Approval of the Roadmap for Implementing the National Greenhouse Gas Emissions Trading System: Analysis of Key Aspects and Prospects for Ukraine
The Green Transition Office welcomes the recent approval by the Cabinet of Ministers of Ukraine of the roadmap for implementing the national Emissions Trading System (ETS). The implementation of the ETS is an extremely important strategic step in the process of decarbonizing Ukraine's economy, fulfilling commitments to achieve the Nationally Determined Contribution under the Paris Agreement, and enabling future integration with the European Emissions Trading System.
The Law of Ukraine "On the Basic Principles of State Climate Policy," adopted by the Verkhovna Rada on October 8, 2024, defines the ETS as a market mechanism for reducing greenhouse gas emissions and an instrument for implementing state climate policy.
ETS Mechanism as a Market Incentive for Decarbonization
The Emissions Trading System is a market instrument that encourages businesses to reduce greenhouse gas emissions in the most economically efficient way. Its principle involves setting an overall limit on greenhouse gas emissions for industries covered by the ETS. Companies receive some quotas for free and must purchase the remaining part on the market. Businesses that can operate with fewer emissions have the opportunity to sell excess quotas to other market participants.
The ETS system has proven its effectiveness as a market tool for emission reduction and is a potential powerful source of targeted financing for "green" projects. According to the European Commission's data for 2023, the EU's ETS has helped reduce emissions in the electricity, heat, and industrial sectors by 47.6% compared to 2005. Total payments from the ETS reached €200 billion (of which €113 billion was for the period 2021-2023). According to the revised ETS Directive in 2023, EU member states commit to using all revenues from the ETS for targeted expenditures related to climate and energy transition.
MRV as a Prerequisite for ETS Implementation
The Law of Ukraine "On the Basic Principles of State Climate Policy" states that the implementation of the emissions trading system is based on the results of monitoring, reporting, and verification (MRV) of greenhouse gas emissions.
On January 8, 2025, the Verkhovna Rada amended the Law of Ukraine "On the Principles of Monitoring, Reporting, and Verification of Greenhouse Gas Emissions," reinstating the mandatory nature of the monitoring, reporting, and verification system for greenhouse gas emissions in Ukraine. The monitoring and reporting system was implemented in Ukraine since 2021 but became voluntary due to martial law. The restoration of the mandatory MRV system became an extremely important and practical step toward implementing the ETS.
Justification and Feasibility of the Announced ETS Implementation Timelines
The ETS implementation plan includes three main stages: preparatory (2025-2027), pilot implementation of the ETS (from 2028), and operational implementation of the ETS (no earlier than 3 years after the cancellation of martial law). These timelines differ significantly from those expected earlier (ETS launch in 2026) – unfortunately, the war has made its adjustments.
Given the forced break in MRV implementation, as well as the fact that a large number of enterprises are currently in the combat zone and in temporarily occupied territories, the Law provides for the right of the facility operator not to submit operator reports for the 2021, 2022, and 2023 reporting years. For the 2024 reporting year, the operator has the right to submit a report by the end of the year in which this Law comes into force. Operators of installations located in the combat zone or in temporarily occupied territories resume MRV reporting after the resumption of operation of the installation.
Based on the experience of implementing the ETS in the EU, at least 2-3 years of full MRV functioning is necessary to ensure the establishment of data collection and verification processes, development of the reporting system, and formation of an objective picture of emissions to establish a baseline for greenhouse gas emissions in the ETS. Given this, the new ETS implementation timelines announced by the Government appear justified and realistic.
ETS Implementation as a Measure to Reduce the Impact of CBAM
The implementation of the Ukrainian ETS is also very important in view of the possibility of reducing the financial impact of CBAM (Carbon Border Adjustment Mechanism) on the Ukrainian economy, as from the beginning of 2026 (according to the current version of the CBAM Regulation), the mechanism of purchasing CBAM certificates for each ton of emissions "embedded" in goods imported into the EU comes into effect. Since, according to CBAM rules, the amount of funds that must be spent on purchasing CBAM certificates is reduced by the amount of carbon payments made in the country of origin of the goods, it is obvious that the implementation of the ETS in Ukraine will prevent the "leakage" of money outside the Ukrainian economy (what is paid in Ukraine remains in Ukraine). In practice, this will mean that as carbon prices in the ETS of Ukraine and the EU converge, the impact of CBAM on Ukrainian exporters will be minimized.
It should be noted that the Government is currently negotiating a temporary derogation for Ukraine from the CBAM due to the difficult economic situation resulting from the war, but such a postponement should not be viewed by Ukrainian exporters as a strategy for survival, let alone development in competitive foreign markets where carbon regulation mechanisms operate, because you won't get a "postponement" from competitors.
What Else Lies Ahead on the Path to ETS Implementation
In addition to developing the legislative framework and creating tools for the functioning of the ETS, further practical steps will have to include defining the concept and parameters of the pilot phase of the ETS, the scope of the ETS, the baseline for greenhouse gas emissions, the volume (quantity) and rules for the distribution of free quotas among different industries. That is, it will still be necessary to develop economically justified "rules" for ETS participants in such a way as to ensure a balance of supply and demand among participants, in which the price level of quotas should be both affordable for participants and high enough to stimulate them to reduce emissions.
Challenges and Opportunities for Ukrainian Business
The planned implementation of the ETS, the adopted Law of Ukraine "On Integrated Prevention and Control of Industrial Pollution," and the CBAM mechanism create a number of challenges for Ukrainian enterprises, especially energy-intensive ones. They are designed for gradual, stimulating implementation and strengthening of emission reduction requirements, and give business a clear signal about the need to prepare for technological and energy transition. It is obvious that conducting reconstruction, renovation, and modernization of enterprises, relying on the use of fossil energy resources, outdated, inefficient technologies and standards, in the new regulatory field is simply not expedient. Ukrainian companies, even in conditions of difficult financial situation, already now should be working on assessing the carbon footprint of their products, increasing energy efficiency of production, etc. Projects that meet these goals can qualify for "green" financing. Currently, the vast majority of international financial institutions have significantly changed their policies and regulations for project selection for financing, introduced a number of criteria regarding the green component in projects, etc. There are free programs for experience exchange and technical assistance provided by grant funds from partner countries, and opportunities to attract grant and concessional financing for the implementation of "green" projects.
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