You're reading: Business Sense: Nation has responsibility to pollute less, protect planet

Newspapers are full of dire warnings about global climate warming and its likely potential consequence. We all can see evidence of climate change taking place in front of our eyes. Scientists have studied the process and identified the reason behind it – the constant and uncontrolled increase in the emission of greenhouse gases into the atmosphere.

To prevent this climate degradation, many countries, including Ukraine, bear a huge responsibility to limit their emissions in order to prevent tragedy.

But it’s not only a huge responsibility. It’s also a huge opportunity for many developing countries such as Ukraine to profit from – or modernize their polluting industries – via coordinated efforts to reduce greenhouse gas emissions.

The best example of this coordinated approach is the Kyoto Protocol, adopted in 1997 within the United Nations’ Framework Convention on Climate Change, and ratified by 189 countries, including Ukraine. Under the protocol, selected countries made commitments to limit or reduce their level of emissions during 2008-2012. If a country reduces its emissions below the level set in the treaty, then the excess available to this country may be sold to another country that emits more than agreed.

The framework provides the basis for market trading of emission allowances, or so-called carbon credits. Based on these foundations, in 2005 the European Union launched the EU Emission Trade Scheme, also known as EU ETS, which provides a cost-effective means for EU countries to cut their own emissions. The EU ETS also supports investments in “green” technology in developing countries and economies in transition.

The EU countries set limits for selected industrial plants. Exceeding the emission limits is subject to severe penalties. Furthermore, the system allows companies to offset a portion of their emissions with the carbon credits purchased on the market or gained from emission-saving investment projects carried out under the clean development mechanism and joint implementation schemes in third countries.

So-called clean development mechanism credits are earned from emission-reducing projects in developing countries. The joint implementation mechanism allows countries committed to reducing or limiting emissions to earn carbon credits from emission-reduction or emission-removal investment projects in other countries, such as Ukraine.

How does this system work in practice? Put simply, companies that keep their emissions below the level of their limits can sell the excess at a market price. In turn, companies that have difficulty meeting their targets may decide among several options: They may take measures to reduce their emissions (invest in environmentally friendly technologies); they can buy extra allowances/clean development mechanisms or joint implementation credits on the market; or they can use a combination of the above.

Due to the creation of the above mechanisms, carbon credits have become an actively traded environmental commodity. In 2008 in the EU alone, the trading volume was 3.1 billion euro. In that year, European trading constituted over 70 percent of the global turnover in CO2 allowances and credits.

In this context, what are the opportunities for Ukraine?

Generally speaking, Ukraine is in a very advantageous position, because the starting point for the calculation of targeted reductions in or limitations on emissions is data from 1990. Following the collapse of the Soviet Union, industrial production in Ukraine contracted drastically, with a correspondingly huge fall in the levels of emissions of gases into the atmosphere.

In December 2009, the United Nations climate change summit took place in Copenhagen. Ukraine was admonished in the media for having the worst target level of emissions in the world. It pledged to reduce emissions by 20 percent from the 1990 level. But that amounts to a 75 percent increase from the current level.

As there is an excess of available emissions in Ukraine, Ukraine can sell its excess to other countries in the form of credits. The downside is that such a favorable situation has not motivated the government to implement environmental programs, such as energy-saving or clean-energy programs.

Such a comfortable position, however, cannot last forever. Although no binding decisions were made during the recent summit on climate change in Copenhagen, there were debates on whether the allowances allocated to post-Soviet countries should be limited.
During the Copenhagen summit, countries were obliged to provide their proposed commitments on the limitation of emissions in writing by Feb. 1. Ukraine has yet to provide any proposal.

The way for Ukraine to gain long-term benefits from the carbon credit trading schemes is to create competitive conditions for investors from other countries to bring environmentally-friendly technologies to Ukraine. The legal framework for the realization of such projects has already been established. However, there are many questions related to the tax treatment of the sale of carbon credits by Ukrainian entities. Unfortunately, Ukrainian tax law does not directly answer any of them.

The lack of certainty with respect to tax issues, and the potential for severe penalties being imposed by the tax authorities, does not help Ukraine attract foreign investors who would otherwise be interested in the opportunity.

In the short term, Ukraine may benefit from the trade in excess carbon allowances granted under the Kyoto Protocol. Ukraine’s economy is developing. There are expectations that industrial output, and consequently emission of greenhouse gases, will increase. But it is unlikely that Ukraine will increase its emissions to the cap very soon. Nevertheless, the possibility of changes in international environmental agreements should be considered.

What is more important, Ukraine has the opportunity to attract significant investments in greenhouse gas emission reduction projects. To benefit wisely from the opportunity created by the Kyoto Protocol and attract investors to bring new solutions and technologies to Ukraine is a challenge. This chance should not be lost. But this window of opportunity will not last forever.

Magdalena Patrzyk is a manager with PricewaterhouseCoopers in Ukraine. She is in charge of the group’s Lviv office and specializes in global compliance services and indirect taxation. She can be reached at [email protected]. Maria Prysyazhnyuk is consultant with PricewaterhouseCoopers in Ukraine. She specializes in indirect taxation. She can be reached at [email protected].