Why Ukraine Should Participate in the Green Transition

Today, Ukraine is moving towards full membership in the European Union (in our view, the probability of Ukraine being invited to start accession negotiations in December 2023 is quite high). As part of this process, Ukraine will gradually implement European standards in various sectors, including environmental standards in production and consumption. The EU has set an ambitious goal to become the world’s first climate-neutral region (with net-zero greenhouse gas emissions) by 2050. To achieve this goal, the European Commission approved the European Green Deal in 2019, which includes plans to minimize greenhouse gas emissions, increase energy efficiency, and develop renewable energy sources. 

Why is it necessary to take global warming seriously?

The average temperature on Earth is rising, and the pace of this increase is accelerating. This leads to a rise in the sea level and an increase in the frequency of natural disasters: in the early 2020s, their occurrence was on average four times higher than in the early 1970s. Clearly, natural disasters result in losses for production and households, which in turn negatively affects insurance companies and banks. However, slow climate change also impacts the economy, as the conditions for agriculture, tourism, and access to drinking water change. Human activity, including the burning of fossil fuels for energy production, is one of the factors contributing to climate change. If emissions continue to rise, the increased concentration of greenhouse gasses could lead to a rise in the average global temperature by 3-6°C compared to the end of the 19th century, which is 2-4 times higher than current levels.

What measures do countries take to limit global warming?

In order to mitigate these negative phenomena, developed countries have developed and are trying to implement a green transition strategy, which involves transitioning from fossil fuels to energy from renewable sources. Part of this strategy is the Paris Agreement of 2015, which aims to limit long-term global temperature increases to 1.5-2°C compared to the pre-industrial era (which is 2-3 times less than projected if no action is taken). Under this agreement, countries commit to reducing CO2 emissions to a certain level compared to 1990 (nationally determined contributions, NDCs). According to the UN’s assessment, achieving the goal of the Paris Agreement requires a 45% reduction in global emissions by 2030 and achieving climate neutrality by 2050. Therefore, most developed countries, including the G7, announce their intentions to achieve climate neutrality by 2050.

However, as of today, global CO2 emissions continue to increase. The annual growth rates of emissions from 2012-2022 for all countries worldwide was 0.7%, including China, which is considered a “leading country,” with an annual increase of 1.6%. Compared to 1990, global emissions have increased by 65% (Figure 1).

Today, the NDCs until 2030 of 193 countries that participate in the Paris agreement foresee an overall increase in greenhouse gas emissions by 11% compared to 2010. It is not surprising that the New Climate Institute notes that governments are not making sufficient efforts to achieve the goals declared in the Paris Agreement.

This is understandable because the green transition is an expensive and complex process. The overall capital investment needs for the period 2020-2050 could be between EUR 600 to EUR 1,250 billion. 

Ukraine’s participation in climate initiatives

Our country has signed and ratified the Kyoto Protocol, under which it sold CO2 emission allowances for some time. The Ministry of Ecology plans to resume emissions trading next year. Ukraine also participates in the Paris Climate Agreement.

Due to significant reductions in industrial output during the 1990s, Ukraine may look good in climate initiatives without substantially reducing emissions relative to the levels before the full-scale invasion. As of the mid-1980s, Ukraine’s carbon dioxide emissions reached 740 million tons or 3.7% of global emissions. From 1991 to the end of 2020, Ukraine reduced its CO2 emissions by 3.5 times in absolute terms, and its share in global emissions decreased sixfold. 

Most of the emissions reduction occurred during the 1990s due to the decline of energy-intensive industrial production. During the economic recovery from the early 2000s to the mid-2010s, emissions stabilized at around 300 million tons per year, including through a gradual reduction in the energy intensity of Ukraine’s economy (measured as primary energy consumption to GDP). During the 2000s, the energy intensity of our economy decreased by 55% [1] compared to 2000, and during the 2010s, it decreased by an additional 11%. However, despite these improvements, Ukraine’s economy remains energy-inefficient. At the end of 2020, its energy intensity was 57% of the 1990 level (for comparison, in Poland it was 33%), and it was 2.6 times higher than the EU average.

Under the Paris Agreement, in 2016 Ukraine committed not to exceed 60% of the 1990 emissions by 2030. Its actual emissions level at that time was 38% of the 1990 level, meaning that Ukraine was already meeting these commitments. In July 2021, the government approved Ukraine’s Updated Nationally Determined Contribution (NDC2) to the Paris Agreement. It aims to reduce greenhouse gas emissions to 35% of the 1990 level by 2030 (the actual emissions level at the end of 2020 was 36%, partly due to reduction of economic activity caused by COVID-19). Ukraine’s National Economic Strategy until 2030 emphasizes the need to achieve climate neutrality by 2060.

However, according to the New Climate Institute’s assessment, Ukraine needs to reduce emissions to 25% of the 1990 level by 2030. This is nine percentage points more than its suggested commitment. 

Where would the money come from?

Reducing the consumption of fossil fuels requires significant investments into new technologies. For example, according to Ukraine’s NDC2  under the Paris Agreement, additional investments to achieve the stated goals by 2030 were estimated at EUR 102 billion.

The long-term benefits of these investments are clear: alignment with the European Union, reduced dependence on energy imports, decreased environmental pollution, and quality of life improvement. However, in the short term, there is a likely increase in production expenses and a corresponding loss of competitiveness for more environmentally friendly products. And, of course, the main question is where Ukrainian companies can find the money for “green” recovery. 

In developed countries, governments finance approximately one-third of investments in the green transition through state development banks or subsidized loan programs. Private sector invests the rest of the funds. In Ukraine, capital investments were low even before the full-scale invasion and were primarily (two-thirds) funded by companies’ own money. It is clear that today the investment opportunities for businesses have further deteriorated.

After the war ends, Ukraine will require significant financing and, consequently, additional capital mobilization instruments. These instruments can be blended finance and public-private partnerships (PPP). Blended finance typically combines official development assistance with other private or public funds in order to attract additional resources from other stakeholders. 

Using “green bonds” and sustainable development bonds can be a promising avenue. In international practice, these instruments are successfully used to finance large infrastructure and green energy projects. However, for these instruments to work effectively, the National Capital Market Regulator must ensure the implementation of international standards for the operation of sustainable development bonds [2]. (including preventing their use for money laundering).

For the successful development of the national capital market and attracting large institutional investors, it is necessary to fully implement international standards for disclosure of information, diversification of financial products, and protection of investor rights. In the long term, Ukraine should consider joining the European Union’s Capital Markets Union. Introducing a new capital market regulation system will stimulate investment, including in “green bonds” and sustainable development bonds.