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7.3. UKRAINIAN JI AND IET STRATEGY: HOW TO APPROACH THE INTERNATIONAL MARKET?

Joint Implementation. In order to maximize JI investment opportunities, Ukraine first of all should demonstrate that it could be a reliable and credible partner. The best strategy thus is to jump start with implementing some pilot projects, either through Activities Implemented Jointly or through Track 2 JI. Learning by doing will be very important for establishing local capacity, especially because Ukraine currently is the only country in the Central and Eastern Europe region, other then Slovenia, that have not implemented a single AIJ/JI project. Of no less importance is demonstrating to the international investor community the political will and interest in cooperation.

Implementation of first JI projects under Track 2 JI should coincide with the development of sound Track 1 institutions and the launching of the process to fulfill all Track 1 eligibility criteria, so that investors eventually are able to choose between Track 1 and Track 2, otherwise Track 1 will never be available. The Government should therefore strive to establish as soon as possible the necessary climate change institutions, especially the national inventory system, since both the domestic institutional processes and international review and determination of the eligibility are likely to consume considerable amount of time. The elements of Ukrainian national strategy for Track 1 JI are examined in detail in Chapter 5. Particular recommendations of Chapter 5 include:

• No restrictions on JI activities in the short- to mid -term, as long as they yield real emissions reductions. Non-additionality and low -hanging fruit issue should not be a concern in the period up to 2012, as JI is likely to act as enabler of FDI. At the same time, the introduction of best-available technology standards still remains advisable.

• No crediting period for JI projects beyond 2012 or until the country’s emissions target for 2013-17 has been defined.

• A mandatory re -validation of additionality in 2010-12 for any JI projects c laiming emission reductions after 2012.

In order to encourage investor interest, the Ukrainian government should provide all potential investors with clear and up-to-date information about their procedures, project eligibility criteria, decision-making authority, monitoring requirements, reporting formats, information requirements and approval processes, as well as procedures for public participation in JI oversight. Regulations that balance the need for transparency in implementing JI project with business confidentiality will need to be established. The decisions should not be left open for ad-hoc decision-making; moreover they should be ideally independent of political interests in order to demonstrate consistency in project approval and to ensure the political stability needed for JI investment. Institutional procedures should be streamlined as much as possible, for example by establishing a “one-stop shop” for investors. The organizational structure of

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the JI process and the mandates of the authorities should be clear and made available to ensure efficient and transparent JI process.

Additional efforts may need to be undertaken to improve general investment climate in the country by removing barriers to Foreign Direct Investment, such as inadequacies of the legal system, perverse subsidies to utilities and natural monopolies, overall quality of the offered investment projects (see Chapter 3 for details). For the sake of JI investment particularly, clear dispute resolution procedures may need to be established. For example, disputes could arise between certifying entities and investors or environmental NGOs; or between investors, project sponsors and credit buyers, on the one hand, and government, on the other, over host country regulatory or other decisions that allegedly have prevented an entity’s ability to earn credits from a project.

Strong contractual and financial institutions are another key element that enhances investor confidence. A stable and favorable investment climate is needed for both domes tic and foreign investors. Established property rights over emission reduction units as well as the system of the contract enforcement can significantly increase the willingness to invest in and insure the JI projects. Legislation that provides a clear basis for investment in general will also encourage JI investment.

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BOX 7.1 EXAMPLES OF INVESTMENT FUNDS FOR JI PROJECTS

Dexia-FondElec Energy Efficiency and Emission Reduction Fund is a 70M euro equity fund established by the European Bank for Reconstruction and Development (EBRD) to improve energy efficiency and reduce GHG emissions in Central and Eastern Europe. The fund is capitalized by the EBRD, Dexia Group, and several Japanese firms. It is managed by FondElec – a private equity fund management firm. The fund is focusing on energy service companies (ESCOs), district heating systems, and combined heat and power (CHP) projects.

Prototype Carbon Fund (PCF), opened in January 2000, is a $145M fund sponsored and managed by the World Bank to purchase carbon emissions reductions in renewable energy and other carbon offset projects in developing countries [and economies in transition] and distribute the carbon emissions reduction credits to PCF investors, which so far include 6 Northern countries governments and 15 private companies, including British Petroleum, RaboBank, Deutche Bank, and 6 Japanese electric utility companies. All PCF-supported projects must have the approval of the host country’s government. The PCF’s geographic focus is Africa, Latin America, and Central and Eastern Europe.

Renewable Energy and Energy-Efficiency Fund (REEF) was established by the International Finance Corporation (IFC) to invest in renewable energy and energy -efficiency projects in developing countries and economies in transition. The principal fund manager is Energy Investment Fund (EIF). The REEF, with $100M in equity and $100M in debt, will consider investments in projects with total capitalization requirements of between $1 and $100M. REEF may also make loans to projects or project sponsors on a bridge or permanent basis.

The Netherlands’ Emission Reduction Unit Procurement Tender (ERUPT) has completed three rounds of tendering for JI projects and may open a forth round in late 2003. ERUPT provides opportunities in that it:

• Encourages of major foreign investments without national government guarantee • Does not require a contribution from the local budget • Uses of the most advanced technology • Serves as a source of high quality regional employment during construction and operation • Offers ERU price calculated as the breakeven for project feasibility • Makes feasible small scale projects

The Government of Austria will offer financial support to companies that undertake projects aimed at cutting greenhouse ga s emissions abroad. For this purpose an annual 36 million euro has been set aside to purchase emissions credits for reductions achieved abroad by Austrian companies involved in joint implementation and clean development mechanism projects. The initiative is envisaged to resemble Dutch ERUPT and CERUPT programs.

Sources: http://www.ebrd.org; http://www.prototypecarbonfund.org; http://www.carboncredits.nl; http://www.pointcarbon.com

Emissions Trading. The strategy for engaging into international emissions trading should be primarily based on two considerations. Firstly, the decision of the US to withdraw from the Kyoto Protocol will have strong implications for Ukraine, as it most likely will reduce the price and demand for AAUs dramatically. Under the circumstances, Ukraine may decide whether to compete with other EITs or simply bank its surplus allowances for future commitment periods.

The decision on emissions trading must balance the vision of its social and economic development of Ukraine and a long-term (up to 2020) emission forecasts, which are covered in detail in Chapter 2. The conclusion of this study is that it can be advisable for Ukraine to engage in limited emissions trading, since it is unlikely that its GHG emissions in the commitment period w ill accede its Kyoto Protocol target, even if commitment period reserve is taken into account. It is especially important for the Ukrainian government to define AAUs volumes, and to choose the appropriate trading strategy to maximize IET revenues. To

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supplement basic guidelines for emissions trading set out in the Marrakech Accord84, we suggest the following strategy for participation in IET (see Chapter 5 for details):

• Start negotiations with potential buyers regarding sale of surplus AAU immediately.

• Sell about 1/3 of the surplus AAU (corresponding to 350 mln tonnes of ? ? 2). In case a price of $8.0 /t CO2e can be achieved (although this is optimistic, see Chapter 3), revenues of about $2.8 billion are generated during the first commitment period 2008-12. Ideally, a part of these revenues can already be received before 2008, through up-front payments.

• Reserve the remaining surplus AAUs (about 145 mln tonnes CO2) for sale at a later stage, or for Ukraine’s own use in the second commitment period, 2013-17. These reserve AAUs should not be sold until Ukraine’s emission target for the period 2013-17 has been defined, and until long-term development of carbon prices becomes more certain.

Relatively low operation costs represent an advantage of AAUs trade over ERUs trade (as ERUs need to be produced in JI projects), while its disadvantages include potential lower allowance prices and uncertainty over Ukraine’s future eligibility for trading. A transparent national registry for recording and tracking forward sales, as well as a transparent GHG inventory are essential for the success of emissions trading for Ukraine.

It is important to note that emissions trading entails certain political and financial risks, as the country that uses its surplus AAUs in the present, might not have the AAUs available to sell or use in the future. An appropriate governmental policy, supported by additional public expenditures, would be necessary in order to achieve further GHG emission reductions in Ukraine. It is recommendable therefore that a revolving fund for streamlining AAU revenues into GHG mitigation or other environmentally benign projects is established (as for example a Green Investment Scheme that is currently under discussion in Russia). In the longer-term, the national climate policy would benefit from such financial mechanism, as it would help Ukraine to overcome existing financial barriers to restructuring its carbon-intensive economy.

Establishment of such a scheme can substantially improve the ability of the Ukrainian government to market its AAUs, provided that transparent institutional structure has been set up for it and clear guidelines and decision-making procedures have been adopted for funding projects under its umbrella. Current political and economic constraints of potential AAU buyers indicate that there will be a sizable market for “greened” Ukrainian AAUs, with potential list buyers including the Government of Canada, some of the EU member states, Japanese and possibly European companies.

In the medium term, additional domestic policies and measures may be introduced to generate further emissions reductions which the Government could sell on the international

84 In accordance with these limits, each Party must maintain in its registry a “commitment period reserve” which

should not drop below 90% of the Party’s assigned amount or 100% of five times its most recently reviewed inventory, whichever is lowest.

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GHG market, for example a moderate governmental program to encourage renewal of the energy infrastructure and up-grading of industrial facilities, or a shift from existing taxes on income / labor to taxes on energy use and carbon emissions. In the longer term, Ukraine may also consider the introduction of a domestic GHG trading scheme involving large emitters such as e.g. power generators, metal producers, mining and cement companies.

7.4. TIMETABLE

According to the Marrakech accords, in order to be able to participate in the Kyoto Protocol mechanisms, a Party has to demonstrate that it has met eligibility requirements. A Party will be considered to have met the requirements 16 months after the submission of the report to facilitate the calculation of its Assigned Amount and to demonstrate its capacity to account for its emissions and Assigned Amount, unless the enf orcement branch of the compliance committee (JI Supervisory Committee) finds that it has not met the requirements. Determination of the eligibility can occur at an earlier date, if the enforcement branch has decided that it is not proceeding with any quest ions of implementation relating to these requirements indicated in reports of the expert review teams of the Kyoto Protocol and has transmitted this information to the secretariat.

The earliest date that the eligibility of countries to participate in JI can be determined is dependent on the date of the first COP/MOP. The earliest date that the Track 2 JI is likely to be operational partly depends on when the JI Supervisory Committee, a JI rule-making body under UNFCCC Secretariat, is established and functioning. The JI Supervisory Committee will at the earliest be established at the first Meeting of the Parties (MOP) of the Kyoto Protocol after it enters into force. Pending Russia’s ratification of the Protocol, the first MOP may convene in 2003 or 2004. The Supervisory Committee will accredit Independent Entities and each Track 2 JI project will have to be determined (validated) by an Independent Entity.

Thus, in order to be able to fully participate in Track 2 JI in 2006, already by the end of 2004 Ukraine needs to have established a JI focal point, to have elaborated its JI strategy and have established project selection and approval procedures. These are the key issues that need to be resolved to gain investor confidence in Track 2 JI cycle in Ukraine. The last two pieces of the puzzle, Assigned Amount and the national registry, will not be as urgent, since they require technical, rather then political solutions, and will also depend on the speed of relevant technical work at the UNFCCC Secretariat.

If Ukraine is to participate in the Kyoto Protocol under Track 1, as Annex I Party it should have in place, no later than one year prior to the start of the first commitment period (i.e. by the end of 2006), a national system for the estimation of anthropogenic emissions by sources and removals by sinks of all greenhouse gases not controlled by the Montreal Protocol according to the guidelines for national inventory system adopted by the Conference of Parties.

It is our recommendation that Ukraine proceeds with establishing the capacity to fulfill Track 1 eligibility requirements as soon as possible. Firstly, the sooner the eligibility information is

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submitted, the more the country will be able to benefit from the international review processes that will help Ukra ine to improve, in particular, its inventory systems. Secondly, it will cushion any potential delays in providing clarification, if such are requested to the JI Supervisory Committee. Thirdly, any delay in setting up national systems and institutions means some delay in participating in the mechanisms, since they are the eligibility requirements to participate. The suggested timeframe for building the national infrastructure for participation in the Kyoto Protocol is presented below:

FIGURE 7.1 SUGGESTED TIME S CHEDULE FOR BUILDING THE NATIONAL INFRASTRUCTURE FOR PARTICIPATION IN THE KYOTO PROTOCOL

2003 2004 2005 2006 2007

Designation of a JI/IET focal point

Development of national JI/ IT strategy

Elaboration of project selection criteria and procedures

Track 2 available è

National inventory system development

National registry developed and tested

Preparation of the annual inventories

Track 1 available è

Assigned Amount established and recorded

Preparation for IET and negotiation with purchasers

Eligibility determination

The actual transfers of emission allowances (AAUs and ERUs) to buyers will most likely only become possible around 2008. As noted in Chapter 5, this is because such transfers require design and installation of registries in Ukraine, the buyer countries as well as at the UNFCCC. In addition, Ukraine’s Assigned Amount for 2008-12 will have to be finally determined and physically issued into the registry before any Assigned Amount Units can be transferred. Due to their complexity, these tasks are unlikely to be completed before 2008. As a result, Ukraine cannot expect any major full-scale cash revenues from the direct sale of ERUs and AAUs before 2008.

Ukraine may, however, be able to benefit from forward contracts with buyers. Such contracts would stipulate the delivery, at a later date, of specified amounts of emissions allowances at a specified price. Ideally, some buyers may even be willing to pay a part of the purchase price up-front, before the actual delivery of the emission rights. When taking advantage of such opportunities, the buyers and the Ukrainian government will likely be willing to engage only if they see that the country is on track to fulfill eligibility requirements – the former would

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want to reduce potential delivery risks, while the latter needs to avoid financial liabilities. Thus, Ukraine may engage in Track 2 JI starting from 2004, and Track 1 JI from approximately 2006. With rega rd to the sale of surplus AAU, Ukraine should start preparations and negotiations immediately, in order to be able to start actually selling AAUs approximately in 2005-2006.

An important action stipulating JI investments in Ukraine will be the implementation of first JI projects. Continuously improved JI-related capacity in the country will further enhance the attractiveness of Ukraine as a JI host country. Below a suggested time table for project implementation and capacity building is sketched.

FIGURE 7.2 SUGGESTED TIME S CHEDULE FOR JI DEMONSTRATION PROJECTS AND CAPACITY BUILDING

2003 2004 2005 2006 2007

Presentation of potential JI projects to interested investors

such as the World Bank’s PCF

Contract negotiation on first projects, project approval by

Ukraine’s government

Implementation of first JI projects

Implementation of further JI projects

Capacity building on project design, base line

determination, financial project assessment

Capacity building on projet monitoring as well as

verification and certification (under JI track 1).Contract

negotiation training for IET

7.5. POSSIBLE SOURCES OF CAPACITY BUILDING ASSISTANCE

A number of government agencies and development organizations are active in the economies in transition:

Bilateral donors, i.e. the governments of countries interested in facilitating the implementation of their JI projects in Ukraine may be able to provide capacity building support to supplement their activities. For example, the Dutch Ministry of Economic Affairs, the Swedish Energy Agency, and the Japanese International Cooperation Agency have been previously engaged in capacity building activities in the region.

The European Commission has allocated 4 million Eur os for climate change assistance programs in the New Independent States through EuropeAid office. The proposed activities

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are: (1) capacity building to establish GHG inventories and national systems to estimate emissions and develop emission projections; ( 2) assistance with the development of networks and partnerships in scientific research and exchange of climate-related data and modeling results; (3) capacity building for emissions trading, JI, and CDM, including pilot projects.

International financial in stitutions may provide capacity building assistance through complementary funds such as PCFplus, a World Bank program that supplements the Prototype Carbon Fund (PCF) with activities in the area of outreach, research, and training. The objectives of the Program are to build capacity of host countries and the PCF participants, to enhance the operations and activities of the PCF and its partners, and to promote the market for and quality of GHG projects and emission reduction credits by reducing risks and transaction costs.

Global Environment Facility (GEF) provides assistance with capacity building in climate change through series of enabling activities85 and technical assistance in the framework of larger climate change mitigation projects that are being prepared for implementation in the country.

Fees from processing JI projects as well as revenues from AAU sales from transactions implemented under the umbrella of a specially designated fund may also become a sustainable and substantial resource for funding Ukraine’s capacity building needs.

7.6. CONCLUSION

The Plan of Action suggests that the Ukraine Government is to ensure that JI track 2 is available as soon as possible, at the latest by the end of the year 2004, so that ideally first demonstration projects can be implemented from year 2005 onwards86. These demonstration projects should be submitted to interested investors this year (2003) already and detailed contract negotiations should take place in the year 2004. JI track 1 should be made available by the end of year 2006 and IET by the end of year 2007, so contract negotiations on AAU sales can start before the requirements for IET are met in full.

Increased emphasis should be put on capacity building in Ukraine, which in the coming years should concentrate on project and baseline design, project development and financial project assessment. From the year 2005 onwards, capacities required for IET and JI track one become important issues.

85 Only non-Annex I countries are eligible for GEF UNFCCC enabling activities. GEF currently cannot fund

activities that are specifically directed at building capacity for Kyoto Protocol. 86 Note that Track 2 will most likely be fully operational in the year 2006 only, but Ukraine should have the

relevant institutions readily available in the year 2004, for details see detailed description within the chapter.

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ANNEX

ANNEX 1.1 KEY INDICATORS

FIGURE A1.1 ENERGY INTENSITY OF GDP (PPP) AND PER CAPITA IN 1999

Source: Estimated on: Key world energy statistics. – International Energy Agency. – Paris: Statistics Publications. – 2001

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FIGURE A1.2 EMISSIONS INTENSITY OF GDP (PPP) AND PER CAPITA IN 1999

Source: Estimated on: Key world energy statistics. – International Energy Agency. – Paris: Statistics Publications. – 2001

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ANNEX 2.1 PRICE ELASTICITY OF THE DEMAND BY THE TYPES OF FUEL AND SECTORS OF ECONOMY

TABLE A2.1 PRICE ELASTICITY OF THE DEMAND BY THE TYPES OF FUEL AND SECTORS OF ECONOMY

Category Venezuela Iran Kasakhstan Indonesia Russia South Africa China India Brazil Ukraine All countries Energy in total -0.3 -0.3 -0.4 -0.25 -0.6 Total: industry, -0.7 0.4 Total: public utilities -0.9 Oil products -0.5 -0.3 -0.25 -0.6 -0.5 Industry -0.3 -0.5 -025 -0,4 -0.25 -0.1 -0.25 -0.1 -0.3 -0.27 / -0.2 / -0.12 Electricity plants -0.75 -0.75 -0.75 -0.75 -0.75 -0.75 -0.75 -0.75 -0.75 / / -0.06 Agriculture -0.45 / -0.4 / 0.2 Construction industry -0.45 / -0.4 / 0.1 Transport -0.3 -0.5 -0.25 -0.2 -0.25 -0.4 -0.4 -0.1 -0.3 -0.21 / -0.1 / -0.2 -0.5 Public utilities -0.9 -0.5 -0.25 -0.1 -0.25 -0.2 -0.25 -1.0 -0.9 0.39 / 0.5 / 0.2 Households / / 2.4 Electricity -0.06 Industry -0.6 -0.5 -0.25 -0.0 -0.25 -0.3 -0.25 -0.1 -0.6 -0.07 Electricity plants Agriculture -0.15 Construction industry -0.12 Transport 0.02 Public utilities -0.1 -0.5 -0.25 -0.25 -0.2 -0.25 -0.1 -0.02 Households -0.05 Natural gas -0.1 Industry -0.1 -0.5 -0.25 -0.75 -0.25 -0.1 -0.1 -0.1 -0.1 Electricity plants -0.75 -0.75 -0.75 -0.75 -0.75 -0.75 -0.75 -0.75 -0.75 -0.1 Agriculture -0.2 Construction industry -0.1 Transport 0.1 Public utilities -0.5 -0.25 -0 1 -0.25 0.2 Households Raw coal -0.6 -0.6 -0.4 Industry -0.5 -0.25 -0,1 -0.25 -0 1 -0.1

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ANNEX 3.1 METHODOLOGY AND MODELS

There are two methodological approaches to the development of macroeconomic scenarios, energy balance and pollutants emission: bottom-up and top-down.

The bottom-up approach is characterized by a detailed analysis of some economic agents or groups of enterprises (sectors of economy, types of economic activity). Such approach, in the case of an enterprise, requires a large amount of data on financial indicators, production potential, inputs of resources and fuel, technological parameters, technical conditions of the equipment, experimental measures of real emission levels, etc. Besides, it is necessary to have an idea about the firm’s plans for the future, which depend on the market situation and on the competitors’ behavior. This approach provides a relatively reliable estimation of emission levels but it requires a lot of time and effort, therefore it is useful only for short -term analysis and/or for a specific sector of the economy. It is also very difficult to get requested information in a command system (due to confidentiality for non-governmental institutions) as well as in the market economy (confidentiality because of competition). In the framework of this research, this approach does not meet the purpose.

The top-down approach results in le ss exact emission estimation. Two kinds of top-down approaches can be used for analyzing economic systems: the macroeconomic approach (i.e. when the economy is treated as one process – “the weak model”) and the sectoral approach (i.e. when the economy is viewed as the aggregation of a few economic processes – “the strong model”). The first one can be used for express-estimation and gross emission level forecasts under the condition of stable econometric parameters in the retrospective period. The second one is instead used in the case of countries in transition. It does not avoid the drawback of producing low reliable forecasts for the long-term, but it provides a sufficient analysis of possible scenarios and key factors that influence GHG emission levels. This approach can be implemented using statistical data that, even if they are not extremely precise, reflect the main trends of the economic activity.

As a consequence of the description above, the Leontieff model is the most suitable to our purposes. The model is based on the matrix of input-output balance that currently is determined in Ukraine under the National Accounts system. During the process of calculating sector indices, the problem is that statistical reports do not reveal sector deflators. However, if the input-output balance for a few years is available, it is still possible to calculate the forecasted GDP Input and Output structure based on forecasted indices of development in prices for some sectors of the economy in relation to a base year (1999 in this case). It is worth mentioning that the investigations are made based on a classification of industries that was valid until 2001. According to the new system, that is more useful as the object of modeling in “input-output” model (one process – one product, that is approximately “clear” industry) input-output balance of Ukraine was not calculated. The definitions of industries are not always adequate to other market economies; therefore some corresponding explanations are included in the text (for example, in the analysis of energy consumption and energy statistics). Some computer models were developed using the input-output balance. The

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review of such algorithms is presented below. The top-down modeling approach is used for macroeconomic and industry levels. We start by the description of the macroeconomic approach, as it was used for the estimation and presentation of the first forecasts of GHG emission in Ukraine.

For the solution of the majority of problems, the project team applied the so-called “strong model” that, as mentioned before, is based on the static Leontieff model.

In the strong model, some methodical tricks proposed and designed by the developers of the VICTORIA 87 system are applied: first, the implementation of quasi dynamics, based on the recalculation of a static cost matrix depending on the assigned scenarios of numerous indexes, secondly, the implementation the algorithm of optimization of structure of economy on the basis of the different scenarios of export-import relationships, etc.

The assigned initial scenarios are divided into two groups: obligatory set and additional set. The scenarios that are needed for the solution of any task using the two level model are included into the obligatory set. The scenarios that are needed f or a special solution using the two level model are included into the additional set. Depending on the problem addressed, it is necessary to use those or another scenarios from the additional set. Therefore, the assigned initial scenarios for the strong model are the following.

Obligatory set:

1) GDP scenarios 2) GDP of economics sectors scenarios 3) Cost matrix 4) Maximum own production of economics sectors scenarios 5) Proportions of energy resources consumption scenarios 6) CO2 emission factors

Additional set:

7) Expenses changes by sectors owing to energy saving 8) Expenses changes by sectors owing to technological progress 9) Energy resources prices dynamics Methodology of Statistical Surveys and Energy Balance Forecasting

Quality of Input Data

Relations between the parameters of mining, import, export, processing and consumption are defined in the form of energy balance. This balance is the main source of information for determining the prospective volumes and directions of state energy flows. Reliability of energy balance parameters and their standard form are defined by the level of correspondence between the structure and methods of the country’s energy balance construction and real economic processes.

87 VICTORIA Software Developers Group. Version 3.0 Baltic Mercantile Ltd. User's Guide and Reference.

(VICTORIA is the intellectual integrated system for the investigation of macroeconomic and ecological consequences of various scenarios and energy policies in different countries and regions).

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The last fuel-energy balance of Ukraine as a Soviet Republic was prepared for the year 1990. Total energy balance report for the year 1995 was to be built in a form that, in many respects, was similar to the instructions for the 199088 report. However, due to the lack of financial resources, this report was not prepared. According to the current methodology, annual statistics on the production and consumption of energy resources were not aggregated and were published in separate tables, prepared by different departments of the Statistics Committee. The Ministry of Economy tried to aggregate data from different sectors and construct a draft total energy balance. The common form of analysis of energy flows efficiency is different, and it is based on the fact that primary balance of energy resources, balance of the energy-processing sector (balance of fuel-energy industry), and the balance of final energy consumption are separately distinguished within the total balance.

Methodology of Energy Forecasting

Long-term energy forecasts (even for countries with a stable economy) have a low level of correspondence to the eventual real values, no matter what methodology is used. Energy planning should be more directly linked to the analysis of developing energy consumption trends and situation on energy markets. However, the practice of forecasting and periodically updating of the forecasted parameters makes it possible to determine the interval of perspective demand changes with a certain level of reliability.

Taking into account a low level of reliability of retrospective energy and economic data, the use of econometric analysis in Ukraine is significantly limited. Therefore, this survey uses a combined approach, based on standard aggregated functions and comparative (instead of empirical) estimation of productive coefficients. This approach is used by IEA for the estimation of the level of demand for countries in transition, as well as by other institutions that deal with energy forecasting.

Methodology for GHG Emission Estimation

The calculation of GHG emissions is based on the Revised (1996) Guidelines for National Greenhouse Gas Inventories developed by the Intergovernmental Panel of Experts on Climate Change (IPCC)89.

The goal of the methodology recommended by IPCC is to provide the simplest realistic procedures of GHG emission estimation.

88The instruction on the fuel-energy balance construction, dated 1990 about the forms # 1-TEB and #1-TEB

(CB)/USSR State Statistics Committee, 1989 – 46p. 89 Updated Guiding Principles for the National Registration of GHG. Vol. 2: Manual on the GHG

/Intergovernmental group of experts on global warming questions. Edited by: Houton, D.T., Maira Filho, L.G., Lim, B., Trenton K., Mamatu, I., Bonduki, Y., Griggs, D.D., Kallander, B.A. 1996. ?

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ANNEX 4.1 SHORT REVIEW OF THE PROGRAMS FOR THE ENERGY SECTOR DEVELOPMENT

Ukrainian National Energy Program

The National Energy Program (NEP) (1996) determines the future development of the energy sector. The supply of energy resources is determined based on forecasted future need until 2010. During this period, according to the Ukrainian NEP, the target is to decrease the import energy resources by 69 Mtce compared with 1990 imports (39% reduction).

In the coal industry, the program includes the reconstruction of existing coal mines, construction of new ones, increase and stabilization of mining volumes. By the year 2010, coal production should increase to the level of 170 Mt of processed coal, which will satisfy the Ukrainian demand.

In the oil and gas industries, the plan includes essential growth in investments, improvement of resource productivity, and increase in gas and oil mining. Domestic production of oil is planned to be increased from 4.1 Mt in 1995 to 7.5 Mt in 2010, and production of gas from 18.2 to 35.3 Bm3.

In the same period, the NEP plans the reconstruction and modernization of electricity plants for a total capacity of 35.5 GW. This will increase their capacity by 2.7 GW. New plants will be built with a capacity of 21.2 GW, and old plants will be eliminated with a capacity of 6.1 GW. From the 32.4 GW of launched capacities of energy production system it is planned to reconstruct 22.5 GW according to the NEP. This will allow to increase the total la unched capacity by 22.5 GW. Equipment with the launched capacity of 3.1 GW will be taken out of use, 8.5 GW of new capacities will be implemented.

Suggestions prepared by the Ministry of Economy about the introduction of changes and amendments to the NEP of Ukraine until 2010, due to social and economic contingencies, were approved by the Decree of the Government dated 29 November 2000 #1757 “About the measures on the further implementation of the National energy program of Ukraine until 2010”.

Energy strategy of Ukraine until 2030 and in further perspective

The targets of the national energy policy are defined in the Recommendations proceeding from the Parliament discussions “Energy policy of Ukraine”, held on June 15, 2000, and in the Recommendations proceeding from the Parliament discussion “Energy strategy of Ukraine until 2030”, held on April 18, 2001.

The Energy Strategy Conception uses forecasts of the national economy development until 2030. In particular, it is forecasted that in 2001-2003 (end of the economic crisis), annual rates of GDP growth will be 4%-7%; they will be 8% in 2004-2007; 8% in 2020; and not more than 4.2% in further periods. According to the forecasts, GDP in 2030 will be 2.7 times higher than in 1990. The document stresses that, under these conditions, it is necessary to ensure a significant increase in energy efficiency.

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According to optimistic estimations, volumes of coal production can reach the level of 100 Mt in 2010. In particular, the increase of coal production in 2005 has to be 16.8 Mt, and in 2010, 23.8 Mt. The 72 coal mines with the highest production potential are planned to generate most of the growth. In order to support this alternative scenario of development, near 3B UAH annually has to be provided from the State budget.

From 1994 to 2000, extraction of natural gas grew by more than 1.8 times. Self-financing is in practice the only way to support and increase oil and gas production. In the period 2010-2015, it is possible to expect an increase in oil and condensate gas production to the level of 5.5-6 Mt.

The main task for the closest future must be finishing the construction of the energy blocks at Khmelnitsk and Rivne Nuclear energy stations. At the same time, the creation of a domestic nuclear-fuel cycle in Ukraine is a strategically important task. This will significantly increase the level of energy self-sufficiency in Ukraine. In addition, it is planned to finish the construction of a domestic storage place for radioactive waste.

Starting from 1997, a stabilization of the level of energy inputs in GDP has taken place, and in the further period until 2010 its significant reduction is forecasted. This allows us to expect that Ukraine will reach the European parameters of energy efficiency by 2010.

Programs for development of energy sector branches.

Coal industry

The volume of mining forecasted by the National Energy Program (170 Mt in 2010) seems not to be realistic. In the “Conception of Structural Reforms in the Coal Industry of Ukraine Under the Conditions of Market Relations Development”, prepared by the Ministry of Coal industry in 1995, the real potential of the industry is set at the level of 170 Mt per year. The same source states that, if the current trends remain unchanged, the annual production will decrease to the level of 50-55 Mt. According to forecasts made in 1999 by coal industry experts, the annual production can be maintained at the level of 80 or 130 Mt (depending upon state subsidies).

Based on the analysis of the industry, there is a belief that the volumes of production, forecasted by the program “Coal – 2005” at the level of 157.7 Mt annually, will not be reached.

Based on the previous analysis, and taking into account the competition on the world market, the production of coal in Ukraine can be forecasted at the level of 95-105 Mt in 2005, 100-110 Mt in 2010, and 105-120 Mt in 2015. Supply of processed coal from own sources will be at the level of 75-83 Mt in 2005, 80-88 Mt in 2010 and 85-93 Mt in 2015.

The planned development of the coal industry requires state subsidies, and it is higher than if the industry were left to compete freely in the world market. In spite of this, domestic production of coal will not be able to satisfy domestic demand, therefore the country will have to import processed coal, depending on different scenarios of economic development, in the amount of 6-14 Mt in 2005, 21-29 Mt in 2010, 27-35 Mt in 2015. The significant amount

198 NSS Ukraine

of processed coal that the state will have to import in the period 2010-2015 is an additional reason for fostering the development of the Ukrainian coal industry.

The initial variant of the coal industry reform program planned to close near 120 unprofitable enterprises. However, the Government program adopted in 2001 plans to reduce the existing 196 coal enterprises to 157. In the past, Ukraine refused to close 50-60 non-profitable mines during three years, and that caused the World Bank to delay the credit of USD 100M for coal industry restructuring.

Oil and gas industry

The National program “Oil and Gas in Ukraine until 2010” was adopted by the Decree of the Cabinet February 17, 1995 #25. In that document, the oil and gas condense production was planned to reach the level of 7.5 Mt and 35.3 Mt correspondingly by 2010, due to increase in geological research, discovering of new oil and gas deposits, and increase in the amount of mines in use. Additionally, the program planned large volumes of work for the modernization of the domestic oil-processing industry, the development of oil and gas machinery in Ukraine, enhancement and increase in efficiency of the gas transportation system, and use of non-traditional sources.

However, due to the non-favorable economic situation in the country, and mainly due to the large oil and gas debt (more than UAH 25B during 1995-2000), it was not possible to reach the degree of development envisioned in the National program. Amendments to the National program “Oil and gas in Ukraine”, named “Development of the Conception of the Organizational Structure of the Oil and Gas Complex in Ukraine, Program for Reconstruction and Modernization of the Gas Transportation System and Legislative Support for the Amended National Program” were compiled in 1998-2000. The Decree of the Cabinet dated June 21, 2001 #665 “About the National Program -Oil and Gas in Ukraine until 2010-” was prepared for the implementation of §7 of the Decree of the Cabinet dated November 29, 2000 #1757 “About the measures for the realization of the National Energy Program of Ukraine until 2010”. The main indicator s of the Program can be seen in the Table 2.17.

TABLE A4.1 NATIONAL PROGRAM “OIL AND GAS IN UKRAINE UNTIL 2010”

Indicator 2001 2002 2003 2004 2005 2010 Total

Increase in oil and gas condensate stock, M tons 5.58 6.07 8.74 11.11 16.45 12.53 107.53 Expenditures for the geology research, M UAH 553.6 691.1 822.6 997.6 1,127.4 1,417.7 11.105 Production of oil and gas condensate, M m3 3,620 3,629 3,750 3,859 4,003 5,416 41,894 Production of gas, M m3 18,037 18,500 19,100 20,200 21,300 24,500 213,124 Capital input to the oil, gas and gas condensate production, M UAH

2,056 2,058 1,921 1,961 1,802 1,550 17,698

Reconstruction of the gas transportation system, M USD.

36.2 82.4 101.7 114.8 82.6 22 729.6

Gas transportation system development, M USD 125.1 379.6 618.2 368.0 351.0 2.1 1,953.6

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Nuclear energy industry90

Ukraine holds the 7th place in the world in energy production by nuclear power plants (NPP) after USA, France, Japan, Germany, Russia, South Korea and Great Britain. After the Chernobyl nuclear power station was shut down on December 15, 2000, 13 nuclear blocks are working in 4 NPPs for a total registered capacity of 11,880 ? W, which accounts for 23.3% of the total registered capacity of power stations (51,084 MW). In 2000, electricity produced by nuclear plants was 50% of the total amount of electricity produced in Ukraine (72.1B kWh were produced in 1999 by NPP).

The strategy for the nuclear energy industry development until 2010, and further unt il 2030, is elaborated based on the forecasted level of electricity produced by NPPs, which will equal nearly 100B kWh in 2020 and will remain at that level until 2030.

The program for the modernization of active energy blocks plans to reconstruct and enlarge all BBEP energy blocks by 2013, and will require financial support during the period 2000-2010 (the total amount roughly equals 1B USD). During the period 2002-2004 it is planned to finish the construction of block #2 of Khmelnitskaya NPP and block #4 of Rivnenska NPP in co-operation with Russia; in 2001 they were 85% complete.

All energy blocks were built in the period 1980-1990, the average term of NPP exploitation is 40 years, and therefore all the energy blocks currently working will be used until 2020. At that point, Ukraine will have to make a decision on lengthening the NPP exploitation period to 60 years, so that the energy blocks can be used until 2030 and further. Such a program will require expenses during 2010-2020, for a total amount of roughly USD 1B (USD 100M per energy block).

Ukraine has all the necessary conditions for the procurement of fuel for NPP and the utilization of radioactive waste. Following a Decree of the President of Ukraine, “The complex program for the creation of the Nuclear Fuel Cycle in Ukraine” (NFC) was elaborated in 1994. In the edition of 2000, this program states the plans for creating the capacity for the production of natural uranium and for the complete supply of all Ukrainian NPP, creating the capacity for nuclear clear and rolled zirconium production, and other measures. In the whole structure of NFC, the process of isotopic dressing of uranium remains problematic. The construction of a storage facility for spent nuclear fuel (planned to be completed by 2006) will allow to stop the practice of moving it out.

The program of energy saving

The basis for the implementation of an energy saving policy in Ukraine is provided by the Complex State Program on Energy Saving (CSPES), approved by Decree of the Cabinet # 148 dated Feb 5, 1997, and by the law of Ukraine “On Energy Saving”.

Based on the source: A.P. Chernov, M.P. Umanets. Strategic Development of the Nuclear Industrial Complex of Ukraine/ Proceedings on the Regional WEC European Energy Forum “Kiev-2000”. Market transformation in the energy industrie. Perspectives for the beginning of the third millennium. Ukraine, Kiev, 16-19 May 2000. V.1., S. 57-64.

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The program is implemented in three stages. The first one ended at the end of 1997. During that period, the focus was on decreasing unproductive fuel and energy consumption, and on implementing low capital intensity measures targeted to save energy. This had to cause a decrease in the input of energy resources by 10-15% and correspondingly to save more than USD 200M.

The second stage (1998-2000) was related to the implementation of measures aimed at increasing energy efficiency of the existing technology, which had to make possible to save another 15-20% of energy resources amount and about USD 300M.

The third stage, which will be completed in 2010, and includes a structural reform in Ukraine, will allow to cut energy resource demand by 30%, stabilize their consumption and reach the optimal level of energy saving. Expenses will be decreased by USD 4.7B.

Energy-saving measures in all industries, which had been planned before the year 2000, are expected to allow total savings of 35.9 Mtce in 2000. In 2005 potential energy source saving will be at the level of 68.7 Mtce. By 2010, 108.8 Mtce can be saved.

The estimated total demand for energy sources in 2010 is 320-330 Mtce, at the same time real cons umption in 1995 was 226.3 M tce; therefore, the increase is 42-46%. However, this demand will be equal to only 91-93% of the highest level of consumption that was reached in 1990.

The highest share in the structure of the energy saving potential belongs to the industry (58-59%), followed by the energy sector (19-20%), municipal needs (11-12%), and agriculture (3-3.5%).

The necessary investments for the realization of energy saving potential until 2010 will be roughly equal to USD 6B.

The forecast of energy resources use, developed in the framework of the discussions on the Program, shows much lower levels of consumption than the ones stated in the previous variant of the Program. For example, the consumption of boiler-furnace fuel in 2005 is forecasted to be 175.0-176.8c Mtce, in 2010 – 190-192.9 Mtce. The consumption of electricity is forecasted to be at the level of 201.9-203.3 TWh in 2005, 244.9-246.6 TWh in 2010: a decrease by 23.6-24.3% and 18.0-19.3% compared with the previous parameters. The demand for fuel energy resources in the amended variant is 230.6-238.0 Mtce in 2005, 259.2-294 Mtce in 2010.

Research on financially viable and technically feasible levels of energy saving in particular industries shows that the volumes of energy saving will be: 24.5-27.8 and 21.3-24.4 TWh of electrical energy; 23.1-26.0 and 57.7-62.4 M Gcal of heat, and 7.0-8.0 and 30.9-35.0 Mtce of fuel.

The total amount of financially viable energy saving will be 58.7-65.7 Mtce in 2005, 77.7-93.3 Mtce in 2010, which in comparison with previous estimations are 25.9-30.5% and 27.5-31.0% less. This reduction is caused by smaller volumes of GDP and by the absence of financial support, which has influenced the terms of the Energy Saving Program realization. However, capital inputs in the amended program are higher: UAH 33.1-36.5B in 2005 and UAH 46.5-52.7B in 2010. The increase of the expense for energy saving measures (from

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11.7-16.1% in 2005 to 19.1-22.4% in 2010) provides an explanation for using the price index for the period 1996-1999 in cost estimations.

The program of non-traditional and renewable resources use

The economic contingencies are pushing Ukraine to target non-traditional and renewable sources of energy.

In the Decree dated December 31, 1997 #1505, the Ukrainian Cabinet adopted “The Program on the state support of non-traditional and renewable energy sources and small hydro and fuel industry” as a part of The National Energy Program of Ukraine. The major goal of this program is to create the necessary conditions for development and implementation of efficient technologies and equipment that use non-traditional and renewable sources of energy and small hydro and fuel energy. This will allow for a reduction in the volume of traditional energy sources used, and to improve the ecological and social situation in the state. The realization of the program until 2010 will avoid the consumption of 10% of the traditional types of energy sources due to the utilization of non-traditional and renewable energy resources.

The indicators of annual energy source savings as the result of gradual implementation of “The program for state support of non-traditional and renewable energy resources and small hydro and fuel energy industry” are stated in the Table 2.18.

TABLE A4.2. TYPES OF FER ECONOMY AS THE RESULT OF PROGRAM REALIZATION

Directions of non-traditional energy industry 2000 2005 2010 Wind energy production 0.018 0.250 0.969 Solar energy production 0.033 0.111 0.306 Geothermal energy production 0.200 2.000 6.400 Small hydro-energy production 0.068 1.533 3.007 Non-traditional fuel 1.720 6.500 20.030 Energy of environment and energy technological potential 0.194 0.828 1.257 Small fuel energy production - 3.950 7.900 Mixed energy systems based on non-traditional and renewable resources and accumulating system.

0.002 0.041 0.263

Total (M tons of coal equivalent per year) 2.235 15.213 40.130

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ANNEX 4.2 JI/IET PARTICIPATION REQUIREMENTS 91

A4.2.1. Participation in JI

A4.2.1.1. General Eligibility Requirements Decision 16/CP.7, paragraph 20: A Party involved in an Article 6 project shall inform the secretariat of:

(a) Its designated focal point for approving projects pursuant to Article 6, Paragraph 1(a);

(b) Its national guidelines and procedures for approving Article 6 projects, including the consideration of stakeholders’ comments, as well as monitoring and verification.

A4.2.1.2. Eligibility Requirements if Track 1 is to be followed Decision 16/CP.7, paragraph 21: Subject to the provisions of paragraph 22 below, a Party included in Annex I with a commitment inscribed in Annex B is eligible to transfer and/or acquire ERUs issued in accordance with the relevant provisions, if it complies with the following eligibility requirements:

(a) It is a Party to the Kyoto Protocol;

(b) Its assigned amount pursuant to Article 3, paragraphs 7 and 8, has been calculated and recorded in accordance with decision -/CMP.1 (Modalities for the accounting of assigned amounts);

(c) It has in place a national system for the estimation of anthropogenic emissions by sources and anthropogenic removals by sinks of all greenhouse gases not controlled by the Montreal Protocol, in accordance with Article 5, paragraph 1, and the requirements in the guidelines decided there under;

(d) It has in place a national registry in accordance with Article 7, paragraph 4, and the requirements in the guidelines decided there under;

(e) It has submitted annually the most recent required inventory, in accordance with Article 5, paragraph 2, and Article 7, paragraph 1, and the requirements in the guidelines decided there under, including the national inventory report and the common reporting format. For the first commitment period, the quality assessment needed for the purpose of determining eligibility to use the mechanisms shall be limited to the parts of the inventory pertaining to emissions of

91 Text taken from the Marrakech Accords

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greenhouse gases from sources/sector categories from Annex A to the Kyoto Protocol and the submission of the annual inventory on sinks;

(f) It submits the supplementary information on assigned amount in accordance with Article 7, paragraph 1, and the requirements in the guidelines decided there under and makes any additions to, and subtractions from, assigned amount pursuant to Article 3, paragraphs 7 and 8, including for the activities under Article 3, paragraphs 3 and 4, in accordance with Article 7, paragraph 4, and the requirements in the guidelines decided there under.

Decision 16/CP.7, paragraph 22:

A Party included in Annex I with a commitment inscribed in Annex B shall be considered:

(a) To meet the eligibility requirements referred to in paragraph 21 above after 16 months have elapsed since the submission of its report to facilitate the calculation of its assigned amount pursuant to Article 3, paragraphs 7 and 8, and to demonstrate its capacity to account for its emissions and assigned amount, in accordance with the modalities adopted for the accounting of assigned amount under Article 7, paragraph 4, unless the enforcement branch of the compliance committee finds in accor dance with decision 24/CP.7 that the Party does not meet these requirements, or, at an earlier date, if the enforcement branch of the compliance committee has decided that it is not proceeding with any questions of implementation relating to these requirements indicated in reports of the expert review teams under Article 8 of the Kyoto Protocol, and has transmitted this information to the secretariat

(b) To continue to meet the eligibility requirements referred to in paragraph 21 above unless and until the enforcement branch of the compliance committee decides that the Party does not meet one or more of the eligibility requirements, has suspended the Party’s eligibility, and has transmitted this information to the secretariat.

A4.2.1.3. JI Eligibility Requirements if Track 2 is to be followed Decision 16/CP.7, paragraph 24:

Where a host Party does not meet the eligibility requirements set out in paragraph 21 above, the verification of reductions in anthropogenic emissions by sources or enhancements of anthropogenic removals by sinks from an Article 6 project as being additional to any that would otherwise occur, in accordance with Article 6, paragraph 1(b), shall occur through the verification procedure under the Article 6 supervisory committee, as set out in section E below. The host Party may however only issue and transfer ERUs upon meeting the requirements in paragraphs 21 (a), (b) and (d) above.

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ANNEX 4.3 UKRAINIAN ADMINISTRATIVE STRUCTURE FOR CLIMATE CHANGE: AN EXAMPLE This scheme describes the a possible administrative structure, including the main administrative body IMCCC, relevant ministries and authorities, and CCSE.

State Committee of

Forestry

(climate unit)

President

Verkhovna Rada

MENR divisions: 1. Climate Change Unit

2. National Inventory Center (NIC) as a core of the national inventory system

UNFCCC Secretariat Cabinet of Ministers

Ministry of Foreign Affairs

Inter-Ministerial Commission on Climate Change , Focal Point - Minister of The Environment and Natural Resources

JI Oversight Board

Ministry of Fuels and

Energy

(climate unit)

Ministry of Transportation

(climate unit)

Ministry of Agriculture

(climate unit)

State Committee of Energy

Conservation

(climate unit)

State Committee on Statistics (SCS)

Climate Change State Enterprise (CCSE)

Orders and directive flow

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ANNEX 4.4. REGULATION OF INVESTMENT ACTIVITY IN UKRAINE CONCERNING JI PROJECTS

Presently, investment activity in Ukraine concerning JI projects is regulated by the following legislative acts:

• Law of Ukraine “On Investment Activity”

• Law of Ukraine “On a Procedure for Foreign Investment”

• Law of Ukraine “On elimination of discrimination in taxation of enterprises that use property and finances of a domestic origin”

• Tax, tariff, currency legislation

• Other agreements and legislative acts

Law of Ukraine “On elimination of discrimination in taxation of enterprises that use property and finances of a domestic origin”

Article 2. The enterprises, which are established by foreign investments, joint activities, contracts on industrial cooperation, etc. within the territory of Ukraine without formation of the juridical person, are under both tariff, currency and tax legislation adopted by the legislation of Ukraine on a question of currency and tariff regulation and the taxation of the enterprises, organized without the foreign investments except for cases when under laws of Ukraine it is authorized the preferential order of the taxation of the enterprises organized without the foreign investments.

Article 3. The special legislation of Ukraine on foreign investments, and also the state guarantees of protection of the foreign investments, determined by the legislation of Ukraine, do not regulate a question of currency, tariff and the tax laws working in territory of Ukraine, if another is not stipulated by the international agreements of Ukraine, the consent to which compulsion is given by the Verhovna Rada of Ukraine.

Law of Ukraine “On Investment activity”

Article 3 Clause 1 Para. 4 Development and implementation of new and resource-saving technology intended for the improvement of social and ecological conditions.

Article 5 Para. 1 Subjects (investors and participants) of the investment activity can be citizens and legal persons of Ukraine and foreign countries, and countries themselves.

Article 11 Para. 2 Thus concessionary terms are being created to investors who carry out investment activity at the most important for satisfaction of public needs directions, first of at social sphere, technical and technological preservation of the environment and health.

Article 18 Clause 2 Para. 3 In case of adoption, by the state or other entities, of regulations that infringe the rights of investors and other participants to investment activities, the losses experienced by the subjects of investment activities, are subject to compensation in full by said entities.

Article 19 Clause 1 Para. 2 The state guarantees protection of investments irrespective of patterns of ownership, and foreign investments. Protection of investments is provided by the legislation of Ukraine, and by the international agreements of Ukraine. Investors, including foreign investors, are provided with equal rights, and the perpetration of discriminating actions is prohibited.

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ANNEX 5.1. ECONOMIC TOOLS AND EXISTING EXPERIENCE REGARDING ? ? 2 EMISSION REDUCTION

Among the traditional economic instruments for achieving emission reductions, the most widely used are: Emission limits combined with penalties in case of non-compliance, environmental taxes, taxes on the use of resources ( energy taxes), and the allocation of emission allowances (certificates). All of these instruments have advantages and disadvantages concerning their impact on the emitters, economic efficiency, political ideology, implementation costs, and environmental effects.

Taxes and Payments for the Resources

Taxes on the use of resources are implemented to limit the demand when there is no need to impose a restriction. This type of taxation became a successful instrument for reducing the energy inputs into the production processes and the consumption of oil products per capita (especially in EC countries) after the oil crisis in the 1970’s. From an economic point of view, the tax on resources reflects the so-called “shadow price” of the resource or the deficit cost of the resource. Environmental benefits have become in this case a secondary effect.

Currently, oil taxes are - together with taxes on alcoholic drinks and tobacco - the most profitable assets in the budget of the EC countries. In the European Union, the main share (60-70%) of the oil prices usually consists of taxes: road tax, environmental tax, VAT etc. In Great Britain, for example, the share of taxes in the oil price makes up 75% - the highest than elsewhere. In spite of the fact that annual revenue from environmental taxes collected in the EU countries amounts to $300B per year, they are not the main source of funding for environmental protection activities. The reason for this is that most of the money flows to the national budgets, and is spent on social programs. Only a fraction of these assets is dedicated to environmental protection activities. In Germany, slightly more than $500M are allocated to the environment. In Great Britain, where the annual tax revenue reaches $80B, only $100M were allocated for the development of renewable energy sources this year.

The efficiency of resource taxes can be ensured under the condition that before the tax is introduced, subsidies and other factors that influence the resources' price must be eliminated. Taxes and charges should reflect the real cost of the resources, whereas this is determined mostly by the policy of liberalization and the development of market relations in the energy sector. The adoption of resource taxes by Non-OECD countries, in contrast, seems to be limited as in some countries of the world resources are subject to administrative regulation. The results of IEA92 research prove the fact that in the 8 largest countries that are not members of OECD, such as China, India, Indonesia, Iran, Kazakhstan, Russia, South Africa, and Venezuela, prices for energy sources are lower than they should be. In these countries

92 The review of the conditions of the energy sector in the world. Features of 1999. A sight on the financing of

energy sector: can prices reflect a reality. International Energy Agency. 1999.

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final prices are on average 20% lower than the prices of alternative solutions, or undistorted market prices.

Taxes and resource prices should be implemented gradually, in order to avoid an economic shock, because too high prices for energy sources can become a brake for economic growth.

Taxes and Payments for Emission

The taxon emissions is an important instrument of emission control in developed countries. Germany has set a system of taxes for all waste production processes. The same instrument has been working now for 10 years in the Netherlands and since the 1960’s in France.

The tax system consists of defined payments per unit of emissions. Ideally, the tax rate is equal to the marginal cost of reaching the targeted emissions level, where the marginal cost is the cost of reducing the “last” unit of emissions.

The tax system has two main benefits in comparison with the administrative system of reaching set emission standards.

• First, the tax provides an incentive to reduce emissions where the associated costs of abatement are lowest. Each emitter will reduce his emissions to a level where the marginal cost for further reductions equals the defined payment for pollution.

• Secondly, the tax system is able to work in a condition of imperfect primary information. Sometimes it is possible to set the tax level, and subsequently rise or reduce it until the optimal level is found.

In the economic sense, the tax system encourages mitigation of polluting activities, changes in the production cycle towards reducing environmental impact, and employment of up-to-date technologies for re-cycling and re-use.

While emission taxes and charges are used as environmental policy instruments, the following restrictions must be taken into account:

1. Improper registration the pollutants leads to reduced payments

2. The exact calculation of the emission restriction costs for every pollutant is expensive and uncertain

3. For every type of pollution, increases in the tax need to reflect the growth of marginal costs of reaching higher levels of environmental quality

4. The emission tax is not suitable for the regulation of some kinds of pollution (hazardous waste, noise pollution in the cities)

5. The tax is not effective in the case of environmental disasters

6. The tax effect can weaken due to several factors (inflation, rapid economic growth, etc.)

The first three problems are not crucial, and can be technically resolved. The other points to some extent limit the influence of the emission tax on air and water pollution. In these areas, emission taxes and charges are widely used in the developed world.

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The Possibilities for ?? 2 Emission Reduction 93

In general, there are three possibilities to achieve ??2 emission reductions: decrease in energy use, shift to fuels with lower carbon intensity, and ? ? 2 utilization / sequestration.

In 1992, the International Energy Agency (IEA) suggested a list of fiscal and structural activities targeted to fulfill the goals set out in the UNFCCC. The following alternatives were discussed:

• Adoption of a tax based on the carbon intensity of fuels.

• Increase of nuclear energy supply capacity to 50% of electricity produced.

• Radical increase in natural gas utilization in the power industry.

According to the IEA estimations, technically all alternatives listed above can be implemented. However, only a significant tax on carbon intensive fuels ($200 for the ton of carbon, which corresponds to $24 for the barrel of raw oil, $138 for the ton of coal and $3.06 for the MBTU of natural gas) or the combination of half of the tax ($100 per ton of carbon) and the increase in NES (Nuclear Energy Sources) would be the most effective actions.

In June 1992, the EC commission has made an official suggestion to implement a tax of 10$ per barrel of raw oil on fuel energy efficiency (with the initial level of the tax to be set at $3, and a gradual annual increase by $1 during 7 years) as the first step within energy policies towards ?? 2 emission reduction. The main goal of this instrument is to increase the efficiency of energy use and to promote the use of fuels with a lower intensity in carbon.

The first level of tax was 17.7 ECU per ton of oil equivalent ($21.24 at the rate 1ECU=$1.20). Half of this was to be paid for ?? 2 emission and the other half for the share of energy which corresponds to 2.81 ECU per ton of ? ? 2 and 0.21 per Gigajoule of energy. Simultaneously to the tax implementation, it was planned to use other instruments that would lead to ?? 2 emission reductions. These measures would promote the increase in fuel processing efficiency (the program GAVE) and the use of the renewable sources of energy (the program ALTENER). Additionally, it was proposed to create special funds for implementing the suggested measures in developing countries.

93 The review was based on following materials: Korcheva Y.P., Ganefeld R.V- the clear technologies of electricity

production on FES. S.2. Economical and political aspects of the ?? 2 emission reduction (Analytical literature review) Ministry of energy and electricity industry of Ukraine. Scientific center of coal energy technologies. Kiev. 1997.

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It was estimated that the adoption of the tax would lead to an increase of the fuel prices: In England, fro example, the price for gas was estimated to increase by 46% (from 194 pence/GJ to 283 pence/GJ), prices for domestic coal by 69%(174 -295 pence/GJ) and prices for imported coal by 101% (119 - 240 pence/GJ).

The attitude of the 12 EC countries towards the suggested tax was quite critical. Representatives of energy intensive production processes, and coal and oil producers presented their sharp opposition, which even increased after President Clinton's proposal about the energy taxation in the USA (59.5 cents/MBTU on oil used for transportation and 25.6 cents/MBTU on oil used for heating) which is much more liberal than the European tax.

There were significant differences in the official attitude towards the suggested tax among the EC member countries. Six countries (Germany, Denmark, Belgium, the Netherlands, Italy and Luxembourg) supported the suggested taxation, while the others were against it.)

England was arguing it would come back to its ? ? 2 emission level of 1990 in the year 2000, but without any control in the energy sector development during that time.

France was against the tax on the fuel used for the production of energy, but it allocated large amounts of money into nuclear energy development, and considered a ??2 emission reduction to the level of 2 tons of carbon emission per capita sufficient for the country. 94

In Germany, strong opposition was fostered especially in the new regions.

Countries with rapidly developing economies – Greece, Portugal, Ireland and Spain - argued against ?? 2 emission control until 2000. Besides this, Ireland and Spain defended the opinion that the tax must be applied only on fuel (coal and lignite being their main sources of energy).

At the same time Norway, without even being an EC member state, implemented a tax of $50 per ton of ? ? 2 emitted, which is much more strict than the suggestion of the EC commission.

Energy taxes are often linked on the grounds of various political objectives. This makes it difficult to reach an agreement on their harmonization in the EC. Furthermore, the periodical raise of the oil price due to the OPEC cartel, will lead to a significant increase in oil product prices in EC countries.

94 According to the First National Communication on the climate change, the total GHG emissions in the

Ukraine in 1990, calculated as carbon equivalent, amounted to 260.6 million tons. This quantity represents an annual emission per capita (considering a population of 51,8 million people) of 5.0 tons of CO2 (5.0 t CO2/capita/year).

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Review of Carbon and Energy Taxes in EU95

Economists and international organizations have frequently advocated carbon and energy taxes as instruments for reducing carbon dioxide emissions. Within their environmental policies, an increasing number of Western European countries have implemented taxes based on the carbon or energy content of energy products (Sweden, Norway, the Netherlands, Denmark, Finland, Austria, Germany and Italy). Several other countries, like Switzerland, France and the United Kingdom, are currently discussing proposals for their implementation. At the same time, carbon or energy taxes proposals in some other countries have failed, sometimes quite disastrously (e.g. in the United States).

TABLE A5.1.1: TAXES ON ENERGY PRODUCTS IN SOME SELECTED COUNTRIES

Country Petrol (gasoline) unleaded

Diesel Diesel/Gas Oil (industrial use)

Coal (industrial use)

Natural Gas (industrial use)

$PPP /

1,000 l

$PPP /

ton CO2

$PPP /

1,000 l $PPP /

ton CO2 $PPP /

1,000 l $PPP /

ton CO2 $PPP /

1,000 kg $PPP /

ton CO2 $PPP /

1,000 m3 $PPP /

ton CO2

Denmark 395 164 272 95 206

(197 -

180)

72

(69 - 63)a

163

(153 -

136) 67

(63 - 56) 28

(21 - 6) 15

(11 - 3) Finland 558 232 324 113 55 19 33 14 28 15 France 590 245 370 129 78 27 0 0 1 1 Germany 495 205 313 109 40 14 0 0 33 17 Netherlands 583 242 336 117 102 36 11 5 55 29

Norway 520 216 403 140 46

(23) 16

(8)b 46 19 93 49

Spain 490 203 356 124 104 36 0 0 8 4

Sweden 456 189 295 103 183 64

(19)c 126 52

(19) 105 56

(22) Switzerland 356 148 372 129 1 1 0 0 0 0 UK 630 261 645 224 40 14 0 0 0 0 USAd 101 42 116 40 na na na na na na Japane 320 133 124 43 4 1 na na 23

(8) 12

(4) Source: Baranzini, Goldenberg and Speck, 2000. na: not available. a Tax rate is for light processes and heavy processes. b Tax rate is for gas oil used in the pulp and paper industry. c Tax rate is for energy products us ed in the manufacturing industry and greenhouse horticulture sector. d Figures for USA: 1996 (source OECD/IEA: Energy Prices and Taxes. Paris, 1997). e Figures for Japan: 1996 for petrol and diesel; 1995: gas oil; 1994 natural gas (source OECD/IEA: Energy Prices and Taxes. Paris, 1997). Japan has a general petroleum excise tax on all crude oil refined in Japan: rate was 1996 2040 yen/1,000 l - 12.1 $PPP/1,000 l (this figure is not included in the table above). Tax rates for European countries are for 1998 in national currencies and then converted with 1997 purchasing power parities (PPP) (PPP source: OECD Main Economic Indicators July 1998, Paris)

95http://www.rec.org/REC/Programs/SofiaInitiatives/EcoInstruments/GreenBudget/GreenBudget6/carbon.html

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In countries where carbon/energy taxes have been implemented, several issues are generally considered in developing them. Often, carbon/energy taxes:

• Are only one instrument in a package of measures aimed at reducing emissions

• Are often part of a general fiscal reform and replacing other taxes on energy and reducing the distortion impacts of traditional taxes (e.g. on labor and capital)

• Are usually gradually phased-in and adjusted over time to account for inflation

• Include exemptions, and exceptions have been granted to energy-intensive industries or to industries facing international competition

Taxes on energy products and the derived ‘implicit’ carbon taxes vary significantly between countries (see table A5.1.1), and thus the average price of a ton of carbon is relatively different from country to country. This is one of the main problems to implement internationally coordinated carbon taxes.

The data in the table also shows that there are large differences between the taxation levied on different energy products. Some fuels, like petrol and diesel, are heavily taxed, and the main reason is that those energy products possess a low demand elasticity, and thus taxing them is an easy way to collect fiscal revenues. With respect to the carbon content of energy products, it should also be noted that, in almost all countries (except Sweden and Denmark), coal has a particularly low implicit carbon tax. In fact, coal is still heavily subsidized in countries like Germany and Spain. More in general, fossil fuels with higher carbon content often have lower implicit carbon taxes than those with a lower carbon content. Therefore, with respect to the objective of reducing carbon emissions, a reform of the energy tax structure should accompany the eventual introduction of carbon taxes.

Empirical studies evaluating the environmental effectiveness of implemented carbon taxes are rather limited so far, but the few evaluation studies demonstrate that carbon taxes are an effective instrument for reducing CO2 emissions. The lack of appropriate studies can be ascribed to the fact that there are several methodological difficulties and complexities in doing such evaluation studies.

An evaluation study of the Swedish CO2 tax, carried out by the Swedish Environmental Protection Agency (SEPA), concludes that the CO2 tax "… has helped to reduce emissions of carbon dioxide in line with the Swedish environmental policy" (SEPA 1997, p.52). The Danish Ministry of Finance estimated the effect of the carbon/energy tax regime a 4.7% reduction in CO2 emissions from 1988 levels in the year 2000.

Detailed information on environmental related taxes and charges and on energy taxes implemented in the EU Member States plus Norway and Switzerland can also be found in “European Commission 1999”96.

96 Given review is made according to the following material:

Baranzini, Goldenberg, and Speck. "A Future for Carbon Taxes" in Ecological Economics. Forthcoming, March 2000.

European Commission. "Database of Environmental Taxes in the European Member States plus Norway and

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Existing Experience and EU Policy for CO2 Emission Reduction

During the last decade, the EC countries have used a variety of ecological policy instruments. Among these instruments are the following:

• Instruments of technical regulation based on "the best technologies available" together with penalties for those who do not use these technologies

• Measures for waste disposal that reduce methane emission from landfills

• Measures targeted to reduce GHG emissions from fuel combustion, among which:

- Promotion of energy efficiency (energy saving)

- Increase of share of renewable energy sources in the energy balance

- Reduction of state support of the coal industry

"Agreements on ecology" (voluntary agreements of the EC Commission with particular industries about the improvement of ecological parameters of production) have become the last word in this field (the first of such agreements was signed in 1988 with the Japanese car construction industry and it presumes increase in efficiency of combustion in cars by 25% in 2008.)

In EC countries, several types of environmental taxes are used. For the purpose of increasing ecology policies efficiency and consolidating their efforts to protect the environment (policy harmonization), EC members modified the implementation scheme of environmental taxes in the direction of a more active use of market forces and financial instruments, resulting in an increased number of taxes97. Besides this, the potential growth in the number of EC members generated the necessity of implementing regulations. According to a suggested classification, environmental taxes are divided into 2 groups: emission taxes, which include taxes for direct natural environment pollution, and taxes on goods, whose production or consumption can cause dangerous impacts on the natural environment.

According to EC principles, the implementation of certain types of taxes would not le ad to competition bias, obstacles to international trade (such an effect appears in case of different levels of taxation for one good in different countries), economic discrimination of certain goods or producers, or other barriers to maintaining equal conditions while protecting the domestic environment.

Switzerland - Evaluation of Environmental Effects of Environmental Taxes," Office for Official Publications of the European Communities, 1999. The database can also be downloaded from the homepage of DGXI http://europa.eu.int/comm/dg11/enveco/index.htm.

Swedish Environmental Protection Agency (SEPA) "Environmental Taxes in Sweden - Economic Instruments of Environmental Policy." Report 4745. Stockholm. 1997.

Ekins, P. and S. Speck. Competitiveness and Exemption from Environmental Taxes in Europe. "Environmental and Resource Economics." Vol.13. pp.369-396. 1999.

97 Umweltsteuern und –Gebühren im Binnenmarkt. Mitteilung der Kommission ? OM (1997) 9 ??? 26.03.1997

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The efforts of the European Community have led to certain results98, however not satisfactory. In particular, data published by the European Ecology Agency (EEA) shows that during the period 1990-1998 the total GHG emission level has decreased by 2% in the EC (KP commitments of EC are -8%). This result has been achieved due to the reductions that took place in the two largest countries: Germany and Great Britain, but in the rest of the countries GHG emission volumes have increased.

Emission reduction in Germany was reached largely due to the unification with the New Laender, where it was equal to 50%. Old electricity stations, which were working on brown coal, were closed or transformed to work on gas. The ba lance of fuels used in the power production changed: coal has decreased, while natural gas has increased from 15% to 21%, and oil has increased from 36% to 40%. In summary, the total emission volume in Germany decreased during those 8 years by 16%.

In Great Britain from 1990 to 2000, GHG emission has decreased by 14%. This was the result of massive transformation of electricity stations from coal to natural gas, large deposits of which were discovered in the Northern Sea. The share of coal in the production of power in the 1990’s decreased from 65% to 38%, the share of oil also decreased from 11% to 5%, while the share of gas increased from 1% to 28%. The contribution of nuclear electricity stations to the electricity balance has grown from 21% to 26%.

The experience shows that the existing measures are not enough to ensure the fulfillment of KP commitments. If such measures are enforced, they will lead to increase in costs and undesirable consequences for the economic development. The problem is worsened by the fact that among EC countries there is a significant difference in marginal costs of GHG emission reduction (in The Netherlands they are higher than $150 per ton of ??2, in the "New Laender" of Germany they amount to $22-25). In addition, this difference is present even among sector averages and among particular producers within the sectors.

The lack of traditional instruments of ecology policy leads to the discussion about using the flexible KP mechanisms among EC countries as well as with other countries. EC countries could be potential suppliers in the quota market or participants of Joint Implemented projects. In June 1998 the EC Commission declared99 that the EC could implement its own trade regime according to the KP before 2005: 3 years before the implementation of the international emission quota trade. "The Green Document on GHG emission trade in the EC" includes the main characteristics of the future trade system, especially from a management point of view, as the trade system must be compact, clear and easy to manage. Such a system is targeted on the point sources of GHG emission. The set of potential candidates for trade participants consists of all metallurgic enterprises, petrol-chemical and non-organic chemical and paper industries, and cement plants. Only quite large power and fuel stations (capacity 50,000 kW and higher) are considered as candidates. Only 45% of total EC ??2 emission comes from these entities. In the future, under the condition of system efficiency, an increase in the number of trade participants is planned. For sim plicity reasons, the only object of trade 98 S. Rogynko. Greenhouse gas : in wholesale and retail. http://isn.rsuh.ru/iu/journal/journals.2001/9.htm 99 COM (1998) 353 ??? 3.06. 1998 ?.

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among all GHGs is going to be ??2, as carbon dioxide accounts for 80% of total GHG emissions in EC countries and, according to experts' opinion, C? 2 emission monitoring is the easiest and the most precise among all GH gases.

In May 2002, the EU has ratified the Kyoto Protocol. Among EC countries, Great Britain, the Netherlands, Denmark, Norway, and France show the greatest interest in the KP mechanisms. Great Britain is planning to start a domestic emission quota trade in 2002, while Denmark has started the implementation of a pilot emission quota trade project in the power industry in 2001.

In spite of the variety of traditional ecology policy measures (mainly environmental taxes and penalties) a real progress in GHG emission reduction was not reached, revealing the need of new approaches that, together with traditional measures, would allow to make real steps towards the fulfillment of the UNFCCC Parties' commitments.

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ANNEX 5.2. POLICY SCENARIOS FOR DOMESTIC CO2 EMISSION REDUCTION

This annex describes the policy scenarios for domestic CO2 emission reduction presented in Section 5.4 of this report. The three scenarios are:

Strategy 1: A Governmental energy efficiency program, which would support GHG reducing measures with financial subsidies;

Strategy 2: Increased taxation of energy consumption, with a corresponding reduction in other taxes so that the Government’s net tax revenues would remain unchanged.

Strategy 3: Accelerated switch from coal to natural gas in the power generation sector.

The costs of the policy scenarios are calculated from a macroeconomic perspective, i.e. from the perspective of the Ukrainian Government. Each scenario is analyzed without and with revenues from the sale of the achieved GHG emission reductions, assuming a sales price of XX $/t CO2e. The discount rate used is 10%.

Governmental Energy Efficiency Program

This scenario assumes substantially increased financial support for energy saving measures by the Ukrainian Government, with the objective of fully exploiting the available potential. The total amount of environmental investments is asumed to gradually increase until 2012, but not to exceed 6% of GDP. Moreover, we assume that 75% of the total environmental investments will be spent for measures contributing to reductions in emissions of GHG and local air pollutants.

Regarding investments required for a given CO2 emission reduction, we rely on results of the past Ukrainian energy saving program. In addition we account for two types of positive financial flows:

• Reductions in fuel costs associated with energy savings (see Table 5.3)..

• Reductions in health costs related to respiratory diseases. The energy efficiency program will reduce the consumption of fossil fuels, particularly coal, and associated local air pollutants such as SO2, NOx, particulates, and CO. These pollutants cause respiratory diseases. Statistics show that during the period 1990-1995, respiratory diseases decreased in parallel with CO2 emissions (see Table 5.2), as a result of the recession in the industrial sector. Respiratory diseases are estimated to account for more than a half of all health costs in Ukraine. In the period 1992-95, state expenditures for the treatment of respiratory diseases equaled 5% of the total sta te budget or 1.5% to 2.2% of GDP. We assume that these costs would decrease in proportion to ??2 emission reduction.

Besides respiratory diseases, the energy efficiency program will also yield reductions in the direct health costs related to global warming.

100 This effect will however be small, because

100 The evaluation, published in the May 2001 issue of the Journal of Environmental Healt h Perspectives,

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reductions of GHG emissions in Ukraine alone will only have a minor influence on the degree of global warming.

The results of the scenario in terms of costs and ?? 2 emission reduction are shown in Figures A.5.2.1 and A.5.2.2. They imply that such a forcing of energy saving measures would not be profitable for Ukraine, even if the resulting reductions in GHG emissions can be sold on the international GHG market. Substantially higher carbon prices would be required make this strategy economically profitable.

TABLE A5.2.1 INTERVALS OF FUEL PRICES IN UKRAINE (DECEMBER 1999) 101

Cost Gas 8,200 Kcal/thousands of m3

Coal 3,900/4,300 Kcal/kg Diesel

UAH/thousand of m 3 UAH/thousand of tons

195 330 350 100 123 160 750

$*/ thousand of m3 $/ thousand of tons

35.4 60.0 63.6 18.2 22.3 29.0 136.6

$/ thousand of t?e 30.2 51.2 54.0 32.7/29.6 40.0/36.3 52.0/47.2 * Exchange rate ?s 5,5 UAH/$

TABLE A.5.2.2 GDP AND HEALTH CARE EXPENSES (IN 1995 PRICES)

1992 1993 1994 1995 GDP, bln UAH Mln USD

5,033 24,197

148,273 32,666

1,203,769 37,974

5,293,000 35,932

State budget, bln UAH Mln USD

1,920 9,231

52,249 11,511

630,647 19,894

2,430,276 16,498

Budget of health-care institutions, UAH Million USD

170 817

5,380 1,185

51,988 1,640

236,455 1,605

Number of all diseases per 100 000 people

62,335* - - 63,474

Number of respiratory diseases per 100 000 people

32,962* - - 30,628

Official rate KrB/USD 208 4,539 31,700 147,307 Source: State Statistics Committee Of Ukraine.* Data for 1990.

identifies and examines five key health problems that could be influenced by global climate change. Those problems include heat-related illness and death, health effects related to extreme weather events, health effects related to air pollution, water-borne and food-borne diseases, and vector-borne and rodent -borne diseases. (by Margot Higgins, ENN) (Climate Change Initiative Newsletter, May 2002 (23)

101 Carp, I.M , Shydlovskiy A.K. The fuel problems of energy /Materials oft eh International Conference “Energy safety in Europe. View to the 21st century”, 3-6 May 2000, Kiev, 235 pp.: p . 13

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FIGURE A.5.2.1 CASH FLOWS AND CO2 REDUCTION UNDER STRATEGY 1 (achievement of 100% energy saving potential through “considerable” governmental spending)

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FIGURE A.5.2.2 CASH FLOWS AND CO2 REDUCTION UNDER STRATEGY 1 IET (achievement of 100% energy saving potential through “considerable” governmental spending plus revenues from international emissions trading)

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Energy Consumption Taxes

This scenario assumes introduction of an energy / carbon tax, with a corresponding reduction in other taxes. Such a tax will make energy efficiency measures more profitable, thereby providing incentives to reduce energy consumption. The results for the two cases without and with sale of the achieved GHG emission reductions are shown in Figures A.5.2. 3 and A.5.2.4.

The calculations are based on the assumption that the energy / carbon tax will be fully revenue-neutral for the Government, because other taxes on e.g. labour would be correspondingly reduced. This represent a very rough approximation. In pr actice, an ecological tax reform of this type will always influence Government revenues, because it will influence the growth rate of the economy. The question whether this influence will be positive or negative has been extensively discussed in the economic literature. The answer will usually depend on the circumstances of each country. For example, in countries which have distorting energy subsidies in place, increased energy taxation will effectively remove these subsidies, resulting in increased economic growth in addition to reduced energy consumption and reduced GHG emissions.102

Due to the simplifying assumptions made for this scenario, the results should be interpreted with caution. Nevertheless, they indicate that substantial reductions in GHG emissions could be achieved through increased taxes on energy and / or GHG emissions. Such a shift in taxes could be beneficial overall for the Ukrainian economy, in particular if the resulting reductions in GHG emissions can be sold to international buyers. In conclusion, the case for a shift towards energy / carbon taxes in Ukraine deserves further attention and analysis.

102 The review of world energy industry. Special features of 1999, opinion on energy subsidizing: Do prices

reflect the reality? International Energy Agency. 1999.

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FIGURE A.5.2.3 CASH FLOWS AND CO2 REDUCTION UNDER STRATEGY 2 (introduction of energy/carbon taxes)

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FIGURE A.5.2.4 CASH FLOWS AND CO 2 REDUCTION UNDER S TRATEGY 2 IET (introduction of energy/carbon taxes plus revenues from international emissions trading)

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Energy Policy (increase of natural gas share)

The different fossil fuels differ in their carbon content. For example, combustion of natural gas causes CO2 emissions which are about 40% lower than combustion of an equivalent amount of coal, on an per-energy basis.

The fuel mix used in the Ukrainian power generation sector has been subject to significant changes during the last decade. The share of natural gas has decreased, while the share of nuclear energy has increased (see Chapter 2).

One policy option to reduce GHG emissions is therefore to promote natural gas for power generation. While the national energy strategy will focus on coal, such a switch seems nevertheless possible to some extent, especially for private firms if the switch is economically profitable. Such options are, for example, discussed in the context of the investment program of non-state consortiums, taking into account the long-term foreign loans and investment tax credit mechanisms.103

Our scenario assumes increased switching from coal to natural gas in power generation. We assume that in 2010 the share of natural gas will reach the level of 1990, corresponding to 3.4%. The cost analyses for this scenario do not assume any significant changes in investment. Negative cash flows do, however, result from the price differential between coal and natural gas.

The results of the scenario analysis are shown in Figures A.5.2.5 and A.5.2.6. They imply that the fuel switch would not be economically viable, even if the resulting emissions reductions could be sold internationally.

103 The “Energiya” Consortium: will the common sense overcome? Information for the discussion. Analytical

materials/Transnational industrial-financial corporation SK “Concern Energiya” (Consortium “Energiya”).

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FIGURE A.5.2.5 CASH FLOWS AND CO2 REDUCTION UNDER STRATEGY 3 (fuel replacement in the power generation sector)

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FIGURE A.5.2.6 CASH FLOWS AND CO 2 REDUCTION UNDER S TRATEGY 3 IET (fuel replacement in the power generation sector plus inpayments from International emissions trading)

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ANNEX 5.3. OVERVIEW OF JI PILOT PROJECTS

Table A5.3.1 shows Joint Implementation (JI) and Activities Implemented Jointly (AIJ) projects by investor countries, registered at the secretariat of the UN Framework Convention on Climate Change (UNFCCC) (dated 8/30/2000).

TABLE A5.3.1: JI AND AIJ PROJECTS BY INVESTOR COUNTRIES

Total In particular, projects with countries

of Annex 1 of the Convention In particular, projects with countries not included in Annex 1 of the Convention

Projects

Emission reductions

[t CO2 equivalent]

Number of projects

Emission reductions

[t CO2 equivalent]

% Number of projects

Emission reductions

[t CO2 equivalent]

%

The United States of America 33 311,536,098 6 34,581,936 11.1 27 276,954,162 88.9

Norway 6 4,486,539 2 2,583,442 57.6 4 1,903,097 42.4

Australia 7 5,219,609 --- --- --- 7 5,219,609 100

Japan 4 1,534,240 --- --- --- 4 1,534,240 100

Total for Countries of Umbrella Group 50 322,776,486 8 37,165,378 11.5 42 285,611,108 88.5

The Netherlands

19 11,495,960 13 11,373,520 99.0 6 122,440 1.0 Germany

4 32,379,000 4 8,379,000 100 --- --- --- Sweden

43 2,320,792 43 2,320,792 100 --- --- --- France

2 175,142 2 175,142 100 --- --- --- Total for EU countries

68 46,370,894 62 46,248,454 99.7 6 122,440 0.3

Donor countries choose JI projects to implement emission reduction projects based on lower marginal costs, project scale and favorable investment climate of the recipient country. The majority of investments are made in projects on energy efficiency improvement, renewable energy sources, wastes utilization, and forestry development in Central and Eastern Europe. The highest number of projects in countries with economy in transition is held by Sweden and The Netherlands.

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On behalf of the government of The Netherlands, the company Senter buys GH G emission reduction quotas via the Joint Implementation mechanism, in the framework of the program Carboncredits.nl104. Trading of achieved emission reduction can partially cover the costs of the investors. (Senter will buy the achieved reductions at a price that can vary from 2 to 5 EUR per ton of CO2 equivalent. The projects should be implemented at least until 2012. The minimal emission reduction must reach 500,000 tons of CO2 equivalent.)

The Carboncredits.nl program is interested in suggestions about long-term investment in the following sectors: substitution of fossil fuel with alternative fuels, transfer to fuel with lower concentration of carbon, implementation of energy efficient technologies, waste utilization, forestation (only in Central and Eastern Europe).

Among the 32 Parties that now accumulate the experience in the field of the Joint Implementation mechanism, 24 Parties are recipient countries and 8 are investor countries. At the Secretariat of the Convention, the following projects (listed in table A5.3.2) with the participation of 12 countries in transition are registered. Ukraine has no JI projects. Therefore, the experience of countries in transition is important for Ukraine.

TABLE A5.3.2: S UMMARY OF JI PROJECTS BY HOSTS

The recipient countries Number of projects Investor countries Latvia 24 Netherlands, Sweden, Germany Estonia 21 Sweden Lithuania 9 Sweden Russian Federation 9 USA, Netherlands, Germany Czech Republic 4 USA, Netherlands, Germany, France Slovak Republic 4 Norway, Nethe rlands, Switzerland Romania 4 Netherlands, Switzerland Hungary 4 Netherlands, France Poland 3 Norway, Netherlands Bulgaria 1 Netherlands Ukraine - - Byelorussia - -

Poland, for example, created a Secretariat for Joint Implementation, where two main criteria for discussing potential JI projects were developed105:

• For the project to be adopted, it should deal with technology development and equipment improvement or with financial resources for the support of these technologies and equipment.

• The project directly has to reduce the GHG emissions from the production of goods and services by means of improving the efficiency of raw materials

104 The informational Bulletin on climate changing questions, December 2001

http://www.senter.nl/asp/page.asp?alias=erupt 105 The problems and the strategy of fulfillment by Ukraine the UN Framework Convention on Climate

Changing./ Shevchuk, V.Y., Trofimova, I.V., Trofimchuk O.M., etc - ? . :??????, 2001, - 96pp. pp:.26,35-36.

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utilization or their composition, reducing the GHG concentration in the waste through chemical, physical and biological processes of distillation or utilization, and also by means of removing GHG from the air.

Russia, as another example, has created a special structure that includes an official body dedicated to coordination of Joint Implementation measures and JI projects examination: the Inter-departments Commission of Russian Federation on Climate Change Problems (the contact address for JI participants). Table A5.3.3 shows data of projects registered in Russia. The Commission has prepared and adopted the following criteria (that in general are very close to common criteria), adopted also by the Additional body of the Convention on scientific -technical questions:

• The project must have on purpose actions, which are additional to measures that will be undertaken unconditionally in accordance to the basic development scenario of the country; it has to be targeted on GHG emission reduction or GHG absorption

• The project has to be voluntary for both parties

• The project has to allow the verification of the results, including special monitoring by the Commission

• The implementation of the project has to attract investments to the country

• The Parties have to use instruments for stimulating the participation of private investors in Joint Implementation

• The project documentation has to be presented to the Commission in Russian

Therefore, while Poland, in the process of determining the criteria for JI projects, puts the emphasis on the innovative character of technologies, Russia underlines the importance of the widest possible attraction of investments (including private investments). Both of these points are important for Ukraine, and they must be reflected in the national requirements for JI projects.

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TABLE A5.3.3 JI PROJECTS, ACTED ON CONSIDERATION ON IAC RF IN 1994 - 2000 YEARS

Title Involved Participants

Term of life of the project

Reduction of ? ? 2 emission (ton)

Emission reduction t ? ? 2/year

Year of registration

Cost, $/t ? ? 2

Volume of foreign investments USA dollars

Type Stage of implementation

RUSAFOR (reforestation) Russia, USA 60 292,728 5-7 1996 3 - 4 55,000 1 Carried out Hotbed facilities (economy) in the Tyumen area

Russia, Holland

- - 0.2 1997 20* 3,387,000 4 Carried out

Methane utilization on the landfields of Moscow area

Russia, USA 10 255,268 18 1997 <1 - 7** 1,200,000 3 Carried out

GAZPROM - RUHRGAS (optimization of natural gas distribution system)

Russia, Germany

2 225,500 150 1997 1.5 - 3** 700,000 2 Carried out

RUSAGAS (outflow of methane in gas mains)

Russia, USA 28 30,995,750 1,100 1996 1 - 5*** 200,000 3, 4 Beginning of implementation

CHELYABINSK (efficiency of the municipal heat supply) - - - 100-200 - 1 - 5*** 3,100,000 4 Beginning of

implementation LYTKARINO (efficiency of the municipal heat supply) - - - 70 - 1 - 5*** 7,600,000 3,4 Beginning of

implementation ZELENOGRAD (efficiency of the municipal heat supply)

- - - 50 - - About 2-3M U$D 4 Not started

VOLOGDA (reforestation) - - - 15 - 1.5 - 3 About 1-2M U$D 3, 4 Not started Steam -to-gas power stations "Kuban" construction

Russia, Germany 4 2,700,000 - 2000 - - - -

Vologda Russia, USA 60 858,000 - 1997 - - - -

Tikhvin Russia, Holland - - - - - - - -

Conditional division of projects Type 1 - definition of an opportunity of activity - the first project of a pilot phase Type 2 - the nature protection initiative of a private business Type 3 - achievement of a floor price of the emissions reduction (financing from special fund) Type 4 - commercial projects with a “climate” component

* The order of values , possible from 8 up to 80 $ depending on the future development of the project and market conditions ** Depending on a place and year *** Cost about several dollars per ton ? ? 2

Source: http://cpc.hydromet.ru/texts/tracks.htm, http://ceeri.ecoinfo.ru/climate/russian/investigations/view.htm