012 - 25.1 million tons), an increase of 4.4% by volume over 2010 volumes (1.9% less than in 2011).

Power and heating

The basis of the country's power is the energy system of Ukraine, consisting of generation, transmission and distribution capacities. The energy system provides centralized power supply to domestic consumers, interacts with power systems of neighbouring countries, and provides export, import and transit of electricity. Electricity production in the country is carried out by thermal power plants (TPPs), nuclear plants (NPPs), hydro and pumped storage plants (HPP, PSP), wind and solar power plants.

The main catalyst for the development of renewable energy in Ukraine science 2009 has being the "green" tariff for the production of electricity by solar and wind power plants. Since that time a number of wind and solar power plants were commissioned in Ukraine. According to the


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market survey conducted by the experts of the Ukrainian Wind Energy Association, by the end of 2013 the cumulative installed capacity of wind energy sector in Ukraine reached 371.2 MW compared to 276 MW in 2012, which corresponds to a growth rate of 56%. The wind power plants produced about 630 million kWh of electrician power, which constituted 0.33% of total electricity production in the country. Solar energy in Ukraine experienced impressive growth during the last years too. About 3 MW of solar energy capacity was connected to the network in 2010 and 373 MW in 2012.

In Ukraine there are 17 coal-fired TPPs, owned by generating companies, with the unit installed capacity ranging from 470 to 3600 MW. Ukraine has four nuclear power plants, with a total of 15 reactors. The country also has four large hydropower plants along the Dnieper and Dniester rivers with total capacity of 3.3 GW, and the total installed capacity of hydroelectric power in Ukraine is 4.7 GW. Most of the Ukrainian TPPs produce only electricity, and only three of the 17 major power plants generate heat and electricity and have an installed capacity of 1,670 MW.

The country has about 250 CHP plants, which provide 23% of the total heat production for district heating. The main fuel for CHPs is natural gas (76-80%); they also use oil (15-18%) and coal (5-6%). Equipment for most CHP plants is outdated and does not meet modern environmental standards and regulations. There is therefore a need for refurbishment, modernization, or complete replacement in most of the CHPs.

There are also more than one hundred thousand boilers in the country, which also provide heat for district heating. The vast majority of them are small-scale industrial or autonomous heating boilers. Most of these boilers are in need of renovation and replacement of the main equipment. These small boilers provide over 60 % of total heat production. The main fuel for them is natural gas (52-58 %); the percentage of liquid fuel is 12-15 % and coal - 27-36%.

Transportation

The geopolitical and geographical position of Ukraine is extremely convenient for the development of transport, although these benefits are underutilized. Overall transport network of Ukraine includes 45,900 km of pipelines, 21,600 km of railways, 166,100 km of paved roads, and 2,100 km of operational river navigable waterways with access to the Azov and Black Seas.

Industry

In 2011 there were 129,313 industrial enterprises in Ukraine. Sold industrial products by activities in 2011 are shown in Figure 5.

With plentiful natural resources and a legacy of industrial support to the former Soviet Union, Ukraine has a strong manufacturing and processing base. The manufacturing sector was deeply affected by the recession, with a 24% drop in GHG emissions from 2008 to 2009, with the cement, ammonia/fertilizer, and ferrous metal industries dropping by 58%, 39%, and 19%, respectively. Some growth occurred in 2010, and GDP has been rising steadily since, so these industries will therefore see their GHG emissions increase as well.


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Figure 5. Sold industrial products by activities in 2011

Ferrous metallurgy is the dominant industry, contributing approximately 20-25% of GDP and generating approximately 30-35% of Ukrainian exports. Taking advantage of its substantial iron ore reserves, Ukraine produced more than 33 million metric tons of crude steel, ranking it 10th in the world in 2012.5 The share of non-ferrous industry (aluminium, copper, etc.) in the Ukrainian economy is small, with less than 5% of GDP in 2010 (see Figure 6).

Currently, ferrous metallurgy combines more than 200 entities, including 19 integrated steel mills and plants, 12 tube plants, 12 coke plants, 10 refractory plants, 12 mining and metals enterprises, several ferroalloy plants, and more than 100 companies specializing in scrap and waste metals reprocessing.

23%

18%

16%

12%

11%

7%

6%

6%

1%

energy

metallurgy

food

machinery

mining

chemical

coke production

others

light industry


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Figure 6. Metal production in Ukraine and other countries by types

Other industries such as the ammonia production are part of a chain of the fertilizer and nitrogen-based products, with natural gas as the input and fuel. Cement production is a large source of carbon dioxide emissions, both from energy consumption as well as the chemical process to make clinker. The refining of petroleum products occurs in six refineries and seven gas processing plants, where refinery gas and natural gas are combusted to make petroleum and other hydrocarbon products; however, refinery utilization and production have been trending down and been erratic.

2.3 Historical and Projected GHG Emission Trends, and Key Drivers

2.3.1 Historical GHG Emission Trends

In 1990, Ukraine’s emissions were 929.9 million t CO2e, excluding LULUCF. The largest fall in emissions occurred between 1990 and 1999. The main causes of the GHG emission reductions in the 1990’s in Ukraine were the transition from a centrally planned to a market-based economy and structural changes in the economy (shift from energy-intensive production sectors towards services). These changes resulted in a significant decrease in energy consumption in the manufacturing sector, as well as changes in the structure of primary energy use with reduced use of coal and increased use of natural gas.

Starting from 2000 an increase in GHG emissions was observed. Emissions grew at a rate of 1.6% per year prior to the onset of the economic crisis in 2008-2009. Since 2001 GHG emissions have been increasing due to the growing demand for energy to meet the needs of the recovering mining sector, metal production, and chemical industries, and the growing number of vehicles.

The drop in the output of export-related industries resulting from the financial and economic downturn in the second half of 2008 resulted in a slowdown in the growth of GDP from 7.9% in 2007 to 2.3% in 2008. This financial and economic downturn led to a decrease in GHG emissions, mainly from the manufacturing, industrial processes, and construction sectors. Total

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Pig iron & primary steel Secondary steel Aluminium & ferroalloys


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GHG emissions in 2011 amounted to 401.58 million tCO2e (without LULUCF) and decreased by 56.8% between the base year and 2011.

Figure 7. Total GHG Emissions in Ukraine (without LULUCF), 1990-2011, million tСО2e

In 2011, the main GHG in Ukraine was CO2, accounting for 76.1% of total GHG emissions1 expressed in CO2 equivalent, followed by methane (CH4) (15.8%) and nitrous oxide (N2O) (8.0%). Historical GHG emission trends by type of GHG are presented in Figure 7. Hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6) collectively accounted for 0.2% of the overall GHG emissions in the country. The energy sector accounted for 76.0% of total GHG emissions, followed by the industrial processes sector (12.1%), the agriculture sector (9.0%), the waste sector (2.8%) and the solvent and other product use sector (0.1%).

GHG emissions were mostly underpinned by emissions from the energy sector, which on average comprised around 70% of the total national GHG emissions (see Figure 8). Between 1990 and 2011, GHG emissions from the energy sector decreased by 58.5%, driven mainly by a sharp economic decline in the 1990s and the consequent decrease in the primary energy consumption, as well as switch from liquid to gaseous fuels used for energy production. In 2011, emissions from the energy sector amounted to 305.23 million tCO2e, or 76.0% of the total GHG emissions. Around 85% of the energy sector emissions come from fuel combustion and about 15% are fugitive emissions.


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Figure 8. Total GHG emissions in Ukraine by sectors, 1990-2011, million tСО2e

In 2011, emissions from the industrial processes sector amounted to 48.78 million tCO2e, or 12.1% of total GHG emissions, and emissions from the solvent and other product use sector amounted to 0.33 million tCO2e, or 0.1% of total GHG emissions. Since the base year, emissions have decreased by 38.9% in the industrial processes sector, and decreased by 12.2% in the solvent and other product use sector. The key driver for the fall in emissions in the industrial processes sector is a decrease in industrial activities as a result of the transition to a market economy in the early 1990s. Within the industrial processes sector, in 2011, 54.4% of the emissions were from metal production, followed by 22.5% from mineral products, 21.6% from chemical industry and 1.5% from consumption of halocarbons and SF6.

The contribution of the agricultural sector to the total GHG emissions within the period 1990-2011 varied from 8 to 13% without LULUCF. GHG emissions in the sector in 2011 amounted to 36.2 million tons CO2e, and decreased by 65.1% in comparison with 1990. The fall in GHG emission from the agricultural sector was observed as a consequence of the significant reduction in livestock and the use of fertilizers, as well as the changes in manure management practice.

2.3.2 Energy and GHG Intensity

According to data of the International Energy Agency the energy intensity of GDP of Ukraine has fallen substantially over the past two decades. Following an initial increase, as GDP dropped faster than energy use in the early 1990s, energy intensity has been declining since 1996, reaching 1.3 tonnes of oil equivalent (toe) per 1,000 USD of GDP in 2009. However, in recent years it has increased again and was close to 1.5 toe per 1,000 USD of GDP in 2011. However, energy intensity per capita in Ukraine is at levels comparable with OECD Europe. Per capita energy intensity in Ukraine fell sharply between 1990 and 2011, but has since remained relatively stable at just under 3 toe per capita in 2011, or 40% below the 1990 level. The EU average was 3.2 toe per capita in 2011.


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According to data of the World Bank, the intensity of Ukraine’s GHG emissions follows a profile similar to that of its energy intensity. Since 2000, emission intensity per capita has been relatively stable at a level of about 6.5 tCO2 per capita, which is similar to that of OECD Europe.

With GHG emissions per capita comparable to the EU on the one hand, and the considerably lower GDP per capita on the other, , Ukraine’s GHG emissions intensity in GDP terms, Ukraine’s GHG emissions intensity is very close to that of Russia and about four times higher than OECD Europe as of 2010. The carbon intensity per unit of GDP (CO2/GDP unit using PPP) decreased by 47.4% in the period 1992-2010, from 2.4 kg to 1.0 kg per USD (year-2005) of GDP, mainly as a result of changes in the structure of the economy. This decrease was also influenced by changes in the structure of the primary energy supply, including an increase in natural gas consumption and a decrease of coal and oil consumption in the 1990s, and a later increase in the use of coal owing to the rise of the market price of gas from 2006. Ukraine forecasts a decrease of energy intensity per unit of GDP by 25.6% by 2020 as a result of planned energy efficiency measures and efforts to improve the environmental performance of the energy sector.

2.3.3 Projected GHG Emission Trends

The main development objectives of Ukraine are as follows:

A. National security and sustainable development of the economy. B. Constant improvement of social standards of living. C. Minimizing the negative impact on the environment.

The latest GHG projections were developed in Ukraine for its Sixth National Communication to the UNFCCC (6NC). Table 3, 4 and Figure 9below provide the projected GDP levels, anticipated GHG emissions, and carbon intensity of GDP for the realistic scenario of economic development. GHG emissions in the period 2010-2030 will be significantly below the 1990 levels under all realistic scenarios of the economy.

Table 3. GDP, GHG Emissions and Carbon Intensity, 1990-2030

Index Unit 1990 2000 2010 2020 2030

GDP (in prices of 2000)* bln UAH 399.3 170.1 262.7 349.4 548.7

to 1990 % 100.0 43.2 65.8 87.5 137.5

to 2010 % 152.0 64.7 100.0 133.0 208.8

GHG Emissions mln t СО2e 929.9 395.8 383.2 459.2 541.9

to 1990 % 100.0 42.6 41.2 49.4 58.3

to 2010 % 242.7 103.3 100.0 129.3 141.4

Carbon Intensity t СО2e/1000 UAH 2.327 2.325 1.457 1.340 0.994

to 1990 % 100 99.92 62.62 57.58 42.73

to 2010 % 159.70 159.56 100.00 91.96 68.24

* GDP at constant prices refers to the volume level of GDP. Constant price estimates of GDP are obtained by expressing values in terms of a base period. In this case 2000 was used as a base year.


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Figure 9. GHG Emission Projections (in % from base 1990 year)

Table 4. GHG Emissions by sources (without LULUCF), 1990-2030, million tСО2e

Sectors 1990 2000 2010 2020 2030

Energy (including transportation) 735.6 305.9 290.9 334.1 423.4

Industrial Processes 79.8 42.3 46.5 72.9 68.8

Agricultural 103.6 37.4 34.5 43.1 43.8

Waste 105 9.9 11.0 9.0 6.0

Total 929.5 395.5 382.9 459.2 541.9

2.4 Climate change mitigation objectives

Ukraine is an Annex I Party to the UNFCCC. Under the UNFCCC Kyoto Protocol, Ukraine committed to keeping its greenhouse gas (GHG) emissions at the base year (1990) level during the first commitment period 2008 - 2012. Ukraine meets its Kyoto Protocol 1st commitment period target even according to the “without measures” scenario, which incorporates significant growth in the use of coal.

In the Copenhagen Accord, Ukraine put forward a conditional target of 20% emissions reductions below the 1990 level by 2020. Ukraine’s position in the post-2012 targets negotiations contained the following conditions: allowing the country to keep its status as an economy in transition, preserving the carry-over of AAUs, and carrying on the operation of the existing flexible mechanisms of the Kyoto Protocol post-2012. After the Kyoto Parties in Durban (December 2011) agreed upon the extension of the Kyoto Protocol into the second commitment period (CP2), Ukraine joined the negotiated text of the Protocol with 24% reduction target and the intention to remain in the Kyoto Protocol.


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To address the issue of effective participation of Ukraine in the second commitment period under the Kyoto Protocol Ukraine prepared and submitted to the UNFCCC Secretariat a formal proposal on methodological issues related to the Kyoto Protocol, including Articles 5, 7 and 8 of the Kyoto Protocol. These proposals allow for resolving the discrepancies and uncertainties arising in connection with the adoption of the Doha amendment to the Kyoto Protocol, and creating a transparent and clear rules for participation in the second period not only for Ukraine, but also for all countries that have quantitative commitments. They are based on the principles of justice, do not contradict the provisions of the Doha amendment to the Kyoto Protocol and do not pave the way for trading 'hot air'.

During the last nineteenth Conference of the Parties to the UNFCCC and the ninth meeting of the Parties to the Kyoto Protocol, held 11 - 22 November 2013 in Warsaw (Poland), a draft document on the " Modalities for the accounting of assigned amounts under Article 7, paragraph 4, of the Kyoto Protocol " was prepared and discussed, in which the Ukrainian proposal was set out. The adoption of this document at the next Conference of the Parties to the UNFCCC and the meeting of the Parties to the Kyoto Protocol is to facilitate the ratification of the Doha amendment to the Kyoto Protocol by Ukraine.

The Figure 10 below illustrates the data on actual GHG emissions in Ukraine, Ukraine’s commitment during the first and second periods of Kyoto Protocol and the emissions forecasts for the period 2013-2020. The projections were performed by national experts in 2013 and are based on the findings obtained in the framework of the study by European Bank for Reconstruction and Development (EBRD) conducted in January 2011, analysing the possible measures to reduce greenhouse gas emissions in Ukraine, and the data of the research study "The development of long-term, medium-term and short-term forecasts of greenhouse gas emissions under different scenarios of economic development of Ukraine".


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Figure 10. Actual and projected emissions in Ukraine

The impact of the Doha Amendments on Ukraine

It was already mentioned that according to the text of Annex B to the Kyoto Protocol Ukraine has undertaken the commitments to reduce emissions during 2013-2020 by the level 76% of the 1990 base year. This means that as per the latest GHG inventory for 1990 - 2011 Ukraine would have the right to emit GHGs approximately at a level of 700 million tCO2e, which is 5.600 billion tCO2e for 8 years.

It is clear from the presented figure that the projection of emissions for any of the expected scenarios of economy development will likely not exceed Ukraine’s obligation for the second commitment period of the Kyoto Protocol.

However, in accordance with the Doha amendments any positive difference between the assigned amount for the second commitment period (5.600 billion tCO2e for 8 years) and the average annual emissions for the first three years of the previous commitment period multiplied by eight is transferred to the cancellation account of the Party. Taking into account the historical GHG emissions during 2008-2011, when the economy was significantly affected by the crisis, Ukraine will actually receive a quantity of assigned amount units which will cover only about 42% of GHG emissions from the baseline level in 1990. This means that Ukraine would not reach its target without implementing significant additional GHG emission reduction measures.

Thus, during the second commitment period of the Kyoto Protocol due to the peculiarities of the Doha amendment Ukraine will likely to suffer from the lack of AAUs allocated for 2013-2020. Additionally it will not have access to its AAU surplus from the first commitment period. All these circumstances can prevent Ukraine from engaging in project-based mechanisms under the Kyoto Protocol as a component of country’s climate change mitigation action plan.

At the same time, the activities under existing state plans/programs, aimed at renewables and energy efficiency, may not be sufficient to meet the obligations under the KP2. Thus, there is


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an imperative need to strengthen Ukraine’s climate change mitigation policies even if Ukraine's proposal to clarify the Doha decision is adopted.

Long-term mitigation targets and European integration context

In 2009, in the run up to the Copenhagen summit, Ukraine pledged to reduce emissions by 50% from 1990 levels by 2050. This target would require maintaining the GHG emissions in 2050 at roughly today’s levels, implying a net zero growth in emissions between now and 2050 despite an expected economic growth. Achieving Ukraine’s 2050 GHG emissions target depend critically on substantial broadening and deepening of the structural reforms implemented to date to foster a shift to cleaner fuels and more efficient technologies. A domestic MRV system could be an important driver of meeting commitments both under KP2 and a new global post-Kyoto agreement.

On 21 March 2014 the Ukrainian Government signed the political provisions of the Association Agreement with the EU. The agreement commits both parties to cooperate and converge policy, legislation, and regulation across a broad range of areas.

On 27 June 2014 Ukrainian President Petro Poroshenko signed the economic part of the

ASSOCIATION AGREEMENT BETWEEN THE EUROPEAN UNION AND THE EUROPEAN ATOMIC ENERGY COMMUNITY AND THEIR MEMBER STATES, OF THE ONE PART, AND UKRAINE, OF THE OTHER PART. The agreement commits Ukraine to an agenda of economic, judicial and financial reforms and to gradual approximation of its policies and legislation to those of the European Union. Ukraine has also committed to take steps to gradually conform to technical and consumer standards upheld by the European Union. In exchange, the European Union will provide Ukraine with political and financial support access to research and knowledge, and preferential access to EU markets.

According to the Association Agreement implementation of provisions of the Directive 2003/87/EC establishing a scheme for GHG emission allowance trading within the Community and amending Directive 96/61/EC as amended by Directive 2004/101/EC (for short, the Directive) shall be implemented within two years of the entry into force of this Agreement. However, the actual period of implementation of the Directive depends on the date of its ratification by Ukraine and the date of receipt the Union's notification on the completion of the procedures, indicating the parts of the Agreement that shall be provisionally applied, and whether Annex 30 of the AA will be provisionally applied.

The cornerstone of all areas recorded in the Agreement (p.50, ANNEXES OF TITLE V: ECONOMIC AND SECTOR COOPERATION), namely:

adoption of national legislation and designation of competent authority/ies; establishment of a system for identifying relevant installations and for identifying

greenhouse gases (Annexes I and II); development of a national allocation plan to distribute allowances to installations (art. 9); establishment of a system for issuing greenhouse gas emissions permits and issuance of

allowances to be traded domestically among installations in Ukraine (art. 4 and 11 - 13); establishment of monitoring, reporting, verification and enforcement systems and public

consultations procedures (art. 9, 14 – 17, 19 and 21);

is implementation and operation of the MRV system.

This means that Ukraine would be obliged to implement climate change mitigation policy via MRV system development in particular. Verified emissions data as a result of MRV system


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implementation will give a more comprehensive picture for decision makers concerning the achievable scale of Ukraine’s commitments for the post-2020 period and mitigation actions to be undertaken without prejudice to the national interests of Ukraine. Moreover, the establishment of an MRV system along with the results of MBIs implementation modelling could provide the information to determinate the optimal ways of low-carbon development for the long term, which in turn will ensure energy and environmental security of the people, society and the state.

2.5 Institutional Arrangements

This section presents existing institutional arrangements in Ukraine in relation to climate policy development and implementation. As has been demonstrated above, climate and energy are closely intertwined in Ukraine. For this reason, this section discusses institutions supporting both climate and energy policies. Finally, the energy and industrial statistics data management system established in Ukraine will be described.

Climate change

The Ministry of Ecology and Natural Resources (MENR) of Ukraine is the main (leading) authority on environmental protection; rational use, restoration and protection of natural resources; state control over land use and protection; environmental safety; nature conservation; waste management; formation, conservation and rational use of mineral resources; as well as topographic surveying and mapping activities.

The responsibility for climate change policy-making lies within the MENR of Ukraine. Presidential Decree of September 12, 2005 № 1239/2005 defined the MENR as a coordinator for the implementation of Ukraine's commitments under the UNFCCC and the Kyoto Protocol.

The coordination and implementation of all climate policy-related measures defined by the MENR falls under the responsibility of the State Environmental Investment Agency of Ukraine (SEIA). The SEIA ensures the implementation of state policy on climate change. The SEIA activities are coordinated by the Cabinet of Ministers through the Minister of Ecology and Natural Resources of Ukraine. The main objective of the SEIA is to meet the requirements of the UNFCCC and the flexible mechanisms under the Kyoto Protocol.

A number of national ministries and agencies as well as regional administrations and the Ukrainian Academy of Sciences are involved in the development and implementation of climate change-related policy at the national and regional levels.

To strengthen the implementation of Ukraine’s commitments under the UNFCCC and the Kyoto Protocol, an Inter-Agency Commission on Climate Change (ICCC) was established in 1999. The ICCC includes representatives of the MENR, SEIA, Ministry of Economic Development, Ministry of Energy and Coal Industry, Ministry of Infrastructure and other ministries and departments. The ICCC headed by Vice Prime Minister of Ukraine. The ICCC undertakes the main following tasks:

Co-ordination of the implementation of the national plan of measures for the provisions of the UNFCCC and Kyoto Protocol (2005, revised in 2009);

Approval of official submissions to the UNFCCC secretariat; and

Preparation of draft regulations and legislation for consideration by the Cabinet of Ministers.

Energy


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The institutional framework for energy policy development and implementation has been reorganized in recent years with the Cabinet of Ministers of Ukraine designated as the ultimate decision-making body. The Cabinet of Ministers of Ukraine is responsible for policy coordination and oversight of state energy companies. Energy policy is high on its political agenda with Parliament and the President also involved in the decision-making.

Government ministries with energy policy responsibilities include the following:

The Ministry of Energy and Coal Industry (MECI) is responsible for most energy supply policies and for coordinating energy policy across the government and providing advice to the Parliament.

The Ministry of Economy and Trade Development (METD) is the lead for energy efficiency policies; responsibilities for implementing energy efficiency policies are shared with several ministries and agencies.

The State Agency on Energy Efficiency and Energy Saving of Ukraine is the central executive body responsible for implementation of state policy on efficient use of energy resources, energy efficiency increase, ensuring the increase of the share of renewable energy and alternative fuels in the energy balance of Ukraine.

The Ministry of Ecology and Natural Resources (MENR) is responsible for licensing and production sharing agreements for hydrocarbon development and for climate change policy.

The Ministry of Regional Development, Construction and Housing and Communal Sector of Ukraine develops policy and programmes relevant at local levels.

The Ministry of Finance is responsible for taxation relevant to the energy sector.

Data collection and management

The collection and collation of energy and industrial statistics in Ukraine has been evolving since 1991 through 2001 under the responsibility of the State Statistical Service of Ukraine (Urkstat). This evolution is based on the law of Ukraine and a series of ordinances of the Cabinet of Ministers of Ukraine in 1999, 2007, 2008 and 2011, with the ultimate aim of achieving compliance with international rules and EU standards. Statistics are collected and reported monthly and annually. There are six key administrative sources of data on the primary energy sources as well as heat and electricity, with price data being supplied by the NERC.

The Urkstat has been working closely with the IEA to develop and publish the energy balance for Ukraine in accordance with the agency’s and international standards. Energy balances for 2010 and 2011 were recently completed and are available on the Urkstat website.


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3. Building Block 2: Policy Landscape, Objectives and Preparatory Work to Support and Inform Policy Decisions

3.1 Policy-mapping to Develop a Comprehensive Picture of Inter-dependent Policies Affecting Climate Policy Objectives

Ukraine has significant GHG mitigation potential based on the Sixth National Communication (6NC) and several studies conducted by UNDP, EBRD, and World Bank, mainly in the energy supply sector, and related to energy consumption in the residential and commercial sectors, primarily buildings and appliances, and in industry. However, little of this potential has been tapped, owing to a number of regulatory, economic, technical and infrastructure barriers. In addition, the lack of systematic planning, monitoring and evaluation of the programmes and measures at the national and sectoral levels is a challenge that needs to be addressed in order to tap this mitigation potential.

3.1.1 Mapping of Existing Domestic Climate Policies

Ukraine’s climate policy framework and cross-sectoral measures include the following key documents, presented in the table below.

Title Principles and objectives defined in the

document Gaps and relevance to MBIs

The National Plan for the Implementation of Provisions of the UNFCCC and the Kyoto Protocol (2005, updated in 2009)

The document stipulates: general framework and actions of the UNFCCC and its Kyoto Protocol implementation; regional initiatives on climate change impact awareness; development of the annual submission of Ukraine’s GHG inventory; development of infrastructure and for JI mechanism realisation; development of legal basis for regulating of GHG emissions; methodological and information support for GHG emissions data accounting in accordance with international requirements; electronic database of the results of the GHG inventory; development of draft law on GHG emissions regulation and limitation; participation of Ukraine’s delegations in international climate negotiations; definition of GHG emission provisions and possible scenarios of economy development for determination of post-

The National Plan is characterised by the lack of clear practical regulations for the implementation of GHG reduction sectoral mechanisms due to the fact that Ukrainian GHG emissions were far below its Kyoto targets. The document has provisions for the development mainly project-based Kyoto market mechanisms – JI. Little attention was paid to development of internal MBIs with no concrete mechanisms to be considered. The document was updated in 2009 on the basis of Ukraine’s position in KP1. The Plan should be revised after ratification of Ukraine’s commitments in the framework of KP2.


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2012 climate goals; organisational and educational actions.

The Strategy of National Policy for Environmental Protection to 2020 (2010)

The objectives of the document are: to optimize the structure of the energy sector by increasing the use of energy sources with low carbon emissions; to increase forest-covered squares through reforestation and afforestation; to establish economic conditions for the introduction of environmentally friendly modes of transport; to increase energy efficiency and the use of renewable and alternative energy sources; to increase tax burden on the environmentally harmful activities and forms of consumption; to establish system of payments for environmental pollution well-grounded environmentally and economically

The Strategy of National Policy for Environmental Protection to 2020 duplicate the Kyoto target emissions reduction without any clear practical mechanisms of its achieving. MBIs are not considered in the strategy.

The National Action Plan on Environmental Protection for 2011-2015

The document was developed to implement the provisions of the Strategy of National Policy for Environmental Protection to 2020. The main objectives are: to increase public awareness of environmental issues; to improve the environmental situation and safety; to improve regional environmental policy; to approve the technological standards of pollutant emissions and specific emissions of greenhouse gases; to adopt a national climate doctrine; to implement a system of accounting, monitoring and reporting of anthropogenic GHG data; to implement national greenhouse gas emissions regulation standards harmonized with international standards ISO; to implement the compensation mechanisms of the damages caused by an excessive emissions of GHGs.

This basis for introduction of some MBIs is defined in the paper. It includes the provisions for differential environmental tax introduction. The tax on CO2 emissions was introduced as a result. The development of methodological basis for environmental accounting and reporting is envisaged. MRV draft regulation has been developed. No complex studies were expected to define the optimal way of introduction of market based mechanisms. The CO2 tax was introduced as a part of environmental fee for pollution. Consequently it has no targeted use for GHG abatement. The Plan should be revised after ratification of Ukraine’s commitments in the framework of KP2 to ensure country’s climate targets reaching.


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The regulatory instruments (requirements and standards) play a key role in Ukraine’s climate change related policy. Since Ukraine’s emissions are far below its Kyoto targets for the 2008-2012 period, Ukraine’s position so far was that it does not urgently need an overarching national GHG emissions reduction strategy. Nevertheless, there have been some initial steps taken towards consideration of economic instruments in addition to regulations and standards in Ukraine’s climate change policy portfolio.

The main driver for consideration of economic instruments is the goal to increase the security of the energy supply through enhancing energy efficiency and increasing the use of renewable energy. As around 76% of the national GHG emissions stem from the energy sector, Ukraine is setting priorities in energy and climate-related policies to increase the use of renewable and nuclear energy as well as efficiency in fuel and energy consumption. Ukraine has established a set of new regulations in the energy sector, such as the Law on Power Industry (1997, with amendments in 2010), which introduced feed-in tariffs for renewables and the tax code (effective January 2011), which includes a number of instruments to promote renewables and energy efficiency: tax exemptions and reductions to stimulate the use of energy-efficient technologies and appliances and CO2 taxation to stimulate GHG emissions reduction from the supply side. The planned measures for GHG emissions reduction focus on technological measures such as modernization of existing power plants, promoting new combined heat and power plants, and implementation of energy efficiency programmes. They also include structural measures such as increases in nuclear power and renewable energy sources, and collecting and using the methane from coal mining for heat and power production.

The current regulatory framework in Ukraine regulating GHG emissions and climate change mitigation is not sufficient and needs to be significantly improved. The existing regulations contain statements about the importance and the needs of development of climate change mitigation actions and mechanisms for GHG emissions limitations. However, none of them includes quantitative targets essential for achieving the effective progress in these areas, as well as clear provisions for considerations of market based mechanisms are absent.

3.1.2 Experience with the Use of Market Based Approaches

Ukraine has been successfully using the Kyoto Protocol international market based mechanisms to incentivize GHG emissions reductions. Ukraine participates in international Joint Implementation activities and also in the trading of the Assigned Amount Units (AAUs).

The necessary legal and institutional frameworks for implementing Joint Implementation (JI) and International Emission Trading (IET) mechanisms of the Kyoto Protocol have been established. To realise its potential in 2006 - 2008 Ukraine developed procedures for participation in the flexible Kyoto mechanisms, in particular for the approval of JI projects and rules for IET under the Green Investment Scheme (GIS).

Ukraine established the separate state authority responsible for execution of the provisions set by the UNFCCC and implementation of GHG mitigation projects. This is the State Environmental Investment Agency, which a central body of executive power coordinated by the Cabinet of Minister through the Minister of Ecology and Natural Resources of Ukraine, with the main responsibility to oversee implementation of the Kyoto Protocol and facilitate the country’s participation in the carbon markets.


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JI is an important mechanism for Ukraine to attract foreign investment for the implementation of GHG emission reduction measures in industry. Ukraine has in place a number of JI projects, which are at different stages of preparation and implementation. As of February 2013, 435 JI projects had received letters of endorsement; letters of approval had been issued to 296 JI projects. The majority of JI projects are supported by European Union countries, namely Denmark, Germany, Ireland, Netherlands and United Kingdom. The remaining projects are supported by Japan and Switzerland. Ukraine has become the largest Emissions Reduction Units (ERU) supplier with 277 registered JI projects that delivered more than 500 million ERUs. As of the end of 2013, 58.3% of the world’s ERUs were GHG reduction units from Ukraine.

Ukraine is also the third largest AAU seller. With regard to participation in international emission trading, Ukraine has set up a Green Investment Scheme (GIS) that is funded from the revenues from trading AAUs and aims to fund GHG emissions reduction projects. GIS is also coordinated by the State Environmental Investment Agency. It is operational and regulated by a number of legal acts adopted in within 2008-2012. 47 million carbon units were sold as AAUs and Ukraine invested some of this money into domestic GHG reduction projects through the GIS. So far, the key partners of GIS have been Japan and Spain. As of end-2012, the SEIA had received 1,909 project proposals from 25 regions of Ukraine seeking environmental (green) investment. Most of the GIS projects focus on thermo-insulation and energy efficiency improvements of public facilities, e.g. schools, hospitals and kindergartens, with measures that include thermal insulation of facades and roofs, and replacement of windows and doors. Other projects aim to replace boilers to use alternative fuels in educational institutions and health care facilities.

Despite all these activities targeted at GHG emissions reduction, Ukraine remains to be one of the most energy and carbon intensive European countries per unit of GDP. It still has huge potential for GHG emissions abatement.

Participation in Kyoto Protocol’s international market allowed Ukraine to gain valuable experience relate to the implementation of the marked based instruments during the first commitment period of Kyoto protocol. With Ukraine’s successful experience in JI and IET market it has a positive image on the international carbon market. The necessary institutional arrangements were established to realise and manage GHG mitigation projects. The responsible special state authority was created for this purpose; the national legislation regulating the implementation of project activities aimed at GHG emissions reduction and accounting of emission reductions was adopted. Another important experience was the development of the automated system for recording and processing of the information on anthropogenic emissions and removals of greenhouse gases - the National Electronic Registry of Anthropogenic Emissions and removals of greenhouse gases, which operates in accordance with the international standards for technical data interchange. Hundreds of enterprises participated in the JI project have got a valuable experience in GHG data collection and processing, GHG emissions monitoring system development and maintenance. Finally, technical and institutional capacities have been developed in the country by the broadening of the presence of accredited companies providing the third party verification services. The aspects described above can make up a good basis for further implementation of MBIs in Ukraine.

3.1.3. Development of MBIs in Ukraine

Currently Ukraine is considering a mixed market based scheme, starting with the input of a fiscal instrument and development of MRV system, and then the introduction of domestic GHG emissions trading scheme.


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In 2010, Ukraine’s Parliament approved the introduction of taxes on GHG emissions, which came into effect in 2011 as part of a wider Environmental Tax designed to limit emissions of various pollutants into the atmosphere, water and soils. The current Environmental Tax applies to Stationary Sources of Pollution (SSP) as well as Mobile Sources of Pollution (MSP). The GHG tax component covers virtually all stationary sources of GHG emissions, mainly power sector enterprises and processing industry including metal and coke production, chemical and petrochemical, cement and food industries.

The 2014 tax rate on CO2, the most emitted GHG, is UAH 0.26(€0.0172). Primarily due to this low rate, the current tax system does not seem to be a driver for reducing GHG emissions. The Government of Ukraine now aspires to improve the GHG tax system, including raising the tax rates and introducing more stringent monitoring, reporting and verification requirements in connection with it. To comply with EU-Ukraine Association Agreement provisions, Ukraine has to develop and implement an ETS over the next few years. An improved carbon tax would provide a useful bridging and transition mechanism into an ETS, and indeed, elements of a carbon tax system may run successfully side-by-side with an ETS. In addition to closer ties with Europe, such an arrangement would help fulfill several important policy objectives of Ukraine, including stimulating capital for increased industrial efficiency, increased energy security and preparation towards a post-2020 international climate agreement.

A discussion document (Final Draft) “Improving the existing carbon charge in Ukraine as an interim policy towards emissions trading” for stakeholders in the PETER2 Project, sponsored by the EBRD (www.ebrdpeter.info) is prepared in 28 July 2014. The Government of Ukraine has requested EBRD consultants to conduct two tasks as part of the PETER3 project:

1. Analyze the existing carbon charge and propose improvements to it as an interim policy

towards emissions trading;

2. Prepare a road map for a transition from an enhanced carbon tax to a domestic ETS (will be

ready by the end of 2014).

A discussion document focuses on the first task and proposes several improvements to the existing GHG taxation system. The main conclusions of the document are presented below.

The full extent of the EU-Ukraine Association Agreement on the country’s Energy policy is yet to be seen. With the EU-Ukraine Association Agreement signed 27 March and 27 June 2014, the Ukrainian Government might revise a number of its energy and climate related policies. Thus, the Energy strategy up to 2030, adopted in 2013 will need a thorough revision to incorporate targets on renewable energy sources. In turn, this might lead to changes in the level of tax required to bring emissions to the commitment levels outlined above.

As a result of the ongoing anti-terrorist operation in the East of Ukraine, the state of industry and infrastructure is undergoing changes and there may yet be ramifications especially for coal mines, power plants and distribution infrastructure, industrial enterprises, and public and residential buildings. The design of an improved carbon tax will need to take into account methodological issues on GHG accounting and reporting, power generation capacities distribution, and development of RES generation capacities resulting from recent developments relating to territorial control.

http://www.ebrdpeter.info/


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Further, a reshaping of the electricity market is imminent. Considerations from this include:

Electricity market deregulation (market prices for all groups of users, potential need in

Governmental intervention for low-income citizens); Potential feed-in tariff revision and tax incentives for renewable energy sources (tax

exemption, preferential treatment, etc.).

Finally, energy efficiency measures and natural gas consumption cuts have been recently announced by the Prime Minister of Ukraine to promote energy security especially for the coming 2014/15 winter. Such measures may have a faster impact than otherwise on energy efficiency in the country.

To create a mixed market based scheme through the introduction of MRV in Ukraine a new regulatory framework needs to be developed. Such a regulatory framework will be the draft law on the development of MRV system in Ukraine, which is being drafted by the SAEI and submitted to the MENR for consideration.

To support the development of the MBIs, Ukraine has also requested the assistance from UNDP. The relevant analytical work is being carried out under the framework of the ongoing UNDP Low Carbon Development Project. It is expected that the project will support the SEIA in preparation of the draft law on ETS. As described in the preliminary report by UNDP, the ETS model will be simulated using a computational tool, a computable general equilibrium model of the Ukrainian economy. The model will cover all the main sectors of the economy, the private households, public sector etc. The production activity in every economic sector in the model will be explicitly linked to energy use by means of a production function. The choice of energy source by producers will be described by explicit production functions which distinguish between the use of different fuels, such as coal, gas, and oil products. In addition, emissions from industrial processes (e.g. in chemistry, agriculture, waste management, etc) will also be linked to the production levels in the economic sectors through a so-called Leontief functional relationship. The official publications of the State Statistics Service of Ukraine and the UNFCCC will be used as the sources of the energy use and emission data. The results of UNDP project are expected to be obtained by the end of 2014.

Another important political decision directing Ukraine to consider MBIs in short term perspective was the signing of the Association Agreement with EU. The agreement commits Ukraine to gradual approximation of its policies and legislation to those of the European Union where EU ETS constitutes the basis of climate change mitigation policy.

3.2 Climate Sectoral Policy Objectives

According to a GOU decrees, sectoral strategies and programs, e.g. "National Energy Strategy till 2030", Ukraine aims to reduce the energy intensity of its GDP by 50% and increase its share of renewable energy in total electricity production from the current 3% to 19% by 2030. The main sectoral policy objectives include the importance of rational energy use, the promotion of domestic energy production, and switching to alternative and renewable energy sources. There is a set of priorities, which include reducing the economy’s energy intensity, improving its energy efficiency, integrating with the European energy system, expanding domestic energy production, decreasing air pollution and developing adaptation strategy.


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Based on 6NC the total economically feasible emissions reduction potential of Ukraine’s policies and measures (PaMs) is estimated at 23.1 million t CO2e in 2010 (calculated as the sum of the economically feasible GHG emissions reduction potential of implemented and adopted measures by sector) and 119.1 million t CO2e in 2020. PaMs implemented in the energy sector have the largest emissions reduction potential, followed by measures in the industrial process sector and those in the transport sector. According to the forecasts by the Ukrainian government, GHG emissions by 2020 would be 20% below 1990 levels.

Hence, improving the persistently low levels of energy efficiency along with all associated problems such as import dependency and greenhouse gas emissions is one of the key development challenges for Ukraine today.

3.2.1 Low Carbon Strategy for Key Sectors

There is no approved Low carbon development strategy in Ukraine at present. “Capacity Building for Low Carbon Growth” project, implemented by UNDP and funded under the International Climate Initiative of the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety develops the Concept of the Low carbon development strategy for Ukraine. The main preliminary results of the project are presented below.

Implementation of a low carbon development strategy that will be developed by the end of 2014 is expected to significantly contribute to economic and social development of Ukraine by creating green jobs, promoting energy efficiency and energy security, and improving access to a variety of financial resources to stimulate the country's low carbon growth, including carbon markets and market-based mechanisms.

Based on the results of a thorough economic analysis with a deep emphasis on macroeconomic relationships as well as on sector-specific details, the project experts are working on economic growth strategy that can be used by the Government of Ukraine to inform the formulation of its sectoral processes domestically, and internationally.

Growth in energy-efficient industries along with technological modernization contributed to a 40% reduction in the carbon intensity of Ukraine's GDP for the period 2000-2008, though the energy intensity of Ukraine is still relatively high compared to its peers. Across the electricity and industrial sectors, there is opportunity for improvement with the replacement of outdated boilers, district heating network upgrades, kiln modifications, energy management, and development of clean sources of energy (among other actions). Across the district heating, electrical, and manufacturing sectors alone, there are nearly 100 million tons of CO2e of reductions (by 2030) that are profitable and pay for themselves.

Abatement possibilities in Electricity sector

The technical condition of most power plants and power are poor. These facilities could be upgraded or closed in favour of new, more efficient units with the use of modern technologies (for example, with supercritical parameters, circulating fluidized bed boiler, and other technologies).

The energy sector in Ukraine has significant investment potential for carbon neutral sources. The potential of solar energy and wind power is confined to specific regions, but still has opportunities for growth, though biomass is the renewable energy source with the greatest potential across all regions of the country. A number of nuclear plants are set for mothballing, though new nuclear sites are still a possibility. Hydroelectricity has been historically strong, but opportunities for large scale growth are somewhat limited.


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The total annual technically attainable energy potential of the principal renewable energy sources in Ukraine is about 81 million toe, or 70 billion cubic metres (bcm) of natural gas, which equates to 40% of Ukraine’s annual energy needs; the volume of its development in 2030 may reach 50%. The Figure 11 demonstrates the distribution of various curses potential on the territory of Ukraine.

Figure 11. Total energy potential of renewable energy sources in Ukraine

Abatement possibilities in District Heating

Recent calculations show that by 2030, annual reductions from district heating facility upgrades could yield large reductions (around 19 million t CO2e). Smaller scale but still significant changes on the demand side (improving insulation for instance) in residential and commercial buildings could also yield roughly 4 million t CO2e by 2030.

Abatement possibilities in Industry

Apart from the cement sector, there is extremely high depreciation in equipment throughout all sub-sectors of the manufacturing industry. The most significant opportunities lie within the steel sector where inefficient processes can be modified. Some of the major opportunities are the replacement of open hearth furnaces, as well as implementation of continuous steel rolling, and coal dust capture and use as fuel. Recent research calculates reductions in the steel sector could reach 39 million t CO2e annually by 2030.

Abatement possibilities in Transport

The largest abatement possibilities deal with increasing fuel efficiency of the fleet, which has a large proportion of soviet-era obsolete vehicles on the road. Analysis shows that the process of upgrading the fleet of retail transportation fuels could reduce 16 million t CO2e annually by 2030. However, investments in freight and public transport would also help to clean the transportation sector.


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3.2.2 National Energy Strategy till 2030

The power generation sector – with its outdated and inefficient fleet of plants and equipment, lack of pollution control and aging infrastructure – is the largest source of GHG and local pollutant emissions in the country. The modernization is urgently needed to bring Ukraine’s energy sector to international standards, enhance energy security and support economic growth, improve energy efficiency and address local pollution as well as global climate change. To meet long-term ambitious GHG emission reduction goals, high efficiency, low emissions technologies, including combustion of coal under supercritical and ultra-supercritical conditions, integrated gasification combined-cycle and carbon capture and storage have an essential role to play. However, significant investment in energy efficiency and low-carbon energy sources is required.

On the supply side, based on the Energy Strategy, Ukraine has the potential to eliminate its natural gas import dependency in the foreseeable future by substantially increasing domestic gas production, both conventional and unconventional, such as shale gas and coalbed methane, developing the country’s biomass potential and maximizing the energy efficiency gains. On the demand side, the potential for energy efficiency and energy savings is large, especially in the industry and residential sectors. This potential, however, remains largely untapped and insufficiently addressed in Ukraine’s present energy policy framework. By prioritizing energy efficiency policies, Ukraine could save large volumes of energy, especially gas. To do so will require a framework that frees up private and public funding while at the same time progressively removes subsidies for gas consumption in households and district heating systems, which are unsustainable and an obstacle to investment. Furthermore, Ukraine would benefit in the long term from reallocating the resources directed towards subsidies to funding mechanisms that can realize the country’s energy efficiency potential.

The revised National Energy Strategy was developed in line with the Programme of Economic Reforms 2010-2014 of the President of Ukraine and complies with the schedule of the Reform of the Electric Power Sector. Adopted in 2006 the document was updated in 2013 as a result of changes in the national and global economies, new international commitments, failure to follow the existing strategy and shift in the energy priorities of Ukraine as a whole.

The updated document is vital for reform of the energy industry and its future development. The key goal of the National Energy Strategy is to meet the following objectives:

Increase GDP of Ukraine through efficient development of fuel and energy complex; Create the environment to ensure that the demand for energy products can always

be met; Improve energy security of Ukraine; Improve energy efficiency; Reduce man-made impact and ensure civil protection in the area of man-made

security of fuel and energy complex.

The Updated National Energy Strategy of Ukraine to 2030 includes important discussions on environmental problems and provides guiding principles to address them. However, its recommendations are very general. The strategy does not address financing issues. Concrete targets and timeframes still to be set as well as suggestions on how the government and industry can work together to reduce emissions in the most cost-effective manner. International cooperation on new technologies and materials could be beneficial to Ukraine’s efforts on power sector modernization.


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3.2.3 Renewable Energy and Energy Efficiency Policy

The energy intensity of Ukraine’s GDP is high compared with that of advanced countries of the world and is a significant factor in the competitiveness of the economy. According to figures supplied by the GOU, at 0.4kg of oil equivalent per US$ of GDP Ukraine’s energy intensity is comparable to that of Russia (0.42), twice that of the United States (0.19) and three times that of Japan and Germany (0.14).

Ukraine, like many more developed countries, has unrealized energy efficiency potential. The IEA’s Ukraine 2012 puts it at 20-30% of the energy supply - a magnitude that should ensure that it is accorded a high priority in a sustainable energy policy.

With less than half the energy efficiency potential of Ukraine, the EU has set a target of a 20% improvement in energy efficiency by 2020 and member states have drawn up individual national energy efficiency action plans to secure, demonstrate and monitor progress with respect to the target. Against this background, according to the National Energy Strategy, Ukraine has set energy saving targets of 30-50% in various timeframes, to 2015 and to 2030.

One of the stated reasons for the 2012 update of the National Energy Strategy of Ukraine to 2030 was to address and provide for the growing importance of energy efficiency. This was in the context of a world of rising oil and gas prices, where there is greater emphasis on security of supply and on the need to reduce emissions of GHG. It is precisely because of energy efficiency’s direct and positive impact on the economic, social and environmental dimensions of energy systems that it is widely recognised by policy makers as the priority in achieving early and sustained progress on energy and climate goals. The energy saving potential of Ukraine has been estimated at 27 million toe equivalent by the IEA in its Ukraine 2012 review.

A draft Law on Energy Efficiency, which should replace the 1994 Law on Energy Conservation, which is unanimously recognised as obsolete, is still under preparation. Article 5 of this law provides for “Ensuring implementation of energy saving policies and measures for energy conservation in all sectors of the economy - industry, transport, construction, agriculture, etc., in social and everyday life, as well as in interstate and international cooperation”.

3.2.4 Air Quality and Environmental Tax

The general requirements for atmospheric air protection are stipulated by the Law on Protection of Atmospheric Air (1992, updated in 2014). This law defines the legal and institutional framework and environmental requirements in the field of air protection, including: environmental safety of air; the maximum permissible pollutant emissions by stationary sources; maximum allowable influence of physical and biological factors of stationary sources; content of pollutants in the exhaust gases. The mitigation of the negative impacts of climate change is also mentioned in the article 16 of the document, which declare the general obligation of enterprises, institutions and organizations (in accordance with international agreements) to reduce and subsequently completely stop producing and use of chemicals with harmful effect on the ozone layer; to reduce emissions of carbon dioxide and other substances which can cause the negative climate change impact.

One of the most pressing challenges that Ukraine faces today is the need to drastically reduce emissions of sulphur dioxide (SO2), nitrogen oxides (NOX) and particulate matter (PM) from large thermal power plants. In 1990, 97% of NOx and SO2 emissions came from the energy sector,


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and the remaining 3% from industrial processes. Between 1990 and 2010, SO2 emissions decreased faster than GHG emissions due to significant reduction in the consumption of fuel oil which was replaced by natural gas; however, these emissions remain much higher than European standards.

The State Fund for Environmental Protection is the main source of funding for environmental protection measures. Its activities are regulated by the Law on Environmental Protection and the Ordinance on the State Environmental Fund from 1998. Revenues of the fund come from an environmental tax, voluntary payments by organizations and enterprises, and environmental fees for pollution. The most stable source is revenues from the environmental tax, which replaced collections for environmental pollution that existed until 2011. The Tax Code of Ukraine adopted the environmental tax in 2010.

Revenues from the Environmental Fund are small compared to the financial needs of the power and industry sectors for air pollution abatement. Moreover they have to be spent on a variety of environmental issues such as water and waste matters, and environmental monitoring.

3.3 The Main Drivers for Introducing MBIs in Ukraine

Summarizing the current state of Ukrainian policy in the field of climate change mitigation and taking into account the set international climate goals of the country, as well as already undertaken internal measures set forth in the BB1 and BB2 above, the following drivers for further introduction of MBIs can be emphasised.

First of all the positive results from implementation of international market based Joint Implementation and International Emission Trading mechanisms make up the good basis for further development of domestic market based mechanisms of GHG emissions reduction.

During the participation of Ukraine in the first commitment period of the Kyoto Protocol the strong institutional capacities were developed. The special state authority – the central body of executive power in Ukraine with the main responsibility to oversee and facilitate the country’s participation in the carbon markets was created, which is the State Environmental Investment Agency. The necessary infrastructure, including GHG emission data verifiers and the GHG electronic register, was developed as an integral part of GHG emission reduction projects flow. On the one hand these capacities can be used for subsequent development and introduction of the MRV system and domestic ETS.

However, bearing in mind that the existing national infrastructure and legislation was oriented on GHG reduction project mechanisms, it is clear that further extensive studies are needed to establish the requirements and procedures at installations level for the introduction of MBIs in Ukraine. The consideration of market-based mechanisms can be done only after setting of the clear goals relate to GHG emission reductions and overall efficiency of Ukraine’s economy. The setting of a long-term emissions control targets and a national policy package is extremely important.

The need to prepare Ukraine for constructive engagement in post-2020 global climate agreement and European integration are the other important drivers for introduction of MBIs, which could help to continue and expand country’s participation in the UNFCCC mechanisms, to enhance efforts to reduce GHG emissions and to invest revenues in cost-effective GHG reduction projects in district heating, industrial and residential energy efficiency, renewables etc. It is clear that to reach the undertaken obligations within the KP2 Ukraine have to consider additional


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abatement possibilities without a delay. This became of special importance after Ukraine signed the Association Agreement with EU and taking into consideration the necessity of harmonising of the Ukrainian environmental legislation with the EU climate policy, in particular MRV system and ETS.

Finally, the assessment of MBIs in Ukrainian context will help to define an optimal economic instrument to direct financing of GHG abatement measures through the most cost-effective, environmentally and economically feasible way.


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4. Building Block 3: Core Technical and Institutional/Regulatory Market Readiness Component

This building block describes existing relevant components for readiness, such as the existing GHG data management system in Ukraine.

The GOU feels that a prerequisite for the introduction of MBIs is a good understanding of the emission sources covered and their behavior and thus proposes to introduce an MRV system as a first step. For any MBIs, reliable and comprehensive data on GHG emissions constitutes an essential foundation to ensure environmental integrity. Ukraine’s obligations under the UNFCCC, the Kyoto Protocol and the EU integration initiatives make the establishment of the MRV system and preparation of an informed decision concerning the selection of MBIs to reduce GHG emissions timely and highly important for Ukraine. Tackling these issues is urgent and, due to the current national circumstances, requires strong expertise, technical and financial support from the PMR.

Indeed, analysis of the leading international practice in implementing administrative, fiscal and market instruments for regulating negative anthropogenic effect on climate change, show that creating and providing functioning of the MRV system for GHG emissions is a necessary step towards successful design of MBIs. As the example of the pilot phase of EU ETS shows, robust facility-level data on historical emissions are key input for decisions on the design of a mechanism. Such data should cover at least several years to allow identification of reliable emission trends and thus necessitates a pilot MRV phase where participants’ emissions are monitored, reported and verified.

For this reason, under the mandate of the Cabinet of Ministers of Ukraine from 2011, the SEIA started development of a framework law for monitoring, reporting, and verification. Additional impetus to has been provided to Ukraine’s ambition to advance approximation towards the EU by singing EU-Ukraine Associated Agreement, which envisages establishment of a system of MRV of GHG emissions in the two years after its ratification of 27 EU countries and Ukrainian Parliament.

Being a framework law, the document leaves many of the implementation details to be set up, including detailed regulations on modalities and procedures for monitoring, reporting and verification of GHG emissions; accreditation of independent expert organizations performing the verification of monitoring reports; state recording of the installations emitting GHGs; state management of monitoring, reporting and verification of GHG emissions, as well as relevant supporting methodologies.

The MRV system will be a first step towards an ETS, but potentially also other MBIs, e.g. a carbon tax. The MRV system therefore needs to be designed to collect all relevant information required to make an informed decision for a certain type of MBI. Careful preparation of the MRV system is necessary to ensure that it can provide the appropriate support in selecting an MBI and that it can be cost-effectively adapted, as needed, into a dedicated MRV system for the MBI chosen. The latter will require flexibility in the design. The development of respective regulations and implementation of the actual system in its first phase require both financial support as well as

technical expertise from the PMR.


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PART I – the Status of MRV activities in Ukraine

4.1 Ukraine’s Current System for Estimating GHG Emissions

This section describes the existing system of data collection and management in Ukraine. The primary purpose of the existing GHG reporting system is submission of information about the country’s GHG emissions and removals by sinks under the Kyoto Protocol.

As an Annex I Party of the UNFCCC and Annex B of the Kyoto Protocol, Ukraine is required to develop, and submit to the UNFCCC Secretariat, annual inventories on GHG emissions and removals, not controlled by the Montreal Protocol, using the methodologies of the Intergovernmental Panel on Climate Change (IPCC).

There are currently three types of data reporting that are used for the estimation of GHG emissions and removals by sinks in Ukraine.

National level data: used for the national GHG Inventory , for example, statistical reporting;

Sector level data: mainly used to determine mitigation strategies and measures, partly also for the national GHG Inventory, for example, sector-related information of relevant ministries and agencies;

Company-level data: regular statistical data that is used to develop statistic reports for two levels: national and regional.

The national annual GHG inventories are currently the most reliable and comprehensive data source for GHG emissions in Ukraine.

The reliability of data used to create the national inventory is high. The national GHG inventory of Ukraine provides also estimation of the uncertainty levels of data, following the IPCC guidelines. The table below presents an example for energy and industry sectors, as the key and largest sources of GHG emissions. This shows that data in the overall inventory as an average is of good quality.

Table 5. Uncertainty levels for the sectors energy and industrial processes

The following section describes in detail the national GHG emission inventory system of Ukraine, on which the national GHG inventories are based.

4.1.1. National GHG Emission Inventory System of Ukraine

The Ministry of Environment and Natural Resources of Ukraine is the national focal point for climate change issues. Under its guidance, the State Environmental Investment Agency is the single national entity responsible for:

Operation of the national GHG inventory system,

Sector Share in the total emissions, % The uncertainty of emissions in

2011, %

Energy 75.6 3.7

Industrial Processes

12.8 3.1


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Preparation of the national inventories, The implementation of the quality assurance/quality control (QA/QC) procedures, Submission of the national inventories to the UNFCCC secretariat, and Providing support to the inventory review process.

In 2011, National Center for GHG Emission Inventory was established by the Act of the Cabinet of Ministers No. 1194-r. It is a substructure of the SEIA and has the main responsibility for the preparation of the national GHG inventory, including data collection and processing. Furthermore, the SEIA has special agreements on regular data provision with major government entities, such as the State Statistics Service, the Ministry of Fuel and Coal Industry, the Ministry of Industrial Policy, the State Forest Resources Agency and the State Water Resources Agency.

Other ministries, agencies and institutions are also involved in the preparation of the national inventories, such as: the State Agency for Land Resources, the National Academy of Sciences of Ukraine (NASU), Environmental Investment Fund, Ukrtransgaz, the Ukrainian Hydrometeorological Institute and the State Road Transport Research Institute. These organizations provide activity data, e.g. fuel consumption, on request by the SEIA, develop national methodologies, and participate in the collection and pre-processing of data. The National GHG inventory system organization chart is presented below in Figure 12.

Figure 12. Organization chart of the National GHG Inventory System in Ukraine

The operation of the National GHG Inventory System provides the SEIA with insight into the complexities of data collection, evaluation and quality assurance. This experience is of importance when considering the introduction of an MRV system. At the same time, the national GHG inventory aims to estimate emissions at the national level and does not necessarily provide the level of detail necessary for the MBIs.


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4.2 Assessment of the Current Regulatory Framework for GHG Monitoring and Reporting

Ukraine’s current system of collecting information on GHG emissions is strongly geared towards the preparation of the national-level reports. An Agreement on exchange of information between the SEIA and the State Statistics Service of Ukraine was developed at the national level in order to improve the collection and elaboration of statistical information on the proper accounting of GHG emissions. The agreement entered into force on October 29, 2012. The SEIA also coordinates the collection, analysis and processing of information for the preparation and submission of the National Communications and Biennial Reports.

At the same time, the system of reporting of company level data requires significant improvement. At the moment, the only obligation companies have towards reporting their GHG emissions comes from the statistical reporting system. In accordance with existing requirements by the State Statistics Service, enterprises emitting air pollutants have to report both quarterly and annually report to statistics and environmental agencies on emissions of air pollutants and greenhouse gases. The statistical form “#2-tp (air) Report on air protection” includes all GHGs included in the Kyoto basket (CO2, N2O, CH4, PFCs, HFCs, SF6). The form #2-tp (air) covers only stationary sources and does not include mobile sources. The data reported in the form is used for levying environmental taxes, including the CO2 tax.

The current version of the Tax Code of Ukraine does not stipulate a specific monitoring and reporting system for the CO2 emissions, beyond statutory methodological guidance on calculation of emissions. The aggregated report on emissions and due amounts of taxes is provided separately to the Ministry of Revenue and Duties of Ukraine, which is the administrator of the tax. The data, which is based on 2-tp (air) statistical forms, is known to be of a rather low quality.

An assessment was made by the UNDP project, whether the data collection based on the #2-tp (air) reports could be used as basis for an MRV system. The approach was found not to be suitable as the uncertainty in the reported data is too high, as the comparison with data from the national GHG inventory showed. For example, in 2012, CO2 emission data reported by stationary combustion sources in the 2-tp (air) report was two times lower than the estimate for the same sources in aggregate made by the national inventory on the basis of their aggregate fuel consumption. For some categories the difference in estimates can be as high as several hundred times. The main reasons for the high levels of uncertainty were found to be the following:

Use of inconsistent methods for emission calculations; Inconsistent application of statutory methodological guidance by the operators; Lack of quality control for background data; Non-performance of internal and external control (QA/QC) of reporting data.

An important barrier to the use of existing data collection systems is the provisions of the Law on State Statistics1 with regard to confidential information. The confidentiality provisions make it impossible to obtain the data on the volume of production as well as on consumption of raw materials at the plant level, which would have been necessary to reduce the uncertainty of facility-level emission estimates produced by the facility operators. Furthermore, the collected

1 Article 21: Guarantees of state statistics agencies on ensuring the statistical data confidentiality. Primary data collected

by state statistics agencies from the respondents during statistical observations and administrative data on the respondents received by the state statistics agencies from bodies engaged in activities related to the collection and use of administrative data constitute confidential information that is protected by law and is used solely for statistical purposes in the consolidated impersonal form. The dissemination of statistical information on the basis of which it is possible to identify confidential statistical information about a particular respondent is prohibited.


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data is filed at the regional offices of the State Statistics Service of Ukraine and is currently supplied to the national statics authorities in aggregated form. Where permission to access the reporting forms is obtained on a case-by-case basis, efficient use remains difficult for the following reasons:

Complex format of forms; Different media (paper, electronic); Large number of reporting enterprises, which can lead to unnecessary costs for

processing information, etc.

4.2.1. The dialogue of Ukraine’s authorities with the private sector with regards to the proposed MRP activities

A broad range of stakeholders is engaged in consultation, communication and interaction to ensure market readiness of Ukraine. The constructive dialogue of Ukraine’s authorities with the private sector with regards to the proposed activities is going on.

In Ukraine, regulatory bodies have traditionally had close and informal contacts with various stakeholders, particularly businesses, and consultations are seen as a norm of the regulatory process. Consultations are crucial in shaping consensus around the preparation of the draft MRP and its final version. The MRP components, namely development of facility levels MRV, and policy analysis in respect of market based instruments in selected sectors are strongly support by the private sector and business associations as well as by National Chamber of Commerce and its regional offices. Constructive interaction between business and science communities, NGOs and the governmental agencies at the appropriate levels will be continued for organizational and coordinating activities to ensure market readiness of Ukraine.

Regular stakeholder’s consultations are and will be a part of the MRP process. Private business stakeholders consultations are scheduled to take place on quarterly basis and public stakeholders consultations are going to take place during each key steps of MRP process. The SEIA serves as a secretariat of the stakeholder consultations. Sectoral Working Groups would be established on the need basis. Stakeholders Regular Committee will be established and operate on voluntary on-going basis to support, consult and coordinate with the GoU on each step of establishing and implementing MRV system and ETS. This Committee will consist of private businesses and industry association’s representatives, including Chamber of Commerce, industrial and sectoral NGOs, public society representatives, science and research society. This will ensure the inclusiveness and transparency of the MRP process at each step and will provide GoU the opportunity to respond to the needs of private business and civil society.

4.2.2. Working Group on MRV Law Development

Recognizing the need to improve facility-level reporting, the GoU has initiated process of developing a reliable system of monitoring, reporting, and verification of GHG emissions of individual companies and enterprises. This section describes the drafting of the MRV Law, including the process of consultation with relevant stakeholders.

Resolution of the Cabinet of Ministers of Ukraine dated 25 May 2011 №577-р approved the National Environment Protection Action Plan for 2011-2015 (the National Plan), where Item 60 specified: “Development and submitting to the Cabinet of Ministers for revision draft acts


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providing for functioning of the system for state recording, monitoring, reporting, and reliability checks of data related to anthropogenic GHG emissions”.

Pursuant to the National Plan, the SEIA commenced development of a draft law for introduction of a system for GHGs monitoring, reporting and verification. To facilitate the consultations on the draft law, Working Group on MRV Law Development was established under the SEIA in April 2012. The working group included:

Senior officials and technical personnel of the SEIA;

Representatives of the Verkhovna Rada (Parliament) of Ukraine, namely

- Head of the Sub-Committee on state policy in the sphere of waste management, energy saving, non-traditional and alternative energy sources;

- Head of the Committee on environmental policy, nature use and liquidation of the Chernobyl catastrophe consequence;

- Head of the Secretariat and senior principal consultant of this Committee; - Senior principal consultant of the Committee on fuel and energy complex, nuclear

policy and nuclear safety; Representatives of governmental bodies: Ministry of Ecology and Natural Resources;

Ministry of Justice; Ministry of Finance; Ministry of Economic Development and Trade; State Aviation Service;

Representatives of scientific and expert communities, business, and NGOs: Directorate for electricity generation of the DTEK (largest energy company in Ukraine); Carbon Management Company GmbH; “Consus S.A.” Group; Cherkassy research institute of technical and economic information in the chemical industry; Green Investment Fund Ltd.; Expert and Advisory Centre "Legal analytics"; NGO "Centre for Development of Society";

Representatives of program management teams of the UNDP, WB PMR and USAID technical assistance projects.

In total 12 meetings the Working group on the MRV Law Development were held between its establishment and August 2014. The Working group discussed the conceptual ideas, structure and content of the draft MRV Law as a first step. Later, the Working group discussed comments, observations and suggestions prepared by its members as well as by experts and interested persons or organizations not included in the Working group. This was the case for all versions of the document.

In June 2013, the draft law prepared by the SEIA was submitted to the MENR for review. In order to finalize the development of the draft law, the SEIA established a dedicated internal drafting team in July 2013. The team is composed of relevant technical personnel from a number of the SEIA divisions: legal, joint implementation, strategic planning, and international cooperation. It works under the leadership of the First Deputy Head of the SEIA and Director of Department for International Cooperation, Joint Implementation and Accounting of GHG Emissions. The team’s terms of reference mandate it to formulate, justify and finalize each article of the document. The team met at least once a week since it started its work.

Inter-agency coordination during the development of the law was supported through the ICCC. The status and content of the law was discussed at two ICCC meetings in April and December 2013.


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The draft law is expected to be submitted to the Parliament for approval after the ratification of the Associated Agreement. Its detailed descriptions are provided in the section below.

4.2.3. Draft Law for Facility-level GHG Monitoring, Reporting, and Verification

The main provisions of the draft Law “On measures for organizing and implementing monitoring, reporting and verification of greenhouse gases emissions” are described below.

The law consists of 13 Articles and a set of final provisions. The first four articles serve as preamble and describe:

Definitions of the key terms and concepts used in the law; The sphere of application of the law (i.e. functions of the society in relationship to the

MRV of GHG emissions); Related domestic legislation and international agreements Ukraine is party to; Main principles of on which MRV activities should be based (i.e. rule of law, government

transparency, continuity, sound technical basis, etc.).

The main substantive provisions of the law are presented in Articles 5 – 9, which describe the roles of the government institutions, the responsibilities of facility operators, verifiers and the key steps in the MRP process.

Government bodies involved in the implementation of the MRV system are defined as:

The Cabinet of Ministers of Ukraine; Central body of executive power that develops and ensures implementation of the state

policy in environment protection (i.e. the Ministry of Ecology and Natural Resources of Ukraine);

Central body of executive power that ensures implementation of state policy in the field of climate change and compliance with the UNFCCC and the Kyoto Protocol (i.e. the State Environmental Investment Agency of Ukraine);

Other central bodies of executive power in the corresponding areas of activity authorized by the President of Ukraine in the manner prescribed by the law.

The authority of the central bodies of executive power in implementation and operation of the MRV system in Ukraine is defined in the following way:

The Cabinet of Ministers of Ukraine coordinates formation and implementation of state policy in developing MRV of GHG emissions. Its main role in the MRV system is to adopt the various procedures and rules that would serve as the supporting framework of the secondary legislation. Namely, the Cabinet of Ministers of Ukraine is assigned responsibility to adopt:

Rules for state recording of the installations emitting GHG; Rules for monitoring, reporting and verification of GHG emissions; Rules for state control over monitoring, reporting and verification of GHG emissions.

The central body of executive power that ensures implementation of state policy in the field of climate change and compliance with the UNFCCC and the Kyoto Protocol (further referred to as the National Competent Authority - NCA) in the field of MRV of GHG emissions shall develop and propose for adoption in manner prescribed by law regulations governing:

State registration of GHG-emitting facilities;

nau://ukr/995_801/

nau://ukr/995_801/


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Implementation of monitoring and reporting of GHG emissions; Procedures for verification of monitoring reports by independent expert organizations; State enforcement of compliance with the Law on MRV of GHG emissions; Requirements for the monitoring plan; Requirements for monitoring and the verification reports; Methodologies for measurements or calculations of GHG emissions by installations.

The NCA shall also carry out the following functions as part of the implementation of the MRV system:

State registration of GHG-emitting facilities; Review and registration of monitoring and verification reports; Based on assessment of conformity, appointment of independent expert organizations

for reviewing monitoring plans and verifying monitoring reports; Development and operation of the electronic registry (database) of GHG emission data

provided by facility operators based on monitoring results; Approval of monitoring plans.

The Law defines organization and implementation of the MRV of GHG emissions as follows:

Monitoring is executed by facility operators according to the monitoring plans approved by the NCA;

Based on the monitoring results, facility operators prepare monitoring report in compliance with the monitoring plan;

Monitoring reports are subject to mandatory verification by independent expert organizations;

Operators submit verified monitoring reports and verification reports for approval by the NCA each year no later than March 31 of the year following the reporting year.

Thus, the draft law of Ukraine “On measures for organizing and implementing monitoring, reporting and verification of GHG emissions” establishes the general framework for implementation of the MRV system in Ukraine. The responsibilities and roles of the central bodies of executive power in implementation and operation of the MRV system in Ukraine is illustrated in schematic manner in the flow diagram presented below.


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Figure 13. Flow diagram of authority of the central bodies of executive power in implementation and operation of the MRV system in Ukraine

The flow diagram of the MRV system proposed in this draft law is presented below.


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Figure 14. Flow diagram of the MRV system operation

As can be seen from its description, the Draft MRV Law developed by the SEIA has a framework nature and establishes the general principles and structure of the MRV system and its implementation. A body of secondary legislation would need to be developed and adopted in order to ensure practical implementation of the MRV Law after its adoption.

It should be also pointed out that the Draft MRV Law does not provide for independent verification of the monitoring plans developed by the installation operators. The approval of the monitoring plans will therefore require from the SEIA significant financial, technical and institutional resources, particularly within the initial years of implementing the MRV system in Ukraine.

PART II – Proposal for a Comprehensive System of Facility-level GHG MRV

This section of the BB3 presents the analysis and recommendations elaborated by the MRP team in close collaboration with the SEIA as part of the preparation of the MRP proposal. As described in the section above, the regulatory development in the area of facility-level MRV in Ukraine currently focuses on the preparation and adoption of the law on facility-level MRV of GHG emissions. The law is envisaged to be a framework document, describing the core of the MRV system and setting up the mandate for the various government agencies to finalize and implement the system. Specific decisions concerning the system’s scope and coverage as well as various procedures required to ensure the functioning of the system are expected to be determined through secondary legislation.

Preliminary work supporting the development of the secondary legislation has been started as part of the preparation of the MRP. Its outputs are presented in the sections below and concern primarily

the coverage of the scheme, thresholds for inclusion in the MRV system, and


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needs assessment with regard to development of methodological and regulatory guidance.

The conclusions and proposals contained in this section are fully shared and endorsed by the SEIA.

4.3 Sectors to be Considered for Coverage by the MRV System

This section presents background analysis and recommendations towards sectoral coverage of the facility-level MRV system in Ukraine.

The assessment of the suitability of the sectors for their inclusion in the MRV system was made on the basis of two main criteria: (1) the MRV system should cover sectors with significant contribution to the national GHG emissions and (2) coverage should be limited to sectors that can be MRVed with reasonable effort and low uncertainty, at least initially. The first criterion was addressed by screening of main sources of GHG emissions in Ukraine.

As a first step, the MRP team analyzed key source categories of GHG emissions that have been already identified as part of the National GHG Inventory System. Key source category is defined in the IPCC Good Practice Guidance as “one that is prioritized within the national inventory system because its estimate has a significant influence on a country’s total inventory of direct greenhouse gases in terms of the absolute level of emissions, the trend in emissions, or both”.2

In 2011, the National GHG emissions inventory of Ukraine identified 16 key source categories across all sectors and all GHG in the Kyoto basket. Most prominent among these are stationary combustion of fossil fuels, emissions from road transportation, iron and steel production, natural gas activities, including production, transmission, leakage, venting and flaring. Coal production and agricultural activities also contributed prominently to Ukraine’ GHG emissions. Table 6 shows the list of the key source categories based on their GHG emissions and their share in the total GHG emissions in Ukraine in 2011.

However, not all of these sources lend themselves to be MRVed with reasonable effort and low uncertainty. Emissions from non-point sources, such as those relating to agricultural activities, fugitive methane emissions, e.g. coal handling and gas activities, can be costly to monitor and verify independently. The screening of key source categories showed that majority of MRV-able key categories relate to either CO2 emissions from stationary combustion of fossil fuels or process-related CO2 emissions. The only non-CO2 emission category from a point-source in the list is N2O

emissions from nitric acid production.

2 Good Practice Guidance and Uncertainty Management in National Greenhouse Gas Inventories, IPCC; 2000)


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Table 6. List of key source categories based on GHG emission level in 2011

IPCC category

codes IPCC categories GHG

Emissions in 2011 thousand tons of

СО2e

% of total emissions

1.А.1, 1.A.2, 1.A.4, 1.A.5

Stationary Combustion of solid fuel CO2 123 500.65 31.0%

1.А.1, 1.A.2, 1.A.4, 1.A.5

Stationary combustion of gas fuels CO2 93 351.73 23.0%

1.A.3.b Road transport CO2 30 620.91 8.0%

2.C.1 Cast Iron and Steel Production CO2 23 716.70 6.0%

4.D.1 Direct emissions from agricultural soil

N2O 22 066.17 6.0%

1.B.1.a Coal production and handling CH4 21 565.38 5.0%

1.B.2.b Natural Gas CH4 19 557.00 5.0%

4.A Intestinal fermentation CH4 8 761.94 2.0%

1.А.1, 1.A.2, 1.A.4, 1.A.5

Stationary liquid fuel combustion CO2 7 166.06 2.0%

2.B.1 Ammonia production CO2 6 755.92 2.0%

6.А.2 Uncontrolled residential solid waste landfills

CH4 5 768.13 1.0%

1.A.3.e. Other types of transport CO2 4 856.18 1.0%

2.А.3 Utilization of limestone an dolomite CO2 4 018.70 1.0%

2.А.1 Cement production CO2 3 839.93 1.0%

2.В.2 Nitric acid production N2O 3 231.26 1.0%

4.В Manure disposal, storage and utilization

N2O 3 108.75 1.0%

Despite nitric acid production being a point-source, monitoring N2O emissions from this process is costly due to the fact that it requires installation of specialized equipment for continuous monitoring of N2O emissions. However, interviews with industry experts in Ukraine revealed that due to the sector’s active involvement in JI and the relatively low number of facilities producing nitric acid in Ukraine, such equipment is either already installed or is available can be deployed relatively easily. Same is also valid for a related process of producing adipic acid, which is produced by the same facilities. For this reason MRP team recommends inclusion of both nitric acid production and adipic acid production in Ukraine’s MRV system.

Thus, at the conclusion of the first stage of screening, 9 activity types were recommended for inclusion into the MRV system – 8 key source categories as highlighted in the Table 6 above and production of adipic acid.

As a second step, screening beyond the key source categories already analyzed was applied. In particular, any further categories below the key category threshold 3.1 million ton and


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above 2 million ton per year were examined. Particular attention was paid to sectors that permit facility-level MRV activities. This analysis showed that there are two sectors in the category of industrial processes that are not in the list of the key source categories yet contribute significant levels of СО2 emissions (over 2 million tons per year), namely, limestone production and ferroalloys production. These types of activity are also recommended for inclusion into the MRV system.

Finally, the categories identified were enlarged and harmonized for easier reference within the MRV system. Activities relating to stationary fuel combustion are to be treated as one category. Emissions from IPCC Category 2.А.3 “Utilization of limestone and dolomite” are to be allocated to the industrial source category where they are emitted (mainly production of iron and steel, cement, lime and glass). Thus, CO2 emissions from the use of limestone, dolomite and other carbonates at the facility level will be recorded in all activities where utilization of limestone and dolomite takes place and will be seen not a separate activity, but is a separate “fuel, raw stock - product” flow for which the emissions are assessed for the facility if such flow takes place.

Thus, nine types of activity will be included into the MRV system at the initial stage of its implementation in Ukraine, namely:

1. Stationary Combustion of Fuels; 2. Production of Iron and Steel; 3. Production of Ferroalloys; 4. Metallurgical Coke Production; 5. Production of Cement; 6. Production of Ammonia; 7. Production of Limestone; 8. Production of Nitric Acid; 9. Production of Adipic Acid.

4.3.1 Sectors Less Suited for Coverage by the MRV System

In addition to the sectors above, Annex I identifies a number of sectors which have relevant emissions but seem less well suited for coverage by the MRV system (mainly due to the number and type of sources and high uncertainties). These sectors include:

Fugitive emissions. Transport. Waste.

While these sectors are not necessarily well suited for an ETS, they could be considered for other types of carbon pricing mechanisms, like offsets. Detailed analysis of these sectors is presented in Annex I of the MRP.

4.4 Threshold Levels for Inclusion into the MRV System

The lower limit of GHG emissions for inclusion of a facility into a facility-level MRV system in Ukraine is proposed to be at 25 000 tons СО2 per year.

For the category of stationary fuel combustion, which is the largest of the categories to be included, this broadly translates into the following threshold levels of consumption of fossil fuels per year: 13 million m3 of natural gas, or 12 000 tons of coal, or 8 000 tons of residual fuel oil. This


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is assessment is further refined below for electricity generating and heat generating facilities separately.

The minimum annual fuel consumption and minimum average electrical load of electricity generating facilities to be potentially included in the MRV system in Ukraine in conformity with the recommended GHG emission threshold of 25 000 t СО2 per year is presented below. The following assumptions have been used in the calculations:

hour of operation per year – 8 760; specific fuel consumption – 360 tce/MW*hour.

Table 7. Detailization of threshold levels of electricity generating facilities

Fuel type Average electric

load, MW

Power generation, MW*year

Fuel consumption,

tce

Fuel consumption,

GJ

Emissions, tons CO2

Fuel consumption, t/thousand m3

Coal 3 26 280 9 461 277 273 25 966 12 899

Residual Fuel Oil 3.5 30 660 11 038 323 486 24 777 8 230

Natural Gas 5 43 800 15 768 462 122 25 576 13 704

Thus, coal-fired power generating facilities with load of 3.5 MW per year, gas-fired facilities with load of 5 MW per year and power generating facilities consuming heating oil with average annual load of 3.0 MW and above per year, produce СО2 emissions of about 25 000 t per year and must be included in the MRV initial phase in Ukraine.

Similar assessment was also make for district heating facilities. Minimum annual fuel consumption and minimum total capacity of heat generating facilities to be potentially included in the MRV system in Ukraine was based on the following assumptions:

standard heating period – 192 days; average load during heating season – 70%; boilers efficiency – 90%.

Table 8. Detailization of threshold levels for district heating facilities

Fuel type Capacity, MWthermal

Energy generation, MW*year

Fuel consumption,

GJ

Emissions, tons CO2

Fuel consumption, t/thousand m3

Coal 20 64 512 258 048 24 165 12 005

Residual Fuel Oil 25 80 640 322 560 24 706 8 206

Natural Gas 35 112 896 451 584 24 993 13 392

The total number of facilities falling under the MRV system has been estimated based on the proposed threshold levels for each of the categories. Several hundred facilities are expected to fall under the scheme in the energy sector, while the number of facilities in the industrial sector


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will be much smaller. Precise estimation cannot be made due to potential for fuel switch and lack of data on the precise capacity levels of the smaller installations.

Total 2011 emissions for the list of IPCC categories for the initial phase of MRV system in Ukraine amount to 271 000 tons of СО2e, which makes 68.7% of the total GHG emissions. However, this percentage will smaller because the MRV system will not cover small installations. Such coverage of GHG sources by MRV system in Ukraine is significant and representative. On the table below the preliminary estimation of installation that will be covered by the MRV system at the initial phase is given.

Table 9. Preliminary estimation of number of facilities falling under the MRV scheme

# Type of activity Preliminary number of installation

Energy Sector

1. TPP and CHP over 20 MWelec 42

Gas compressor stations 74

District heating boilers over 20 MWthermal Hundreds

Large Industrial Enterprises

2. Production of Iron and Steel 10

3. Production of Ferroalloy 4

4. Metallurgical Coke Production (off-site metallurgical coke production)

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5. Production of Cement 12

6. Production of Ammonia 6

7. Production of Limestone 8

8. Production of Nitric Acid 5

9. Production of Adipic Acid 5

4.5 Additional Regulatory Needs for MRV System Implementation

As described in Part I, the Draft MRV Law only establishes the general (framework) measures for implementation of the MRV system in Ukraine. Specific decisions and procedures required to ensure the functioning of the MRV system are expected to be adopted through secondary legislation. This includes regulatory documents defining the scope of the regulation - monitoring, reporting, and verification of GHG emissions for installations – as well as defining the main rules and procedures for such regulations. Three main sets of regulatory documents would need to be developed to implement the MRV Law in practice once it is adopted.

1. Procedures for monitoring, reporting and verification of greenhouse gases emissions

Such procedures should establish requirements and procedures for developing monitoring plan, preparing reports on monitoring GHG emissions, and verification by an independent expert organization of reports on GHG emissions monitoring. Simplified requirements to monitoring plans, reporting and a simplified procedure of verification of monitoring reports is recommended to be set-up for installations with low GHG emissions.

2. Procedures for accreditation of independent expert organizations which perform verification of reports on monitoring of GHG emissions


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Accreditation procedures are to establish requirements for independent expert organizations and procedures of their accreditation to perform verification of reports of monitoring GHG emissions at installations.

3. Procedures for state registration of the facilities emitting GHG in a MRV Database

Registration procedures shall establish requirements and procedures for state registration of installations included in the MRV Database.

4.5.1 Relevant Methodologies and Guidelines for MRV System Implementation

To provide for reliable, successful and transparent functioning of the MRV system in Ukraine, the following statutory methodological guidance will also need to be developed and approved. They shall be adjusted in conformity with the requirements that will be incorporated in the approved procedures for monitoring, reporting, and verification of GHG emissions, and other corresponding documents regarding functioning of the MRV system in Ukraine.

Methodology for definition of GHG emissions for each of the types of activities included in the MRV system;

Monitoring plan templates (with examples according to activity types), a template for simplified monitoring plan for installations with insignificant GHG emissions;

Templates of report on GHG emission monitoring, template of simplified monitoring report for installations with insignificant GHG emissions.

As the MRV process and requirements will be new for all participants in the MRV system in its initial phase, such activity will require significant technical, institutional, financial and other resources both on part of the monitoring reports verifiers, and on part of the National Competent Authority. Therefore it is very important to develop guidance documents that will assist the installations operators in developing monitoring plans, carrying out monitoring and developing monitoring reports and in undergoing verification of monitoring reports.

List of such guidance documents is provided below:

Example of standard procedure for organizing monitoring at installation level; General guidelines in GHG emissions monitoring and reporting; Guidelines in interpretation of installations’ activity types; Guidelines for lab testing frequency; Guidelines for sampling and samples testing; Guidelines for data management and data control system; Guidelines for estimation of uncertainty; Guidelines for utilization of biomass.

The above list of documents would be adjusted to reflect the latest requirements of the MRV system in Ukraine. All regulation preparation activities will involve an intensive consultation process with stakeholders from sector representatives, institutions, NGOs, relative organizations and PMR experts.

Draft structure of the example of typical procedure for organizing monitoring at installation level is presented below:

Responsibilities for monitoring and reporting emissions from the installation Diagram of activities data flow for monitoring Form of monthly activity data setup

http://ec.europa.eu/clima/policies/ets/monitoring/docs/gd1_guidance_installations_en.pdf


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Procedure of GHG emissions archiving and subsequent storage Procedure used for regular evaluation of the monitoring plan's appropriateness,

covering in particular any potential measures for the improvement of the monitoring methodology

Procedure for the sampling plans for the analyses Procedure to be used to revise the appropriateness of the sampling plan Procedure to be used to estimate stocks at the beginning/end of the reporting year Procedure used to keep track of instruments installed in the installation used for

determining activity data Procedures used to manage data flow activities Procedures used to assess inherent risks and control risks Procedures used to ensure quality assurance of measuring equipment Procedures used to ensure quality assurance of information technology used for data

flow activities Procedures used to ensure regular internal reviews and validation of data Procedures used to handle corrections and corrective actions Procedures used to control outsourced processes Procedures used to manage record keeping and documentation

4.6 Institutional and Technical Needs for Implementation and Operation of MRV system

It is estimated that hundreds of installations will be covered by the proposed MRV system in Ukraine. Hence significant amount of accredited and authorized verifiers will be needed for the verification of the monitoring plans and monitoring reports. Considering the tight timeline for the implementation of the MRV system, a condensed and intensive campaign on capacity building of relevant stakeholders and accreditation and authorization of verifiers will be implemented to prevent any delay with respect to the established timeline for the initial implementation and reporting year stage of the MRV system. In the BB5 detailed institutional and organizational needs for implementing and operating the initial stage of the MRV system are described.

While Ukraine has in place both a registry for Kyoto purposes and data management systems for national inventories, they are not readily suited for the needs of recording and managing MRV data. Therefore, for the purposes of an MRV database, data management systems and procedures need to be designed. Database management system (including a document exchange system) shall utilize web-based user friendly technologies in order to ensure robustness and effectiveness of the system.

Development of an MRV implementation system database will have at least the following stages:

Selection of the software Technical support for a web based reporting and verification system Training of the trainers for the system Piloting the data management system


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4.7 Target/Goal Setting for Market Instruments

Ukraine does not currently have any identified targets for market-based instruments. The background studies, which are explained and listed in BB-4 Part-II, will be presented to the decision makers for their consideration on implementation of market based instrument(s), including goal setting by implementation.

4.8 ToR(s) and Proposed Budget

The aggregated deliverables are presented in the table below.

Table 10. Deliverables for BB-3

Deliverables Description

1. Regulatory additional documents for introduction of MRV system for GHG emissions in Ukraine

To establish requirements and procedures at installations level for developing monitoring plan, preparing reports on monitoring GHG emissions, and verification of reports on GHG emissions monitoring by an independent expert organization, the following regulatory documents will be developed: - Procedures for MRV of GHG emissions; - Procedures for accreditation of independent

expert organizations which perform verification; - Procedures for state registration of the facilities

emitting GHG in a MRV Database of reports on monitoring of GHG emissions;

- Procedures for state registration of the facilities emitting GHG in the MRV Database.

- -

2. Relevant Methodologies and Guidelines

To provide for reliable, successful and transparent functioning of the MRV system in Ukraine, detailed methodological guidance will be provided as described in section 4.5.1: - Methodologies for each of the types of activities

included in the MRV system; - Monitoring and reporting templates; - Comprehensive guidelines for the operators.


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3. MRV database

Development of the MRV database, including inventory of installations and GHG emissions and initial support of its operations

- Development and support of the MRV database, including inventory of installations and GHG emissions

- Collection, verification and approval of GHG emission monitoring plans and reports on monitoring, organization of a service/department for installations operators support

- Archiving and storage of monitoring and verification reports

4. Training and capacity building activities for stakeholders on MRV system implementation

Training of NCA personnel in maintenance of the GHG emissions database. Training and Capacity Building Activities for Stakeholders on MRV


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Deliverables and Budget

Breakdown of the cost to the activities and years are given in below table.

Table 11. Deliverables and Budget for BB-3

Activity Year 1 Year 2 Year 3

Year 1 Year 2 Year 3 PMR

budget

Estimated overall budget 1 2 3 4 1 2 3 4 1 2 3 4

1. Development and approval of the relevant regulatory framework and methodological guidance for MRV system operation

700 000 700 000 700 000

2. Development and support of the MRV database, including inventory of installations and GHG emissions

350 000 100 000 50 000 500 000 500 000

3. Training of NCA personnel in maintenance of the GHG emissions database

100 000 50 000 150 000 150 000

4. Collection, verification and approval of GHG emission monitoring plans and reports on monitoring, organization of a service/department for installations operators support

200 000 300 000 500 000 500 000

5. Archiving and storage of monitoring and verification reports

50 000 50 000 50 000

6. Training and Capacity Building Activities for Stakeholders on MRV

200 000 500 000

700 000

7. Engagement of consultants and technical experts

50 000 50 000

100 000

Total BB-3 1 050 000 400 000 450 000 1 900 000 2 700 000


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5. Building Block 4: Planning for a Market-Based Instrument

In order to ensure a successful launch of a market-based instrument (e.g. an ETS), careful planning and of preparatory activities are required. Given Ukraine’s circumstances, the main objective for BB-4 is to identify market-based options and share these options with relevant government decision-makers in order to facilitate a decision on a market instrument. Based on roundtables, meetings and inter-agency discussions, the research funded by PMR and other donors is expected to clarify the appropriate policy options and mitigation strategies for Ukraine. Conclusion of the policy deliberations will enable finalization of the choice of carbon pricing instruments and broad decision on their design and implementation frameworks. Consultative processes and policy dialogue would be required at this stage.

The vision of the GOU on the introduction of carbon pricing in Ukraine covers the period of the next 7 years, which includes “pre-decision”, “decision” and “implementation” phases. Figure 16 illustrates the main milestones the country is expected to reach in this time frame. Taking into account Ukraine’s political direction towards European integration, the 7-year time scale targeting the introduction of one or more MBIs (likely including an ETS) by 2020 would support both the EU aspiration to move towards creation of a global carbon market by and after 2020, and facilitate Ukraine’s constructive engagement in the post-2020 international climate regime.

Figure 15. Overview of planning and implementation of MBIs in Ukraine

Therefore, the exploration of activities for identification of options for market based-instruments should include the development of sectoral mitigation strategies, projections, and assessments on possible implications of implementation of different carbon pricing or fiscal instruments, based on these sectors’ and long- term macro-level targets of Ukraine.

Part-I of BB-4, provides an assessment of market readiness and a policy-mapping analysis. Part-II provides an assessment of needs required to facilitate decision-making on the implementation of market based instruments.


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5.1 PART I - Assessment of Market Readiness

The policy mapping analysis presented in BB-2 shows that important goals have been set for the relevant agencies and sectors in relation to Ukraine's transition to a low energy and carbon intensity of the economy. Ukraine has already successfully increased use of renewable energy and facilitated improvements in energy efficiency, which make a significant contribution to the country’s long-term mitigation objectives. Due to these efforts, both public and private institutions have gained momentum towards establishing low carbon development principles as one of Ukraine’s key strategic objectives.

Ukraine has been actively working on opportunities to expand carbon markets and carbon policies domestically. In 2011, the Parliament of Ukraine approved the introduction of a tax on CO2 emissions from stationary sources. The tax was initially set at UAH0.22 per ton of CO2, and increased to UAH0.24 per ton of CO2 as per amendment to the Tax Code of Ukraine from November 20, 2012. The carbon tax covers all stationary sources of CO2 emissions, mainly enterprises of power sector and processing industry (metal and coke production, chemical and petrochemical, cement, and food industries).

However, the current tax of roughly €0.02 per ton of CO2 does not provide an incentive for GHG emissions reductions. The charge for CO2 emissions is collected as a part of the ‘environmental tax’, which includes charges for waste, atmospheric emissions, water pollution etc. According to the Budget Code of Ukraine, the proceeds from the environmental tax (including the CO2 emission charge) are partially channeled to the central budget and used for the ‘environmental modernization projects’.

As of 2014, 50% of the environmental tax is expected to be allocated to environmental projects. The guidelines for selection of the projects to be financed are to be approved by the Cabinet of Ministers. The draft list of eligible activities includes, among others, improving production cycle, use of materials and introduction of technologies which allow avoiding, decreasing or removing atmospheric pollution. However, as CO2 tax proceeds are bundled together with all other existing pollution and waste charges, it would be difficult to establish a direct link between financing of any CO2 emission reduction activities and the tax applied.

As the current tax rate does not provide sufficient incentive to reduce emissions, Ukraine is seeking to raise the current tax rate, possibly revise the system of the application of the tax and introduce more stringent MRV requirements in connection with it.

Another option pursued by the GoU has been the introduction of a domestic ETS. The success of the Kyoto flexible mechanisms in Ukraine has raised awareness of their potential among senior policy-makers and has built capacity and understanding in the private sector. The majority of the largest players in energy and industry has either hosted or has been indirectly involved in a JI project. As a result, the awareness of the concept of carbon pricing is relatively high.

Policy-wise, the introduction of a domestic ETS would facilitate reaching important policy objectives of Ukraine, including

preparation for implementation of the post-2020 international climate agreement; reduction of the carbon and energy intensity of the Ukrainian economy, paving way for

securing Ukraine’s energy security; economic stimulus to the industry for capital investments to the energy-saving

technologies;


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fulfillment of the European integration goals of the GOU and preparation for compliance with the EU-Ukraine Association Agreement.

Suitability of the sectors and their mitigation potential

Suitability of the sectors for inclusion in market-based instruments as well as their preliminary mitigation potential has been analyzed within the framework of the UNDP project “Capacity Building for Low Carbon Growth in Ukraine”, which is supported by the Government of Germany through the International Climate Initiative.

Growth in energy-efficient industries along with technological modernization has been shown to have contributed to a 40% reduction in the carbon intensity of Ukraine's GDP for the period 2000-2008, though the energy intensity of Ukraine remains relatively high compared to its peers. Across the electricity and industrial sectors, significant opportunities were identified for improvement with the replacement of outdated boilers, district heating network upgrades, kiln modifications, energy management, and development of clean sources of energy (among other actions). Across the district heating, electrical, and industrial sectors alone, nearly 100 million tons of CO2 equivalent reductions by 2030 were identified that are profitable and could pay for themselves.

A more detailed analysis of the suitability of each of the individual sectors for inclusion in the ETS or other MBIs is provided below:

Power Sector, including electricity generation; cogeneration/combined heat and power, excluding separate processing or district heating purposes

The power sector is a significant contributor to GHG emissions, with many large point sources and low cost of abatement. Although there is some export of electricity, most of the exports originate from nuclear and hydroelectric sources; therefore, a cap on fossil fuel based power generation should not significantly hinder its competitiveness.

District Heating System, including district heating boilers, the heating component of CHP and industrial thermal sources

District heating makes a sizable contribution to overall GHG emissions, and has generally a very low cost of abatement. There are many large point sources which will be easier to regulate, though there are also a proportion of smaller facilities that might fall outside of the MRV system and remain outside any potential future cap in an ETS. These facilities are by nature serving local customers, and thus no international competitiveness issues apply. However, the fact that many facilities are owned by municipalities may pose some unique challenges.

Industry, including metallurgy, fertilizers/ammonia, petrochemicals, food processing, coke production, cement and other enterprises

Industrial sectors (including among others iron/steel, ammonia, cement, nitric acid, adipic acid, refineries, and lime) have large point sources with easily-realizable paths to abatement as well as a large proportionate carbon footprint. Therefore, industry is a strong candidate for inclusion into an MBI. Industry is exposed to international markets to some extent, however, and the sector could therefore benefit e.g. from free allocation of allowances if an ETS is introduced.

http://www.undp.org.ua/files/en_33835edited_Project_Document_Low_Carbon_Growth.docx


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Transportation, including fossil fuel combustion for mobile sources in transportation (road, rail, sea)

Transport is not traditionally well-suited for down-stream capped regulation, as the point sources of emission are small and mobile. Upstream regulation could be approached through relevant governmental entities, though that could present administrative difficulties, and the upstream entities are not able to reduce emissions (aside from biofuel blending) since the drivers are the end consumers. Transport does contribute significantly to GHG emissions and at the consumption level is not subject to international competition since all domestic demand would be included.

Residential and Commercial Sector, including residential and commercial burning of fossil fuels that are not connected to district heating

Residential and commercial consumption is not a sector easily included into the MBI, e.g. into an ETS. Though it is a large source of GHG emissions, there are disparate sources of emissions at each household and building. Like the transport sector, upstream regulation could be centralized through relevant governmental entities.

Coal and Gas Sectors, including coal mine fugitive emissions, oil and gas extraction fugitive emissions, and pipeline distribution fugitive emissions

Mining and gas pose challenges for inclusion under a cap, since methane emissions are difficult to measure, and fugitive emissions sites are numerous and often in many separate areas. Though the level of GHG emissions is significant, this sector is not conducive to carbon caps given the monitoring and implementation issues. However, it is important to note that in terms of offset markets, there are potential opportunities, especially in coal mine methane; this is due to the fact that the calculations of reductions simply extrapolate from the amount of methane captured, which is relatively simple to measure.

Waste Sector, including landfill gas, waste water gas

Waste is not a significant source of emissions, and the landfill gas and other emissions sources are difficult to measure. Consequently, the sector is not well-suited to inclusion in MBI programs. There is a possibility for landfill gas to play a role in the offset markets.

Agriculture and LULUCF, including land use, fertilizer from crops, forestry, livestock emissions, and other agricultural and land-based emissions

Agriculture encompasses many broad sources of emissions that are rarely concentrated in one player or area, making it very difficult to regulate under an ETS, though it is a significant source of overall emissions. Forestry and fertilizer management are also well represented in offset markets, but do present some complexity as far as measurement and additionality determination are concerned.

Based on this analysis, power sector, district heating, and industrial sectors are considered to be the most suitable for inclusion into an ETS or other MBIs.

Electricity and manufacturing are deemed to be suitable since they

are easily identifiable, large point sources which make up most of the emissions in the sector;

release a significant portion of GHG emissions (17%, 25% respectively); offer numerous and largely profitable emission reduction opportunities;


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subject to many regulatory and reporting requirements, hence their inclusion in the ETS will not create significant incremental burden.

District heating is also deemed suitable due to the fact that

it has some of the greatest potential for cost-effective reductions of any sector; it has large point sources similar to the power and manufacturing industry, though there

are more medium to small facilities in this sector than in power and manufacturing; it allows for a relatively uncomplicated MRV process.

Electricity and heat producing district-heating plants (CHPs) and power plants (TPPs) are recommended to be included in a pilot phase of the ETS. A pilot phase is considered useful and necessary in order to build capacity of the local operators, provide them with the chance to better understand the market and their own opportunities to reduce emissions while the obligations in the ETS are not as stringent. The selection was motivated by a number of factors, namely that:

Reductions potential in the power sector is the greatest, with 44 million t CO2e of reductions are possible annually by 2030 for a sector that emitted 65 million t in 2010;

The thermal power sector has a large portion of private companies that are used to traded markets (through power trading), more than the manufacturing and heating;

The market is more uniform than the manufacturing and the larger district heating sector, easing administrative and regulatory burdens in the early phase.

The recommendations for the selection of the sectors for inclusion into ETS are well aligned and have been coordinated with the choice of sectors to be initially covered by an MRV system.

Institutional readiness

The long and successful track record of implementation of Kyoto instruments in Ukraine has created a uniquely high level of institutional awareness and preparedness for the introduction of MBIs. As a specialized government body responsible for the implementation of climate policies and carbon markets in Ukraine, the SEIA possess both practical experience as an institution and trained personnel familiar with the various aspects of the functioning of MBIs. Thus it is perfectly positioned to provide a robust institutional platform for the launch of the ETS in Ukraine.

Furthermore, as an Annex I participant of the Kyoto markets for the last 5 years, Ukraine has been maintaining a fully functional registry under the Kyoto Protocol. The registry has been developed by a national developer “Softline” and is hosted and operated by the SEIA. Numerous transactions have been conducted through the registry and its staff is highly trained in both technical and market aspects of its operation.

One of the most important advantages of Ukraine regarding any possible market mechanism will be strict regulations on the MRV system covering GHG emission sources in the main sectors (energy, industry). Having a reliable MRV system is the essence of any market or fiscal instruments. Therefore, in the case of a decision to implement the system for piloting the market mechanism after a detailed assessment, Ukraine will be able to structure such mechanism using the MRV system and to apply it smoothly to the chosen sectors.

At the same time, while the SEIA has gained significant background capacity, the launch of the MRV system and the MBIs would require new skills and further institutional strengthening at the SEIA. BB5 covers capacity building activities responding to the need to improve specific knowledge of both the SEIA and other stakeholders involved (e.g., market regulators, market participants, accreditation bodies for verifiers, etc.) on the MRV and MBIs.


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5.2 PART II - Needs Assessment for MBI(s)

The analysis of the market-based instrument readiness of different sectors provided above demonstrates that the establishment of any possible market based instruments in Ukraine requires detailed analyses and assessments on both domestic and international policies while taking into account socio-economic conditions, long term projections, and sectoral targets of Ukraine.

Policy mapping evaluation also shows that the momentum created so far for transition to low carbon economy has been mainly due to non-market mechanisms and instruments. The main driver of this process has so far been financial incentives (as in the case of tariffs or tax reductions) or regulatory instruments, such as a penalties or high taxes. Ukraine is therefore considering a mixed scheme starting with the strengthening of the existing fiscal instrument and development of MRV system, and then the introduction of other MBIs, most likely a domestic GHG emissions trading scheme.

Preparatory work on mapping out design options for the development of a domestic Ukrainian ETS has been carried out under the UNDP Low Carbon project. Additional analytical support to Ukraine’s ETS work has been provided under the EBRD PETER project in the form of reviews of international experience, examination of international linking options; analysis of the existing carbon charge and proposal of it improvements as an interim policy towards emissions trading.

USAID Energy Sector MRV project developed elements of MRV system for power sector. USAID Municipal Energy Reform project is a part of USAID global EC-LEDS initiative and providing low emission development policy support along with National GHG Inventory System assistance. MRP is in on-going coordination with MERP project in order to ensure coordinated efforts and eliminate potential overlaps, even though MERP has clearly stated that no assistance is planned for ETS. Climate Change Donors Coordination Platform has been established under USAID initiative in Feb 2014, this web-based platform serves coordination and information exchange purposes and MRP is a part of this network.

While further technical assistance is planned to continue support to Ukraine in various aspects of its climate change policy, significant gaps still remain, in particularly in supporting the launch of MBIs and their further implementation. In order to provide a comprehensive overview of remaining MBI support needs, this sections provides an overview of ongoing and planned technical assistance initiatives and their expected outcomes before identifying the remaining needs and formulating a request for PMR support.

5.2.1 Ongoing and Planned Technical Assistance of Relevance to MRP

EBRD: Preparedness for Emissions Trading in the EBRD Region (“PETER“)

Phase I of EBRD Peter project was completed in 2012-2013, providing a review of international experiences in the set-up of domestic emissions trading schemes, examination of international linking options and recommendations on the framework for development of ETS in economies in transition.

Responding to a request from the GOU, the PETER project continues to support MBI development in Ukraine through its Phase II, which will:


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Analyze the existing carbon charge and propose improvements to it as an interim policy towards emissions trading, including existing legal and regulatory framework, institutional arrangements and implementation modalities;

Provide assessment of the alternative design options of a carbon-based fiscal instrument. Develop a road map for a transition from an enhanced carbon tax to a domestic ETS;

including possible transition paths from carbon-based fiscal instrument towards full carbon trading; and instruments that could facilitate such a transition.

A discussion document (Final Draft) “Improving the existing carbon charge in Ukraine as an interim policy towards emissions trading” for stakeholders in the PETER2 Project is prepared in 28 July 2014 and submitted to the GOU. The main improvements proposed are to:

1. Introduce two tax bands for stationary sources of pollution, with the lower tax band meant for sectors where carbon leakage has been identified by the European Commission as a significant risk or are classified as Emission Intensive Trade Exposed industries (such as iron and steel); and the high band for sectors which are not predominantly active in an export market (such as electricity producers).

2. Introduce a domestic offset market system, where non-covered entities and entities under the low tax band can produce offset units to sell to entities under the high tax band to lower their tax compliance costs.

3. Take hard-to-measure sectors such as Waste, Agriculture, Forestry and Fugitive emissions out of Tax for the time being, but allow them to participate in the offset market. Later, when measurement systems improve, consideration can be given to bringing these sectors back into the tax. This is similar to the approach taken by carbon tax schemes in advanced development stages or under implementation, such as South Africa and Norway.

4. Take entities which emit less than 25,000 tonnes CO2e out of the tax altogether, but allow them to participate in the offset market. Such entities are responsible only for approximately 5% of currently taxed emissions in Ukraine and would face high transaction costs if participating in the early stages of a strict and elaborate MRV regime. Again, smaller entities can be brought back into the tax later after MRV processes are standardized.

5. For offset projects, introduce standardized baselines and methodologies for project-based emission reduction measurement processes as developed under widely accepted international standards such as the Clean Development Mechanism (CDM) and the Verified Carbon Standard (VCS) – to ensure real and additional emission reductions.

6. Introduce a common tax rate unit for different GHGs per tonne of carbon dioxide equivalent, to harmonize the rate in relation to their Global Warming Potential (GWP).

7. Recycle tax revenues to lower income groups to offset hardship caused by increased prices; and to industry and local government budgets to promote technology innovation, emission reduction and other environmental projects.

Introducing a meaningful carbon tax based on robust MRV systems in advance of an ETS has the following further advantages:

In the lead-up to an ETS, companies in other jurisdictions have been known to over-report emissions leading to inaccurate sectoral emissions baselines, which in turn lead to establishment of higher caps than justifiable. However if companies are paying a meaningful carbon tax on their emissions, they are incentivized to report much more


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accurately which will help in the development of accurate emissions baselines to inform the ETS cap.

The carbon tax system already exists and can be made more robust quite quickly in comparison to the development and implementation of an ETS.

The carbon tax system outlined below can generate estimated revenues of about USD 33.8 billion up to 2030. The proposed offset market of up to 7.4 billion USD would reduce tax revenues to a total of 26.4 billion USD from 2016 to 2030 (the size of the offset market depends on the implementation speed of MRV).

According to economy-wide modelling conducted by the Institute for Economics and Forecasting of Ukraine, simple increases in the tax rate for all currently covered entities results in a small negative effect on GDP, especially over a short time frame (e.g. up to 2025) but which reduces over a longer time frame (e.g. up to 2050).

Redistributing revenues to industry and to the population would have the least negative effect on the long-term growth of the economy.

The timing of the transition between carbon tax and ETS will be important especially in the light of the Ukrainian Government’s climate policy obligations under the EU-Ukraine Association Agreement, and for this a roadmap will be developed as part of Task 2 within the PETER project.


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UNDP/International Climate Initiative: Capacity Building for Low Carbon Growth in Ukraine

The project aims to support the Government of Ukraine in steering the country on a low emission pathway for Ukraine’s long-term economic development and to develop a Concept of Low Carbon Strategy for Ukraine. To this effect, the project’s focus is on strengthening the institutional capacity of Ukraine to design and implement long-term policies and measures directed at reducing emissions of greenhouse gases and enhancing absorption by sinks.

The following reports and studies were accomplished so far and results from which were included into the MRP:

Identification of policies and measures for low carbon growth in Ukraine and assessment of their mitigation potential;

Analysis of alternative schemes to finance different strategies with special reference on proceeds from Post Kyoto Instruments;

Legal advice on the development of framework elements of an ETS, particularly MRV; Preliminary assessment of ETS design options; Assessment of data needs and facilitating improvement of installation-level data collection; Development of a greenhouse gas emission model; Short analytical papers on economic analysis of policy options; Analysis of the 2012 Doha Amendment to the Kyoto protocol, its implications for Ukraine,

including economic assessment.

The Concept of Low Carbon Strategy for Ukraine is expected to be finalized by the end of 2014.

USAID Municipal Energy Reform Project

The primary purpose of the Municipal Energy Reform Project (MERP) is to enhance Ukraine’s energy security. Increased end-use energy efficiency combined with increased production of clean energy in large towns and cities will reduce the consumption of conventional energy in Ukraine, cut GHG emissions, energy expenditures and imports. The main goals of the project are therefore to improve Ukraine’s energy policies, increase energy efficiency and facilitate more investments in Ukraine’s energy sector.

One of the project activities supports enhancing capacity for the GOU in development and introduction of Low Emission Development Strategies (EC LEDS), which includes three specific support areas:

Strengthening institutional capacity in planning LEDS and Resource Efficient Development Strategy (LEDS –REDS);

Implementing LEDS-REDS through support in developing and introducing clean energy technologies and energy services; and

Developing a uniform database on LEDS-REDS and exchanging experiences and best practices with other countries participating in EC-LEDS.

A GoU is currently discussing with USAID support for targeted assistance in support of the set-up of the MRV system in Ukraine under the EC LEDS component of the MERP.


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EU-funded Clima East Project

The EU-funded Clima East project works with seven Partner Countries (Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine and the Russian Federation) on developing approaches to climate change mitigation and adaptation, in order to better equip partners to achieve greenhouse-gas emission reductions, and deal more effectively with the impacts of climate change.

The Clima East combines pilot projects component focusing on ecosystems-based approaches to climate change and a policy component, which provides Expert Facility to the Partner Countries, intended to support the development of improved climate change policies and strategies by the Partner Countries and the formulation and implementation of effective action plans and projects. Expert support is provided to the Partner Countries in the form of consultations, workshops, study tours, training, and advice as appropriate.

Ukraine has requested support of the Clima East Expert Facility on the following topics: Expert support for the UNFCCC negotiators; Expert support for developing MRV for large industrial sectors and emitters; Expert support for the development of GHG reduction economic instruments for industry.

Further topics of support in the area of LULUCF inventories and climate policy elements are under discussion between Clima East and the GOU.

The main outcomes of the ongoing technical assistance projects of specific relevance to MRP are presented in Table 12 below.

Table 12. Key outputs of ongoing TA projects in Ukraine of specific relevance to MRP

DONOR PROGRAM PERIOD Outputs of specific relevance to MRP

EBRD “Preparedness for Emissions Trading in the EBRD Region” (PETER)

2012-2015 PETER phase I (2012-2013): Rationale, key

challenges and logical framework of introducing

ETS, review of ETSs globally, linking options.

PETER phase II (2013-2014): assessment of

carbon tax options for Ukraine, road-map for

transition from carbon tax to an ETS.

Budget: € 750,000 (split with Kazakhstan)

Germany (UNDP/ICI)

“Capacity Building for Low Carbon Growth in Ukraine”

2012-2014 Legal support in development of a draft ETS law;

Preliminary assessment of ETS design options;

Assessment of data needs in installation-level

data collection;

Concept of Low Carbon Strategy for Ukraine

USAID “Municipal Energy

Reform Project” 2013-2017

Main outcomes related to MRV system and

MBIs are under discussion

EU “Clima East” 2015-2016 Consultations, workshops, study tours, and

training will be arranged on MRV for large

industrial sectors and emitters and GHG

reduction economic instruments for industry

http://www.climaeast.eu/partner-countries/armenia

http://www.climaeast.eu/partner-countries/azerbaijan

http://www.climaeast.eu/partner-countries/belarus

http://www.climaeast.eu/partner-countries/georgia

http://www.climaeast.eu/partner-countries/moldova

http://www.climaeast.eu/partner-countries/ukraine

http://www.climaeast.eu/partner-countries/russia


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5.2.2 Needs Assessment for Development of MBIs in Ukraine

The logical framework for further analysis of transition pathways to carbon markets developed under EBRD PETER project describes six key steps in the process of setting up domestic MBIs. Its starting point is existence of national climate policy goals necessitating introduction of MBIs and a political decision or, as a minimum, an expressed political will to consider carbon pricing as a policy tool.

Figure 16. Steps towards establishment of MBIs (adapted from the EBRD PETER project)

The country has already demonstrated strong political will towards introduction of carbon pricing, putting it firmly on the step 1 in the figure above. Analytical support is being provided to Ukraine through on-going technical assistance projects to assist with assessment of the broad policy options for implementation of the carbon tax and its transition towards carbon trading, supported by a strong MRV framework, as part of step 2 of the process described above.

Proposed PMR intervention in Ukraine is expected to focus primarily on steps 3 and 4 of the framework, highlighted in Figure 16 above, namely in providing analytical support in assessing some of the more technical policy options and the set-up of the regulatory framework. The biggest component of this work will be the set-up of the MRV system, described in Building Block 3 of this proposal. Additionally, further, in-depth analysis is required to support the technical design of the MBIs and allow for policy and implementation decisions to be made by the Government.

Analysis of the carbon tax design options is provided by Phase II of the EBRD PETER project. The project elaborates proposals for improvements of the tax, assess assessment of the alternative design options of a carbon-based fiscal instrument and will develop a road map for a transition from an enhanced carbon tax to a domestic ETS. Consequently, Ukraine proposes to focus the efforts of the MRP activities on the technical support issues for the design of other MBIs, including Ukrainian ETS system.

After the MRV system is established and the choice to proceed with an ETS is made, selection of methodologies of allowance allocation and the actual allocation of allowances is the next technical step in the establishment of an ETS. Preliminary assessment of design options for Ukrainian ETS carried out under the UNDP Low Carbon project recommends Ukraine to use allocation by grandfathering in the early phases of the scheme, with transition towards a combination of benchmarking and auctioning. Both methods are relatively unknown in Ukraine and would require careful examination and support in building an acceptance of them.

Specific tasks that are required for support of development of benchmarking approaches include:

(i) In Year I, an in-depth introduction of benchmarking concept; analysis of the benchmarking options and best practices, as well as the lessons learned from


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implementing benchmarking schemes in the EU ETS and North American schemes; assessment of the data needs for implementation of benchmarking methodologies.

(ii) In Year II, preliminary collection of data of the necessary data as identified in data needs assessment previously;

(iii) In Year III, analysis of the collected data, their quality, preparation of preliminary assessments on their basis, identification of data gaps and barriers to allocation by benchmarking in Ukraine, recommendations on the ways of dealing with the identified gaps and barriers.

Specific tasks that are required for support of preparation of eventual auctions of Ukrainian allowances include a review of relevant auction theory and experience, analysis and specific recommendations on auction design and implementation, including the choice of auction format, institutional capacity needs, recommendations for administrative and institutional support systems and the various aspects of the bidding rules and procedures.

For the sectors not covered by the MRV system in the initial phase (transport, waste, agriculture, LULUCF, district heating and others), recommendations on selection of appropriate mechanisms, such as domestic offset mechanism and new market mechanisms need to be prepared, including analysis of their suitability for these mechanisms in Ukrainian conditions, recommendations on the selection of sectors and eligible activities, quantification of the potential offset supply in total and by sector, assessment of the necessary support MRV framework, including project-specific MRV protocols, as well as regulatory and institutional requirements.

Many of the issues surrounding ETS design are rooted in technical and practical considerations but might require high-level policy decisions. This particularly concerns decisions relating to the handling of economic impacts on domestic economic sectors, internationally exposed industries and ensuring minimization of social effects (e.g. electricity price hikes), which affect the choice of the sector coverage of the scheme and level of ambition in covered sectors.

Similarly, some of the fundamental principles guiding the design of the scheme, such as scarcity, the need to ensure environmental integrity, market credibility and openness to international markets are also ultimately policy decisions that are at a later stage reflected in the formulation of technical and legislative foundations of the scheme.

In order to facilitate finalization of the technical design decisions, it is recommended to do economic modelling of the identified design options, including linkage to other similar markets, which would include assessment of the macroeconomic impacts of introduction of ETS or other MBIs in Ukraine, as well as sectoral and social impacts. The analysis would consider implications of the different levels of stringency that could be applicable to the system, resulting market shortage, carbon price ranges, and possible price containment mechanisms, such as the use of offsets for compliance.

Finally, the concluding element of the preparation of the MBIs in Ukraine shall be development of a policy-makers document, which is to outline identified MBIs options, their impact assessment. The document will follow the regulatory guidelines for preparation of policy proposals and will include relevant background information, regulatory and economic analysis of the proposed options and their impacts, roadmap for their implementation and a relevant legal assessment. The document will take the research and analysis completed under various technical assistance projects to the new level translating it into a format suitable for direct use by policy-makers in Ukraine.


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Additional tasks required for the introduction of MBIs in Ukraine

Taking into account Ukraine’s current status with regards to MBI development and expected contribution of ongoing technical assistance projects, the Government of Ukraine considers that a number of additional tasks are required with regards to the introduction of MBIs, which are set out in four work packages below:

ETS design options. An assessment of outstanding design options for on ETS that require consideration by Ukrainian government will be performed under this work package. The activities will be primarily focused on analysis of benchmarking and auctioning options for Ukraine, including methodological and design recommendations, data requirements and preliminary allocation suggestions. A small portion of requested funding will be kept for topical research into other design issues that might need clarification over the course of three years of MRP activities in Ukraine. Such issues could include e.g. market oversight, registry regulation, tax treatment of carbon units, etc. Furthermore, development of more detailed MBI options based on the results of the modelling, e.g. related to scope, target/cap setting, allocation approach, timeframes, etc., as needed, can be provided under this work package.

Domestic offsets options. For the sectors not covered by the MRV system in the initial phase (transport, waste, agriculture, LULUCF and others), recommendations on selection of appropriate mechanism(s), such as offset mechanism and new market mechanisms considered under the UNFCCC shall be prepared, including assessment for technical (MRV) system, legal, human capacity, infrastructure, and organizational framework.

Economic impact assessment for ETS/other MBIs. After the selection of mechanism(s) and sector(s), and after the outputs from UNDP and EBRD projects, the modeling based on different scenarios and with a sensitivity analysis, shall be performed in order to assess the implications of implementing MBIs sectors covered by the MRV system and selected MBIs for the sectors not covered within the MRV system, including estimation of environmental, economic, social and fiscal impacts of alternative design options. The assessment shall also consider a demand assessment for credits and possible linkage to other similar markets.

Carbon Pricing Policy Decision Document for policy makers and stakeholders shall be prepared, based on the outcomes and recommendations of relevant MBI studies. Such integrated paper shall be the essential document for policy makers to implement MBIs in selected sectors. The Paper shall outline key elements of a road map for the implementation of market instruments, provide regulatory legal and economic assessment of the identified options as required by the Ukrainian law and stipulate measures relating to a piloting period for the selected sectors in order to identify organizational, legal and institutional needs for further establishing a comprehensive framework.

Above-mentioned analytical studies will provide the basis for the decision makers and public for the implementation of appropriate MBIs in the different sectors of Ukrainian economy.


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Timeline and Budget

Timeline and budget for the deliverables and activities identified under BB-4 are provided in section 5.3. The total of cost of these deliverables and activities are estimated to be USD 1250,000.

Ukraine plans to accomplish the deliverable #1 “ETS design options study” using PMR funding, and requests to perform this task USD 0.5 million.


The deliverables under BB-4 are derived from the three additionally necessary activities as identified above and are described inError! Reference source not found.


Deliverables/Reports Description

1. ETS design options study An assessment of outstanding design options for on ETS, focusing primarily on methodological and design issues for benchmarking and auctioning. Topical research into more detailed MBI options based on the results of the modelling and/or progress of MBI deliberations in Ukraine, including but not limited to scope, target/cap setting, legal definition of units, etc. will also be covered.

2. Domestic offsets options study

Recommendations on selection of appropriate mechanism(s), such as offset mechanism and new market mechanisms considered under the UNFCCC for sectors not covered by the MRV system in the initial phase (transport, waste, agriculture, LULUCF and others).

3. Economic impact assessment for ETS/other MBIs

Modelling of the various MBI options (based on results of UNDP project as far as possible as well as on data collected under the MRV system to the extent available) for sectors covered by the MRV system as well as not covered by the system with regards to economic impacts

4. Carbon Pricing Policy Decision Document

Decision Document for stakeholders and policy makers shall be prepared, based on the outcomes and recommendations of relevant studies. Such document shall provide regulatory legal and economic assessment of the identified options as required by the Ukrainian law and shall be the essential tool for decision-makers on MBIs Ukraine.


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Year 1 Year 2 Year 3

PMR budget

Estimated overall budget

1 2 3 4 1 2 3 4 1 2 3 4

1. ETS Design Options Study

150 000 200 000 150 000

500 000 500 000

2. Domestic Offsets Options Study

150 000 150 000

300 000

3. Economic Impact Assessment for ETS/other MBIs

200 000

200 000

4. Carbon Pricing Policy Decision Document

250 000

250 000

Total BB-4 150 000 200 000 150 000 500 000 1 250 000


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6. Building Block 5: Organization, Communication, Consultation and Engagement

The BB-5 provides an organizational structure for the decision making body of the PMR activities in Ukraine and an assessment of needs and plans for stakeholder’s consultation and engagement processes throughout the implementation phase. The block also includes the information on the MRP Implementation Team, which will have the responsibility of coordination for the full range of activities identified in the MRP and help strengthen the Government’s limited technical capacity and expertise on MRV systems.

6.1 Organizational Framework for MRP Activities and Decision Making Process

As the government agency responsible for coordination and implementation of climate change and carbon market policies in Ukraine, the SEIA will lead the work of the Government of Ukraine on the development of MRV system, and preparation for an informed decision-making process on the use of market based instruments. Accordingly, the main implementing institution for the MRP activities in Ukraine will also rest with the SEIA, which will perform the functions of the National Coordination Authority (NCA) for PMR in Ukraine.

Figure 17. Organizational chart for implementation of MRP activities in Ukraine

The NCA will coordinate MRP-related policy-making and government consultations within Ukraine through the Cabinet of Ministers and, in a working level, though creation of an Interagency Technical Working Group. A dedicated MRP Implementation Team will be set-up


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under the auspices of NCA to provide day-to-day management of MRP activities. The figure above illustrates the institutional structure for implementation of MRP activities in Ukraine. The following functions are envisaged for each of the institutions involved in the MRP implementation:

The Parliament of Ukraine adopts laws/amendment of laws with regard to implementation of climate change related issues.

The Cabinet of Ministers of Ukraine coordinates formation and implementation of state climate change policy, including MRV of GHG emissions.

National Coordination Authority (SEIA) conducts the national coordination of MRP activities, acts as the decision-making and the policy-making authority on MRV and MBI issues.

MRP Implementation Team provides day-to-day management of MRP activities in Ukraine.

Interagency Technical Working Group coordinates a platform for different ministries and agencies to ensure appropriate linkages and information flows and enhance common understanding among different government departments.

6.2 MRP Implementation Team

In order to optimize the SEIA participation in MRP activities, the SEIA’s ‘Division of GHG accounting’ will be directly responsible for MRP implementation for the whole period of 3 years of MPR activities in Ukraine. In the SEIA’s structure illustrated below, this Division is highlighted in red as part of the Department of International Cooperation, Joint implementation and GHG accounting. The SEIA currently employs 63 professionals. The structure of the SEIA is presented below (Figure 19).

The Division of GHG Accounting consists of five employees and has accumulated substantial experience in development and implementation of different related requirements, guidelines, procured, instructions, such as: “Procedure for preparation, review, approval and implementation of GHG emissions reduction projects”, “Instruction on realization of joint implementation projects under the national procedure”, “Requirements for documents which substantiate the anthropogenic emissions and removals of greenhouse gases, to obtain a letter of support to the owner of emission sources the JI project", "Requirements for the preparation of JI projects", “On the development and maintenance of the National Electronic Registry”, “Procedure for the review, approval and implementation of projects under the Green Investment Scheme (GIS)” and other important documents related to national inventory system and implementation of KP flexible mechanisms.

In addition to the five employees of the newly created SEIA Division of GHG Accounting, the MRP Implementation Team will be strengthened by a Management Support Unit, funded by PMR. The responsibility of the Management Support Unit will be primarily to support the managerial, administrative and technical running of the MRP activities. It will consist of 5 experts, including a Project Manager, two technical experts, and financial and procurement specialists. One of the technical experts will be responsible for coordinating MRV activities under BB3, while the other expert will be responsible for MBI-related activities under BB4 and stakeholder outreach and consultation under BB5.

Thus, the MRP Implementing Team will consist of:

I. Division of GHG accounting in the SEIA, financed by state budget (5 employees) II. Management Support Unit, financed by PMR (5 experts)


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Figure 18. Structure of the SEIA

6.3 Stakeholder Coordination and Consultations

A broad range of stakeholders need to be engaged in consultation, communication and interaction to ensure market readiness of Ukraine. Therefore, it is proposed to create a multi-stakeholder Interagency Technical Working Group (ITWG). Engagement of the ITWG in the MRP activities will allow increasing the capacity of the MRP Implementing Team through inputs of a variety of technical and policy experts. ITWG will also be instrumental in facilitating the exchange of views on the MRV system development and market based instruments (MBIs) implementation among different stakeholders.

Constructive interaction between business and science communities, NGOs and the governmental agencies at the appropriate levels will be implemented for organizational and coordinating activities to ensure market readiness of Ukraine. The consultation process will also be important to improve the utilization of existing geo-economic and scientific potential and to discuss the best way to reduce GHG emissions, particularly through market mechanisms. An important part in the discussion process for market-based instruments will also be coordination with business - associations, such as the Ukrainian Union of Industrialists and Entrepreneurs and Associations of various important industries such as metallurgy, energy, chemistry, etc.

For this reason, the membership of ITWG will cover a wide range of stakeholders, including governmental actors, industry associations, Chamber of Commerce and Industry, international and local consulting companies, The National Academy of Sciences of Ukraine and civil society organizations. The list of stakeholders preliminary identified during the MRP preparation phase and suggested for inclusion in the ITWG is presented below. The list will be extended if necessary.


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Interagency Technical Working Group

Government:

Cabinet of Ministers

Ministry of Ecology and Natural Resources

Ministry of Energy and Coal Mining

Ministry of Economic Development and Trade

Ministry of Finance

State Environmental Investment Agency

Non-governmental organizations (NGOs):

Union of ecological auditors of Ukraine

Ecoclub

National ecological center of Ukraine

International public organization “Environment-People-Law"

Association of agro-ecology of Ukraine

MAMA 86 (Mother 86)

Research organization "Biosafety Committee"

All-Ukrainian Charity Foundation "Sprout"

All-Ukrainian Charity Foundation “Community Energy"

Industrial Associations:

Ukrainian Union of Industrialists and Entrepreneurs

Association of metallurgy

Association of chemical industry employers “Union of Chemists of Ukraine"

Association of energy industry

Association of consumer goods industry

Association of wood-based industries

Association of machinery-producing industry

Research and academia:

Institute of Energy

Institute of Economic Forecasting

Other Institutes and research bodies of the National Academy of Sciences of Ukraine

Independent think-tanks

International and local consulting companies

6.4 Outreach and Communication Strategy

The main objective of this component is to engage the stakeholders from both the private and the public sectors, by learning of their capacities and interests, as well as sharing information on the objectives and requirements associated to the design, implementation and operation of a MRV system and different MBIs in the country.

For this reason an outreach and communication strategy on the MRV system and MBIs implementation in Ukraine has been planned, which includes the following priority measures:

Organizing broad consultations with stakeholders through series of meetings and seminars convened by the ITWG. The SEIA will prepare and disseminate consolidated conclusions of such consultations and take them into account in the development of the MRV system and MBIs;

Preparation of publications, such as articles or series of articles as the basis of wide consultation process on the main features of the MRV system, ETS and other MBIs. The publications will highlight various aspects related to MRV system development and MBIs, technological issues, economic impacts, international relations, etc. These publications will be disseminated through national and regional printed and electronic media such as


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newspapers “Governmental messenger”, “Ecotizhden”, periodical “Company’s Ecological Safety” and others;

A series of educational workshops and seminars for schools, universities, and scientific communities in order to increase their awareness and knowledge on climate change, mitigation policies and measures, adaptation to climate change, GHG sources and sinks, MRV system, ETS and other market-based instruments.

To support the implementation of the strategy and to support the development of the capacities of the MRP team, exchange of experiences will be organized with other countries which have already implemented or developed national emissions trading systems and MRV systems of GHG, such as Australia, New Zealand, European Union, USA, Japan, Turkey and others.

In carrying out the consultations and outreach activities, the MRP Team will rely on existing outreach tools that already play a significant part in environmental communication strategy of Ukraine, namely the Public Council of the SEIA and the Aarhus Information Center of the MENR.

The Public Council of the SEIA is a permanent collegial elected advisory body established for the purpose of citizens participation in state affairs, public control of the SEIA activities, establishment of effective interaction between the public and the SEIA, considering public opinion during national policy formation and implementation process, and the performance of state obligations under international treaties and agreements on climate change.

The activities of the Council are regulated by the Constitution and laws of Ukraine, acts of the President of Ukraine and the Cabinet of Ministers of Ukraine, decisions of the SEIA, by other laws and regulations of Ukraine, and the Charter, based on the Model Charter of the Public Council. Its main tasks are to:

Create the conditions for citizens to realize their constitutional right to participate in state affairs;

Conduct the public control under the activities of the SEIA in different climate change policies and strategies;

Encourage the SEIA to consider public opinion during national policy formation and implementation process on climate change issues;

Plan consultation and cooperation between relevant government agencies and stakeholders.

The Aarhus Informational Center of the MENR was founded in 2003 and is governed by Coordination Council, which includes representatives of the MENR, the Public Council under the MENR, the State Ecological Academy of Postgraduate Education and Management, NGOs, international organizations and foundations. The Center:

provides information and communication opportunity for dialogue between community and state authorities in the development of environmentally significant decisions;

organizes and conducts public consultations, public hearings, conferences, seminars, round-table discussions on the development of laws and regulations, plans and programs on the environmental issues;

conducts information and training seminars for government officials, representatives of local self-government bodies, ecological oriented NGOs and Mass Media;


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participates in / provides organizational support / management of international and national projects on the implementation of the Aarhus Convention, the Espoo Convention, environmental education and education for sustainable development.

The Public Council under the SEIA and Aarhus Informational Center together will provide a communicational platform for realization of communication strategy of MRV, ETS and other MBIs implementation in Ukraine. This platform will help organize and conduct the planned meetings, round tables, conferences, seminars and workshops envisages as part of the MRP’s consultation and communication strategy engaging all interested stakeholders.


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To perform all the tasks in this section, the total required funding is USD 1.05 million. Ukraine requests from the PMR USD 0.6 million to perform the deliverable #1:

Establishment of the MRP Team for smooth implementation and coordination of activities and works identified within this MRP.


Deliverables Description

1. Establishment of the MRP Implementation Team

Establishment of a Team for smooth implementation and coordination of activities and works identified within this MRP

2. Conferences and Workshops on MRV system, ETS and other MBIs

Perform capacity building activities especially for related public institutions and sector representatives and other stakeholders to be identified; through conferences, workshops, study visits, etc.

3. Meetings, Round-tables, Seminars with related stakeholders for consultation of MRV system, ETS and other MBIs

Holding sufficient number of meetings, round-tables, seminars with private sector representatives and public institutions in order to ensure successful MRV system development and preparation of appropriate analysis/reports for ETS and other MBIs

4. Public Awareness Activities

Media activities, publications, materials, broad public education and awareness raising activities.

Budget

Breakdown of the cost to the activities and years are given in below table.


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Year 1 Year 2 Year 3 PMR

budget Estimated

overall budget

1 2 3 4 1 2 3 4 1 2 3 4

1. Establishment of the MRP Team 200 000 200 000 200 000 600 000 600 000

2. Conferences and Workshops on MRV system, ETS and other MBIs

50 000 50 000 50 000

150 000

3. Meetings, Round-tables, Seminars with related stakeholders for consultation of MRV, ETS and other MBIs

50 000 50 000 50 000

150 000

4. Public Awareness Activities (Media activities, high level public/private meetings etc.)

50 000 50 000 50 000

150 000

Total BB-5 200 000 200 000 200 000 600 000 1 050 000


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7. Building Block 6: Summary of Activities, Timeline and Budget

This section summarizes and explains Ukraine’s MRP timeline and budget for activities identified under building blocks 3, 4 and 5 in details. The relationship between building blocks is also presented. The overall timeline of the MRP implementation is estimated to be about 3 years through the end of 2017.

Figure 19. MRP Timeline

The first year includes beginning of most activities identified in MRP. This stage requires strong financial support for the successful kick start of the project. During first year the most costly activity is preparation and introduction of additional regulatory documents for MRV system. It requires development of strong system for preparation monitoring plans, reports and verification of GHG emissions. Along with development of regulations, the analysis of MBIs should be performed in order to choose the most reliable instruments for Ukraine’s economy sectors, including an assessment of outstanding design options for on ETS, focusing primarily on methodological and design issues for benchmarking and auctioning. From the beginning of the project the working team would be established in order to deliver planned activities.

In the second half of the first year the development of the MRV database will start. The database would be used for storing and managing data on GHG emissions, monitoring plans and reports etc. Study on recommendations on selection of appropriate mechanism(s), such as offset mechanism and new agreement mechanisms considered under the UNFCCC for sectors not covered by the MRV system in the initial phase (transport, waste, agriculture, LULUCF and others) will start from this point if co-financing will be found. Public and private trainings and capacity building activities should be performed in order to deliver the main concepts of MRV system and prepare stakeholders and operators of installations for implementation stage. Stakeholder’s


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engagement activities for discussion of MRV and MBIs and public awareness activities also will begin at this stage and will continue till the end of the project if Ukraine obtains additional financing.

At the start of the year 2 the database should be established and would require only technical support, thus NCA’s personnel should begin training in managing the database. Soon after preparation the actual data collection and verification should begin. At this stage the assessment of design options for on ETS, that are being implemented or considering in different countries/regions shall be performed.

With the continuous trainings of stakeholders, the service for the support of installation operators should be organized. Developed skills of operators are vital for correct market readiness and they also need to have source of information about different aspects of MRV system functioning.

At the beginning of the 3rd year of the project enough data on GHG emissions should be gathered to start archiving and storage of monitoring plans, monitoring reports, verification reports, their registration documents by the NCA, and other relevant documents.

Carbon Pricing Policy Decision Document, as essential guideline for MBIs policy makers and stakeholders on MBIs Ukraine will be prepared on this stage, based on the outcomes and recommendations of relevant studies if additional financing will obtain. Such document shall provide regulatory legal and economic assessment of the identified options as required by the Ukrainian law.

Table 17 below gives a summary of budget and timeline for activities described in BB 3, 4 and 5.


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Table 17. Timeline, total budget and PMR budget identified in BB-3, BB-4 and BB-5

Building Block


Year 1 Year 2 Year 3 Total 1 2 3 1 2 3 1 2 3 1 2 3

BB-3

Development and approval of the relevant regulatory framework and methodological guidance for MRV system operation

700 000 700 000

Development and support of the MRV database, including inventory of installations and GHG emissions

350 000 100 000 50 000 500 000

Training of NCA personnel in maintenance of the GHG emissions database

100 000 50 000 150 000

Collection, verification and approval of GHG emission monitoring plans and reports on monitoring, organization of a service/department for installations operators support

200 000 300 000 500 000

Archiving and storage of monitoring and verification reports

50 000 50 000

Training and Capacity Building Activities for Stakeholders on MRV

200 000 500 000 700 000

Engagement of consultants and technical experts 50 000 50 000 100 000

Total BB-3 1 250 000 1 250 000 500 000 2 700 000

Total BB-3 from PMR 1 050 000 400 000 450 000 1 900 000


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BB-4

ETS Design Options Study

150 000 200 000 150 000 500 000

Domestic Offsets Options Study

150 000 150 000 300 000

Economic Impact Assessment for ETS/other MBIs

200 000 200 000

Carbon Pricing Policy Decision Document 250 000 250 000

Total BB-4 400 000 600 000 250 000 1 250 000

Total BB-4 from PMR 150 000 200 000 150 000 500 000

BB-5

Establishment of the MRP Team 200 000 200 000 200 000 600 000

Conferences and Workshops on MRV system and MBIs

50 000 50 000 50 000 150 000

Meetings, Round-tables, Seminars with related stakeholders for consultation of MRV and MBIs

50 000 50 000 50 000 150 000

Public Awareness Activities (Media activities, high level public/private meetings etc.)

50000 50000 50 000 150 000

Total BB-5 350 000 350 000 350 000 1 050 000

Total BB-5 from PMR 200 000 200 000 200 000 600 000

TOTAL Estimated Budget Needs 5 000 000

TOTAL PMR Estimated Budget Needs

3 000 000

Co-funding from GOU State Budget* 450 000 450 000 450 000 1 350 000 *State funding for the 5 employees. Exchange rate on 11/08/2014: 100 USD - 1260.68 UAH. Source: http://www.bank.gov.ua/control/uk/index


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Annex I

Table AI.1. GHG emissions from industrial processes in Ukraine in 2011

GHG and IPCC Categories CO2 CH4 N2O

(thousand tons)

Total Industrial Processes 43 788.79 37.27 11.25

A. Minerals production 10 982.80 - -

1. Cement production 3 839.93

2. Limestone production 2 804.46

3. Utilization of limestone and dolomite 4 018.70

4. Soda ash production 166.43

7. Other 153.28 - -

Glass production 153.28 - -

B. Chemical Industry 6 824.69 11.28 11.25

1. Production of ammonia 6 755.92 - -

2. Production of nitric acid 10.42

3. Production of adipic acid - 0.82

4. Production of carbide 68.76 0.33

5. Other - 10.95 -

Technical carbon 0.65

Olefiant gas - 0.19 -

Methanol 0.32

Coke - 9.80

C. Metallurgical Industry 25 981.30 25.99

1. Production of Gray Iron and Steel 23 716.70 25.99

2. Production of ferroalloys 2 264.60

List of IPCC Categories / Activity Types less suited for coverage by an MRV system at the current time

A number of inventory categories includes relevant emissions, but do not seem suited for the MRV system as it is planned under the framework law at the current point in time.

Fugitive Emissions

Fugitive emissions amounted to 41.6 million tons of СО2-equivalent in 2011, but does not seem well suited for the planned MRV system as emission sources are diffuse and often difficult to identify and even where identified, difficult to measure with the necessary certainty.

Table AI.2. Emissions in category Fugitive Emissions

IPCC Categories 2011

million tons of СО2e

Fugitive emissions 41.6

1.B.1 Solid fuels 20.1

1.B.2 Oil and Natural Gas 21.5


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Transport

The table below presents СО2 emissions from transportation in 2011. The largest input to GHG emissions is made by road transport emissions – 84.5%. MRV is complex due to the large number of mobile sources.

Table AI.3. GHG emissions from Transportation

IPCC Categories 2011

million tons of СО2e

1.А.3 Total transport 36.7

1.A.3.a Civil Aviation 0.2

1.A.3.b Road transport 31.0

1.A.3.c Rail transport 0.5

1.A.3.d Marine transport 0.1

1.A.3.e Other transportation, including 4.9

1.A.3.e.i Pipeline transport 4.9

Waste

The table below shows GHG emissions from Waste in 2011. 10-12 million tons of solid residential waste (SRW) is placed in 6000 landfills existing in Ukraine per year. Diffuse sources and level of uncertainty are barriers to MRV.

Table AI.4. GHG emissions from Transportation

IPCC Categories CO2 CH4 N2O

4 Waste, total 0.48 473.03 3.59

4 A. Disposal of solid waste - 346.83

1. Controlled solid waste landfills - 72.16

2. Uncontrolled solid waste landfills NA 274.67

B. Wastewater discharge and treatment 126.19 3.59

1. Treatment and discharge of household wastewater

40.53 0.26

2. Treatment and discharge of industrial wastewater

85.67 3.33

C. Waste combustion 0.48 - 0.00

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