Green Investments into the Ukrainian Economy

UKRAINE: Options for Designing a Green Investment Scheme under the Kyoto Protocol
World Bank Report, November 2006

This report was requested by the Government of Ukraine and has been prepared using funding from the World Bank’s Carbon Finance Unit. The report analyzes options and opportunities for Ukraine to trade surplus allowances (so called Assigned Amount Units or AAUs) under the Kyoto Protocol and to link proceeds from such transactions to climate friendly programs, a process referred to as ‘greening’. While greening is neither required nor defined under the Kyoto Protocol potential buyers have indicated that this would be a likely condition of purchase.

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Ukraine ratified the Kyoto Protocol in 1994 and together with other industrialized country signatories has agreed to reduce its greenhouse gas (GHGs) emissions by an average of 5.2% of over the period of 2008-12 compared to a 1990 baseline. Even allowing for economic growth in this first commitment period Ukraine and several Eastern European countries have surplus assigned amount units due to an economic decline since 1990; in 1999 Ukraine’s emissions were 43% below their 1990 baseline. In contrast a number of countries including Japan, Italy and Spain are unable to meet these commitments through domestic action alone and can make use of the Kyoto flexible mechanisms to ease the burden of compliance.  The flexible mechanisms present an opportunity for Ukraine to attract foreign funds and technologies - through international emissions trading or project based transactions under Joint Implementation - to modernize the economy, improve the competitiveness of industry and reduce dependence on imported fossil fuels.

Ukraine and Russia together account for around 75 percent of the global AAU surplus; more than projected demand and triggering competition between potential AAU suppliers. The market is largely untested and is expected to comprise sovereign buyers with the exception of the Japanese private sector since AAUs cannot be used compliance under the EU Trading Scheme during 2008-12. Ukraine’s surplus is estimated at between 1.5 and 2.2 billion AAUs, but not all of the surplus can or should be sold. The marketability and value of Ukraine’s surplus will be affected by the country’s ability to meet the eligibility criteria defined under the Protocol, the proposed use of sale proceeds and the state of the market itself – if Ukraine delays its readiness to trade for too long other sellers may satisfy global demand causing the price per unit to fall significantly. The study looks at how to approach an AAU transaction to strengthen the terms of sale and considers the pros and cons of one-on-one negotiations, auctions, public offerings and tenders.

Establishing a credible, well governed and transparent green investment scheme goes a long way towards addressing the concerns of potential buyers and can be supported through contractual terms, provision of guarantees, and purchase of insurance.  An expressed requirement from potential buyers is the ability to link AAU sale proceeds to agreed projects and programs that address important environmental problems. In Ukraine sale proceeds could be accumulated in a special fund of the Ukrainian budget consistent with fiscal policy, or alternatively and with potentially more risk, in one of a number of extra-budgetary funds.

The study takes a look at nine emissions-intensive industries in Ukraine to assess their potential for greening.  The fuel and energy sector is one of the largest emitters of greenhouse gases; the gas sector generates 32 percent of overall emissions with particularly high contributions from gas transit and compression. The Ministry of Fuel and Energy has indicated that modernizing and improving the efficiency of gas compressor units, facilitating the use of waste energy, or utilizing waste gas at generated during oil and gas production and processing are areas where greenhouse gas emissions can be reduced.  

Renovation, modernization and energy efficiency improvements in the housing, transport, agriculture, and mining and heavy industry sectors could also present opportunities for greening. For example, gas consumption in the steel sector could be significantly reduced by converting production lines from current open-hearth arrangements to converter processes and continuous casting. Or in the agricultural sector proceeds could be directed to programs that would stimulate sustainable development, reduce the use of fertilizers, and improve manure management or expand the production of bio-fuels. Sale proceeds could also support forest expansion, improved forest management or biodiversity initiatives.

To engage in this nascent market Ukraine will need to develop its strategy to manage its AAU surplus and to perform greening. Ukraine’s strategy should be guided by risk mitigation.  The report proposes that Ukraine consider a modest pilot transaction – around 10-20 million AAUs or less than 1 percent of Ukraine’s expected surplus - to test the readiness of potential buyers and obtain experience in this market and in greening.  Ukraine could engage in a pilot transaction through government decisions until a formal law is passed. Such decisions would facilitate pilot negotiations and regulate the establishment of a longer term green investment scheme. A sale agreement could be signed once adequate legal basis is established to allow the future delivery of AAUs and associated greening to buyers and the transfer of proceeds to Ukraine. 

While Ukraine has made notable progress compared to other potential AAU sellers the enabling domestic institutions and legislation are yet to be established.  The Cabinet of Ministers has drafted a resolution that amends the action plan for implementation of its commitments under the United Nations Framework Convention on Climate Change to include a realistic schedule for implementation of a green investment scheme. The timely adoption and implementation of this resolution will be crucial, as the results of the future trade will very much depend on positive outcomes during preparation. The main preparatory work needs to be completed in 2007 so that contracts could be signed from 2008.

If requested by the Government of Ukraine the World Bank could provide support by, for example providing advice and technical assistance to prepare and implement a pilot green investment scheme; through purchasing AAUs in its role as Trustee of a number of carbon funds; or through other services, such as financing underlying public investments, or providing risk guarantees.

More related information you could find on page of the Workshop: Preparing Ukraine for international emissions trading which took place on April, 24, 2007.