Kyoto Protocol CO2 emissions reduction units trading in Ukraine (in-depth market study)

General overview. Ukraine is a party to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which came into force on 16 February 2005. The basic principles of the mechanism commonly referred to as Joint Implementation. Under JI, an Annex I Party can implement an emission-reducing project or a project that enhances removals by sinks in the territory of another Annex I Party and count the resulting emission reduction units (ERUs) towards meeting its own Kyoto target. Any JI project shall have the approval of the Parties involved and provide a reduction in emissions by sources, or an enhancement of removals by sinks, that is additional to any that would otherwise occur.
In Ukraine emission trading within the framework of the Kyoto Protocol has begun. It should be noted that the Ministry of Environment established financial requirements to Jl projects. The transfer of ERUs shall take place at a price not lower than 50 % of the market price in the EU market and advance payment must constitute 10 % of the total value of the project. However, this requirement might be disregarded if the profitability rate of investment project reaches 90 % of the deposit bank rates for legal entities.
According to informal talks with the Ministry of Environment, a Jl project might be approved without these additional financial requirements in cases when it is really favourable for a domestic producer and the goal is to ensure substantial reduction of emissions and, as a result, to modernize production facilities.

Although the Ministry of Environment defined the formalities of submitted documentation for Jl project implementation, unresolved issues, like the creation of a national register, requirements for verification, registration and certification of ERUs, still remain. This means state approval to carry out actions that lead to the transfer of emission reduction units that will be generated as a result of implementation of a project.


Project implementation. Current Ukrainian legislation in the field of emissions trading doesn`t stipulate any precise time-frame for project implementation. General emissions trading procedure include the following stages and steps:

Stage 1. JI project support.

1. Applicant (owner and potential seller of the ERUs) prepares and submits to the National Environmental Investment Agency of Ukraine a project application in due form for consideration and registration.
2. The Agency considers such application, examines its compliance with Ukrainian JI project criteria and, in case of positive conclusion, submits it for consideration to the Interagency Commission on fulfillment of the United Nations Framework Convention on Climate Change.
3. In case of positive decision of the Commission, the Agency issues a Letter of support for further project development. Otherwise the Agency informs the applicant about denial together with indication of grounds for such denial.

Stage 2. JI project approval.

1. Applicant prepares and submits to the Agency a complete project offer (Detailed project design document) along with results of independent international project expertise.
2. The Agency considers project design document and supporting schedules and, in case of positive conclusion, submits them for consideration to the Interagency Commission on fulfillment of the United Nations Framework Convention on Climate Change.
3. Should the decision of the Commission be positive, the Agency issues a Letter of the project approval. Otherwise the Agency submits to the applicant a motivated denial.
4. Applicant ensures monitoring of emissions reduction by independent certified institution and files reports to the Agency on a regular basis.
5. Annually the investor is granted respective ERUs from the Ukrainian Registry of Carbon Units.

According to the latest changes in applicable legislation, the procedure for obtaining permits and approvals was simplified, thus it shall usually take around 3-4 month to obtain all necessary project approvals. Depending on complexity of each situation and readiness of the Project Idea Note as well as Project Design Document, the time-frame may change.

Successful projects. Currently Ukraine uses only 42,3% of its quota. Up to date around 40 projects were approved, which are on different levels of implementation. We managed to trace a few projects, which are currently being successfully implemented in Ukraine. The average price is $5-20 per 1 ton of СО2.

The World Bank and energy generating company "Ukrhydroenergo" sold around 1 million tons of ERUs to the Dutch Carbon Fund.

Podilsky cement plant, Kamianec-Podilsky city
A switch from ”wet” to ”dry” production process twice reduced gas consumption and reduced more than 3 million tons of CO2 emissions. It was the first international project, approved by Joint Implementation Supervisory Committee (JISC).

ISTIL Ukraine (mini steel mill), Donetsk city
The financing facility consists of a $40 million revolving loan for working capital needs and a $45 million term loan for energy efficiency improvements, Quality control systems installation and debt refinance. Energy efficiency measures being implemented by ISTIL Ukraine include the installation of a new oxygen plant, a steam generating unit and a new transformer for the electric arc furnace. These measures are expected to improve overall energy efficiency of the company and cut its CO2 emissions. ISTIL sold EUR 3 million worth of carbon credits to the EBRD for the account of the Netherlands.

Zasyadko Coal mine, Donetsk oblast
Under the project a 24-megawatt cogeneration plant was installed for annual utilization of more than 40 million m2 of coalmine methane. Within 2008-2012 the project will reduce 10,7 million tons of CO2 emissions.

Chemical plant ”Azot”, Cherkasy city
Catalytical elimination of nitrogen oxide during production of nitrogen acid shall reduce 1,8 million tons of emissions in CO2-equivalent.

Alchevsk steel mill, Donetsk oblast
Substitution of outdated steel blast (Martin) furnace to modern convertors and installation of continuous casting equipment shall reduce 8,6 million tons of CO2 emissions.

Oil-extracting plant, Kirivohrad city
New thermal power plant, which utilizes sunflower wastes, shall completely ensure electricity demand of the plant and save more than 200.000 tons of emissions.

Current Ukrainian legislation in the field of Kyoto units trading doesn`t envisage any caps or limitations on the maximum number of JI projects to be approved or on the maximum volume of ERUs to be issued under one project.


Taxation issues. Current Ukrainian taxation legislation doesn’t establish any special tax or levy in the field of emissions trading. They are also not envisaged by pending legislation in the field of Kyoto units regulation as well as by draft Tax Code of Ukraine, which is expected to be adopted till the end of this year. Ukrainian tax laws do not contain any specific regulations with respect to taxation of emissions trading and the tax authorities of Ukraine have not announced their position on this issue. So, the general taxation, accounting and reporting scheme shall be applied. There are also no any tax incentives for international investors or domestic participants, involved in emissions trading scheme under any procedure or type of project.

According to Article 177 of Civil Code of Ukraine objects of civil rights include things, proceeds, securities, proprietary rights etc. Taking into account that ERUs may be treated as proprietary rights, they can be recognized as a taxpayer's property in accordance with the Civil Code of Ukraine. As we understand, the title to ERUs will be transferred to international traders upon exclusion of respective ERUs amount from Ukraine's national register of anthropogenic emissions and absorption of greenhouse gases and inclusion of the amount of such ERUs to the register of the country of international buyer.


Conclusion. Taking into consideration that Ukrainian government has announced its plans to sell in 2008-2015 around 1 billion tons of ERUs from unused Ukrainian quota to such potential buyers as Japan, Austria, Spain, Italy, Belgium, most probably that the necessary legislative base shall be prepared ASAP.

Taking into account that according to the World Bank estimations the demand for CO2 credits, mainly in the EU countries, shall be around 2 billion CO2 metric tons equivalent within 5 years and that Ukraine and Russia hold almost 80% of global CO2 units trading, this market has huge potential in Ukraine.

If you need legal advice or any help with purchase or sale of Kyoto CO2 emissions reduction units trading in Ukraine, please do not hesitate to contact Marketplace UkrRos LLC via www.kpl.net.ua

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