Monitoring, reporting and verifying (MRV) of greenhouse gas emissions – International Experience Relevant for Ukraine

On 5 December a Clima East workshop on MRV for Ukrainian parliamentarians and their staff took place in Kiev. In addition to Ukrainian lawmakers, participants represented NGOs, the business community, central administration, the banking sector and donors. The workshop was opened by MP Ostap Yednak who stated that MRV is a crucial issue for Ukraine, since the country needs to get up to speed with the Association Agreement requirements.

He further stated that MRV is not an entirely new subject in Ukraine. There were earlier attempts at approaching the challenge but this time Ukraine needs to do this properly. He welcomed the participants and invited them to take active part in the discussions that took place after each session.

Mykhailo Chyzhenko, Head of Division on climate policy and reporting of the Ministry of Ecology and Natural Resources welcomed participants on behalf of the ministry. He noted that recently there had been an increase in the number of events devoted to emission problems and climate. MRV is relevant in the context of international treaties that Ukraine is a party to, and in connection with the need to transpose Directive 2003/87/EC on Emissions Trading under the Association Agreement. Unless Ukraine builds a reliable MRV system, the country would not be able to introduce the ETS. More countries are introducing MRV. At Marrakesh COP this was announced by Chile whilst other countries such as Turkey are taking similar steps. Ukraine is being supported by other projects, such as Partnership for Market Readiness but Mr Chyzhenko especially welcomed help from the Clima East project, and praised it’s expertise.

Zsolt Lengyel, Clima East Team Leader noted that the region was not that behind other parts of the world; Kazakhstan introduced Emissions Trading and there is a considerable amount of knowledge to tap into.

Many participants have knowledge of Emissions Trading and are familiar with economic instruments of emissions reduction.

Mr Lengyel noted that the aim of the workshop was to have dialogue, questions, not leaving any issues unanswered. Next year an MRV act will be adopted and it is crucial that the issues at stake are well understood. His subsequent presentation introduced the Paris Agreement context, the Clima East project and some considerations for the setting up of an MRV system: what can be measured and what can be managed. There are three simultaneous challenges as the world gets warmer: how to reignite global growth, how to deliver on the Sustainable Development Goals and how to drive strong climate action post COP.21.  Paris Agreement is a significant step but it needs implementation and improvement. The 2 degrees target will be soon out of reach, infrastructure and investment lock in capital, technology and emission targets for decades. Time is ripe for action, as there is rapid technological change underway, and it is necessary to take into account that policy formulation, subsequent action and tracking, regulatory certainty require robust MRV.

Mr Lengyel continued by noting that sustainable economic growth, improved energy security and increased resilience allow for framing the necessary low carbon growth. Ukraine is facing both, challenges and opportunities – the region is significant in terms of its reduction potential, Paris Agreement has galvanized additional interest in the Clima East region and a great deal of political support, but to date only Ukraine out of the 6 EaP countries has ratified the Paris Agreement. Others are progressing with ratification preparations with various speeds. Continued support is needed to build understanding and capacity to link and deliver climate and economic benefits in the Eastern Partnership (EaP) countries. In this regard the European experience and cooperation will be invaluable. The Clima East project has been providing a regional platform for exchange of experience and capacity building in the EaP countries. The Paris Agreement is a vehicle for transformative change, rapid decarbonization and a recent Declaration on cooperation on environment and climate change in the Eastern Partnership, made public on 18 October 2016 acts as a driving force and a vehicle for cooperative climate action, together with the Association Agreements and the Energy Community Treaty.

In the discussion that followed this presentation, the participants touched on the need to introduce measures such as the ETS versus tax, concluding that Emissions Trading is the optimal choice. However, it is important to learn from the others’ mistakes, also from the mistakes of the EU, where the over allocation problem was difficult to address. Ukraine cannot blank copy other systems, only MRV is an element that has to be copied, Ukraine needs foremost to strengthen the institutional system. Mr Lengyel noted that MRV, compared to other aspects of Emissions Trading is really not controversial. The participants further agreed that a good MRV system is essential for trading, taxation, any other system that could be put in place to mitigate and reduce GHG emissions. All economic instruments: command and control, Emissions Trading, pure economic incentives require robust MRV. Compliance is relevant for MRV reliability, deterrence for cheating. ETS has an imbedded chain of compliance, chain of logical steps: permitting, approval of a monitoring plan, implementation of the monitoring plan, drafting annual emissions report, timely submission of verified annual emissions reports to a Competent Authority, inspection and enforcement by a Competent Authority. The structure of compliance is complex. Establishing an MRV system country creates 95% of the institutional structure.

It was noted that an impact assessment for the introduction of any planned measures would be essential. Ukraine government needs to know how much would it cost for the government to run such a scheme for industrial players, but also how much would this cost companies. Initial impact assessment for Emissions Trading of the Commission heavily underestimated costs on the level of the installations. Monitoring emissions on any level comes with a cost, third party verification adds extra cost on top. Compared to other measures, such as command and control, costs are comparable. Clima East Team Leader noted that Ukraine’s NDC contains a ceiling of emissions which implies scope for growth by 50%. However, raising emissions would not be compatible with Emissions Trading, which is a tool for emission reductions. Mr. Chyzhenko noticed that MRV is the most costly chunk of the system. Quality requirements mean that the capacity of the laboratories needs to be strengthened. Operation of a Competent Authority is also costly.  Some ideas considered involved setting up specific caps, not absolute caps. It was noted that Clima East project is currently discussing with the ministry support to setting up a Competent Authority for Ukraine, to determine how best to structure it.

Two presentations on the World Bank’s Partnership for Market Readiness (PMR)project and on the USAID Municipal Energy Reform Project (MERP) were delivered consecutively by Natalia Parasyuk, and Natalia Kushko, representing their respective project teams. Introducing the PMR project Ms. Parasyuk noted that MRV is technical work, having little to do with allocation and participation, which is a political issue to be resolved in public consultations. The ultimate objective is to put an ETS in place, in order to achieve an emissions reduction.  The PMR wants to set up a system of national inventory, MRV on installations level will provide a baseline. MRV will be necessary to support benchmarking, and to support trade. In Ukraine, there is a need to support the current carbon tax, support is needed for drafting and adoption of the Low Emissions Development Strategy.  A framework law was under development on the ETS but it was abandoned after dismantling of the State Environmental Investment Agency. It will be necessary to set up a Competent Authority in its place. Currently, the leading entity is the Ministry of Ecology and Natural Resources. The institutional framework will have to be adjusted and Technical requirements will have to be put in place. However, support is provided not only the Clima East project but also through the USAID MERP project and PMR project. Lots of questions need to be addressed. PMR project promised to deliver support on policy, legislative/regulatory proposal, trainings, setting-up of a help desk. MRV draft law of Ukraine will be prepared as a result of this project. An entire package will be proposed, an act of Parliament, draft resolutions of the Cabinet of Ministers, policies to transpose the EU MRV regulation and the draft amendments of other laws and regulations. Key tasks of the project are: to develop monitoring and reporting templates, to propose a guidance for operators and the regulator, development of emission calculating techniques, operators’ training on how to prepare monitoring plans based on the needs assessment process. There will be also pilot projects in sectors, depending on the availability of funds. An analytical paper was prepared stipulating activity types and installations that should be covered. For pilots, project will donate verification by the EU based verifiers. Another component is to help develop benchmarks by identifying correct data.

Ms Kushko said that the USAID MERP project was looking at the impact of the emissions MRV in municipalities. The project offers training and the setting up of systems, helping enterprises to prepare their monitoring plans. The project ends in September 2017 and will be followed by an analytical report, aiming to answer the question: what lessons should be taken from there and shared with the authorities? The project would contribute to development of the LEDS.

A further discussion was moderated by Mr. Chyzhenko, who asked the participants what was the way forward for Ukraine, in the context of the Paris Agreement. Will Ukraine go the way of the EU with absolute emissions targets, or should it have a trajectory more like China, with peaking of emissions at some point?

All scenarios show a slight increase of emissions, even in the greenest scenario but not above the 2012 level. There is no strong decoupling of GDP and emissions, in Ukraine GDP growth means some emissions growth. GDP growth cannot be constrained. The challenge is how to build the ETS, how to prevent ETS from stopping the GDP growth? Ukraine needs to set up a fair emissions price, so that this helps modernization of the economy. Article 6 of the Paris Agreement, ICAO and IMO mechanisms aimed are reducing GHG emissions should support development of Ukraine. Representative of business association, Mr Kurylenko asked what was a concept the ministry intended to pursue on Emissions Trading, were business representatives consulted.

Another question from one representative of the banking sector referred to the market context: Will the emissions reduction be left to the market (one extreme) or be regulated (the other), or taxed. He noted that the Korean emission trading is a good example of a good approach where trading is cheaper by 40-60% than regulations or tax. It was also noted that the MERP has conducted some training for sectors, e.g. cement. Participants wanted to know the opinion from business. It is known that five cement operators owned by EU companies declared that they would close their plants, if Emissions Trading was introduced. Participants also worried that current gas tariffs and the need to buy allowances by power producers would lead to further increases of power costs. They stressed repeatedly that there is a need of a very thorough impact assessment.

Feedback from industry is not the only issue. Emissions Trading should not be confused with emission reductions, this can be tax, or regulation, and in each case there will be costs and price increases but the key issue is to select the cheapest method of those available. In the Association Agreement, there is no blueprint for Ukraine’s Emissions Trading. The European experience will be relevant but it is also crucial to avoid a recurrence of the issues experienced by the EU. The ETS has to be built in such a way that it becomes viable in the context of the international market. There is no alternative to a trading system but it cannot cover all the types of installations. Those not covered by ETS will be covered by tax. Much is at the discretion of Ukraine.

MRV is so important because it does not preclude anything, Emissions Trading nor taxation. Irina Stavchuk, National Ecology Center, representing the NGOs sector shared the view that Ukraine was not yet ready for Emissions Trading because the economy needed to grow. MRV is a different matter (to ETS) but verification can be too costly for companies. Participants expressed concerns about the cost of MRV, particularly as they felt that Emissions Trading is for some time not feasible until the economy has grown sufficiently.

After the presentation of the ETS in the EU, its fundamentals, history and the MRV and compliance cycle delivered by Dr. Marzena Chodor, Clima East Key Expert, the team has screened a short film about Emissions Trading taken from the EU website. In the subsequent discussion participants discussed the role of the banks in Emissions Trading in the EU noting that the banks have created innovative instruments supporting the market elements of the system. They also talked about a remedy on the low price of allowances. The reason for the low prices such as over-allocation, the inflow of JI and CDM credits, and at the same time decoupling of emissions and growth, and reduction of carbon intensity of European production, all these were the factors that contributed to the price problem in the ETS. However, the key thing was that the ETS delivered real reductions, and even exceeded the expectations.

This discussion was followed by Mr. Lengyel’s presentation on the implementation of MRV requirements in the EU Member States, with special reference to Croatia as a country joining the EU while the EU ETS was already operational.

MRV is a technical task. MRV systems have to be implemented with a final purpose in mind. Successful MRV requires skills and information in the system. Informed operators and verifiers, informed officials with technical knowledge who can judge the monitoring plans. Multinationals with local operations are always in the forefront and can share experiences with those that have no information on the organization.

To finalise the event, the Clima East Team Leader stated that, having taken into account, together with Mr. Yednak and Mr. Chyzhenko, the intensity of the discussion, real interest of all the participants, regrets from those that were invited that could not come and the announcements of forthcoming documents, including the energy strategy, and the LEDS being prepared, he hoped there would be a roundtable on MRV, Emissions Trading and the challenges that Ukraine is facing, held in cooperation with the existing projects and the incoming German GIZ/BMUB project. Key aspects to be considered include impact assessment of the proposed legislative measures, how the future energy strategy will fit in with climate obligations of the country, what will be the long term vision until 2050 – the UNFCCC encouraged countries to put their long term strategies forward by 2020, and some have already done so at Marrakesh.