Ukraine’s environment ministry has published a draft plan to set up an emissions trading scheme by Jan. 1 2017 that foresees linking to the EU market by 2019, but experts said the proposal was fantastical.

The concept note, posted on the ministry’s website, invites stakeholders to make comments by Oct. 16 with a meeting to hear views scheduled for Oct. 23.

A final plan would still need to be approved by the cabinet of the crisis-stricken government, which is crippled by a pro-Russian rebellion in the country’s east and relies on Russian gas to supply most of its energy needs.

The plan follows the timeline of a much wider EU Association Agreement the government signed in 2014 but implementation may not be realistic in its current form, according to two EU-based experts familiar with the situation who asked not to be named.

The government would find the timeframe extremely challenging and the EU would be reluctant to link under current circumstances, said Ganna Korniyenko, a Kiev-based climate policy analyst at Thomson Reuters.

“The timeline seems barely realistic, given the restrictions on institutional capacities, requirements for infrastructure and the lack of a proper MRV system in place,” she said.

The ETS plan also appears to be in sharp contrast to Ukraine’s INDC, which would allow emissions to rise 40% above current levels by 2030 and was submitted despite condemnation by green groups and after EU-backed advisers had distanced themselves from the process.

PILOT PHASE

The plan suggests a four-year pilot phase over 2017-2020 with no penalties for emitters that breach emission limits, as well as 90% of allowances allocated for free.  It gives no indication of the overall emissions reduction goal.

The document said that the Ukrainian ETS would likely have low liquidity as most of its installations are concentrated among very few owners, and therefore would not be attractive to potential investors as the cost of abatement did not vary much.

“Such potential drawbacks of the Ukrainian ETS can be overcome by the linking of the Ukrainian ETS with the EU ETS,” it said. “Readiness of the Ukrainian ETS to link in 2019 should become a common target for central executive bodies, operators and other stakeholders of the Ukrainian ETS.”

LINKING EFFECTS

Ukraine is one of the world’s top 20 greenhouse gas emitters but its output is less than 10% of the EU’s.

Because Ukraine’s marginal abatement costs are likely to be much cheaper than in the EU, linking the schemes would likely drag down EU carbon prices unless restrictions are placed on the flow of allowances.

Thomson Reuters’ Korniyenko said this, and the lack of reference to linking in the overall Association Agreement, made the prospect of a connection to the EU scheme slim in the near term.

“Unless credible MRV is in place and carbon prices are comparable, the EU will not go for linking,” she said.

UKRAINE-EU RELATIONS

Amid doubts over environmental integrity, the EU banned most Ukrainian Joint Implementation carbon credits from its market in April 2013, but acted too late to prevent its flagship scheme being undermined by over 300 million Ukrainian units that subsequent studies found were unlikely to represent actual emission reductions.

Climate policy has since fallen drastically down Ukraine’s priority list amid the civil war in the country’s east and the annexation of Crimea by Russia.

In 2014, Ukraine signed the EU Association Agreement, which was aimed at building closer political and economic ties following the overthrowing of pro-Moscow president Viktor Yanukovych.

The agreement involves Ukraine taking energy saving measures and increasing its use of renewable energy. It includes provisions to set up the elements of an ETS within two years of coming into force.

After several delays, the agreement is due to come into force at the end of the year.

By Ben Garside – ben@carbon-pulse.com