Policies and measures for low carbon growth in Ukraine by United Nations Development Programme in Ukraine

Policies and Measures for Low Carbon Growth in Ukraine Prepared for The United Nations Development Programme

THOMSON REUTERS POINT CARBON London, 19/08/2013

ACKNOWLEDGEMENTS This report has been prepared by Thomson Reuters Point Carbon as part of the work under the project â&#x20AC;&#x153;Capacity Building Towards Low Carbon Development in Ukraineâ&#x20AC;?. Thomson Reuters Point Carbon is very grateful to the Ukrainian State Environmental Investment Agency for the strong support provided throughout the Project. Valuable inputs were provided by the Environmental (Green) Investment Fund in Ukraine and various Ukrainian sector experts interviewed for this project, who gave very generously of their time. The experts interviewed for this report are listed in Section 4 of this report. The report also benefited from expert feedback gained at a roundtable organized by the UNDP on 16 August 2013. This project is kindly supported by the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety of Germany.

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TABLE OF CONTENTS Acknowledgements ........................................................................................................................... ii Executive Summary............................................................................................................................ 5 1

Introduction ............................................................................................................................... 7 1.1

Project Introduction ............................................................................................................................ 7

1.2

Economy and Emissions ...................................................................................................................... 8

1.3

Business Environment ....................................................................................................................... 11

Policy Development Background ............................................................................................. 16 2.1

Introduction to Low Carbon Policy Development ............................................................................. 16

2.2

Low Carbon Policy Development in Ukraine ..................................................................................... 18

Identified Measures and Policies ............................................................................................. 28 3.1

Residential Buildings ......................................................................................................................... 28

3.2

Agriculture, Land Use and Forestry ................................................................................................... 34

3.3

Power Generation ............................................................................................................................. 42

3.4

Fossil Fuel Mining, Extraction and Transportation ........................................................................... 49

3.5

Manufacturing .................................................................................................................................. 51

3.6

Waste ................................................................................................................................................ 54

3.7

Transport ........................................................................................................................................... 58

Experts Interviewed ................................................................................................................. 62

References ............................................................................................................................... 63

EXECUTIVE SUMMARY This report investigates the policies and measures required for low carbon growth in Ukraine, as part of the “Capacity Building for Low Carbon Growth in Ukraine” project which aims to support the Government in steering the country towards a low emission pathway for Ukraine’s long-term economic development. Beginning with an analysis of the economy and the major emitting sectors, this report goes on to describe overall policy options used for low carbon development. The report then analyses the current state of play in each major emitting sector before identifying measures and policies that may be used. The scope of this report is limited to the identification of measures and policies, and the next stage of the project will analyse their greenhouse gas emissions reduction potential. Economy and Emissions Ukraine has some very significant competitive advantages which have traditionally helped its economy, such as abundant natural resources, a strategic location between Russia and the EU, and a well-qualified labour force. The economy is however facing some serious challenges, including:  Dominance by obsolete, carbon-intensive heavy industry owned by cash-strapped enterprises;  Dependence on foreign energy;  Increasing competition internationally in its traditional sectors;  Difficulty in attracting foreign investment due to a sometimes challenging business environment along with complicated legislative and administrative requirements. To overcome many of these challenges, Ukraine endeavours to accomplish the following:  Reduce dependence on international energy sources, by reducing energy intensity and by producing more domestic energy and fuels;  Stay competitive in the international export markets by increasing efficiency of production and provide high-quality products;  Diversify the economy to reduce vulnerability to external shocks;  Find ways and means to bring in foreign and domestic investment into replacement and renewal of power and industrial production facilities in order to achieve a step-change in efficiencies;  Maintain agriculture as a mainstay of the economy and as a high-potential driver of exports and the wider economy in the near future. Most of these issues important to the economy will also help in the reduction of emissions, apart from the need to reduce dependence on natural gas from overseas which is already leading to switching from gas to coal in many energy generation and industrial facilities. Low Carbon Policy As with any country, Ukraine needs to develop and implement a combination of carbon pricing policy, regulation, market reform, technology policy and behaviour change policy suited to its particular context. Ukraine’s government is already quite active in the development of low carbon policy. It has been actively considering improving its direct carbon pricing policies, by looking to optimise its existing low fiscal charge on CO2 emissions. The government is also exploring the setting up of a domestic emissions trading scheme to 5

ultimately link with the EU ETS. Once this is done, it will help reduce emissions in the major emitting power and industrial sectors. Within the residential buildings sector, legislation is required to enable condominium associations to access bank finance more easily, while making it easier for more buildings to have such associations. Tariff reform and metering is required to incentivise homeowners to install energy efficiency measures. Public private partnership (PPP) structures need to be explored to facilitate improvements in district heating boilers and distribution networks. Agriculture is seen an area of high growth in Ukraine, however policies are required here to transform incentive systems and provide skills, education and access to finance. Agro-holdings need to be incentivised to become long-term stakeholders in the land where they can access finance by using land as collateral, as well as become responsible for the long-term health of the soil. This would lead to the use of the most effective and sustainable agricultural practices and materials to benefit the economy and the environment. Similarly for livestock, skills development and innovative small scale finance options are required to modernise farms, improving yields as well as quality. The land use and forestry sector requires more oversight and investment to reduce illegal and environmentally damaging practices, restore peatlands and develop effective monitoring practices and data. The power sector requires a range of policies, such as: clear sector target breakdowns of generation capacity desired by technology/ sub-sector, investment policy, carbon pricing, speeding up administrative processes, incentives development and optimisation, and manufacturing subsidies which could help develop strategic sections of the economy. In the natural gas market, reform is urgently required, which the government has already begun with the proposals to restructure Naftogaz. This market reform should help bring in the investment to reduce gas leakages in extraction, transmission, distribution and storage facilities. Similarly, strategic privatisation can help the coal mining sector to capture fugitive methane and reduce emissions. The manufacturing sector requires direct carbon pricing policies as well as standards such as productionbased emissions limits; investment incentives are also required to attract much-needed finance to modernise this sector. Near-term policies for the waste sector include clear targets for municipalities with regard to disposal routes as well as collection, re-use and recycling of waste. Pilot projects are required, and should be supported, to demonstrate high achievements in collection and disposal. Policies identified for the transport sector include: (1) the gradual introduction of Euro standards to domestically produced vehicles and differentiated road tax for vehicles based on emissions, (2) PPP mechanisms for construction, improvement and maintenance of strategic public transport infrastructure, (3) planning procedures improvement, and (4) support for car-sharing and flexible fuel vehicles.

1 INTRODUCTION 1.1 PROJECT INTRODUCTION The Capacity Building for Low Carbon Growth in Ukraine project aims to support the Government in steering the country on a low emission pathway for Ukraine’s long-term economic development. To this effect, the project strengthens the institutional capacity within Ukraine to design and implement long-term policies and measures directed at reducing emissions of greenhouse gases and enhancing absorption by sinks. The project goal is the development of a long-term strategy of low carbon growth of Ukraine, that can be used by the Government of Ukraine to inform the formulation of its sectoral processes domestically, and internationally. The project team is pursuing an integrated approach, allowing the Government of Ukraine to utilise the tools, information, and support it requires in initiating, developing and adopting a low-carbon development strategy. The project comprises of the following components and sub-components: 

New generation models and comprehensive projections of GHG emissions: a. Sectoral analysis of GHG emissions in Ukraine, with a view to identify specific emission trends and analyse their causes; b. New generation of greenhouse gas models that will be suited for sectoral emission modelling in Ukraine and can be adjusted regularly based on bottom-up information sectoral and installation-level emissions; c. Comprehensive projections of GHG emissions for the periods up to 2020 and 2050 with and without implementation of climate change policies and measures.



Development of a low carbon development strategy: a. Identified policies and measures for low carbon growth in Ukraine; b. Assessment of the mitigation potential of identified policies and measures; c. Analysis of alternative schemes to finance different strategies with special reference to process from post-Kyoto instruments; d. Preparation and presentation of a concept on low-carbon development strategy for Ukraine, setting out a vision of the country’s new development path up to 2020 and up to 2050.



Preparing for introduction of domestic emissions trading scheme: a. Relevant legal and regulatory analysis, legislative proposals supported, the necessary analytical support to enable their submission to the Parliament of Ukraine; b. Prepared analysis of the scheme’s main elements, such as its goals and objectives, aggregate and sectoral caps, approaches and methods of installation-level allocation, MRV standards; c. Assessment of data needs and facilitation of installation-level data collection to inform the development of the national allocation plan.



Capacity building and climate support policy a. A series of activities leading to strengthening of the overall institutional capacity for climate change policy implementation in Ukraine – ongoing activity for the duration of the project. 7

This report is the first deliverable under the second component, “development of the low carbon development strategy”. Complementary reports are being written under the other component workstreams of this project. Apart from in-house knowledge and expertise at Thomson Reuters Point Carbon, the report has benefited from an extensive literature review, inputs from local consultants hired by the UNDP for this project, as well as a series of semi-structured interviews with a range of Ukrainian experts covering most sectors. The experts interviewed are listed later in this report.

1.2 ECONOMY AND EMISSIONS Ukraine has significant competitive advantages that have traditionally helped its economy:  The country has abundant natural resources, with 311,000 square kilometres of arable land, the largest such area in Europe. It has the largest manganese-ore fields and the second-largest mercury deposits in the world. It also has access to other abundant mineral resources, such as coal, iron, nickel and uranium.  It is strategically located, as a key transit country for Russian gas exports to Western Europe and with access to the Black Sea.  It has a well qualified labour force, with universal literacy and a traditional of engineering excellence. Ukraine has traditionally been a powerhouse of agriculture and heavy industry. After Russia, the Ukrainian republic was the most important economic component of the former Soviet Union. Its fertile black soil generated more than one-fourth of Soviet agricultural output, and its farms provided substantial quantities of meat, milk, grain, and vegetables to other republics. Similarly, its diversified heavy industry supplied 1

unique equipment and raw materials to industrial and mining sites in other regions of the former USSR . Ukraine’s major agricultural products are food grain, sugar beets, vegetables and sunflower seeds. Dairy products and beef processing are other important agriculture based activities. Mining is a major primary economic activity in Ukraine. The industrial sector is dominated by the iron and steel industry. Petroleum products, power generation, heavy machineries, transport equipments, chemicals, and food processing are 2

other major manufacturing industries . As can be seen in the figure below, Ukraine’s major GHG emitting sectors are Energy, Industrial Processes, 3

Agriculture and Waste .

https://www.cia.gov/library/publications/the-world-factbook/geos/up.html

http://www.economywatch.com/world_economy/ukraine/

An understanding of the major emitting sectors and associate trends has been provided by a previous report under this project,

‘Analysis of GHG Emission Trends’.

2011 Ukraine Emissions by sector (without LULUCF) Source: UNFCCC

The major emitters in the economy are: 

Energy sector: Energy Industries, Manufacturing Industries, Transport and fugitive emissions.



Industrial Processes sector: Metal Production, Chemical Industry and Mineral Products.



Agriculture sector: Agricultural Soils, Enteric Fermentation and Manure Management.

Ukraine is dependent on Russia for energy supplies. Ukraine imports about three-fourths of its annual oil and natural gas requirements and 100 per cent of its nuclear fuel needs. This makes it vulnerable to external price shocks. Since independence in 1991, there have been periods of great economic change and challenges. This began with a politically and socially difficult process of privatisation and price liberalisation where by 1999, output had fallen to less than 40 per cent of 1991 levels. This was followed by a period of strong export-led growth between 2000 and 2004 when real GDP growth was 41.2 per cent, with exports growth exceeding GDP growth by a factor of 1.6. In this period, the country benefited from cheap energy imports and was able to draw on its traditional competitiveness in the supply of wood products, metals, chemicals, coke and refined petroleum. The period 2004 to 2007 saw a dramatic increase in domestic consumer and investment demand, spurred by rising pensions and wages, bank loans and state spending. This led to increasing import volumes and a reversal in the balance of trade despite the continuation of a strong export performance. After a two-week dispute that saw gas supplies cut off to Europe, Ukraine agreed to 10-year gas supply and transit contracts with Russia in January 2009 that brought gas prices to "world" levels. The strict terms of the contracts have further hobbled Ukraine's cash-strapped state gas company, Naftogaz. A drop in steel prices and Ukraine's exposure to the global financial crisis due to aggressive foreign borrowing lowered growth in 2008. The economy contracted nearly 15 per cent in 2009, among the worst economic performances in the world. Foreign Direct Investment (FDI) inflows dropped by close to half during the crisis. In April 2010, Ukraine negotiated a price discount on Russian gas imports in exchange for extending Russia's lease on its naval base in Crimea. Economic growth resumed in 2010 and 2011, buoyed by exports, but slowed in the second half of 2012 with Ukraine finishing the year in technical recession following two 9

consecutive quarters of negative growth. Many of the country’s competitive advantages – vast stretches of 4

arable land, a strategic location and a highly skilled labour force – remain untapped . The reversal in trade balances in the last decade can be seen in the figure below. The Ukrainian economy operated at a trade surplus of 3 billion UAH in 2002 but has not posted a surplus since 2005; with the largest deficit over the past decade reported in 2012 at 118 billion UAH.

Ukraine Trade Balance: 2002-2012 40000

20000

Trade Balance in UAH

-20000

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

-40000

-60000 -80000 -100000 -120000 -140000

Year Trade Balance

Ukraine trade balance 2002 - 2012 5

Source: Author (data from State Statistics Service of Ukraine ) The most important export commodities include base metals (27 per cent, of which iron and steel based products are just under 90 per cent), mineral products (12 per cent), chemicals (9 per cent), and machinery and transport equipment (11 per cent). The most important export partners are Russia (27 per cent), Turkey 6

(5.8 per cent) and Italy (4.6 per cent) . Specialisation in commoditised sectors such as steel and reliance on external demand make the country highly vulnerable to price volatility. The last few years have seen increased international competition in the supply of raw materials, and Ukraine is losing some of its export markets. For example, China has increased production of ferrous and non-ferrous metals and is now a net exporter rather than an importer. Reducing Ukraine’s high energy intensity of production will help to reduce dependence on energy imports while maintaining exports in its leading industries such as metals. Energy-efficiency in Ukraine is one third of the average for industrialised countries. Consumption of primary energy resources per unit of GDP in Ukraine is much higher than in the developed countries: 3.7 times higher than in 27 countries of the EU, 2.9 times 7

higher than in neighbouring Poland and 1.4 times higher than in Russia . The energy component has a disproportionately high share in the cost of manufacture of industrial products. This high intensity is caused

OECD, 2012b

www.ukrstat.gov.ua

2011 figures

Yearbook Statistical Energy Review 2010. [Internet source] – http://yearbook.enerdata.net.

primarily by the use of obsolete technologies. Energy efficiency is one of the main objectives of structural adjustment of the Ukrainian economy and an important condition of increasing its competitiveness. Through the turmoil of the past decade, the agricultural sector has stayed relatively stable and has steadily increased its share of total exports. In 2012 Ukraine produced 5.2 per cent of world’s barley and 2.3 per cent of the global output of wheat. Ukraine has become the most important producer of sunflower oil in the world, surpassing Russia in total volume of production in 2010 and accounting for 23.5 per cent of the global output (FAO, 2012). The sector promises much for the future especially as there are many improvements that can be made to increase yields and streamline production. The events of the last decade have brought home the importance to growth of:  Reducing dependence on international energy sources, by reducing energy intensity and by producing more domestic energy and fuels;  Staying competitive in the international export markets by increasing efficiency of production and providing high-quality products;  Diversifying the economy to reduce vulnerability to external shocks;  Finding ways and means to bring in foreign and domestic investment into replacement and renewal of power and industrial production facilities in order to achieve a step-change in efficiencies;  Maintaining agriculture as a mainstay of the economy and as a high-potential driver of exports and the wider economy in the near future.

1.3 BUSINESS ENVIRONMENT The business environment in Ukraine is generally considered poor and in 2013 Ukraine ranked 137 out of 185 8

economies on the World Bank rankings on the “Ease of Doing Business”. This is an improvement over a ranking of 152 in 2012, primarily due to the major improvement in the ability to start a business in the country. Significant challenges remain however in construction permitting, getting electricity, registering property and paying taxes. In the Eastern European region, Ukraine ranks higher than only Tajikistan and Uzbekistan in terms of the ease of doing business. Georgia was best in class in the region with a global ranking of 9.

http://www.doingbusiness.org/data/exploreeconomies/ukraine/#

Ukraine “Ease of Doing Business” rankings Source: World Bank Ease of Doing Business website Despite the Ease of Doing Business ranking of 42 under the ‘contract enforcement’ category, the OECD 9

concluded after a major study that this was one of the main factors discouraging foreign investment in Ukraine, along with corruption and lack of implementation of investment policy legislation. Several of the major sectors that contribute significantly to the GDP as well as GHG emissions are controlled by large national companies. A summary of the key characteristics and players in these sectors have been 10

provided below adapted from reports prepared by Deloitte for Invest Ukraine . 1) Agriculture: The agriculture sector comprises crop production, sugar, meat, egg and dairy markets. An industry consolidation is underway with a large risk being that there are protective measures in place in the form of quotas, tariffs etc. that protect the large national players. Examples of some of large public players in the market include Kernel Holding and MHP. 2) Automotive: This sector is comprised of cars, trucks and buses with international brands (more specifically Russian) dominating the cars (e.g. VAZ) and trucks (e.g. GAZ) space along with local brands (e.g. Etalon Corporation) dominating in the bus arena.

OECD, 2012b

Invest Ukraine & Deloitte, 2011

3) Oil and gas: This sector is regulated by the Ministry of Energy and Coal Industry of Ukraine and has one large, national player, Naftogaz. A non state owned company that has foreign investment is Poltava Petroleum Company. 11

4) Power: This sector operates on the single buyer model whereby generation assets are deployed by private enterprises and sold to the national power company Ukrenergo that is responsible for transmission. There are 27 regional distribution and supply companies (Oblenergos) that deliver the power to the end customers. Some of the distribution/supply regions are state controlled while others are privately controlled or private (e.g. industrial facilities that generate and use for their purpose). 5) Chemicals: This is a fairly large sector in Ukraine comprised of the manufacture of fertilizers, petrochemicals, paper and pulp, plastics etc. Some of the larger companies in each of these sub sectors are primarily local firms including Azot for fertilizers and petrochemicals, Rubezhnoye Cardboard and Packaging Mill for paper and pulp and HEKRO PET for plastics. 6) Metals & Mining: This sector comprised of ferrous (i.e. iron and related products) and non ferrous metals (e.g. copper) represents one of the largest export (nearly 80 per cent produced is exported) revenue sources for Ukraine. System Capital Management (SCM) is the largest (and local) player in this sector.

Entrepreneurship and Small Businesses 12

According to a recent book published by OECD tracking small medium enterprises (SME) in Eastern Europe , nearly 93 per cent of the total number of enterprises in Ukraine can be qualified as small companies, 6.5 per cent as medium-sized companies and 0.6 per cent as large companies. Large companies however employ nearly 42 per cent of the working population and account for nearly 49 per cent of turnover.

SME statistics for Ukraine in 2010 Source: OECD, 2012c

http://www.imepower.com/index.php?lang_id=3&menu_id=17&parentmenu_id=2

OECD, 2012c

The sectors with the largest SMEs were primarily service oriented such as hotels, restaurants, construction, real estate operations, financial services etc. Agriculture, Forestry and Industry have a large number of medium sized companies. The study has recognized the need to enhance support for SMEs by; 1) creating a comprehensive strategy for growing this part of the economy, 2) creating better informational tools and resources to support business set up, 3) enhancing access to equity capital via public private partnerships and, 4) improving the innovation ecosystem that results in the creation of these enterprises. Not reflected in the figures above is the substantial ‘informal economy’ in Ukraine, borne out of the complex regulatory environment for businesses. It is mainly comprised of micro and small enterprises and 13

concentrated in the agriculture and construction sectors. The World Bank estimates that 4.5million Ukrainians are employed in the informal economy. Many countries are looking to start-ups and small businesses to develop innovations in the low carbon sector, and become important driving forces for their economies. A plethora of support systems have been created in China, the USA, UK and Germany; these include in the areas of workspace, training and information, and access to technology, data and finance. With its highly literate population, Ukraine could also create a green entrepreneurship sector if it is able to improve its business environment. Multilateral Development Banks Ukraine benefits from significant support and spending from multilateral development banks. The European Bank for Reconstruction and Development (EBRD) is the largest international investor in the country, and has 14

funded over 300 projects in Ukraine with cumulative investment nearing about 9 billion Euros . The International Bank for Reconstruction and Development (IBRD) as of May 2012 had disbursed approximately 15

$5B in loans with an additional $1B still to be committed . Additionally, the International Finance 16

Corporation (IFC) has approved approximately $2.4B in support for Ukraine . One of largest funding programmes in the low carbon space is the Ukraine Sustainable Energy Lending Facility (USELF) – an investment facility of €70 million (€50 million from the EBRD and €20 million from the Clean Technology Fund). The USELF is designed to provide finance to private local enterprises wishing to invest in renewable energy projects in Ukraine. Technical assistance on projects preparation, regulatory framework development and strategic environmental review is funded by the Global Environmental Facility (GEF).

The development banks are critical for the development of the low carbon sector in Ukraine. They are partnering with government and business to conduct pilot projects in many low carbon sectors. For example, the EBRD has been supporting biogas development in Ukraine, as well as supporting the implementation of safety measures in nuclear power stations. The USAID is supporting a programme of public private

Referred to in OECD, 2012c

http://www.ebrd.com/downloads/research/factsheets/ukraine.pdf

https://finances.worldbank.org/countries/Ukraine

https://finances.worldbank.org/dataset/IFC-Investment-Services-by-Country/ad4g-m4pt

http://www.ebrd.com/pages/news/press/2013/130606a.shtml

partnership (PPP) development, a mechanism that holds great promise for several low carbon infrastructure projects.

2 POLICY DEVELOPMENT BACKGROUND 2.1 INTRODUCTION TO LOW CARBON POLICY DEVELOPMENT Target-setting The Stern Review (2006) provided a series of guidance on policy-making on climate change. It proposed that the first step towards any low carbon policy framework needs to be a shared understanding of the long-term goals of stabilisation – describing a range of acceptable emissions paths through the years. For this reason, long-term national and international targets are essential, and several countries have now decided on and published such targets. In attempting to meet these targets, strong links between current actions and long-term targets need to be at the forefront of policy-making. It is also important to recognise that flexibility will be required so that policies can adapt to changing circumstances as the costs and benefits of climate change responses become clearer over time. From year to year, there needs to be flexibility in what, where and when reductions will be made, to reduce the costs of meeting stabilisation goals. Having said this, the policy environment should not be so flexible that it is seen as unstable – this would lead to a lack of confidence and appetite from investors and project developers. As stated in the Stern Report, “In order to influence behaviour and investment decisions, investors and consumers must believe that the carbon price will be maintained into the future. This is particularly important for investments in long-lived capital stock. Investments such as power stations, buildings, industrial plants and aircraft last for many decades. If there is a lack of confidence that climate change policies will persist, then businesses may not factor a carbon price into their decision-making. The result may be overinvestment in long-lived, high-carbon infrastructure – which will make emission cuts later on much more expensive and difficult.” The Stern Report further proposed that policy to reduce emissions should be based on three essential elements: carbon pricing; technology policy; and the removal of barriers to behavioural change. Carbon pricing In economic terms, greenhouse gases (GHGs) are an externality and those who produce them do not face the full costs of their actions themselves: however an appropriate price means that they pay the full social cost of their actions. A price can be put on carbon explicitly through tax or trading, or implicitly through regulation. 18

There are advantages and disadvantages of all of these . For example, a carbon tax is simple for administrators and affected parties to understand; it can be costeffective for administrators; it can provide certainty as a continuing, stable incentive; and the costs are transparent and predictable. On the other hand, finding an optimal tax level can be tricky; costs can quickly

laid out in detail in Thomson Reuters Point Carbon, 2012

get passed onto consumers; it is slow to respond to market occurrences; and it does not provide certainty regarding total emissions reductions. A cap and trade system on the other hand, can provide certainty in targets; is a predictable and stable framework; is flexible and allows for response to market occurrences. Its disadvantages include being perceived as complicated and requiring new institutions and new capacity; being subject to distortion or market abuse; and potentially suffering from low liquidity especially in domestic, non-linked schemes. Regulation, also referred to as ‘command-and-control’ (CAC), is quite different from trading or taxation as the regulators need to make decisions on a sector-by sector basis. CAC regulations are the most common forms of environmental policy in both advanced and developing countries. As the name implies, the CAC approach consists of a 'command', which sets a standard – e.g. the maximum level of permissible pollution, and a 'control', which monitors and enforces the standard. They can be broadly categorised into: i) technology standards, where emitters are required to use specific emission reduction technologies; and ii) performance standards, where specific, compulsory environmental targets are set (such as a certain volume of emissions per unit of output), but without requiring any specific technologies. CAC regulations can be simpler than trading or taxation, as existing institutions can be used for implementation, market participants are usually familiar with the concept; and they can be effective in areas where emissions measurement (and thus pricing) is difficult – e.g. methane emissions from agriculture; or fugitive emissions from pipelines. On the other hand, it is difficult for regulations to account for the cost of implementation to individual firms; they do not generate revenue for government; they do not react quickly to market occurrences; and they do not provide as much certainty about emissions reductions as a trading scheme would. The choice of policy tools and combinations of tools depend on countries’ national circumstances, on the characteristics of particular sectors, and on the interaction between climate-change policy and other policies. Some administrations may choose to focus on trading initiatives, others on taxation or regulation, and others on a mix of policies. Their choices may also vary across sectors. Technology Policy Globally, policies are required to support the development of low-carbon and high-efficiency technologies. Policies are required to cover the full spectrum of technology development, from research and development to demonstration and early stage deployment and commercialisation. The development and deployment of a wide range of low-carbon technologies is essential in achieving the deep cuts in emissions that are needed. Of course, investing in lower-carbon technologies carries risks, though there are ways to limit and spread risks to those who are best able to carry them. Removal of behavioural change barriers The removal of barriers to behavioural change is another essential element, particularly important in encouraging the take-up of opportunities for energy efficiency. Even where measures to reduce emissions are cost-effective, there may be barriers preventing action. These include a lack of reliable information, transaction costs, and behavioural and organisational inertia. The impact of these barriers can be most clearly seen in the frequent failure to realise the potential for cost-effective energy efficiency measures.

Regulatory measures can play a powerful role in cutting through these complexities, and providing clarity and certainty. Minimum standards for buildings and appliances have proved a cost-effective way to improve performance, where price signals alone may be too muted to have a significant impact. Information policies, including labelling and the sharing of best practices, can help consumers and businesses make sound decisions, and stimulate competitive markets for low-carbon and high-efficiency goods and services. Financing measures can also help, through overcoming possible constraints to paying the upfront cost of efficiency improvements.

The Climate Policy Initiative categorizes policies into three types, based on the problems that the policy may 19

be trying to address : “POLICIES THAT REMOVE BARRIERS address opportunities for greenhouse gas reduction that should make economic sense on their own terms, without incentives (or after the appropriate level of incentive has been granted), but fail to get implemented for any of a number of market failures such as a lack of information, high transaction costs, regulatory constraints, or incentives directed to the wrong people. A typical example is energy efficiency actions that should pay for themselves, but do not get adopted. Policies that remove barriers can be directed to correcting these market failures. POLICIES THAT PROVIDE INCENTIVES address opportunities for greenhouse gas reduction that may not make economic sense under the current market structure, but would do so with appropriate accounting for the value of associated environmental benefits (the environmental externality, in economist parlance). Policies that provide incentives could include directly pricing the externality, such as through carbon pricing, but can also include more targeted subsidies, tax breaks, or other incentive systems. Typical examples include protecting forests or supporting renewable energy. POLICIES THAT SUPPORT INNOVATION are in a separate class of policy. Beyond barriers and incentives lie a series of technology or process improvements that may currently not exist or be too expensive to implement, but may become economically beneficial when the technology is developed and the costs come down. Many of these technologies could provide significant benefit, but might not get developed without policy support. Examples include cellulosic biofuels, carbon capture, nuclear fusion, or solar photovoltaic (PV) technology 10 years ago. Policies could include research and development, demonstration plants, or deployment policies.”

2.2 LOW CARBON POLICY DEVELOPMENT IN UKRAINE Ukraine has a number of climate change policies in place and in 2011 was the top-ranked CIS country on the EBRD’s CLIM Index. CLIM was developed as a global index of Climate Laws, Institutions and Measures (CLIM)

CPI, 2013

in 95 countries . Among other objectives, this index is used to compare the quality of domestic climate policies internationally. The CLIM Index does not measure or compare the effectiveness of these policies; rather it offers a comparative assessment of the extensiveness and quality of climate change mitigation legislation, policies, measures and institutions. Ukraine was ranked ahead of countries such as India and USA, and significantly better than Russia which has a similar reliance on energy-intensive industry; and on par with the lowest ranked EU-member transition country Estonia. The reasons for a relatively strong performance on this index at that time included Ukraine’s adoption of the “National Plan on Approaches for the Implementation of the Provisions of the Kyoto Protocol,” adopted in August 2005, the establishment of the independent National Ecological Investment Agency, laws enacted on renewable energy (including wind energy targets and feed-in tariffs) and energy efficiency; and the Ukrainian “Reforestation and Afforestation Programme 2010-2015” which contains ambitious targets for carbon capture using land use, land use change and forestry mechanisms.

Criteria within the CLIM Index International cooperation: how quickly a government ratified the Kyoto Protocol and whether it developed institutional capacity to participate in the flexible mechanisms and host projects under Joint Implementation (JI) or the Clean Development Mechanism (CDM). Domestic climate framework: this includes broad climate change laws and targets, and levels of institutional engagement in climate change (ministerial, independent committee and so on). Sectoral fiscal or regulatory measures or targets: these include targets and regulations in each of the sectors identified in the reports of the Intergovernmental Panel on Climate Change, apart from waste. Cross-sectoral fiscal or regulatory measures: these include carbon taxes and emission-trading schemes. Source: EBRD, 2011

Determinants of Climate Change Policy Making 20

The EBRD has recently produced a detailed analysis of the determinants of climate change policy making, finding that:  Policy-making direction is dependent on the structure of government, and especially the institutional veto players – or actors whose agreement is required for domestic policies to be enacted. If a government is non-democratic, the paths of influence will tend to go directly from interest groups to government actors, with less influence by the public along the way;  Public knowledge of climate change is a powerful driver of climate change policy adoption;  The relative size of the carbon-intensive industry is significantly and negatively associated with climate change policy adoption;  States with low administrative capacity are just as likely to adopt climate change policies as states with high administrative capacity;

EBRD, 2011



Countries who adopt international commitments such as under the Kyoto Protocol tend to adopt more assertive climate policies.

Examining climate policy determinants in Ukraine, the EBRD study first looked at the main decision-makers in the policy-making regime. It found that the country has gone through two major shifts in the constitutional distribution of political power over the past decade. Prior to the Orange Revolution of 2004, Ukraine was a strong presidential republic in which the President was the main agenda setter as well as the most powerful veto player. From 2006, when constitutional amendments (decided in 2004) took effect, Ukraine became a mixed presidential-parliamentary republic, in which the legislative branch acquired a number of executive functions, and the government and parliament became influential veto players in their own right. In 2010 however, the Constitutional Court ruled that the 2004 constitutional amendments were unconstitutional and this implicitly meant a reversion to a strong presidential policy-making regime – which is currently the case. In contrast, the media in Ukraine are highly pluralistic and, in recent years, largely free from government interference. While oligarchic ownership has sometimes resulted in the extreme politicisation of some media outlets, these have not been necessarily in the service of the state or the incumbent political leadership. Likewise, in the aftermath of the Orange Revolution, campaigning civil society organisations, including environmental NGOs, rapidly grew in voice and effect within Ukrainian society. They have thus served as effective channels for the dissemination of information about the threat posed by climate change – and therefore the necessity for the Ukrainian government to undertake mitigating measures to help combat climate change. The Ukrainian public is unusually well-informed about the threat of climate change; 78 per cent of the population claim to know something or a great deal about climate change and almost two-thirds worry that it might adversely affect their lives. The interesting mix of high public awareness and a relatively low CLIM Index score has produced the strongest disapproval of state policy in a worldwide sample of 80 countries: in 2011, only 3 per cent of Ukrainians were satisfied with how seriously their government was taking climate change. The carbon-intensive industry lobby is also very powerful in Ukraine, with financial and industrial groups in the steel, coal and petrochemical refinery sectors exerting major influence on a succession of governments, predominantly through financial support for political parties and party leadership campaigns, but also through the placement of their subordinates in government positions, and through their ownership of the media. Although these players have not enjoyed the same veto powers that their counterparts in Russia have periodically exercised, they have served nevertheless as powerful influences – and at times constraints – on successive governments’ climate change policy preferences.

Source: EBRD, 2011 Target-setting It is clear that all countries, particularly industrialised countries, will need to set and meet ambitious emissions reductions targets over the coming years. The IPCC Fourth Assessment Report, Working Group III, summarises the required emission reduction percentage ranges (from 1990 level) in Annex I countries as a group, to achieve the following target greenhouse gas concentration stabilisation levels:  For 450ppm: 25% to 40% by 2020; 80% to 95% BY 2050  For 550ppm: 10% to 30% by 2020; 40% to 90% by 2050  For 650ppm: 0% to 25% by 2020; 30% to 80% by 2050 Ukraine’s international commitment under the Copenhagen Accord is to achieve 20 per cent emissions reductions by 2020, and 50 per cent emissions reductions by 2050, using 1990 as the base year. As emissions are currently approximately half of 1990 levels, such a target allows for a significant increase in emissions until 2020. However by 2050 total emissions need to remain at around current levels – implying a significant decrease in emissions intensity as GDP is forecast to rise significantly by then. Ukraine also has several other targets (e.g. for renewable energy production, agriculture, waste, etc.) which are related but not necessarily tied together. A comprehensive overall target, with associated sectoral targets and strategies, is required. The tools and analysis forthcoming as part of this project will support the development of such targets and strategies. Carbon Pricing Policy in Ukraine In 2011, the Parliament of Ukraine approved introduction of tax on CO 2 emissions from stationary sources. The tax was initially set at UAH0.22 per tonne of CO 2, and increased to UAH0.24 per tonne of CO2 as per amendment to the Tax Code of Ukraine from November 20, 2012. However, the current tax of roughly €0.02 per tonne of CO2 does not provide an incentive for GHG emissions reductions. 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). As the current tax rate does not provide sufficient incentive to reduce emissions, Ukraine has aspirations to raise the current tax rate and 21

introduce more stringent MRV requirements in connection with it .

Thomson Reuters Point Carbon, 2013 21

Ukraine has been also actively pursuing the option of setting up a domestic emission trading scheme. The interest in the ETS has been fuelled by the success of the other carbon market mechanisms in Ukraine, which 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 have either hosted or have been indirectly involved in a JI project. As a result, the awareness of the concept of carbon price is relatively high. The existence of an independent government body responsible for implementation of climate policy further strengthens Ukraine’s ambition to develop and implement an ETS by providing a potential institutional platform for such an initiative. Policy-wise, the introduction of a domestic ETS would facilitate reaching important policy objectives of Ukraine, including:  Preparation for implementation of global post-2020 agreement and the second commitment period of the Kyoto Protocol (should Ukraine decide to take part);  Integration of European policy framework into Ukrainian laws and regulations in anticipation of further advancement of EU-Ukraine relations;  Providing economic stimulus to industry towards capital investments in energy-saving technologies;  Decreasing the carbon intensity of the Ukrainian economy. In October 2010, the draft law envisaging establishment of the domestic market for GHG emission trading passed the first reading in the Parliament of Ukraine. However, this draft law has not been adopted nor reconsidered since. Technology Policy Ukraine has a skilled engineering and technical workforce, however from our interviews it became clear that in the opinion of local experts, a significant number of the skilled workforce are seeking opportunities overseas due to lack of cutting edge research opportunities domestically. Building partnerships with overseas industry and academic institutions can help enable domestic research and development. Many governments are also now looking to support green entrepreneurship so that R&D can be effectively commercialised with financial returns retained in the country. Commitments Related to Membership of the Energy Community In 2010, Ukraine acceded to the Treaty establishing the Energy Community as a Contracting Party, on the basis of meeting conditions of certain EC Directives within specified timescales. The conditions include (1) reform and liberalisation of the gas and power markets, (2) safeguarding security of gas and power supplies, (3) reduction of pollutant emissions from thermal power plants, and (4) promotion of renewable energy and energy efficiency. There has been some progress towards meeting these commitments, however some conditions seem difficult to meet within the required timescales, such as the replacement and renewal of thermal power plant units to meet permissible emissions limits as these improvements need substantial capital investment that is not easy to find. The Energy Community commitments also include adherence to directives related to labelling and information of appliances, and following these should have a significant impact on behavioural change among the population in the long run.

Relevant National Plans and Strategies There are a number of national plans and strategies in Ukraine that provide details of the government’s aspirations in the greenhouse gas mitigation area:        



The National Communication of Ukraine on Climate Change offers a general overview of policies, measures and mechanisms for low-carbon development in Ukraine; National Action Plan on implementation of the Kyoto Protocol to the UN Framework Convention on Climate Change; 23 National Security Strategy of Ukraine ; Fundamentals (strategy) of the National Environmental Policy of Ukraine for the period until 2020; 24 25 Energy Strategy of Ukraine for the period until 2030 ; and the revised version of this Strategy ; State Target Economic Program for energy efficiency and facilitating energy production from renewable energy sources and alternative fuels for the period 2010-2015; Transport Strategy of Ukraine until 2020; Sectoral programmes of energy efficiency and reducing energy consumption by budgetary institutions through their rational use in transport and communication for 2010 - 2014 (the basic directions were defined) with regard to the list of specific measures that had been defined in the Sectoral Programme for energy conservation and for introduction of alternative fuels in transport for 2006–2010; The strategic document that defines national priorities for preventing anthropogenic climate change is 26 the Fundamentals (strategy) of the National Environmental Policy of Ukraine for the period until 2020 (hereinafter – Environmental Policy Strategy). The Strategy defines the following tasks that are directly aimed at GHG emission reduction: o “…optimization of the structure of the energy sector of the national economy by means of increased use of energy sources with low carbon dioxide emissions by 10 per cent by 2015 and by 20 per cent by 2020” (compared to the base year 2010); o “…reduction of greenhouse gas emissions in accordance with the declared international obligations by Ukraine under the Kyoto Protocol to the United Nations Framework Convention on Climate Change”; o “…development and step-by-step implementation of the National Action Plan on climate change mitigation and prevention of anthropogenic impact on climate change for the period up to 2030”.

Apart from the mentioned, the Environmental Policy Strategy defines a wide range of tasks that indirectly lead to GHG emission reduction or carbon dioxide removals enhancement. They include:  “…increasing by 2020 the forest land area up to 17 per cent of the state’s area by means of reforestation and afforestation of the forest fund land”;

Third, Fourth and Fifth National Communications of Ukraine on Climate Change. – Kyiv. – 2009.

National Security Strategy of Ukraine. Approved by the Order no. 105/2007 of the President of Ukraine as of 12.02.2007 (as amended

by Order of the President no. 389/2012 as of 08.06.2012). Official Herald of Ukraine dated 23.02.2007 — 2007, #11, p.7, Article 389, ID 38751/2007. 24

Energy Strategy of Ukraine for the period until 2030. Approved by Order no.145-р of the Cabinet of Ministers of Ukraine as of

15.03.2006 (in Ukrainian). 25

Energy Strategy of Ukraine for the period until 2030. Draft (in Ukrainian).

On the Basic Principles (strategy) of the State Environmental Policy of Ukraine for the period until 2020. Holos Ukrainy (The Voice of

Ukraine) from 14.01.2011 — # 6 (in Ukrainian).

 

“by 2015 providing for economic conditions for infrastructure development of environmentally friendly kinds of transport”; “increasing the energy efficiency of production by 25 per cent by 2015 and by 50 per cent by 2020” (compared to the base year 2010); o “increasing the use of renewable and alternative energy sources by 25 per cent by 2015 and by 55 per cent by 2020 compared to the baseline” (compared to the base year 2010); o “establishment by 2015 of environmentally and economically justified payment system for polluting the environment”.

Energy strategy An elaborated, revised draft version of the Energy Strategy of Ukraine for the period until 2030 was published in 2012. Considering that over 80 per cent of all GHG emissions in Ukraine are associated with the extraction, transportation and use of fossil fuels, it can be concluded that it is the objectives, priorities and tasks underlying the revised strategy that will determine the trends of GHG emissions in Ukraine in general. Ukraine’s strategy for the energy sector carefully balances its goals of GDP growth, efficiency, reliability, energy security, and environmental protection. The strategy is built to address increasing energy demand and external and internal reliability concerns, while also integrating technology improvements in extraction and production, and meeting environmental standards. The report also forecasts the consumption, production and imports/exports out to 2030, based on different economic scenarios. The strategy document presents a number of opportunities to reduce GHG emissions, while also including policies which may increase emissions as well in the pursuit of energy security and GDP growth. In support of clean energy, the document lays out renewable targets for biofuels and renewable power, and also supports nuclear power, while promoting energy efficiency on the production, transmission, and consumption for electricity, natural gas, and petroleum. The tables below contain the Strategy’s forecasts for growth of renewable power and biofuels respectively. Dynamics of Renewable Power Production, TWhs 2010

2015

2020

2025

2030

Wind Power

0.1

0.6

1.9

3.8

7.4

Solar

<0.1

0.3

0.8

1.4

2.6

Small Hydro

0.2

0.4

0.7

1.3

2.1

Biomass

<0.1

0.2

0.3

Other Renewables

<0.1

0.1

0.2

Total

<0.4

<1.4

3.6

6.8

12.6

2010

2015

2020

2025

2030

Bioethanol

<0.1

0.3

0.6

0.8

1.1

Biodiesel

<0.1

0.3

0.8

Total

<0.1

0.3

0.6

1.1

1.9

Dynamics of Production of Biofuels, Million Tons

However, the strategy also supports growth in processing and mining/drilling for fossil fuels. Therefore, there is a necessary tension that should be addressed as the Ukraine moves towards developing policies to reduce GHG emissions. The major strategic goals and provisions are listed in the table below. Leading Recommendations by Sector in the Energy Strategy Document  Enhance grid connections between electricity regions and countries, including the Electricity completions of both a southern and a northern 750 kV transit line;  Invest and reconstruct 15,000 miles of existing transmission lines per year;  Invest $22 B USD to reconstruct existing thermal power plants, and invest in 14 GW of new coal fired units by 2030;  Reconstruct and expand hydroelectric plants, to include more than 1 GW of new capacity by 2020;  Build 5 GWs of new Nuclear generation capacity by 2030, while also strengthening security and safety measures;  Increase renewable generation to encompass 10 per cent of total capacity by 2030, translating to 5.7 GW of renewable power (excluding hydro);  Thermal and CHP stations to be fully privatized by 2014;  Existing hydro & nuclear plants to improve transparency by meeting international standards for reporting and efficiency, and new plants to be a combination of public and private ownership;  Promoting competitive pricing and tariffs, by eliminating cross-subsidies between consumer groups by 2014;  Decrease electricity intensity of GDP by 40 per cent, by promoting energy efficient building standards, reducing transmissions losses by upgrading networks, promoting efficient appliances. Coal mining

   

Natural gas



    Oil

 

Reduce state support for coal mines by 20 per cent per year with complete elimination of subsidies over 5 years; Prepare to privatize all state-owned mines by 2015, mothballing mines unable to attract investors; Liberalize Ukraine coal market, introduce electronic exchange trading for coal markets, and free up imports; Increase coal production by 30 million tons per year, through mostly private investment, with a target of 75 million tons by 2030. Reduction of consumption of gas in urban areas by 40 per cent and in rural areas by 25 per cent by 2030, due to planned increase in gas prices and energy efficiency measures such as better building codes and building modernization; Maintain constant gas production of 20 billion cubic meters from conventional sources (despite current declining fields) by developing new sources; Develop an additional 10 billion cubic meters of unconventional natural gas (fracking/tight gas, shale, coal bed) by 2030; Improve ability to import natural gas from non-traditional sources, including potentially from Azerbaijan through the construction of an LNG terminal; Improve gas consumption by efficiency by 40 per cent by 2030, through upgrading transmission networks, upgrading buildings, and promoting alternative heating sources. Increase light oil petroleum refining capacity of secondary and tertiary processing to 80-85 per cent of total production by 2030; Support refinery businesses through VAT reduction, loan guarantees, accelerated depreciation, etc; 25

    Cross-



sector

Invest $30-40 B USD in exploration and drilling, to generate a total 3.6 million tons of crude by 2030, and reduce licensing costs while ensuring equal rights to obtain permits; Deregulate the transmission markets to allow for independent management, and promote transparent, liquid traded markets; Subsidize fuel efficient engines, support public transport, and other efficiency measures; Set standards for proportion of biofuel content in overall transport fuel consumption, with targets gradually strengthening over time. Continue to support the framework of the Kyoto Protocol, and regulate GHG emissions for the power and industrial sectors.

The report provides diverse forecasts across a number of energy sectors, as shown in the table below. Energy Indicators in the Baseline Forecast Indicator

2010

Baseline Forecast

(Actual)

2015

2020

2025

2030

TWhs

188

215

236

259

282

Nuclear

TWhs

116

126

133

Hydropower

TWhs

Thermal (Coal)

TWhs

Thermal (Natural gas)

TWhs

Other non-renewable

TWhs

Non-hydro renewable

TWhs

Imports

TWhs

Total Electricity Production

Production of Natural Gas

Units

Bil m

Imports of Natural Gas

Bil m

Total Demand of Electricity

TWhs

191

215

236

259

282

Industry

TWhs

Commercial/Residential

TWhs

101

115

Losses

TWhs

Exports

TWhs

According to the provisions of the Revised Energy Strategy, its implementation should lead to:  Significant increases in absolute consumption of refined petroleum products and increase of their share in the national energy balance. Most of the consumption growth will fall to the share of passenger vehicles which will consume over 50 per cent of all motor fuels in 2030. In addition to using refined petroleum products as motor fuels, the share of liquid biofuels will increase, primarily ethanol and biodiesel.  Increases in the absolute amount of coal consumption against the background of a moderate increase of its share in the national energy balance. In this case, the increase in coal consumption by 28 per cent in 2030 compared to 2010 is to be achieved solely through thermal coal, which will be consumed mainly by energy companies.  Reductions of absolute natural gas consumption against the background of reducing its share in the national energy balance. The most significant reductions are to take place by reducing natural gas consumption by the population by nearly 30 per cent.  Increases in absolute consumption of nuclear energy against the background of a slight increase of its share in the national energy balance. It is planned to provide for electricity generation at nuclear power

plants through extension of the operation of the existing units and both through construction of new units within existing nuclear power plant sites and the construction of new sites.

3 IDENTIFIED MEASURES AND POLICIES 3.1 RESIDENTIAL BUILDINGS Introduction 2

In 2009 Ukraine’s residential building stock consisted of approximately 1,070 million m of total floor area in 27

19.3 million dwellings (in approximately 10,130 buildings), nearly half of which are single family houses . Over 92 per cent of the stock is owned privately, 6.3 per cent is in communal ownership and 1.5 per cent is state owned. Year of Construction

per cent

Pre-1919

4.9

1919 – 1945

12.7

1946 – 1960

25.7

1961 – 1970

24.0

1971 – 1980

16.1

1981 - 1990

10.5

Post-1991

6.0

Large-scale district heating plays a key role in heat supply, accounting for approximately 60 per cent of total end use; the majority is owned by municipal authorities. The remaining 40 per cent of heating is produced through decentralised heating, ranging from boilers serving individual apartment blocks or commercial 28

buildings, to household boilers . The residential housing sector represents a significant opportunity to achieve energy savings in Ukraine. Over 80 per cent of housing stock in the country was built prior to 1980; due to under-investment in maintenance and refurbishment, the stock is largely inefficient. The district heating infrastructure is also old and inefficient. Over 49 percent of heating mains, 47 per cent of distribution networks and 49 per cent of boiler plants and substation equipment have been in operation for over 25 years and need modernization. According to the IFC, the sector consumes approximately 25 percent of the country’s electricity and 40 29

percent of its heat energy resources . At least 80 percent of needed refurbishments are related either to energy saving or energy distribution; and investments with simple payback terms can result in heat energy savings of 30 to 40 percent, and the reduction of gas consumption by 25 to 30 percent. Worley Parsons (2011) estimate that the total energy consumption of the residential sector of Ukraine in 2008 was 272 million MWh/year, and they estimate that energy saving potential is 136 million MWh/year, or

Worley Parsons (2011) and Energy Community presentation http://www.energy-community.org/pls/portal/docs/328185.PDF

EBRD, 2012

http://www.ifc.org/wps/wcm/connect/region__ext_content/regions/europe+middle+east+and+north+africa/ifc+in+europe+and+centra l+asia/countries/promoting+energy+efficiency+in+ukraine+residential+housing

approximately 50 per cent. The estimated technical savings would result in monetary value of approximately 29.9 billion UAH (€ 2.6 billion) per year and annual CO2 reductions of approximately 39 million tCO2. The conditions for Energy Community membership include significant conditions relating to energy efficiency 30

in housing, including the following :  Directive 2010/30/EU on labelling of energy related products specifies that most relevant household 31 products shall bear EU Energy Efficiency Labelling  Directive 2006/32/EC on energy end-use efficiency and energy services with conditions including: o “Providing Incentives, Equal Competition of Market Participants”. The government has to provide availability of efficient and high quality programs of energy audit for all end-users, including households, commercial entities, and small to middle-sized industrial consumers. Market segments with higher operating costs and simple capacity can use such energy audit measures on a non-commercial basis as questionnaires and computer software provided to consumers via the Internet. o “Metering Systems and Consumer Awareness”. The government shall provide consumers with individual meters of heat, hot and cold water at competitive prices. Consumer billing shall be provided by energy suppliers in clear and understandable form based on actual consumption of energy.  Directive 2010/31/EU on the energy performance of buildings, whose specifications include the harmonisation of standards and legislation to ensure that all new buildings by 2020 have close to zero energy consumption. Sector-specific challenges Some of the principal barriers to residential energy efficiency in Ukraine relate to the undeveloped status of homeowner associations, absence of targeted state support and lack of control over energy use. Other issues include regulated energy prices, the inability of financial institutions to lend to the sector because of contradictions in legislation concerning homeowner associations, and a lack of knowledge about the benefits of residential energy efficiency. Tariffs Residential energy and water tariffs are controlled and subsidised, and maintained below production cost. These subsidies are obviously covered from other sources or subsidies and cross subsidies of the residential sector by non-residential consumers. The residential heat tariff was 220 UAH/MWh (approximately 20 EUR/MWh) at the beginning of 2011. In 2011, residential electricity tariffs varied from 0.18 UAH/kWh to 0.24 UAH/kWh with an average of 0.22 UAH/kWh (0.02 EUR/kWh) which is about 4 to 13 times lower than in the 3

EU. For an average household in the Ukraine, the 2011 gas price was 72.54 kop/m (0.069 EUR/m ) for those 3

inhabitants who consume less than 2,500 m of gas per year and have an installed gas meter, and to 79.8 3

kop/m (0.076 EUR/m ) for those without an installed gas meter. In the majority of regions, heat tariffs are set below the cost of heat production and although officially subsidies do not exist, the difference between the costs and revenues is “covered” either through crosssubsidies, exploitation of depreciation, or other financial means. Subsidized tariffs distort economic relations

(DIXI Group, 2013)

it also expands the scope of regulation to industrial and commercial appliances, equipment, and products which consume no energy.

in the energy sector, diminish motivation for investing in energy efficiency in residential housing and also place a burden on the state budget. The lack of individual household meters compounds the problems. Most households pay for heat on the basis of dwelling size, and this reduces the incentive for uptake of any energy efficiency measures. The government has a target however of universal coverage of household meters in the next few years. Metering will need to be done on a building as well as residence level. The vast majority of residential buildings in Ukraine have vertical heat distribution systems where reduced consumption by one user may reduce supply to another – such systems require modifications before metering can be implemented. Ownership and Maintenance The majority of apartments in multi-apartment buildings are privatized, with only a small number owned by municipalities. In absence of a “single owner” of the multi-apartment building, the management role is to be assumed by the co-owners. The relevant laws of Ukraine32 have established two types of residential sector management:  Buildings without established condominiums. Management and maintenance of these buildings continues to be performed by the municipal maintenance organizations;  Buildings with established condominiums. Management and maintenance of these buildings is performed or organized by the co-owners through Condominium Association structures. Unfortunately only approximately 10 per cent of block housing in Ukraine have such structures. Privatization implies joint ownership of the common spaces by the new owners together with all relevant rights and responsibilities, including the responsibility to share repair and maintenance costs for the common property, and responsibility for property maintenance. According to the Law, the apartment owners in multiapartment buildings may establish associations or unions of individual apartment/building owners in a form of condominium or housing/construction association, or they may choose not to organize. Co-owners of apartment buildings who choose to be organized in condominiums are capable of making all decisions through the executive body and assume the responsibility for management and maintenance of their building, as well as for interrelations with utility services providers, etc. A different, more complicated situation is with the management and maintenance of buildings without established condominiums (so called, non-organized co-owners). In these cases, the co-owners are not organised nor mandated to make decisions, and such buildings are managed and maintained by housing and maintenance organizations (HMO) – so called Zhek, selected and engaged by the local self-government. Financing One of the critical issues associated with the organization of co-owners is the ability to create and maintain a capital repair fund. While the law requires condominiums to set up a capital repairs fund, it does not oblige non-organized owners to establish such a fund.

Law of Ukraine on Privatisation of the State Residential Sector No. 2482-ХІІ of 19.06.1992, Law of Ukraine on Condominiums No. 2866-

III of 29.11.2001.

Financing options that can be used include credit lines, ESCO models and energy efficiency revolving funds. However, the Condominium Associations are currently not treated as a viable borrower, since the Law of Ukraine does not provide a clear procedure on collecting debts by the Condominium Associations from the individual owners. This situation has stopped the banks from developing activities in this market. Further, the banks point to a lack of collateral and the inability to enforce payments by the condominium members as another barrier to lending. Therefore the implementation of the credit lines model in the apartment blocks will be complicated under current Ukrainian conditions. Having said this, the local banks are interested in penetrating the residential market and are willing to sign a loan agreement with each apartment owner individually; and if the barriers to financing condominium associations can be removed, there is a good chance that funding would flow there too. Relative to the size of perceived market, Ukraine has a small number of specialized service companies doing 33

business in the residential housing sphere . The low cost of energy, service pricing policies and low understanding of the benefits of such services by local self-governments has caused ESCO companies to largely re-orient themselves to other activities – although energy conservation services are still available. The market is well supplied with materials and equipment from numerous local and international companies. District heating systems are obsolete and subject to major efficiency losses; losses in distribution can be as high as 20 - 35 per cent. A 2011 study for the World Bank found that operational capacity consists almost entirely of gas-fired boilers, which typically use oil as a reserve fuel. The thermal efficiency of these plants, at that point of time, was found to be significantly lower than that feasible with modern gas-fired boilers, and in 34

some cases as low as 20 per cent - although clearly this would be in a small minority of cases. There is also a lack of automated control and commercial accounting in these systems. Public Private Partnership (PPP) structures can be used to overcome these problems. Here, the local authority and private partners could enter agreements where the local authority would bear risks on the demand-side while the private partners could be in charge of asset replacement and long-term operation of heating services bearing the associated risks. In recent years, new challenges have begun to emerge. New building developers are now encouraging individual heating systems; and new buildings often opt for electrified heating. While these are typically more efficient than current district heating solutions, the danger is that the potential for future shared heating systems using low carbon or renewable fuel will be lost. In addition, air conditioning is on the rise and domestic power consumption is rising steadily.

Identified measures and mechanisms Measures for energy savings will typically include:  External wall insulation;  Draught-proofing;  High efficiency lighting;  Window replacements;  Heat network refurbishment and insulation;

Worley Parsons, 2011

EBRD, 2012

    

Central boiler upgrades and modern district heating substations with automatic regulation of heat supply; Effective temperature controls in residences; Use of low carbon/ renewable fuel in boilers; Use of efficient appliances; metering; Smart metering.

However, some of these measures are expensive, and the challenge is to create appropriate financial and commercial mechanisms that can lead to their partial implementation in the short term and complete implementation in the long term. As mentioned above, ESCO, credit line and PPP models can be used and all of these should be explored. In the first instance, the government will need to improve the laws on Condominium Associations to make them viable borrowers for the local banks. The pace of formation of such Associations also needs to be increased. ‘Resident Association facilitation cells’ can be formed to facilitate development of these structures. Payback timescales and models for energy efficiency technologies in residential buildings also need to be researched and publicised. It is understood that funding for energy efficiency improvement of residential housing stock is available under specific conditions from state and local budgets under programs specifically designed to improve residential housing and communal services. Substantial assistance is also provided by several international donors’ programmes in the form of grants. The results of such public grant-led programmes should be made openly available to increase understanding of potential benefits. Further, commercial pilot projects will need to be developed and trialled in different situations – with condominium owners, with HMOs etc, using ESCO, PPP and credit line models. The results of such pilot projects will need to be well publicised; consumers, bankers and service/ technology providers will need to be educated on the structures developed. As seen in other countries by international donors, the local banks will need extensive training and handholding before they will be willing and able to lend to energy efficiency projects in the residential sector. Implementation capacity is often considered as one of the major barriers for establishing a proper framework for energy efficiency in the residential sector. 35

A study conducted for the EBRD concluded that the ESCO model is potentially too complex for the Ukrainian residential sector at the current time. The main reasons for this were the fact that substantial training would need to be introduced to ESCOs and Condominium Associations to be able to mutually benefit from implementation of this model. Under current Ukrainian conditions, the ESCO model would have additional challenges to function mainly related to complicated and unclear procedures for Energy Performance Contracting (related to the application in apartment block buildings): interconnection of tariffs for communal services; schemes for investment repayment by each apartment; connection of communal services tariffs with subsidies for the inhabitants with low income. A promising option to explore is that of public-private partnership (PPP) structures to install energy efficiency measures where the HMO/ local government are responsible. PPP structures are being trialled in Ukraine in a number of sectors. A new PPP unit has been formed as part of Ukraine government to trial projects in various

Worley Parsons, 2011

sectors. This unit is being actively supported by USAID. The unit can potentially be expanded to cover projects in the residential energy efficiency sector as well. Identified policies and policy approaches Several policy options have been identified for making the necessary improvements in the residential sector. To begin with, the role of the state and local government should be gradually, and appropriately, reduced and directed towards the role of influence by incentives. Available state and municipal funds should be used for developing incentives for implementation of energy efficiency projects based on competitive selection. Formation of homeowner associations should be encouraged and expanded, and co-owners of multiapartment buildings should be encouraged and supported in taking responsibility for their own assets. Further, legislation needs to be developed to enable local homeowner associations and housing management companies to access finance to improve energy efficiency in residential buildings. This will need to include legislation to achieve the following:  Land transfer to the co-owners;  Mandatory establishment of a capital repair fund, which is protected from misuse and is available only for agreed upon repairs;  Introducing enforcement mechanism of dues payment by owners;  Gradual phase out of municipal involvement in private residential housing. Understanding and awareness of the benefits of residential energy efficiency needs to be raised. Information from current public and international donor grant funded programmes needs to be collected and be made public. A nationwide programme of pilot projects in different circumstances and contexts needs to be created and implemented, with state support where necessary, with the results widely publicised to generate the awareness. In the future, the most successful proven models can be taken forward as part of a mainstreaming process. The Ukrainian banks must be made part of this process to ensure that appropriate energy efficient housing loan products are developed for multifamily buildings, which can be targeted at homeowner associations and housing management companies. Tariff reform is required, with protections built in for especially vulnerable energy consumers. A socially sensitive approach and implementation plan to market-wide establishment of full cost recovery tariffs, accompanied by consideration of protection for vulnerable population should be developed and gradually implemented. Without tariff reform, the economic case for energy efficiency will be difficult to make. A policy option that has been used in countries such as the UK has been to give energy supply companies mandatory targets to implement a certain amount of domestic scale energy efficiency work every year. However, without tariff reform this option will be difficult to implement. Metering should be made mandatory and the government’s existing aspiration of achieving universal metering in the next few years should be implemented. Reducing the current large scale energy wastage is the key priority in the next few months and years. Funding or other support should be provided to trial PPP mechanisms where private sector partners can maintain and refurbish the obsolete boilers and distribution systems while the municipalities can take the risk on demand.

In the medium term, incentives should be designed for the use of low carbon fuels in the central heating boilers. Meeting the requirements of the Energy Community will necessitate the introduction of standards for household appliances and for buildings, the required standards should be published and disseminated as quickly as possible and their introduction should be gradual so as to not harm associated industries and provide adequate preparation time. In the longer term, the residential sector will need to achieve near zero carbon levels from energy use. As energy prices increase, one of the cost-effective ways to do this on a net basis may be a combination of energy demand-side management as part of a smart grid, and decentralised renewable energy generation at residential building level. Preparation for this should begin now, with information collected and disseminated on smart meter and smart grid pilots currently being undertaken in other countries.

3.2 AGRICULTURE, LAND USE AND FORESTRY Introduction In 2012, nearly 71 per cent of Ukraine’s land was used for agriculture, with a further 17.6 per cent of land covered by forest. Since the year 2000, Ukraine has become one of the world’s leading agro-food exporters, with exports of grain, oilseeds and vegetable oil growing significantly. Ukraine produced 5.2 per cent of world’s barley and 2.3 per cent of the global output of wheat in 2012. The country is the world’s leading exporter of barley, with an average market share between 2000 and 2010 of 14.1 per cent. Owing to exceptional yields in 2008 and 2009, barley exports from Ukraine reached 30.6 per cent of the world’s total in the period 2008-2010. In the following years the share of Ukraine’s barley in global production and exports declined substantially since the area planted dropped from nearly 5 million hectares in 2009/10 to 3.3 million hectares in 2012/13, while the area with more profitable maize increased from 2 to 4.4 million hectares. Ukraine is also the most important producer of sunflower oil in the world, surpassing Russia in total volume of production in 2010 and accounting for 23.5 per cent of the global output (FAO, 2012). The Agricultural Strategy of Ukraine aims to develop and grow the agricultural sector , while ensuring food security, international competitiveness, social development of rural areas, and environmental and soil sustainability. Specifically, the strategy document published in 2012 identifies the following areas of focus:  Food security;  Maintaining market stability for agricultural products and food;  Reducing costs and strengthening competitiveness;  Increasing productivity ;  Reducing the environmental impact of the agricultural sector;  Regeneration and protection and improvement of soils;  Become a leader in food and agricultural product exports;  Social development of rural areas. Similar to the Energy Strategy plan, this document balances the need for economic development and reform, with the environmental and social implications associated with that expansion. In terms of reducing GHG emissions, the plan does not provide specific targets for reduction, but does emphasize biofuel production,

sustainable use of fertilizers, and strengthening transparency and regulatory oversight of the sector. The key components of the Agricultural Strategy are included in the table below. Leading Strategic Recommendations for the Agriculture Sector to be Completed by 2020 Increasing productivity  Reduce cost on a per unit basis between 3-9 per cent depending on sector;  Increase gross production by 40 per cent, with crops, livestock and fishing production increasing 30 per cent, 70 per cent, and 20 per cent respectively;  Increase proportion of no till to 2/3 of all farms;  Achieve 50 per cent of total sales coming from long term contracts to provide more certainty;  Attain 80 per cent of households covered by agricultural cooperatives;  Have 90 per cent of farms covered by insurance;  Grow use of loans/credit 350 per cent  Promote use of software systems to optimize production;  Develop seed selection and breeding, in partnership with science institutions.  Raise exports by 2.8 times; Growing the  Increase tax revenues by 2.4 times; agricultural sector  Expand gross value added in agriculture sector by 2.8 times. economically  Increase in gross labour wages in 2.6-2.8 times; Contribute to social welfare of agricultural  Grow average wages 2x in productivity;  Increase employment in rural areas to match other areas. sector  Establish strategic reserves of key crops; Ensuring sustainable soil fertility and safety  Ensure stronger standardization, certification of production, processing;  Establish mobile laboratories to measure the quality of milk and other animal products;  Promote sustainable crop mixes and mineral fertilizers.  Erect effective market infrastructure and increase access to direct producers; Improving market  Diversify market-based instruments, such as derivatives, and insurance; infrastructure  Strengthen regulatory frameworks and documentation to help securing loans;  Form state institutions to enforce proper control of export products;  Create operational monitoring of agricultural products, helping to better understand and predict markets;  Restructure the Agrarian Fund to turn it into a financial institution;  Promote agricultural associations to represent their rights. From the export, tax revenue and gross value added aspirations in the Agriculture Strategy, it is clear that Agriculture is seen as a major driver of growth in the near future. As shown in the graphic below, yields are low in Ukraine when compared with EU averages, and have the potential for significant increase.

Agricultural Yields in 2010/11, t/Ha Source: USDA (referred in Invest Ukraine & Deloitte, 2011)

A shift from extensive to intensive agriculture is foreseen with yields improving through optimal use of fertilisers, better quality seeds and other progressive techniques. These efforts, particularly the increased use of nitrogen fertilisers, will bring about a significant increase in emissions â&#x20AC;&#x201C; until yields are optimised. Ukraine is traditionally a dairy producer, although its herd sizes and output have been decreasing since independence. Production costs in the sector are comparable to those of New Zealand and significantly lower than most of Eurasian countries. The domestic market is expected to grow strongly in the coming years, and there are export opportunities. Moreover, Ukraine enjoys proximity to a number of large or developing markets, such as the European Union (EU), Russia and the Commonwealth of Independent States (CIS) countries. Forest cover in Ukraine varies greatly from region to region, although the total proportion, at 15.7 per cent of the countryâ&#x20AC;&#x2122;s territory, is relatively low. The majority of forest lands are concentrated in the western (Carpathians) and northern parts of the country. The state owns more than 99 percent of forests, the remainder being owned by municipalities and private companies or small private owners. Forest privatisation has been regulated by the Forest Code of Ukraine since 2006 and is still at an early stage. The vast majority of these forests are managed directly by the State Forestry Committee as the main body of executive power in the sphere of forestry and hunting. Many other authorities share competencies in forestry management, including the Ministry of Agrarian Policy, the Ministry of Defence, the Ministry of Emergencies, the Ministry of Environmental Protection, and the Ministry of Transport and Communications. Forests can be found in protected areas, ranging from small preserved sites (zapovidni urochyshcha) to nature reserves. However, protected areas cover less than 5 percent of the national territory and some types of forestry practices, such as clear sanitary cuts and final felling as well as illegal human occupation of the land, constitute a serious threat to them. Forestry and related industry play an important role in the economic development of certain regions of Ukraine. The volume of products, works and services linked to forestry represented UAH 3,382.7 million and 83,000 employees in 2008. In the Carpathian region, the forestry cluster is the fourth major branch of the economy.

Sector-specific challenges Crop production The majority of agricultural land is owned in small plots belonging to individual owners and leased to large agro-holding businesses who cultivate the land. There is limited use of certified seeds or the best available mix of fertilisers; adequate soil protection and erosion prevention measures are often not undertaken, and there are two likely reasons for this: (1) the lessees have no long-term interest in the land; and (2) there are no incentives or effective penalties for not using the best available techniques. Private land sales are banned, to prevent exploitation and protect the interest of small landowners. However this ban also results in low leasing prices. For these reasons, innovative leasing models are required which make the agro-holding companies genuine long-term stakeholders in the land.

REC (2010)

Difficulty in accessing finance is a main concern for small and medium-sized farmers, limiting their ability to invest in operational activities and fixed assets. Low productivity is the result of limited use of high quality inputs (e.g. fertilisers, pesticides, seeds), especially by small and medium-sized farms, and a lack of investment in fixed assets, such as machinery and storage facilities. The moratorium on land sales has prevented free competition and hampered investment and productivity gains. It has also had a negative impact on (1) access to finance, since land is rarely owned and as a result cannot be used as collateral; and (2) foreign investments, as land cannot be purchased by foreign individuals or foreign companies. Unpredictable trade policies sometimes run counter to market conditions, penalising farmers. For example, restrictions on exports were temporarily implemented during the global grain price rise in 2010. Low quality of grain also 37

adversely affects the ability to process it and, ultimately, overall sector competitiveness . Due to its large agricultural sector, there is significant potential for the use of biomass power generation and energy from biogas technology in Ukraine. Biomass has been identified by OECD (2012) as the renewable energy source with the greatest potential in the country, across all regions. However, only a very limited proportion of this potential has currently been tapped. In the short term, energy from biogas should be used to supply farm companiesâ&#x20AC;&#x2122; own energy needs, and also export power, heat or gas to the relevant grid as appropriate. In the very long term, biogas could be used to potentially generate Hydrogen for use as a transport fuel; pilot projects towards this are being developed in other parts of Europe. UABio (2013) has identified the main barrier to wide-scale implementation of biogas projects in the country as being the green tariff which it says is too low. Further, the OECD and local experts interviewed have also identified the expense and administrative processes of power and natural gas grid connections as another very significant barrier. Sunflower is Ukraine's chief oilseed crop. Sunflowers are typically planted in April and harvested from midSeptember to mid-October. A combination of high price, relatively low cost of production, and traditionally high demand has resulted in sunflower becoming one of the most consistently profitable crops. Its high profitability fuelled a significant expansion in planted area beginning in the late 1990's. Due to its high profitability, many farmers in Ukraine have abandoned the traditional crop rotation practices recommended by agronomists which called for planting sunflowers once every seven years in the same field. Despite the countryâ&#x20AC;&#x2122;s long history of agriculture, a significant lack of knowledge, skills, and abilities in the 38

fields of agronomy and agro-management have also been identified . Production of energy crops (rapeseed, willow, poplar) depends mainly on foreign demand, with lack of clarity on: (1) long-term prospects; and (2) in the case of rapeseed, the social value of focusing on energy crops rather than food. Livestock There has been a significant decline in cattle stocks in the past twenty years in Ukraine (USDA, 2011). This is due to low reproduction of the current stock, low profitability, low purchase prices, lack of mechanization and the need for introduction of more productive breeds. Poultry production is rising quickly and pork production has declined but is now rising again. According to the USDA, production of beef will continue to

OECD, 2012b

ibid

fall. Veal and meat from dairy cows will constitute the vast majority of production. The long downward trend is a result of general inefficiency of the dairy sector with overwhelming majority of animals on household plots. Some investments will continue into dairy enterprises due to extremely attractive milk prices, but high risks and long return period for such investments will prevent large scale investment. It is unclear whether or not these investments would result in a significant beef production increase in the long run.

Ukraineâ&#x20AC;&#x2122;s Meat Production, per cent Source: USDA, 2011

Total numbers of livestock and cows in Ukraine Source: USDA, 2011 Quality standards of milk for food production do not match those of the EU, and even the highest-quality Ukrainian milk cannot be exported to Western Europe. Milk yields, although improving, are still 50 per cent less than in other key producing countries. The production of raw milk is scattered widely, with 80 per cent of production coming from households that own fewer than five cows. In mid-2011, households accounted for 70 percent (growing by one percent from 2009) of all cattle and 78 percent of dairy cows in Ukraine. Ukrainian households are expected to continue to 38

be the major producers of beef in the near future. The level of investment in the sector is low, preventing necessary technological upgrades. Backyard production practices remain inefficient with very little attention paid to feeding rations and animal health issues. Households view livestock husbandry as an important part of the social “safety net” and pay less attention to profitability of a cow. Even existing genetic potential is not fully utilized. Efficiency of industrial farms is also predominately low. Many industrial farms follow outdated livestock management and feeding practices inherited from old collective farms. High milk prices observed on the market in the last year or two ignited some interest from investors, however the flow of money into the dairy enterprise remains to be small. Businesses continue to target the poultry and swine sectors because of higher and faster rates of return. Lower beef prices in comparison to pork have also driven investments elsewhere. Land Use and Forestry Soil erosion is a significant challenge with fertility losses affecting crop production, and humus losses contributing to GHG emissions. Soil erosion in Europe is mainly caused by water and is largely a result of unsustainable agricultural practices, clear cutting of forests and overgrazing. Soil erosion is most serious in the Mediterranean region. It has become irreversible (meaning a loss of more than 1 tonne/ha/year over 50100 years) in some Mediterranean land areas and in the black soil regions of the Republic of Moldova, the Russian Federation and Ukraine. Illegal logging is a significant issue, and occurs due to poor socio-economic conditions in Western and Northern Ukraine. Illegal logging has been acknowledged by all key actors in Ukraine, including governmental authorities, businesses and NGOs. However, volume estimations differ from one source to another. According to the State Forestry Committee, the total volume of illegal logging in Ukraine in 2008 was about 20,000 cubic metres of wood, while according to experts from the Swiss-Ukrainian Forest Development Project in Zakarpattya (FORZA), financed by the Swiss Agency for Development and Cooperation, the average 39

annual volume of illegal logging in Ukraine is approximately 1.25 million cubic metres of wood . In addition to the illegal logging, high-value timber is often exported as low-value timber. Further, forest land registries (forest maps and registrations) are not necessarily accurate. Biomass logged in remote areas remains “in field” after cuts, while it could have been used as a raw material for solid biofuel production. Peatlands cover about 1.4 million ha, i.e. 2.3 per cent, of the Ukrainian land surface, and are mostly found in the large lowland areas of the Ukrainian Polissya region (Volyn, Rivne, Zhytomyr, Kyiv, and Chernihiv oblasts) in the north of the country. Several peatland and other protected areas underline the importance of the Polissya lowlands for ecosystem and species conservation. However, about 50 per cent of the total peatland area of Ukraine has been destroyed or severely degraded due to drainage for peat extraction and 40

agriculture . Drained peatlands are significant sources of greenhouse gas (GHG) emissions. Nitrogen-based fertilisers are significantly useful in boosting crop capacity, and their use needs to be increased in Ukraine. However, the production processes of these fertilisers are highly energy intensive. Optimised use of fertiliser is therefore key to increasing production while keeping GHG emissions in check.

REC, 2010

http://www.succow-stiftung.de/peatland-restoration-in-ukraine.html

There has been a significant decrease in availability and application of organic fertilizers (manure) due to major decline in cattle stocks. This has led to increased mineralization of humus and release of CO 2 emissions from soil. Sapropel from lake and under-peat deposits can be a replacement for organic fertilizer. Identified measures and mechanisms Several operational improvements can be made to boost productivity, however these can only be realised by the innovative development and implementation of mechanisms which create appropriate institutional conditions. In relation to crop production, the measures required include: a move from extensive to intensive farming systems; the optimization of application of nitrogen-based chemical fertilizers, such as through ‘precision agriculture’; an expansion of no-till techniques; the optimization of cultivated area and scientific crop rotation; the application of nitrification inhibitors to increase effectiveness of fertilisers applied; an increase in organic farming; the use of certified seeds and organic fertilizers; the increased use of efficient equipment to reduce fuel use; and the preservation and restoration of peatland. In order to implement such measures, various mechanisms need to be introduced – such as the development of ownership or leasing models that make agro-holdings long-term stakeholders and investors in the land. In parallel, mechanisms for access to finance need to be developed and implemented. In relation to energy production, straw combustion will result in reduction of both nitrous oxide emissions due to reduction of biomass available to mineralization, and carbon dioxide, due to substitution of fossil fuels in energy production elsewhere. The development and implementation of biogas projects is also necessary. Grid connection support and attractive feed-in tariffs will provide the incentive for this to be taken up. The EBRD has promoted the use of biogas in Ukraine for the past few years and in June 2013, it announced that it is organising a financing facility of up to €4.2 million to construct and put into operation a 1.5MW biogas plant at the privately owned agribusiness company Ecoprod, located in the Donetsk region, in eastern Ukraine. This will be one of the first biogas plants in the country to sell generated electricity to the grid. Such pilot projects need to be widely publicised, and technical and commercial viability issues need to be discussed in an open and transparent manner. In relation to livestock, the measures required include: feed additives and diets which help increase in livestock vitality as well as suppress methane production from intestinal fermentation; better manure storage facilities which reduce methane and nitrous oxide leakage; promotion of more productive breeds, and the creation of modern breeding farms. The main mechanism towards this is to find commercial and financial mechanisms for small farms to collectively or individually attract investment to modernise, mechanise and expand. In relation to land use and forestry, the main measures to follow are the prevention of soil erosion by the construction of buffer zones and increasing forest cover; long-term peatland restoration projects; continuation of electronic registration system for wood products, increase of forest road densities, to combat illegal practices. Forest management responsibilities and compliance oversight should come under one central agency (the State Agency of Forestry Resources). Soil carbon R&D facilities (laboratories) need to be supported, with findings used in the development and introduction of the best practices. These findings will need to be widely disseminated to increase understanding of the opportunities and costs. Increase in 40

afforestation and reforestation areas is required, especially in eroded agricultural lands. Use of wood waste can be enhanced as an alternative fuel. Forest mapping techniques need to become accurate and reliable, using modern GIS based techniques triangulated by electronic and other registration data. Identified policies and policy approaches Crop Production Policy approaches in the agriculture sector must look to align human capital skills with the needs of the sector. Entrepreneurship know-how, technical skills, and financial literacy must be tailored to the requirements of Ukrainian farmers. Access to finance will need to be supported via supply-chain financing, leasing, and insurance to cover against risk. Land policies need to be reformed to attract investors and enable the full usage of land assets as collateral. Institutional services such as credit information services, collateral registration, and market information services need further development. Restrictions to grain trade, such as quotas, need to be eased to improve predictability and the attractiveness of the sector to domestic and 41

foreign investors . A skills gap exists in Ukraine agribusiness and a study by the OECD (2012b) proposes that PPP structures in education can help. A targeted education and information campaign is required on economic benefits of intensive and most ecologically beneficial production processes e.g. no-till, correct crop rotation, and optimal fertilizer use and application techniques. Subsidies will be required for land preservation and soil enrichment. Standards for these will need to be published with a timescale. Subsidies and incentives will also be required for organic farming certification and for the use of domestically produced high quality organic fertiliser. In relation to energy production from agricultural wastes, an optimised feed-in-tariff will need to be maintained. Pilot project funding is required for grid connection studies and implementation, with a view towards developing long-term support. In the medium term penalties will need to be introduced and implemented for agricultural wastes not used for energy or fuel production. Livestock Policy approaches here need to better align available human capital with company needs to improve both productivity and quality of raw milk output. Quality standards need to be raised to meet EU standards. Access to finance needs to be facilitated, which would allow an increase in the number of cows per household â&#x20AC;&#x201C; this would in turn reduce the number of contact points for processors. Possible approaches include, for example, micro-finance, supply-chain financing, efficient credit guarantee schemes, cooperative banks; and state-backed finance. Foreign investors need to be attracted to the dairy processing sector by creating a long-term strategy around two priorities: i) improving both the quality and productivity of raw milk production and ii) targeting first Ukraineâ&#x20AC;&#x2122;s domestic market before moving on to the CIS countries, and finally to the EU.

OECD, 2012b

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Incentives are required for the breeding industry to invest in developing the best breeds from domestic as well as foreign stock. A state-backed breeding system could be formed. Education on critical issues needs to be provided to small dairy farmers â&#x20AC;&#x201C; such as on diets and manure storage measures. Manure storage standards need to be introduced and monitored, with strict penalties on non-compliance. Funding support should be provided for pilot projects to enable small farms to collectively or individually attract investment for modernisation. Land use and Forestry A single agency should be formed to manage forestry assets (under the State Agency of Forestry Resources). Clear-cuts (clear-felling) should be banned and enforcement structures need to be made very reliable. Increased share of private ownership and long term-lease of forested plots should be facilitated, with mandatory certification under the FSC (other applicable sustainable management forestry practices). Better forest mapping techniques need to be chosen and implemented by the forestry management agency. Market reforms need to be introduced in regions with illegal logging prevalence to overcome the grey market. Forest road densities need to be increased. Social support measures are required alongside these reforms, as illegal logging often occurs due to poverty and the lack of employment and other opportunities. Soil carbon laboratories should be modernised and resourced. An information campaign should be launched to increase understanding of soil management techniques. Based on scientific evidence, specific national targets established for carbon sequestration. An environmental tax can be introduced on the sale of fuels, to support afforestation, reforestation and forest conservation. Peatland restoration programmes need to developed and supported backed by a national target of coverage for the coming decades, with firm responsibility taken by one government body.

3.3 POWER GENERATION Introduction In 2012, electricity in Ukraine was generated by the following: nuclear power plants (NPPs): 45.5 per cent; thermal power plants (TPPs) and combined heat and power (CHP) plants: 48.7 per cent (approximate ratio of 43

TPP:CHP is 80:20); hydropower plants: 5.8 per cent . Much of thermal power generation consists of coal fired power plants of low efficiency. Wind and solar generation also exists but is as yet negligible in the overall generation mix. The European Business Association (EBA) projects a significant demand for additional capacity in the coming decades.

http://www.ebrd.com/pages/news/features/ukraine-nuclear-safety-upgrade.shtml

Source: EBA (2011) The Draft Energy Strategy sees a very significant role for coal in the coming decades due to the very significant coal reserves in the country, and the switch from gas due to the expense and insecurity caused by gas imports. The technical condition of most power plants and power and heat transmission networks is poor. Decadesold coal-based thermal facilities run with poor efficiency due to:  Completion of design lifetime (close to 100 per cent depreciation levels in some cases);  Requirement to run in power management mode due to lack of manoeuvrability in IPS;  Combustion of low quality fuel;  Use of fuel different from designed fuel. These facilities need renewing or preferably replacement with modern, efficient plant. According to DTEK, the rules stipulate that 1 unit per plant is to be modernized using funds from an investment surcharge applied by NERC. The surcharge does not support specifically environmental improvements e.g. SOx and NOx reduction equipment. Ukraine’s Energy Community commitments relating to electricity generation mainly include the promotion of renewable energy, and the reduction of NO, SO2 and dust pollutants (rather than CO2) from large combustion plants. The requirements of Directive 2001/80/EC on the limitation of emissions of certain pollutants into the air from large combustion plants include the following by 1 January 2018: 

The member states shall draft the relevant programs for gradual reduction in total annual emissions from combustion plants with the efficient heat capacity equal to or higher than 50 MW, and comply with the emission limits taking into consideration the relevant reduction in the percentages specified for each country.



The government has to approve the National Emissions Reduction Plan, which should specify reduction in total annual emissions of nitrogen oxide, sulphur dioxide and dust from the existing plants to the level

that would be achieved by applying the mentioned emission limits to the existing plants operated in 2000. ď&#x201A;ˇ

In addition, monitoring of emission from combustion plants, recommended at the expense of the operator, shall be provided. In turn, operators shall inform the competent authorities on the relevant due dates of compliance with the requirements and improvements made.

Although work has begun, there are significant challenges to meeting these requirements. A National 44

Emissions Reduction Plan is yet to be developed . It is also worth mentioning that there are no defined permissions on the concentration of emissions, no developed strategies to decommission old power plants, no legislative changes to bring the environmental monitoring system in line with the EU requirements, no created economic incentives and feasibility study of the Directive implementation. Substantial investment is required, and problems at some existing thermal plants have meant that other plants cannot be switched off for the retrofitting process. Ukrainian enterprises use outdated technological equipment and ineffective emissions treatment systems that require quite a lot of investments. DTEK holding and the state-owned NJSC ECU, which operate thermal power plants, are facing major challenges in attempting to meet the Directiveâ&#x20AC;&#x2122;s requirements. In September 2012 DTEK claimed that it was ready to invest 23.3 billion UAH in the modernization of all 9 TPPs that were part of DTEK Zakhidenergo, DTEK Skhidenergo and DTEK Dniproenergo by the end of 2018. The reconstruction provides for virtually complete replacement of the equipment, i.e. construction of new units in place of the old ones. Specifically, beginning from 2012, all units would undergo replacement of electric filters, which reduces dust emissions to European standards - less than 0.05 g/m3. The company stated that the newest technologies are used for re-equipment, meeting the requirements of the Energy Community directives, including emissions reduction (for sulfur and nitrogen dioxide, and dust). The power-generating Unit 13 of the Starobeshivka TPP of the PJSC Donbasenergo (operated by the NJSC ECU) has been reconstructed since March 2012. In May 2013 it is planned to complete the first phase of its modernization, namely installation of a new electric filter, turbine upgrade etc. However, the second phase of the project provides for installing desulfurization equipment and is still in the planning phase due to 45

insufficient funding . The renewable energy sector in Ukraine has significant investment potential. Hydroenergy has been historically strong, but technology needs upgrading: plants are owned and operated by the public joint stock company Ukrhydroenergo, part of the Energy Company of Ukraine. The potential of solar energy and wind power is confined to specific regions. Biomass is the renewable energy source with the greatest potential 46

across all regions of the country . High feed-in tariff rates exist to support target to achieve 11 per cent share of renewable energy production by 2030. The tariff does not however support co-generation. The biomass pellet industry is growing, with products mainly exported to Poland. Lack of a guaranteed supply chain impedes production (observation of delivery contracts by the state forestry enterprises, or long-term

DIXI, 2013

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OECD, 2012

forest lease could reduce risks). Solid biofuels could be used in co-firing with coal in some of existing TPPs. However, the production needs a guaranteed demand from the internal market, which could be resolved with introduction of green certificates, or green tariff for co-firing with coal at CHPs/Thermal power plants. Improved logistics are also required â&#x20AC;&#x201C; the current system of railway transport does not provide for efficient and effective use of railways for transportation of pellets. There is also a need for a decrease in number of approvals required for freight use of rail wagons. The Energy Community commitments include Directive 2003/30/EC which requires an implementation plan on the promotion of the use of biofuels and other renewable fuels for transport by 1 July 2011. It binds the government to: set national targets for biofuels consumption; monitor consequences of the use of biofuels also taking into account the specific features of balance related to pollution of the environment ; and disseminate information on biofuels and other renewable fuels. The Energy Community commitments also include Directive 2009/28/EC on the promotion of the use of energy from renewable sources. Nuclear power plants account for 26 per cent of capacity (13GW), but their share in production is approximately 40-50 per cent. Plants are owned and operated by Energoatom, which is subordinate to the Ministry of Fuel and Energy of Ukraine. There have been no significant additions to generating capacity since 2004. According to current plans, around 11GW of current capacity is scheduled to close by 2030. Sector-specific challenges The challenges in the power sector are complex. Regarding thermal power plants, on the one hand it would appear that as the existing technologies are old and outdated, and coal is cheap, the investment case for replacement should be easy to make. However the low tariffs take away from the investment case. Also, the lack of a long-term vision and commitment from owners means that there is no mandate for power facility managers to create plans for investment. Having said this, one can see that international commitments are playing a vital part in the creation of plans for modernisation. The Energy Community commitments have led to a plan of action for pollution reduction from combustion plants and although the plan may be delayed and although the focus is on pollutants other than CO2, there is hope that these commitments will be met in the medium to long term. The investment policy environment for producing renewable energy remains challenging. A complex institutional and legislative framework for renewable energy investment and production is in place. Administrative hurdles are a key barrier to renewable energy production and related investment. Permitting procedures to set up plants for renewable energy production in Ukraine are relatively burdensome. Accessing 47

the power network from new renewable plants is difficult in practice . Grid-related challenges also exist. There is poor transmission capacity in some areas, and there are large transmission and distribution losses (3 per cent and 12 per cent respectively in 2008). Small-scale RE generation grid connections are not currently possible.

(OECD, 2012)

The imperative for increasing energy security and the drive away from gas imports will in the medium term increase the share of coal in the economy. Increasing efficiencies will be required to limit the resulting increase in CO2 emissions. Nuclear power prices do not reflect the full costs of operation, safety and efficiency upgrades and investment requirements for new capacity building. Identified measures and mechanisms Internationally, it has been found that a coherent and compelling energy vision and strategy is important to promoting renewable energy growth. Streamlined administrative procedures can facilitate investment in renewable energy production. Better conditions for accessing the electricity grid can further enhance the business environment for renewable energy producers. (OECD, 2012) Old and depreciated assets need to be gradually phased out and replaced with new assets meeting highest efficiency levels. The investment climate will need to be significantly improved to attract investment into modernization of assets. Power transmission in weakest areas needs to be strengthened, and power transmission losses need to be reduced. A timeline and pathway needs to be set for power market to become more competitive. There is significant potential for shale gas extraction in Ukraine. There should be an increasing share of fuel with low specific carbon content in the fuel balance of "carbon" power plants (TPPs and CHPs) by partial or complete substitution of coal for natural and/or shale gas, gas from coal deposits and methane from gas hydrates. Staged increased in residential tariffs are required, while subsidies may remain for the most vulnerable groups. Small-scale RE generation grid connections need to become viable. Barriers to efficient distribution of power produced at NPPs need to be removed, particularly in relation to tariffs. Identified policies and policy approaches The aspirations for the countryâ&#x20AC;&#x2122;s power sector should be to first and foremost increase the efficiencies of the countryâ&#x20AC;&#x2122;s existing power assets to a level that meets international best practice. Fulfilling the Energy Community commitments for thermal power plants is a good starting point towards this. Subsidies to fossilfuel based generation should be gradually moved to low carbon and renewable energy generation. The aspiration should then be to grow zero and low carbon energy generation significantly, but in the most optimised and cost-effective way as possible so that state subsidies are minimised â&#x20AC;&#x201C; this mix will include renewable energy, hydro, nuclear as well as co-firing of biomass with coal in TPPs. A lower carbon and highly efficient power generation industry will also help Ukraine in the long term in expanding power exports.

The economic opportunity of the international low carbon drive should not be missed by Ukraine. In the medium and long term, policy-makers should look to use the countryâ&#x20AC;&#x2122;s skilled workforce and various strengths and comparative advantages to find and occupy niches of excellence in the low carbon power generation sector. In manufacturing for example, some wind turbine components are built in Ukraine, and policy makers should look to support this industry with incentives for expansion. Within the services industries, long-term opportunities will likely exist internationally for engineering skills in relation to smart grids. With these aspirations in mind, a range of policies are required for the power sector. To begin with, and as mentioned before, an explicit and optimised carbon pricing policy should be put in place. In the short term, this can take the form of an optimised carbon tax (optimising the current fiscal charge on carbon). In the medium term, a cap-and-trade scheme potentially linked to the EU Emissions Trading Scheme will help guide investments onto a lower carbon trajectory. Although Ukraine has a detailed draft Energy Strategy, a more comprehensive vision for low carbon energy production is needed, to boost investor confidence in this space. This should cover step-by-step improved requirements and standards on the following: tariffs; generation efficiency standards; improved competition; low carbon and renewable technology mix, and aggressive reductions on grid carbon factors. The existing 11 per cent Renewable Energy target should be broken down into different sub-sectors with associated mechanisms/ incentives, to provide certainty to investors and to ensure diversity of supply options. Streamlining the administrative procedures would speed up the process for setting up plants that produce renewable energy, increase transparency and reduce costs. Improving conditions for access to the wholesale electricity market and granting the green tariff to new plants would enhance the investment attractiveness of renewable energy. In addition to the policies relating to carbon pricing, competition and procedures, some targeted incentives are also required. The existing feed-in-tariffs (FIT) for renewable energy generation in Ukraine are among the worldâ&#x20AC;&#x2122;s highest, and have proven to be effective in encouraging deployment of wind and solar projects. International experience shows that FITs, priced right, can be more effective than renewable energy obligations and 48

allowances as in the UK Renewable Energy Obligation (ROC) scheme . However it is uncertain if the Ukrainian FITs are priced at a sustainable level. A review should be undertaken with a view towards optimising FITs across all major renewable energy technology types in Ukraine. Manufacturing or sales-related subsidies and tax reliefs should be introduced for renewable and low carbon energy technologies. There are implicit subsidies for fossil fuel production and these should be reduced over the coming few years. Tax incentives should be designed for enterprises which introduce energy efficiency measures (replacement of old CHPs with new more efficient technologies).

LSE, 2011

Investment policy for nuclear power stations needs to be designed and published for consultation. This policy should require that nuclear power prices cover their full costs â&#x20AC;&#x201C; the tariff setting process must include an analysis of full long-term marginal costs and investment requirements. These will include funding for safety upgrades of existing plants, operating life extensions, spent fuel management, new capacity build and decommissioning. In the medium term, grants and funding for domestic-scale feed-in tariffs to be implemented, along with grid connection mechanisms. A state investment fund needs to be set up for infrastructure development and replacement, drawing in private finance as well. This should operate on a commercial basis. All power companies should be required to publish plans for low carbon and renewable energy development. The full potential of hydropower should be fulfilled, which would improve energy independence and increase much needed flexible generation capacity. Support could be provided through a state investment fund. NERC should be facilitated to introduce incentive-based tariff methodology for distribution and transmission networks, which can deliver required investments in modernisation and cost reductions. The long-term aspiration in the power sector should be to have the â&#x20AC;&#x2DC;cleanestâ&#x20AC;&#x2122; and most efficient power generation mix and power distribution infrastructure. Smart grids can help integrate renewable energy in the most efficient manner. Therefore, in the medium and long term, policy-makers should look at ways to benefit from smart grid development work being conducted in other parts of Europe and the world. To begin with, learning collaborations should be started immediately to help the Ukrainian technical and academic sectors to gain knowledge about the work. In the medium term, policy-makers should look to work with international donors to design pilot smart grid programmes to gain knowledge on implementation. Similarly, policy-makers should ensure that the Ukrainian academic sector is able to participate in international work on carbon capture and storage; with a view towards developing in-country expertise to help in development of pilot projects in the medium to long term.

3.4 FOSSIL FUEL MINING, EXTRACTION AND TRANSPORTATION Introduction Ukraine has plenty of fossil fuel reserves and is also well placed geographically where natural gas pipelines from Russia pass through its territory to reach Western Europe. This section focuses on coal mining and gas distribution, both of which are major sources of GHG emissions in the form of fugitive methane, as well as some energy-related CO2 emissions arising from the processes of coal extraction and natural gas extraction. Coal reserves are very plentiful, and production is around 80 million tonnes per year. Natural gas reserves are also quite high, although over two-third of natural gas consumed is now imported. There is significant potential for shale gas extraction in Ukraine. It has been estimated that Ukraine can meet 49

its own gas demands fully from domestic production by 2030 . Almost 80 per cent of EU imports of Russian gas travelling through its territory. In addition to its substantial gas transmission and distribution network, Ukraine also has vast gas storage capacity. The main emissions in this sector are from leakage-related methane and CO2 from fuel combustion in extraction of fossil fuels. Coal mining results in methane leakage from mine ventilation, and natural gas extraction leads to methane leakage from gas wells and volatile leakages from gas plants. There are also significant methane leakages in natural gas transportation pipelines, primarily from fitting seals. There are also gas losses due to technological gas discharging and gas combustion for gas transportation. The draft Energy Strategy calls for more energy security and increase in extraction of domestic coal, oil and gas. However in the long term, out of all fossil fuels, priority needs to be given to natural and shale gas simply due to the lower carbon content of these fuels per unit of energy.

Sector-specific challenges Ukraineâ&#x20AC;&#x2122;s domestic gas production is stagnating, if not declining, whereas the country has untapped conventional and unconventional gas resources. The country has potential to meet its gas consumption with domestic production by 2030. Yet, without comprehensive reforms and foreign investment, it will not be able to increase domestic gas production and significantly increase Ukraineâ&#x20AC;&#x2122;s security of energy supply. The development of alternative gas and oil supply routes from Russia to Europe and shifts in gas demand in Europe are lowering volumes in transit through Ukraine and the revenues from that transit that constitute a significant element in Ukraineâ&#x20AC;&#x2122;s fiscal regime. Maintaining its current transit importance is a challenge for energy policy.

IEA, 2012

The main barrier to the reduction of leakages is the lack of investment. The Ukrainian gas sector is dominated by the vertically-integrated state owned company Naftogaz which is responsible for the majority of domestic production and transmission, and also distribution and supply. Due to the subsidised gas tariff to residential consumers, and due to non-payment of dues, Naftogaz has accumulated significant debt and is thus not in a good position to invest in upgrading its assets. The coal industry has a mix of private and public ownership; state controlled mines accounted for 65 per cent of the steam coal produced in 2009, with the remainder supplied by private mines. Some steel producers also own coking coal mines. The industry suffers from high costs and low profitability and has depended on state support to cover operating costs. As such, sector participants are not in a position to invest in the required improvements. Identified measures and mechanisms The Energy Community commitments include implementation of Directive 2003/55/EC concerning common rules for the internal market in natural gas. The Directive specifies key principles of market liberalization: Independent Regulator; Equal Access; Independence of System Operators; Unbundling of vertically integrated companies; Protection of Consumers; Information Exchange. The government and the NERC have achieved certain progress in development and implementation of secondary legislation, and the ongoing restructuring of NJSC Naftogaz of Ukraine is designed to help implementation of these commitments. Both the legislation and the restructuring need to be completed as soon as possible. Methane leakage from coal mining can be reduced by: ď&#x201A;ˇ Degassing of active coal mines; ď&#x201A;ˇ Methane capture from ventilation systems; ď&#x201A;ˇ Extraction of coal bed methane by well drilling. Methane leakage from natural gas extraction processes will need to be minimised through reconstruction and major overhauls of the underground gas storage facilities, gas transportation infrastructure, and upgrading of gas measuring and distribution facilities. Some of the measures required include: the replacement of compressor seals; replacement of high-bleed pneumatic devices; direct inspection and maintenance at compressor stations, and across the distribution network. Energy saving measures will also need to be implemented during coal mining and natural gas extraction. Measures include: modernization and reconstruction of compressor stations; replacing gas turbine engines and gas compressors; and efficient use of waste heat. Natural gas and potential shale gas reserves can help Ukraine become self-sufficient in gas in the coming decades, and also reduce environmental impacts by reducing the need for coal. An adequate market framework is required to ensure that these resources are tapped.

Identified policies and policy approaches Gas market reform should be designed with a view to incentivizing development from conventional and unconventional sources. Components of the market reform would include:  Development of a clear, transparent and predictable regime for gas exploration and production, including transparent tender/auction procedures, licence terms, fiscal regimes and regulatory requirements. The regime should ensure stability and predictability of exploration and production throughout the licence terms.  Incentives to attract private investment in the recent technologies that are required to maximise production from mature fields. Streamline contractual and fiscal regimes, and allow fiscal incentive schemes for technology related investments.  Removal of the two-tier natural gas tariff and replace non-economic minimum fixed purchase price requirement for domestically produced gas with economically justified gas prices.  Establishment of a clear and transparent regulatory framework for unconventional gas development, including technical and environmental regulations.  Development of pipeline construction procedures (including permits, standards and technical requirements) and guarantees for fair and predictable third-party access to existing pipelines. Coal mining improvement plans need to be developed, with emphasis on enabling finance for capture and use of coal mine methane. As there is a major switch from gas to coal being undertaken in Ukraine, international investment could be sought on the back of state guarantees for demand. The multilateral development banks could also be approached to provide investment in this activity.

3.5 MANUFACTURING Introduction With plentiful natural resources, Ukraine has a strong manufacturing industry. Metals and mining is the most important, and is represented by ferrous and non-ferrous metallurgy which includes a variety of processing stages, from mining and raw materials enrichment, to production of metals and alloys. The other important sectors are Cement, Ammonia and Lime. Ferrous metallurgy produces iron ore and ferrous metals including steel, pig iron and alloys of iron with other metals (such as stainless steel and other types of alloyed steel). Nonferrous metallurgy produces aluminium, copper, zinc, titanium, nickel, magnesium, platinum, gold, silver as well as other non-ferrous metals including their alloys. Ukraine’s metals and mining sector has some significant competitive advantages: strong internal metal consumption; rich and suitably located resource base (iron ore, coking coal, cheap electricity); developed transport network and proximity to global markets; high degree of vertical integration; skilled workforce. The share of non-ferrous industry in the structure of Ukrainian GDP is relatively small (less than 5 per cent in 2010). In contrast, due to literally immense proven and probable reserves of iron ore (even though this is of low iron content), the ferrous subindustry has strong potential and historically has played a key role in Ukrainian economy. In recent years, ferrous metallurgy has contributed approximately 20-25 per cent into GDP and generated approximately 30-35 per cent of Ukrainian export. High export orientation of entities representing Ukrainian metals and mining sector (80 per cent of the output would normally go to export), 51

positions Ukraine among key global players. Based on the export statistics for 2011, Ukraine is the 5th largest iron ore exporting country and 6th largest steel exporting country in the world, exporting 34m tons of iron ore and 26m tons of steel respectively. In spite of Ukraineâ&#x20AC;&#x2122;s currently strong ranking, it has been estimated that the metal and mining sector needs to invest approximately USD 15-20 bn within a decade to overcome existing technological gaps. Without intensive modernization of heavily depreciated production facilities, minimization of negative environmental impact and long-awaited technology changeover, in the medium perspective Ukrainian metal and mining producers may lose their leadership due to inability to further challenge technological superiority of other global players. 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, a number of ferroalloy plants and more than 100 companies specializing in scrap and waste metals reprocessing. Within the chemical industry, most relevant to greenhouse gas emissions is the sub-sector of nitric, mineral and chemical fertilisers. In relation to the cement sector, the most significant sources of emissions are the calcination of carbon materials in clinker production, and the fuel combustion for creating high temperature calcination conditions. Sector-specific challenges Apart from the cement sector, there is extremely high depreciation in equipment throughout all sub-sectors of manufacturing industry. For example, the power intensity of ammonia production in Ukraine is more than 1.5 times that of some countries. Significant emissions arise from pig iron production (blast-furnace process). Fuel efficiencies can be improved quite significantly. Imported coking coal is used for pig iron production and fuel efficiencies will lead to wider benefits for the economy. Metallurgy is a major source of foreign exchange for Ukraine (20 â&#x20AC;&#x201C; 30 per cent), with approx 70 per cent of manufactured goods exported. However demand from key markets such as Middle East, Turkey and South East Asia has declined rapidly as they have developed their own infrastructure or can source their goods from elsewhere. Despite this, the sector is seen as profitable due to low labour costs and good access to ports. Experts are of the opinion that international competition will probably drive a focus on efficiencies in the next 5-10 years, however full-scale renewal may not occur without intervention. The sector currently produces mostly low value goods and there could be a focus on producing higher-value goods. In relation to Ammonia production, the costs are high as the price for natural gas (the source of hydrogen in the ammonia production process) is high. Production may increase significantly in the next few decades in line with agricultural sector projections. This will lead to significantly increased emissions. Remoteness of steel manufacture operations makes it difficult to use blast furnace slag in cement production. 52

Identified measures and mechanisms The metals and chemicals industries would both benefit significantly from refurbishment projects, as quick payback periods should be possible through the replacement of obsolete technologies. Investment case for energy efficiency improvements, equipment modernization and process efficiency measures should be developed and implemented in priority areas, such as: 

Fuel efficiency, including a wide range of sector-specific and cross-cutting measures including energy management systems, process optimisation, waste heat recovery and more efficient furnaces and boilers



Power efficiency, with cross-cutting measures such as more efficient motors, drives and pumps; improvements to compressed air; Replacement of open hearth furnaces in steel production; also sectorspecific measures especially in the metallurgy sector – smelters, electric-arc furnaces, refining processes.



Fuel substitution, by switching to less carbon-intensive fuels. This would include a switch from coal or oil to natural gas; or from fossil fuels to waste fuels e.g. capture of coal dust



Innovations such as Ammonia production using electrolysis at hydro power plants

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; implementation of continuous steel rolling; and coal dust capture and use as fuel. The developed investment cases should be marketed to national and international investors. What is needed in the long term, however, is newly built facilities using the most energy efficient technologies available. The natural need for a high percentage of facility replacement in many manufacturing sectors provides an opportunity for emissions reduction by the installation of highly efficient new manufacturing facilities. According to local experts, scrap metal is now exported; this is a valuable resource which should rather be used domestically. Identified policies and policy approaches As mentioned previously, carbon pricing mechanisms are being improved and developed already and these will apply to the major manufacturing sectors. Funding support should be provided for studies to map opportunities for sustainable manufacturing and development of investment cases as identified above. The studies should include the establishment of production energy and emissions intensity measurement methodologies. Funding competitions should be run for energy efficiency pilots in all major manufacturing sectors, with funding awarded to the best proposals. There should be full transparency in the process, and the solutions received should be widely disseminated.

Customs policies should be improved to level the influence of subsidizing refining in petroleum products manufacture in petroleum product manufacturing countries. Intensity-based emissions limits should be introduced in all sub-sectors, to be progressively increased. State-backed investment products (loans, guarantees, equity) should be offered for fixed asset replacement. Import duty exemptions should be provided for emissions reducing technologies. Technology sharing programmes could be run in partnership with selected countries, to re-establish preeminence of Ukrainian manufacturing expertise.

3.6 WASTE Introduction Solid waste treatment in Ukraine is very far behind practices used in western European countries such as Germany or the UK. It is one of the main sources of soil and groundwater pollution. Ukraine produces between 10 and 12 million tonnes of municipal solid waste per year, and this is expected to grow in line with expected GDP growth until it reaches per capita levels comparable with rich countries. Most solid waste in Ukraine is put into landfills, of which only approximately 30 per cent can be said to be managed landfills. The majority of waste is put into old, inefficient and unmanaged landfills. According to Invest Ukraine (citing MDRC), the waste streams in 2011 were paper (2.5 m tons), metals (425,000 tons), plastics (400,000 tons) â&#x20AC;&#x201C; with the rest being mainly organic waste. In 2011, the UNDP estimated the value of raw material potential in case of introduction of separate waste collection and waste recycling would amount to circa UAH 1.3 bn (about EUR 120m).

Ukraine MSW disposal/ treatment methods, 2011 Source: Invest Ukraine & Deloitte (2011) A modern waste system infrastructure needs to be built in Ukraine virtually from scratch, comprising: 54

      

The establishment of accounting and control systems of waste disposal; Implementation of educational projects and other measures for shaping public culture of separate waste collection; Introduction of separate solid waste collection; Construction of modern plants for processing MSW; Construction or modernization of plants for processing secondary raw materials and/or usage of secondary fuel (RDF); Construction of new landfills; Extension of existing landfills and reclamation of closed landfills.

Efforts towards this have already begun and the Ukrainian government is currently implementing a number of initiatives at the national level:  



National project “Clean City” (under the patronage of the President of Ukraine) has mandated the construction of waste processing plants in 10 regions of Ukraine on terms of public-private partnership. Implementation of a number of legislative initiatives in order to reform and harmonize domestic standards with the relevant EU directives; e.g. ban on disposal of unprocessed waste; implementation of a green tariff for energy produced from waste and increasing consumer rights and responsibilities on waste. A 30 billion hryvnia ‘Energy from Biogas’ project has been designed and announced, however its implementation process is not yet completely clear as many legislative and investment barriers exist.

Source: Invest Ukraine (2011) In January 2013, the Cabinet of Ministers of Ukraine adopted a Concept of the National Programme on Waste Management for the period 2013-2020 and gave instructions to the Ministry of Ecology and Natural Resources of Ukraine together with other interested central and local authorities to develop and submit in six months to the Cabinet of Ministers of Ukraine the draft of National Programme on Waste Treatment for the years 2013-2020. The concept involves reducing the number of waste treatment facilities that do not meet 55

sanitary requirements, the release of land after closure of landfills and dumps, increasing the collection, 50

storage, processing and disposal of waste as secondary raw materials . Sector-specific challenges The main GHG in the waste sector is methane, arising from landfilled organic waste and from wastewater. Emissions have been steadily increasing for the past decade due to increase in waste generation, and very few waste management policies. No single agency has been responsible for waste handling. Only approximately 75 per cent of population have access to waste collection service. Some waste, especially in rural areas, does not go to well-managed landfills and causes contamination 0ver 6,000 official landfills exist, plus many more illegal ones. There is an urgent need to consolidate and potentially open 50-100 larger, properly managed landfill sites. Land plot allocation for landfills is a significant challenge. The most significant challenges in this sector include the following:  Low landfill fees make it difficult for other treatment providers to compete;  Local municipalities are often in charge of landfill operation but lack the capital to manage them properly;  Some sorting facilities are now available in urban areas but are often not very sophisticated;  Incinerators do not produce power, and the heat produced is only used in a limited manner due to competition with the municipal boilers. Incinerators are paid a lowly €10 per tonne;  Many residential buildings have garbage chutes which do not facilitate source-segregation;  Large overseas companies are willing to undertake waste collection contracts however seem less willing to take on long-term liabilities such as waste treatment due to concerns on policy and political environment. Good waste treatment projects do exist e.g. RDF production feeding the cement industry, however they are few and far between. Identified measures and mechanisms Measures that will help improve the outcomes from the waste sector include:  Landfill gas capture and energy generation  Segregated collections  Modern materials recycling and composting facilities  Energy generation from solid waste, organic waste and sewage sludge  Existing national project “Energy from Biogas” The first step to improve the waste sector clearly involves reducing the number of waste treatment facilities that do not meet sanitary requirements, and either retrofitting existing, or creating large modern landfills. Landfill gas capture and energy generation technologies need to be installed. The second step would be to increase source segregation and recycling and re-use. Pilot projects should be run in different municipalities and with different companies, to trial the most efficient ways of material segregation. Alongside, a campaign will need to be run on waste reduction, re-use and recycling.

Concept of the National Programme on Waste Management for 2013-2020

Third, long-term waste management contracts will be required, with targets built in for gradual increase in the proportion of waste recycled and re-used. If international investors and private companies are to be involved, measures will need to be taken to improve confidence on contractual terms. Local waste treatment firms should be facilitated to partner with more experienced firms to improve expertise in waste treatment technologies. Support should be offered in finding and creating domestic and international markets for recycled materials. Energy generation from biogas should become a feature at sewage treatment facilities.

Identified policies and policy approaches To improve the legislation of Ukraine in the field of waste treatment and its harmonization with the legislation of the European Union, the provisions of the following directives should be taken into consideration:    

The Revised Waste Framework Directive (2008/98/EC) of December 12, 2008; The Landfill Directive (99/31/EC) of July 16, 1999; The Waste Incineration Directive (2000/76/EC) of December 28, 2002; The Packaging and Packaging Waste Directive (94/62/EC) of December 31, 1994.

Clear short and long-term targets need to be defined for municipalities, in relation to: landfill standards to be met; landfill gas capture and use for energy generation; re-use and recycling targets; energy from waste production; and in the long term, a ‘carbon target’ for waste disposal solutions. Where an energy-from-waste facility is planned under the existing ‘Clean City’ project, this should be taken into consideration while setting these targets. In the medium term, a landfill tax could be introduced, rising over time to a level where most other disposal methods become competitive. Alongside this, there should be plans made for investment into the technologies and processed that meet the required carbon and environmental standards Awareness campaigns should be run the economic benefits of waste reduction, re-use and recycling Subsidies could be provided for pilot projects on the condition that results will be publicised to inform wider industry of commercial opportunities. Support should be provided for local firms to gain expertise and technology for waste treatment; and there could be support for R&D for refinement of newer technologies. Markets for recycled and reprocessed waste need to be identified and facilitated by government to begin with. The green tariff for electricity production from biogas, particularly biogas from MSW landfills and anaerobic digestion facilities should be optimized according to commercial and financial realities. In the long term, the country should participate in new technology and process development e.g. in hydrogen generation from biogas, for use in transport fuels.

3.7 TRANSPORT Introduction Since independence and prior to the global recession, Ukraine’s passenger car market had seen very high growth. Post recession, it is again seeing some of the fastest growth in Europe. After Russia and Poland, rd

Ukraine is the 3 largest passenger car market in Central and Eastern Europe. Railways have traditionally dominated freight transport although here as well, road transport is expanding with more trucks on the road. Transport accounts for 11 per cent of total emissions in Ukraine and the energy intensity of the sector is low 51

when compared to the EU27 average . However, this may change in future since incomes are growing and car ownership is increasing. Gasoline and diesel fuel are predominantly used in road transport. However, there is an increasing tendency toward the use of liquefied petroleum gas (LPG) associated with increase in prices of conventional fuels. The volumes of LPG consumption increased by four times between 2000 and 2010. Consumption of compressed natural gas (CNG) also increased by four times between 2000 and 2007, but during the period 2007-2010 there was a reverse trend of CNG consumption in transport due to the sharp increase in gas prices. Even so, as of 2010 the total share of CO2 emissions from the use of LPG and CNG in road transport was more than 10 per cent of the total emissions of the industry from combustion of motor fuels. 52

The number of registered passenger cars increased from 116 to 148 per 1,000 people from 2003 to 2010 . However, the number of cars that are actually in use is much lower, due to a big share of obsolete vehicles in Ukraine’s total fleet of vehicles structure. The obsolete vehicles remain registered, but actually are not used. 53

Taking into account the estimates , the number of cars in use was only 42 and 76 per 1000 people in 2003 and 2010 respectively. At the same time, the number of cars in the EU in 2010 ranged from 201 per thousand 54

people in Romania to 700 in Luxembourg . As such it is difficult not to predict a very significant increase in the number of cars in Ukraine in the coming years, and it is expected that the trend of increase of the share of road transport in total CO2 emissions will continue. An environmental analysis of the vehicle fleet structure

showed that more than 70 per cent of the total

registered vehicles in Ukraine comply with Euro-0 standard. Outdated fleet structure and unsatisfactory technical condition of vehicles, along with the problems of mass market penetration of low-quality fuels, discrepancy between current transport infrastructure and modern needs contribute to the further aggravation of environmental problems associated with the emission of pollutants into the air.

UNECE, 2010

http://data.worldbank.org/indicator/IS.VEH.PCAR.P3.

Report of research "Development of methods for calculation and determination of GHG emissions from mobile sources." State

Scientific Library of Ukraine (UDC 621.43.068:543.27, № state. Registration 0112U001736) (in Ukrainian). 54

European Commission “Energy, transport and environment indicators” 2012 - 234 pp.

http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-DK-12-001/EN/KS-DK-12-001-EN.PDF. 55

А.Redziuk, V. Ustymenko, О. Klymenko, О. Bondar. Introduction of environmental standards Euro-3 - Euro-6 in Ukraine, analysis of the

vehicle fleet structure by environmental characteristics // Avtoshlyahovyk Ukrainy, #4, 2011- pp. 2-6 (in Ukrainian).

The Transport Strategy of Ukraine until 2020 envisages the following main areas of road transport development aimed at reducing impact on the environment:  Improvement of the legal framework for environmental protection, energy efficiency and use of alternative fuels in road transport;  Introduction of modern European technology of safe, environmentally friendly and energy-efficient road transport;  Phased implementation of "Euro" international environmental standards for vehicles and motor fuels;  Providing (using the EU experience) tools to monitor compliance with the requirements of prescribed norms as well as technical basis for functioning of effective state regulation system;  Diversification of energy supply, introduction of an effective and transparent mechanism to stimulate consumption of alternative motor fuels, including bio-fuels;  Strengthening of state control over the quality of fuels and lubricants applied when using vehicles;  Reducing the energy intensity of services, ensuring an efficient use of fuel and energy resources with optimization of energy consumption system and increasing the share of alternative fuels;  Improving the technical condition of roads. 57

The Law of Ukraine provides for application of the following international environmental standards for the cars which pass the initial state registration in Ukraine:  Not lower than "EURO-3" – from January 1, 2013;  Not lower than "EURO-4" - from January 1, 2014;  Not lower than "EURO-5" - from January 1, 2016;  Not lower than "EURO-6" - from January 1, 2018. However, the described standards do not apply to the cars manufactured in Ukraine. The following policies for the development of road transport which contribute to the reduction of GHG emissions are in place in Ukraine:  Development of public transport, specifically electric;  Mandatory use of bioadditives (ethanol) in motor gasoline;  Promoting the use of bioadditives (ethanol) in motor gasoline by applying lower rates of environmental taxes compared to pure gasoline. 58

Development of public transport is laid out in two documents: Transport Strategy and the National 59

Development Programme of Public Electric Transport in 2007-2015 . Attention to the development of urban public transport is being drawn due to significant depreciation of the rolling stock, investments and budgeting constraints, change in traffic flows and the need to ensure people’s travelling. The need for its development is also urged by the decrease of a number of passengers, partial reimbursement of the transport services costs provided free of charge for privileged categories of citizens.

Resolution of the Cabinet of Ministers of Ukraine no. 2174-р as of 20.10.2010 “On approval of the Transport Strategy of Ukraine till

2020” (in Ukrainian). 57

The Law of Ukraine "On Amending the Law of Ukraine" On some issues of import to the customs territory of Ukraine and Vehicle

Registration "on wheeled vehicles" from 07.06.2012, № 5177-VI (in Ukrainian). 58

Resolution of the Cabinet of Ministers of Ukraine no. 2174-р as of 20.10.2010 “On approval of the Transport Strategy of Ukraine till

2020” (in Ukrainian). 59

Decree #1855 of the Cabinet of Ministers of Ukraine as of 29.12.2006 "On approval of the State program for municipal electric

transport development for 2007-2015” (in Ukrainian).

Ukraine has a strong production base for biofuels, especially bio-ethanol. Experts estimate that 2m tones of ethanol can be produced p.a. replacing 40 per cent of gasoline – with a high proportion of exports.

Sector-specific challenges The volume of public transport traffic is constantly declining, which demonstrates a lack of policy effectiveness for the development of public transport. This is influenced by the following key obstacles:  Inefficient management of transport companies that are chiefly municipal property;  Unprofitable activities, especially related to the privileged groups and partial compensation of expenses for such transportation by the state and local budgets;  Unsatisfactory technical condition of transport infrastructure;  Poor quality of travel services for the population;  Lack of investment in the sector. The principle impediments to the implementation of the policy on the use of bioadditives are that 1. There is no difference in the rate of environmental tax for mixed and pure gasoline; and 2. a large share of cars in Ukraine are not designed to use gasoline containing more than 5 per cent ethanol. Encouragement to use electric vehicles in big cities will not reduce their СО 2 emissions in Ukraine until the carbon intensity of the power grid reduces dramatically, with coal based generation being phased out and nuclear and renewable energy generation becoming more dominant. Adoption of differentiated rates of import duty and/or tax on car sales based on the value of specific GHG emissions will have an impact on the market price and, as a result will decrease competitiveness of domestic producers. However, it may give impetus to raising the domestic automotive industry up to a new technological level.

Identified policy approaches The gradual introduction of Euro standards to domestically produced cars has the potential to make a significant difference to the future emission trends from road transport in Ukraine. A differentiated road tax should be introduced on the basis of emissions, starting with imported cars but again with the gradual introduction of such taxes for domestically produced vehicles. PPP mechanisms should be used to construct, improve and maintain all major transport infrastructure – roads, tram, metro and rail projects. A new metro line is already being developed for Kiev on a PPP basis. The urban planning system will need to be sensitised towards best practices for the encouragement of public transport, and to support planning in ways that minimise the need to travel. In the planning and design of new neighbourhoods, there needs to be active attention paid to pedestrian friendliness and bicyclefriendliness. Any opportunities for increasing attractiveness of walking and cycling in existing neighbourhoods also should be taken. Car-sharing and car-hire solutions are now becoming commonplace in cities all across Europe and this should be supported in Ukrainian cities as well, through special incentives such as tax breaks for an initial period. 60

Increased use of flexible fuel vehicles and different blends of bio-ethanol in vehicles will help achieve optimal fuel mixes. A policy should be developed to introduce availability of two levels of biofuel blends â&#x20AC;&#x201C; 5 per cent and 10 per cent, to allow consumers to choose based on engine capability.

4 EXPERTS INTERVIEWED Mr. Mykhailo Koval, Director of International Cooperation, Joint Implementation and GHG Inventory Department, State Environmental Investment Agency of Ukraine. Mr. Olexandr Pysarenko, Deputy Director of the Department, Head of the International Cooperation Directorate, Project Director for the “Capacity Building for Low Carbon Growth in Ukraine” project. State Environmental Investment Agency of Ukraine. Mr. Valentin Shlikhta, Head of the GHG Inventory Department, State Environmental Investment Agency of Ukraine. Dr. Ihor Vol’chin, Head of Laboratory, Institute for Coal Technologies Dr. Volodymyr Ivashchenko, Chemical industry expert Dr. Vyacheslav Potapenko, Senior Research Fellow, Department of Environmental and Industrial Safety, National Institute for Strategic Studies A.G. Golubov, Chairman of the Ukrainian Chemists Union, Dr. V.P.Kovalevskiy, Ukrainian Chemists Union Oksana Butrym, Oleksiy Shkuratov, Bedernichek Timur, Land use and Forestry experts, Institute of Agroecology and Environmental Management under the National Academy of Agrarian Sciences of Ukraine Dr. V.A. Kovalenko, Laboratory of ecological and sanitary-epidemiological monitoring of AIC enterprises, chair of cattle hygiene and sanitation named after A.K. Skorohod’ko; Dr. V.І. Kostenko, Professor of Milk and Beef Production Technology Department, National Univercity of Life Environmental Science of Ukraine Mr. Vadim Mantula, Deputy Director for the Director General on Research and Development of Research Institute “Energostal”, and Alexander Kanevskiy, Head of Laboratory, Research Institute “Energostal” Dr. Borys Kostiukovskiy, Head of Department for Nuclear and Renewable Energy Development, Institute of General Energy of National Academy of Sciences of Ukraine Dr. L.V. Datsko, Institute of Water Problems and Melioration, Head of the Laboratory, Senior Research Fellow Iryna Stavchuk and Maria Storchylo, Environmental Experts, National Ecological Center of Ukraine Dr. Roman Podolets, Head of Energy and Fuel Development Stream, Department of the Sectoral Forecasting and Markets, Olexandr Diachuk, Senior Research Fellow, Institute of the Economic Forecasting, National Academy of Sciences of Ukraine Yury Matveev, Deputy Director, Head of Department of Biogas Technologies, Scientific Engineering Centre “Biomass” Dr. Oleksii Klymenko, Senior Research Fellow, State Enterprise “DerzhavtotransNDIproekt” Ms. Olga Semkiv, Carbon Project Manager, D.TEK Dr. Alexandr Sigal, Director of the Institute of Industrial Ecology, Head of the Boiler-construction Institute of the Technical Thermophysics, National Academy of Sciences of Ukraine

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