SK sustainable development digest

Sustainability and profits. For companies, sustainable development is directly related to profits. Changes in supply chains, modernisation of production, changes in consumption and production patterns – everything affects income, thus, sustainable practices are treated with caution. We have arguments in favour of the fact that sustainability and profitability are not mutually exclusive things.

There are successful cases. The “Beyond Supply Chains” report of the World Economic Forum shows examples of UPS, SABMiller, DHL, Unilever and Nestle, which managed to increase profits up to 20 per cent and supply chain cost reduction to 16 per cent. The same report states that the companies managed to increase the brand value by 30 per cent with a concomitant reduction of financial risks.

Reduces production costs. Investments in sustainable development are already efficient in the short term. For instance, companies can quickly increase energy efficiency and process efficiency gains of 20 to 40 per cent. Introduction of sustainable practices for rational consumption is essential as the reduction in the cost of raw materials affects 60 per cent of profits from economic activity.

Protects against external risks. Industries vary in the degree of profit protection from external influences. For example, on average, a third of company profit depends on government intervention. The degree of such impact varies by industry:

• from 25 to 30 per cent of profits from sales of consumer goods (labelling requirements, environmental standards)
• from 35 to 45 per cent for energy (tariff regulation, state subsidies, subsoil use rules, licensing of activities)
• from 45 to 55 per cent for transport, infrastructure, logistics sector (pricing regulation)

Introduction of sustainable practices will help not only to avoid the negative consequences of government actions but also to attract support and build the reputation of a socially responsible company.

Sectoral legislation

On 16 November 2021, the Ukrainian Parliament adopted in the first reading the draft law “On Amendments to Certain Laws of Ukraine on Development of Energy Storage Systems” № 5436-r, dated 17 September 2021. The draft law creates a legal framework for energy storage systems. The draft law provides for:

• establishment of a new electricity market participant – the energy storage system operator (ESS operator). The definition of the ESS operator is provided, its rights, responsibilities and special conditions for functioning in the electricity market are outlined
• licensing of energy storage activities. The regulator will be responsible for approving licensing conditions and issuing licenses for energy storage activities
• a general ban for transmission and distribution system operators to conduct energy storage activities. The draft law provides for the conditions under which these market participants may own, purchase, manage and operate energy storage systems
• regulation of energy storage activities conducted by consumers and electricity producers

Relevant amendments are made to the Law of Ukraine “On the Electricity Market” and the Law of Ukraine “On the National Commission for State Regulation of Energy and Utilities”.

On 18 November 2021, the Ukrainian Parliament adopted in the first reading the draft law “On the Timber Market” № 4197-r, dated 10  September 2021. The draft law establishes the operation principles of a transparent timber market and provides for:

• creation of a forest portal with information on the state of forests. The draft law envisages the process of obtaining special permits for the use of forest resources, certificates of timber origin and other permits in forestry. The usage of the portal will be mandatory for forest users and forest owners
• preparation of the annual plans for forestry operations by forest owners and forest users
• provisions on sale and purchase contracts of timber, specifically, information on the essential terms, liability for buyers and sellers for non-compliance with the terms of sale and purchase contract
• provisions on timber sales at electronic auctions and on the terms of the offer contract

The draft law includes a number of provisions facilitating sustainable development in the forestry sector. Section V “Sustainability guarantees of untreated wood international circulation” provides guarantees of sustainability of international circulation for certain wood products and untreated timber:

• for the export of certain wood products, a certificate of timber origin and certain wood products is required
• for the export of untreated timber, a certificate of timber origin and certain wood products, a certificate of origin for timber from the area where the indicator of protective forest cover is not less than the established standards and a certificate of absence of species listed in the Red Book of Ukraine in areas where timber was harvested are required

The draft law “On Amendments to the Tax Code of Ukraine On Collection of Environmental Tax in Waste Management” № 6345, dated 24 November 2021, provides for an increase in environmental tax rates for the disposal of extremely hazardous waste equipment and devices containing mercury, elements with ionising radiation, fluorescent lamps and for waste disposal, which are determined depending on the hazard class and level of waste hazard. The draft law proposes a gradual increase in the tax rate for household waste disposal starting from 1 July 2022.

On 24 November 2021, the Cabinet of Ministers approved the draft law “On Amendments to Certain Laws of Ukraine on Improving Environmental Audit Procedure”. The draft law provides for:

• harmonisation of terminology in legislative acts in accordance with the Law “On Environmental Impact Assessment”
• obligatory ecological audit a) in case of liquidation or decommissioning of enterprises, institutions or organisations, their structural subdivisions; b) by a court decision establishing a violation of environmental legislation
• unification of requirements for the conclusions of the environmental audit and their publication procedure

The Ministry of Energy of Ukraine has announced development of a support system for small distributed generation Net Billing. Net Billing is a type of calculation of excess electricity supplied to the grid by consumers. The system provides for the calculation of surplus electricity in accordance with market prices. Net Billing will apply to new prosumers.

International experience

The 26th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP26) was held in Glasgow from 31 October to 12 November 2021. The conference resulted in the adoption of the Glasgow Climate Pact. According to the document, the participating countries have committed to revisit the emission targets for 2030, set by nationally determined contributions. For the first time, the document fixed a call for phase-out of coal power and fossil fuel subsidies.

In addition, a number of important events took place within COP26:

• 151 countries have submitted a new or updated nationally determined contribution. 91 of 151 countries have submitted new GHG-related commitments
• 28 companies pledged to accelerate the use of low-carbon hydrogen. Energy companies BP, Shell, Equinor and TotalEnergies were among the companies that pledged to boost demand for hydrogen under the H2Zero initiative
• 46 countries have pledged to phase-out coal. Ukraine did not support the initiative
• 100 countries have joined the Global Methane Pledge. It was agreed to reduce methane emissions by 30 per cent by 2030. Ukraine has joined the initiative
• 141 countries have pledged to halt forest loss and land degradation by 2030. Ukraine supported the initiative

Carbon allowances in the European Emissions Trading System have reached above €74 per tonne. The rise in price in the EU carbon market was boosted by the results of the climate conference in Glasgow, rising gas prices and unfavourable weather conditions for wind energy.

Portugal has shut down its last coal-fired power plant. The Pego plant was the second largest carbon emitter in the country. There is now a public discussion in Portugal on ways to convert the plant to sustainable energy, so as not to devalue the coal phase-out.

Chevron, Qatar Energy and Pavilion Energy have published a methodology for calculating and reporting GHG emissions for liquefied natural gas supplies. The SGE methodology is expected to contribute to awareness raising, better management and transparent reporting of GHG emissions in the industry.

The European Commission will consider a proposal to include gas and nuclear energy in sustainable energy sources. The proposed changes to the “taxonomy” – the classification of sustainable economic activities – could lead to half of the gas plants and most nuclear power plants in the EU being considered “green”.

The European Commission has published a proposal for a regulation on deforestation-free products. The regulation restricts access to the EU market for goods related to deforestation. The regulation establishes a mandatory procedure for verifying compliance with the standards for certain categories of goods, namely: soy, beef, palm oil, wood, cocoa, coffee, as well as some derivative products (leather, chocolate and furniture).

Sustainable development in Ukraine

COP26 summary for Ukraine:

• On 5 November 2021, the Ukrainian Parliament adopted an address to the UN Climate Change Conference. The resolution confirmed the intention to update Ukrainian legislation in accordance with its international obligations (in the areas of waste management, biodiversity, “green” industrial transformation, the establishment of a climate fund, taxation of GHG emissions, etc). The Parliament recommends the Cabinet of Ministers to develop a Strategy for Low Carbon Development of Ukraine for the period up to 2050; the action plan and the concept of attracting financial resources for the implementation of the updated Nationally Determined Contribution to the Paris Agreement; to approve the State Forest Management Strategy of Ukraine until 2035
• Plans to reduce GHG emissions by 65 per cent by 2030 have been announced. The intention to achieve climate neutrality by 2060 has been expressed
• Ukraine has joined Net Zero World. The US initiative grants access to the developments of 17 laboratories of the US Department of Energy in the field of decarbonisation, expert assistance and additional funding

DTEK will build RES projects outside the “green” tariff. Tiligulska WPP will be the last DTEK project to fall under the green tariff. Subsequent RES projects will operate under long-term electricity purchase and sale contracts with consumers or on the open market.

Gas Transmission System Operator of Ukraine: Ukraine can start transporting biomethane starting next year. Recently the biomethane market received the required legal framework with the adoption of the Law of Ukraine “On Amendments to the Law of Ukraine” On Alternative Fuels” for the Development of Biomethane Production”, which was registered under № 5464, dated 5 May 2021.

Information contained in this article is for the general informational purposes only, does not constitute legal or any other professional advice and should not be relied upon as a substitute for specific professional advice adapted to the specific circumstances.

Authors: Maryna Hritsyshyna, Nataliia Hutarevych, Sergiy Bovkunovych