Clima East Expert Facility supported the Establishment of the Competent Authority for greenhouse gas emissions trading in Ukraine

On the 10th April 2017, the Clima East team organised in Kiev a workshop marking the closure of the Expert Facility assignment “Establishment of the Competent Authority for greenhouse gas emissions trading in Ukraine”). The workshop took place in the Aarhus Centre of the Ministry of Ecology and Natural Resources (MENR). The workshop was opened by Ms. Svitlana Grynchuk, Head of Department of Climate Change in the Ministry of Ecology and Natural Resources and by Dr. Marzena Chodor, Clima East Key Expert on behalf of the Clima East Policy project. Ms. Grynchuk stressed how important the setting up of the Competent Authority was for the successful implementation of the Association Agreement (AA) provisions on climate change, and on Emissions Trading System (ETS).

Clima East National Coordinator for Ukraine, Mr. Vladyslav Zhezherin, introduced the team of experts and moderated discussion. The assignment was delivered by a team consisting of Mr. Istvan Bart, Ms. Agnes Kelemen and Ms. Iryna Trofimova, who all participated in the workshop and made presentations of the project results.

To set out the context of the project, Dr. Chodor presented Clima East support to AA implementation, ETS implementation and the Expert Facility, focusing on assignments implemented in the Association countries. In discussion, the participants raised questions about details of the support provided by the Clima East project to Moldova and Belarus in identifying installations for MRV purposes.

Mr. Istvan Bart, one of the three experts working on this assignment announced a change in the agenda which was introduced in order to allow participants less familiar with emissions trading to understand the concept and subsequently delivered a presentation introducing emissions trading. In this he argued that emissions trading and a price on carbon comes at the least cost to the economy, and that companies know best where to reduce emissions and how to do it, so that the overall result is better than a prescription of GHG emission limits by the state. He also outlined the history of emissions trading in the EU, starting from 2005 and focusing on the evolution of the system and the way it has changed, responding to challenges and identified opportunities. Over-allocation was one of the principal problems that the EU struggled with initially, however, MRV regulations, the Union registry and a single European allocation mechanism allowed the EU to put the ETS back on its feet. ETS is now largely a system that generates carbon price for the energy production, as generation of energy cannot be offshored. The ETS gives a long-term vision orf decarbonization of the economy. The ETS is a good and efficient system but it is still underperforming, compared to its potential. That is why the system is being reformed now, through introduction of, among others, a market stability reserve and a steeper reduction pathway, and a stronger support to innovation and modernization.

In discussion, the participants asked how ETS prices affected prices of consumer goods and the economy and were told that in the past there was no significant impact on energy prices in the EU because the price of carbon was low but with the increase of the carbon price, the energy would become more expensive. In Western Europe, energy is not a significant part of consumer spending, in Eastern Europe, consumers are spending more on energy, and the price of energy is more important. There was also a question about past derogations for the energy producers which, as pointed out by the expert, was introduced to finance modernisation of the energy companies.

The following presentation focused on the immediate subject of the Competent Authority, starting with the definition of a Competent Authority (CA). In EU member states there are many CAs which are in charge of various sectors. In Germany, for example, there are c. 300 CAs. The CA for the ETS in the EU member states is responsible for compliance issues and the issuance of allowances, it is in charge of auctioning, often it is overseeing verifiers, ensuring access of the public to information, capacity building and awareness raising. In the past, CAs were also running national registries and now they are responsible for maintaining national accounts in the Union registry. The ETS Directive (2003/87/EC) makes the CA responsible for all the implementation issues on a MS level. However, inspection and enforcement is not always the responsibility of the CA, in some MS this is carried out by environmental inspectorates. In the EU member states, the structure of the CAs is diverse, the CAs are sometimes separate entities, and sometimes part of the ministries of environment but always the ministries of environment/ecology are in charge of policy issues and overseeing implementation. In some countries CA for the ETS is also responsible for the industrial emission directive (IED) implementation.

A presentation by Ms. Iryna Trofimova focused on the harmonisation of the existing legislation with the EU acquis, in line with the Association Agreement. Ukraine needs to adopt both, relevant legislation and regulation. This will be done in stages, leading to the creation of a domestic ETS system, with setting up an MRV system and ensuring public information access. The Ministry of Ecology and Natural Resources is responsible for drafting legislation.

Given the complexity of the task, Ukraine is now negotiating a postponement of deadlines of implementation of the ETS Directive to the period of 2017-2019.

Ms. Agnes Kelemen presented the outline of the institutional framework for emission trading in the EU member states and the arguments behind recommendations for Ukraine presented in the final report from the Establishment of the Competent Authority for greenhouse gas emissions trading in Ukraine project. The experts looked initially at the current institutional framework in Ukraine. They noted that the knowledge accumulated in the Ministry and in the Budgetary Institution “Center for GHG Emission Inventory” is not necessarily pertinent to the MRV tasks. The situation is different for permitting, since the Ministry is also issuing other permits. Experience with Joint Implementation projects is of a limited value for the MRV. The State Ecological Inspectorate can provide input into setting up the system through its knowledge of the installations and companies. At present there are a number of unknown parameters such as the number of installations and the scope of the future CA tasks. The top 20 installations in Ukraine are responsible for 60 per cent of emissions in Ukraine, so including the top 100 installations (in terms of emissions) is going to cover the majority of emissions. The experts proposed therefore to start the implementation of the MRV system and obligations by introducing it in the top 20 installations, then extending it to the top 100 installations, and gradually increasing the number of covered installations to the 250 biggest installations. In discussion it was noted from the floor that there were circa 19 thousand installations across Ukraine belonging to several hundred operators but not all would come above the threshold for the emissions trading. Participants discussed also how to account for emissions from smaller installations. An example of non-ETS rules in the EU was also brought up as one of the possible solutions of this problem. Some of the participants posed the question as to why the setting up of a new MRV system was required when there already exists a tax on emissions in Ukraine at present. They also pointed that there should have been already a system for monitoring of emissions, as without monitoring and reporting – assessing and paying the appropriate tax is not possible, so perhaps that system could be adapted to ETS purposes. The experts stressed that the MRV system should be set up ahead of the emission trading system. There are two rationales for this: the first one is to provide accurate emissions data preventing the crash of the emissions price, once the system is launched. Secondly, in order to cover large emitters, their employees have to learn about MRV first. Learning about trading is another issue, and the bulk of trading will be done by specialised traders, or banks, like in the EU. In discussion it was also noted that a definition of an installation in the Industrial Emissions Directive (IED) was different from the definition of an installation in the ETS, and that this could result in difficulties if reporting and monitoring for the two directives was combined. The experts pointed out that permitting under IED and ETSD was similar, but, indeed, some MS had problems with defining the boundaries of installations. Some MS referred to the tax code. Some MS, like the UK, generated their own detailed guidelines. The participants asked also how much the costs would be to companies for opening a registry account, permit fees, etc. Other questions referred to options including the Budgetary Institution which would potentially raise revenue from various activities, to definition of installations and whether it did indeed make sense to harmonise the definition of an installation in line with the two directives, to the Ministry plans for awareness raising and introducing programs on MRV/emissions trading into the state education system.

The last presentation on organisation, staff needs and costs associated with setting up of the CA was delivered by Ms. Agnes Kelemen. The experts recommended starting initially with a lower number of installations, and this would allow for the reduction of the costs at the outset. A survey of CAs in the EU revealed that in 21 out of 30 CAs, between 1 to 5 people were involved in managing the MRV system, and in times of a heavy workload when companies submitted their annual reports, more people were allocated to the task, or temporary staff were hired, and/or some tasks were outsourced. The number of installations per one staff member in the EU member states’ CA varied between 2 and over 700 installations. The experts stressed that the costs estimate covered the bare minimum of operational costs. The participants noted that this estimate would need to be increased to take into account training costs for operators and costs for maintaining a data management system, amongst others. Participants also discussed the option of outsourcing the functions of CA to the external contractors. Their concern was to ensure an equal level of competence of officials working in CA and of the verifiers. In closing remarks, Ms. Olga Yukhymchuk (MENR) stressed that the project provided lots of insights, even though the Ministry was aware about the amount of work still to be done and other grey areas to be addressed, notwithstanding a good understanding of what a Competent Authority could look like, provided by the Expert Facility assignment. Mr. Mykhailo Chyzhenko, Clima East Focal Point, also thanked Clima East Policy Project team for their support over more than four years of cooperation with the Ministry. Marzena Chodor thanked the officials and the participants for engaged discussion and closed the workshop.