## 1ukrea2023004 — 1. Key Ecological Damages Arising from the War

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---

### Introduction and context
- Average annual temperatures over 2010–22 were 9.9°C, compared with 8°C over 1901–1980.
- Under IPCC Shared Socioeconomic Pathway scenarios, temperatures would rise further even in scenarios keeping increases below 2°C.
- Rainfall patterns expected to become more volatile, increasing frequency of damaging droughts and floods and reducing river discharge, resulting in more arid lands.
- Climate change amplifies existing economic risks and post-war legacies, with agriculture exposed unevenly (south and center more exposed).
- Ukraine’s revised Nationally Determined Contribution: reduce emissions by 65 percent below 1990 levels by 2030 and to zero by around 2060.

### Historical and recent GHG emissions
- 1989 (peak year): 1,030 million metric tons of CO2 equivalent (including LULUCF).
- 2021: 318 million metric tons of CO2 equivalent — down 69 percent from the 1989 peak; Ukraine ranked the 31st largest emitter globally in 2021.
- Energy mix evolution:
  - 1992 fossil-fuel based generation share: 67 percent.
  - Nuclear expanded and has been the main source of generation every year since 2014.
  - Renewable (excluding hydropower) capacity grew rapidly in 2019–21, with solar and wind installed capacity overtaking hydropower pre-war.
- War impacts: damage/removal of clean energy assets and carbon sinks has set back low-emissions progress.

### Key ecological damages from the war (Box 1 findings)
- Wildfires and carbon sink damage:
  - 2022: European Forest Fire Information Service (FFIS) tabulated 1,382 fires.
  - 2022 wildfires estimated to have covered 260,588 hectares.
  - Cumulative weekly CO2 emissions in 2022 were about 118 percent above the pre-war (2021) level.
  - 2023: fire activity less severe than 2022 but showed an uptick around August-September; cumulative weekly CO2 emissions were 24 percent above the same period in 2021.
- Damage to low-carbon energy assets:
  - Zaporizhzhia NPP: installed capacity of 5.7 million MW; accounts for almost 10 percent of Ukraine’s pre-war installed generation capacity; located in temporarily occupied territories.
  - Hydropower plants (HPPs): available power generation capacity dropped by about 7½ percent between 2021 and end-2022.
  - Kakhovka HPP: destroyed on June 6, 2023; eliminated about 3 percent of Ukraine’s pre-war generation capacity.
  - Wind and solar power generation fell by over half in 2022 (some units located in temporarily occupied territories, destroyed, or taken offline).
- Other environmental impacts:
  - Attacks on hazardous material storage (e.g., oil depots) have resulted in GHG emissions and release of other pollutants.
  - Loss of agricultural lands due to mining and resulting contamination could further challenge post-war climate objectives.

### Recent emissions trajectory and near-term outlook
- CPAT-based projection assumptions:
  - (i) real GDP growth matching the Second Review baseline through 2033 and staying at that level thereafter;
  - (ii) no policy changes to environmental/carbon taxation;
  - (iii) other standard CPAT parameters.
- Estimated GHG emissions change:
  - 2022: emissions dropped by about 20 percent, reflecting the economic fallout of the war.
  - Projection: emissions would start trending upward with post-war recovery, crossing pre-war (2021) levels around 2030 and continuing to rise thereafter under the no-policy-change scenario.
- Primary driver of long-term emissions uptrend: GDP growth; energy intensity of GDP contributes in earlier years.

### Economic and policy implications
- Exposure to EU Carbon Border Adjustment Mechanism (CBAM):
  - CBAM tax applies from 2026 to imports of carbon-intensive goods (iron, steel, aluminum, cement, fertilizers, electricity).
  - Shipments directly exposed to CBAM amount to about 2.4 percent of GDP (WB index).
- Need for green modernization and synchronization of carbon pricing with EU policies and infrastructure to mitigate CBAM impacts and support trade competitiveness.
- Importance of integrating climate-informed public investment management (PIM) systems during reconstruction to enable “carbon leapfrogging” and avoid “carbon lock-in.”

### Climate change adaptation investment and debt sustainability
- Long-term debt sustainability analysis starting assumptions:
  - Public debt level around 65 percent of GDP at the scenario start.
  - Gross financing needs (GFNs) averaging 8 percent of GDP in the 5 years leading up to the long-term scenario.
  - Assumes reforms under the program are implemented, donors provide concessional financing through 2033, and external commercial and official bilateral creditors agree to a restructuring providing adequate debt relief.
- Estimated annual fiscal cost of adaptation investments for Ukraine: 0.3 percent of GDP annually (includes strengthening physical assets and enhancing coastal protection, based on Aligishiev, Bellon, and Massetti (2022)).
- Investment composition:
  - 0.22 percent of GDP relates to strengthening existing assets.
  - 0.06 percent of GDP is for new assets.
  - 0.06 percent of GDP is the component related to costal protection against sea level rise.
- Comparative context: sample average across market access countries is 0.6 percent of GDP.
- Time profile and projection assumption:
  - Aligishiev, Bellon, and Massetti (2022) estimates cover the 2021–2030 period.
  - For long-term debt modeling, these investment levels are forecasted to persist at this level until 2053.
  - This assumption implies investment needs do not change over the period and is identified as a key source of risk.
- Note on investments included:
  - Retrofitting of all existing public capital to stand present flood risks, excluding capital expected to depreciate before 2030.
  - Strengthening of new public capital investment against present flood risks.
  - Investment for protection against present and future sea-level rise with Benefit-Cost ratio≥1 in the period 2015-2030.

### Long-term debt and gross financing needs (GFN) scenarios — calibration and key parameters
- Three scenarios isolate policy/borrowing differences while holding common macro-fiscal and adaptation investment assumptions:
  - Continued trends (benchmark): macro-fiscal and borrowing terms remain at levels observed in 2033 indefinitely; marginal interest rates and effective maturities persist at 2033 levels.
  - Harder borrowing terms: macro-fiscal variables same as continued trends; external concessional financing reduced; borrowing in U.S. dollars and Euros subject to market interest rates and shorter maturities.
  - Faster fiscal relaxation: fiscal relaxation starts in 2034; underlying primary deficit (without climate change adaptation investments) weakens to about 2 percent of GDP; calibration allows debt to be stabilized near 65 percent of GDP before considering adaptation investments; borrowing terms remain concessional as in the continued trends scenario.
- Key quantitative assumptions (exact values preserved):
  - Macro-fiscal variables
    - Real GDP (percent change): 4.0% (all scenarios)
    - Inflation (percent; GDP deflator): 5.0% (all scenarios)
    - Primary deficit (percent of GDP): -1.1% (Continued trends), -1.1% (Harder terms), 2.4% (Fiscal relaxation)
    - Underlying primary deficit: -1.4% (Continued trends), -1.4% (Harder terms), 2.1% (Fiscal relaxation)
    - Adaptation investments: 0.3% (all scenarios)
  - Marginal interest rates (in percent)
    - Local currency: 6.4% (all scenarios)
    - U.S. dollar denominated debt: 4.9% (Continued trends), 7.5% (Harder terms), 4.9% (Fiscal relaxation)
    - Euro denominated debt: 0.3% (Continued trends), 7.5% (Harder terms), 0.3% (Fiscal relaxation)
  - Effective average maturity (years)
    - Local currency: 4.6 (Continued trends), 4.6 (Harder terms), 4.6 (Fiscal relaxation)
    - U.S. dollar denominated debt: 6.0 (Continued trends), 5.0 (Harder terms), 6.0 (Fiscal relaxation)
    - Euro denominated debt: 9.8 (Continued trends), 5.0 (Harder terms), 9.8 (Fiscal relaxation)

### Projected debt and GFN outcomes across scenarios (findings)
- Continued trends:
  - Under most favorable assumptions (favorable borrowing terms and tight fiscal policy), debt would fall to extremely low levels before climate adaptation investments.
  - With moderate required investments, debt would rise only a little and remain at low levels.
  - GFNs would be modestly sized.
- Harder borrowing terms:
  - Public debt would end up around 34 percent of GDP by 2053.
  - Investing in adaptation would add about 7 percentage points to the debt ratio.
  - GFNs would rise but remain within generally manageable levels.
- Faster fiscal relaxation:
  - Debt rises weakly to 64 percent of GDP by 2053.
  - Such indebtedness would be more risky.
  - If substantial portions of new debt issuance continued to occur on concessional terms, the GFN-to-GDP ratio could be relatively stable at around 11–13 percent of GDP.

### Caveats and risks to projections
- High uncertainty at long horizons due to:
  - The course of the war.
  - Level of recovery and reconstruction.
  - Post-war economic and social structure.
- Risks to projections can push outcomes in both directions:
  - Key macro-fiscal variables (e.g., growth, inflation) could differ drastically from current projections.
  - Investment requirements for climate change could differ from assumptions due to ecological or war-related infrastructure damage.
  - Build-back-better during reconstruction could reduce future required investments.
  - War legacies could exacerbate vulnerability, raising fiscal costs.

### Policy implications for fiscal sustainability and financing
- Core recommendations and considerations:
  - Avoid excessive fiscal relaxations after debt sustainability is restored.
  - Maintain a somewhat elevated primary surplus for an extended period to enable climate programs to be budgeted without crowding out priorities and while leaving buffers for shocks.
  - Seek financing on adequately concessional terms—including for climate-related policies—to keep GFNs within manageable ranges.
  - If primary balances and financing terms remain prudent, debt would likely stabilize and rollover risks would remain manageable, meeting the Fund’s definition of debt sustainability.

### Policies to lower greenhouse gas (GHG) emissions — carbon pricing and complementary measures
- Current carbon tax and coverage:
  - Carbon taxation in Ukraine began in 2011 with the Environmental Tax.
  - Tax progression: UAH 0.2 in 2011 gradually up to UAH 0.41 in 2018; up to UAH 10 in 2019; up to UAH 30 per ton of CO2 equivalent in 2022.
  - Government collections on this tax were 0.3 percent of total tax revenues in 2022.
  - Ukraine’s effective carbon tax rates are around $1 per ton of CO2 equivalent, compared with an average of $73 per ton of CO2 equivalent in the sample.
  - From the current level of about $0.8 per ton of CO2, the carbon tax and coverage are currently too low to have a material impact.
- Strategic context and commitments:
  - Ukraine’s revised NDC raises emissions reduction target to 65 percent by 2030 compared to 1990 levels.
  - EU accession implications include adopting an Emissions Trading System (ETS) by 2025 that covers power and industry.
- CPAT tool:
  - The IMF-World Bank Climate Policy Assessment Tool (CPAT) estimates emissions, fiscal, and economic impacts of mitigation policies (mitigation model outputs include fiscal indicators, GHG emissions, GDP and welfare effects; other modules cover distribution, air pollution, transport).

Illustrative carbon pricing scenario: target US$50 per ton
- Calibration:
  - Carbon price rises from about $0.8 per ton of CO2 starting in 2025 to $50 per ton of CO2 by 2035.
  - Coverage extends to all fuels, sectors, and industries.
  - Revenues recycled equally among: public investment (recovery and reconstruction), transfers (to cushion bottom 40 percent of income distribution), and other current spending (to implement revenue-based fiscal adjustment).
- Emissions trajectory:
  - This path would cease the upward trend under business-as-usual and broadly stabilize emissions; a target of $75 per ton would lower emissions further.
- Fiscal impacts:
  - If $50 per ton is reached by 2035, total fiscal revenues as a percent of GDP would reach around 4½ percent of GDP in that year.
  - Under $75 per ton, fiscal revenues would rise to 6.1 percent of GDP.
- Social/distributional impacts:
  - Bottom 40 percent face larger direct fuel price impacts, but these are more than offset by the recycled transfers and benefits from higher capital and current expenditures.
  - Net impact is relatively small for higher income households.

Alternative, more ambitious calibration aligned with EU policies
- Calibration:
  - Carbon prices rise from 2025.
  - Sectoral differentiation by 2035:
    - Power and industry: around $100/ton (similar to current EU ETS levels).
    - Buildings and transport: around $50/ton by 2035 (broadly in line with initial EUR 45/ton cap under EU ETS 2).
  - Assumes excise taxes comply with the EU energy tax directive and carbon prices for industrial sectors covered by CBAM reduced by the share of freely allocated allowances.
- Emissions trajectory:
  - Places GHG emissions on a gradually downward trend.
  - By 2035, emissions are about 28 percent lower than the 2019 (pre-war, pre-COVID) level.
- Fiscal and distributional impacts:
  - Fiscal revenue impact about doubles relative to the $50/ton scenario.
  - With similar revenue recycling, lower income households are made better off; negligible impact for high-income households.
- Complementary reforms:
  - Subsidy reform: fuels for heating are heavily subsidized in Ukraine, estimated at 1 percent of GDP.
  - Reforming fuel subsidies and pairing with carbon taxation could generate additional revenues to cushion impacts on vulnerable households and support development priorities.
  - Other measures: feebates, tradable performance standards, and financial sector regulations.

### Box 2 — Implementing ESG Standards in the Area of Financial Services (concluded) — NBU strategy and policy priorities
- Institutional developments:
  - In July 2023, the National Bank of Ukraine (NBU), Ministry of Finance, National Securities and Stock Market Commission, and Deposit Guarantee Fund approved a new Strategy of Financial Sector Development as committed under the June 2023 MEFP, ¶48.
  - NBU views its sustainable finance strategy as part of a broader national initiative to be developed and approved at the Government level.
- Broader national ESG agenda would:
  - Serve as a prerequisite for the NBU to update its Sustainable Finance Development Policy.
  - Act as a roadmap identifying measures and policies across multiple government agencies.
  - Designate a government agency to coordinate stakeholders.
  - Require necessary legislative measures and the introduction of a green taxonomy for the real sector.
- Timing, scope, and priorities for the NBU’s Sustainable Financing Policy:
  - War has forced the NBU to re-prioritize to maintain financial stability; sustainable financing measures will face delays in certain areas.
  - NBU will focus mainly on ensuring financial sector institutions internalize climate risks rather than actively incentivizing sustainable investment flows.
  - Implementation will be gradual: starting with banks, then extending to non-bank financial institutions as data, methodological, legal, and capacity gaps are closed.
  - Climate-related risks to be integrated into supervisory tools (business model assessment, corporate governance review, evaluation of risks to capital positions).
- Policy tools and regulatory measures:
  - Develop regulation and supervisory assessments, climate stress-testing, and monetary policy measures aligned with international best practices.
  - Amend corporate governance, risk management, and disclosure regulations to include ESG risks.
  - Update data reporting templates and assessment of exposure to physical and transition risks.
  - Incorporate climate-related risks into SREP, ICAAP, ILAAP.
  - Introduce climate stress-testing and green monetary policy tools.
  - NBU to formulate an internal National Bank framework on Sustainable development for itself.
- International coordination:
  - NBU plans to follow BCBS and FSB recommendations and participate in NGFS and SBFN for best-practice exchange.

### Summary findings and macro-climate policy implications (Sections 24–27)
- War impacts and past performance:
  - War has been a setback to continued progress on Ukraine’s climate objectives; prior to the full-scale war Ukraine achieved significant reductions in GHG emissions.
  - Invasion resulted in damage/loss of low carbon energy plants, wildfires damaging forests, and significant environmental damage.
- Long-term potential and risks:
  - Ukraine can internalize climate priorities alongside reconstruction, macroeconomic stability, and social protection.
  - Vulnerable to substantially warmer temperatures and more volatile rainfall patterns under adverse climate scenarios.
  - Major recovery/reconstruction without climate consideration risks setbacks to climate targets.
  - Ukraine committed to introducing an ETS as part of EU Association Agreement and must design it carefully to avoid uncertainty; a well-designed system could help avoid risks related to the EU’s CBAM.
- Investment and fiscal considerations:
  - Essential adaptation investments are moderate sized; Ukraine should be able to make these investments over the longer term, including after debt sustainability is restored, without causing debt vulnerabilities to reemerge.
  - Indicative scenario analysis shows the importance of preserving fiscal space for these investments by avoiding excessive policy relaxations over the longer term.
  - Seek financing for these investments on the softest available terms so debt service payments do not exacerbate financing needs.
- Carbon pricing and distributional considerations:
  - Ukraine’s Environmental Tax is a form of carbon taxation but is currently too small to make an impact.
  - CPAT modeling indicates raising the price of carbon to $50/ton can help contain GHG emissions and generate substantial revenues.
  - Carbon pricing measures could be implemented alongside comprehensive subsidy reform.
  - A portion of revenues from carbon pricing should be directed toward targeted support to vulnerable households to implement environmental policies equitably.

*Source: 1ukrea2023004 - 1. Key Ecological Damages Arising from the War (IMF, December 4, 2023).*

### 1. Key Ecological Damages Arising from the War ______________________________________ 6

### 1. Key Ecological Damages Arising from the War

### Introduction and context
- Average annual temperatures over 2010–22 were 9.9°C, compared with 8°C over 1901–1980.
- Under the Intergovernmental Panel on Climate Change’s Shared Socioeconomic Pathway scenarios, temperatures would rise further even in scenarios keeping increases below 2°C.
- Rainfall patterns are expected to become more volatile, increasing the frequency of damaging droughts and floods and reducing river discharge, resulting in more arid lands.
- Climate change will add to existing economic risks and post-war legacies, with agriculture exposed unevenly (south and center more exposed).
- Ukraine’s revised Nationally Determined Contribution: reduce emissions by 65 percent below 1990 levels by 2030 and to zero by around 2060.

### Historical and recent GHG emissions
- 1989 (peak year): 1,030 million metric tons of CO2 equivalent (including LULUCF).
- 2021: 318 million metric tons of CO2 equivalent — down 69 percent from the 1989 peak; Ukraine ranked the 31st largest emitter globally in 2021.
- Energy mix evolution: in 1992 fossil-fuel based generation share was 67 percent; nuclear expanded and has been the main source of generation every year since 2014. Renewable (excluding hydropower) capacity grew rapidly in 2019–21, with solar and wind installed capacity overtaking hydropower pre-war.
- War impacts have set back low-emissions progress by damaging or removing clean energy assets and carbon sinks.

### Key ecological damages from the war (Box 1 findings)
- Wildfires and carbon sink damage:
  - 2022: European Forest Fire Information Service (FFIS) tabulated 1,382 fires.
  - 2022 wildfires estimated to have covered 260,588 hectares.
  - Cumulative weekly CO2 emissions in 2022 were about 118 percent above the pre-war (2021) level.
  - 2023: fire activity less severe than 2022 but showed an uptick around August-September; cumulative weekly CO2 emissions were 24 percent above the same period in 2021.
- Damage to low-carbon energy assets:
  - Zaporizhzhia NPP: located in temporarily occupied territories; installed capacity of 5.7 million MW; accounts for almost 10 percent of Ukraine’s pre-war installed generation capacity.
  - Hydropower plants (HPPs): available power generation capacity dropped by about 7½ percent between 2021 and end-2022.
  - Kakhovka HPP: destroyed on June 6, 2023; eliminated about 3 percent of Ukraine’s pre-war generation capacity.
  - Wind and solar power generation fell by over half in 2022 (some units located in temporarily occupied territories, destroyed, or taken offline).
- Other environmental impacts:
  - Attacks on hazardous material storage (e.g., oil depots) have resulted in GHG emissions and release of other pollutants.
  - Loss of agricultural lands due to mining and resulting contamination could further challenge post-war climate objectives.

### Recent emissions trajectory and near-term outlook
- CPAT-based projection assumptions: (i) real GDP growth matching the Second Review baseline through 2033 and staying at that level thereafter; (ii) no policy changes to environmental/carbon taxation; (iii) other standard CPAT parameters.
- Estimated GHG emissions change:
  - 2022: emissions dropped by about 20 percent, reflecting the economic fallout of the war.
  - Projection: emissions would start trending upward with post-war recovery, crossing pre-war (2021) levels around 2030 and continuing to rise thereafter under the no-policy-change scenario.
- Primary driver of long-term emissions uptrend: GDP growth; energy intensity of GDP contributes in earlier years.

### Economic and policy implications
- Exposure to EU Carbon Border Adjustment Mechanism (CBAM):
  - CBAM tax applies from 2026 to imports of carbon-intensive goods (iron, steel, aluminum, cement, fertilizers, electricity).
  - Shipments directly exposed to CBAM amount to about 2.4 percent of GDP (WB index).
- Need for green modernization and synchronization of carbon pricing with EU policies and infrastructure to mitigate CBAM impacts and support trade competitiveness.
- Importance of integrating climate-informed public investment management (PIM) systems during reconstruction to enable “carbon leapfrogging” and avoid “carbon lock-in.”

### Climate change adaptation investment and debt sustainability
- Long-term debt sustainability analysis assumptions (starting point):
  - Public debt level around 65 percent of GDP at the scenario start.
  - Gross financing needs (GFNs) averaging 8 percent of GDP in the 5 years leading up to the long-term scenario.
  - Assumes reforms under the program are implemented, donors provide concessional financing through 2033, and external commercial and official bilateral creditors agree to a restructuring providing adequate debt relief.
- Estimated annual fiscal cost of adaptation investments for Ukraine: 0.3 percent of GDP annually (includes strengthening physical assets and enhancing coastal protection, based on Aligishiev, Bellon, and Massetti (2022)).

*Source: 1ukrea2023004 - 1. Key Ecological Damages Arising from the War (IMF, December 4, 2023).*

### 0.22 percent of GDP relates to strengthening existing assets, 0.06 percent of GDP is for new assets,

### 1ukrea2023004 - 0.22 percent of GDP relates to strengthening existing assets, 0.06 percent of GDP is for new assets,

### Climate adaptation investment profile and modeling assumptions
- Investment composition (as stated):
  - 0.22 percent of GDP relates to strengthening existing assets.
  - 0.06 percent of GDP is for new assets.
  - 0.06 percent of GDP is the component related to costal protection against sea level rise.
- Comparative context:
  - Sample average across market access countries is 0.6 percent of GDP.
- Time profile and projection assumption:
  - The Aligishiev, Bellon, and Massetti (2022) estimates cover the 2021–2030 period.
  - For long-term debt modeling, these investment levels are forecasted to persist at this level until 2053.
  - This assumption implies investment needs do not change over the period and is identified as a key source of risk.
- Note on what investments include:
  - Retrofitting of all existing public capital to stand present flood risks, excluding capital expected to depreciate before 2030.
  - Strengthening of new public capital investment against present flood risks.
  - Investment for protection against present and future sea-level rise with Benefit-Cost ratio≥1 in the period 2015-2030.

### Long-term debt and gross financing needs (GFN) scenarios
- Three scenarios isolate policy/borrowing differences while holding common macro-fiscal and adaptation investment assumptions:
  - Continued trends (benchmark):
    - Macro-fiscal and borrowing terms remain at levels observed in 2033 indefinitely.
    - Marginal interest rates and effective maturities persist at 2033 levels.
  - Harder borrowing terms:
    - Macro-fiscal variables same as continued trends.
    - External concessional financing is reduced; borrowing in U.S. dollars and Euros subject to market interest rates and shorter maturities.
  - Faster fiscal relaxation:
    - Fiscal relaxation starts in 2034.
    - Underlying primary deficit (without climate change adaptation investments) weakens to about 2 percent of GDP.
    - This calibration allows debt to be stabilized near 65 percent of GDP before considering adaptation investments; borrowing terms remain concessional as in the continued trends scenario.
- Key quantitative assumptions (exact values preserved):
  - Macro-fiscal variables
    - Real GDP (percent change): 4.0% (all scenarios)
    - Inflation (percent; GDP deflator): 5.0% (all scenarios)
    - Primary deficit (percent of GDP): -1.1% (Continued trends), -1.1% (Harder terms), 2.4% (Fiscal relaxation)
    - Underlying primary deficit: -1.4% (Continued trends), -1.4% (Harder terms), 2.1% (Fiscal relaxation)
    - Adaptation investments: 0.3% (all scenarios)
  - Marginal interest rates (in percent)
    - Local currency: 6.4% (all scenarios)
    - U.S. dollar denominated debt: 4.9% (Continued trends), 7.5% (Harder terms), 4.9% (Fiscal relaxation)
    - Euro denominated debt: 0.3% (Continued trends), 7.5% (Harder terms), 0.3% (Fiscal relaxation)
  - Effective average maturity (years)
    - Local currency: 4.6 (Continued trends), 4.6 (Harder terms), 4.6 (Fiscal relaxation)
    - U.S. dollar denominated debt: 6.0 (Continued trends), 5.0 (Harder terms), 6.0 (Fiscal relaxation)
    - Euro denominated debt: 9.8 (Continued trends), 5.0 (Harder terms), 9.8 (Fiscal relaxation)

### Projected debt and GFN outcomes across scenarios (findings)
- Continued trends:
  - Most favorable assumptions (favorable borrowing terms and tight fiscal policy).
  - Debt would fall to extremely low levels before climate adaptation investments.
  - With moderate required investments, debt would rise only a little and remain at low levels.
  - GFNs would be modestly sized.
- Harder borrowing terms:
  - Public debt would end up around 34 percent of GDP by 2053.
  - Investing in adaptation would add about 7 percentage points to the debt ratio.
  - GFNs would rise but remain within generally manageable levels.
- Faster fiscal relaxation:
  - Debt rises weakly to 64 percent of GDP by 2053.
  - Such indebtedness would be more risky.
  - If substantial portions of new debt issuance continued to occur on concessional terms, the GFN-to-GDP ratio could be relatively stable at around 11–13 percent of GDP.

### Caveats and risks to projections
- High uncertainty at long horizons due to:
  - The course of the war.
  - Level of recovery and reconstruction.
  - Post-war economic and social structure.
- Risks to projections can push outcomes in both directions:
  - Key macro-fiscal variables (e.g., growth, inflation) could differ drastically from current projections.
  - Investment requirements for climate change could differ from assumptions due to ecological or war-related infrastructure damage.
  - Build-back-better during reconstruction could reduce future required investments.
  - War legacies could exacerbate vulnerability, raising fiscal costs.

### Policy implications for fiscal sustainability and financing
- Core recommendations and considerations:
  - Avoid excessive fiscal relaxations after debt sustainability is restored.
  - Maintain a somewhat elevated primary surplus for an extended period to enable climate programs to be budgeted without crowding out priorities and while leaving buffers for shocks.
  - Seek financing on adequately concessional terms—including for climate-related policies—to keep GFNs within manageable ranges.
  - If primary balances and financing terms remain prudent, debt would likely stabilize and rollover risks would remain manageable, meeting the Fund’s definition of debt sustainability.

### Policies to lower greenhouse gas (GHG) emissions — carbon pricing and complementary measures
- Current carbon tax and coverage:
  - Carbon taxation in Ukraine began in 2011 with the Environmental Tax.
  - Tax progression: UAH 0.2 in 2011 gradually up to UAH 0.41 in 2018; up to UAH 10 in 2019; up to UAH 30 per ton of CO2 equivalent in 2022.
  - Government collections on this tax were 0.3 percent of total tax revenues in 2022.
  - Ukraine’s effective carbon tax rates are around $1 per ton of CO2 equivalent, compared with an average of $73 per ton of CO2 equivalent in the sample.
  - From the current level of about $0.8 per ton of CO2, the carbon tax and coverage are currently too low to have a material impact.
- Strategic context and commitments:
  - Ukraine’s revised NDC raises emissions reduction target to 65 percent by 2030 compared to 1990 levels.
  - EU accession implications include adopting an Emissions Trading System (ETS) by 2025 that covers power and industry.
- CPAT tool:
  - The IMF-World Bank Climate Policy Assessment Tool (CPAT) is noted as a model suite to estimate emissions, fiscal, and economic impacts of mitigation policies (mitigation model outputs include fiscal indicators, GHG emissions, GDP and welfare effects; other modules cover distribution, air pollution, transport).
- Illustrative carbon pricing scenario: target US$50 per ton
  - Calibration:
    - Carbon price rises from about $0.8 per ton of CO2 starting in 2025 to $50 per ton of CO2 by 2035.
    - Coverage extends to all fuels, sectors, and industries.
    - Revenues recycled equally among: public investment (recovery and reconstruction), transfers (to cushion bottom 40 percent of income distribution), and other current spending (to implement revenue-based fiscal adjustment).
  - Emissions trajectory:
    - This path would cease the upward trend under business-as-usual and broadly stabilize emissions; a target of $75 per ton would lower emissions further.
  - Fiscal impacts:
    - If $50 per ton is reached by 2035, total fiscal revenues as a percent of GDP would reach around 4½ percent of GDP in that year.
    - Under $75 per ton, fiscal revenues would rise to 6.1 percent of GDP.
  - Social/distributional impacts:
    - Bottom 40 percent face larger direct fuel price impacts, but these are more than offset by the recycled transfers and benefits from higher capital and current expenditures.
    - Net impact is relatively small for higher income households.
- Alternative, more ambitious calibration aligned with EU policies
  - Calibration:
    - Carbon prices rise from 2025.
    - Sectoral differentiation by 2035:
      - Power and industry: around $100/ton (similar to current EU ETS levels).
      - Buildings and transport: around $50/ton by 2035 (broadly in line with initial EUR 45/ton cap under EU ETS 2).
    - Assumes excise taxes comply with the EU energy tax directive and carbon prices for industrial sectors covered by CBAM reduced by the share of freely allocated allowances.
  - Emissions trajectory:
    - Places GHG emissions on a gradually downward trend.
    - By 2035, emissions are about 28 percent lower than the 2019 (pre-war, pre-COVID) level.
  - Fiscal and distributional impacts:
    - Fiscal revenue impact about doubles relative to the $50/ton scenario.
    - With similar revenue recycling, lower income households are made better off; negligible impact for high-income households.
- Complementary reforms:
  - Subsidy reform: fuels for heating are heavily subsidized in Ukraine, estimated at 1 percent of GDP.
  - Reforming fuel subsidies and pairing with carbon taxation could generate additional revenues to cushion impacts on vulnerable households and support development priorities.
  - Other measures: feebates, tradable performance standards, and financial sector regulations.

*Source: Excerpt from IMF Ukraine report provided in the supplied content.*

### Box 2. Ukraine: Implementing ESG Standards in the Area of Financial Services (concluded)

### Box 2. Ukraine: Implementing ESG Standards in the Area of Financial Services (concluded)

### NBU strategy and prerequisites for implementing ESG standards
- In July 2023, the National Bank of Ukraine (NBU), Ministry of Finance, National Securities and Stock Market Commission, and Deposit Guarantee Fund approved a new Strategy of Financial Sector Development as committed under the June 2023 MEFP, ¶48.  
- The NBU considers its strategy to implement ESG standards in the financial services sector (including sustainable financing) should be part of a broader national initiative developed and approved at the Government level.  
- The broader national ESG agenda would:
  - Serve as a prerequisite for the NBU to update its Sustainable Finance Development Policy.
  - Act as a roadmap identifying measures and policies across multiple government agencies.
  - Designate a government agency to coordinate stakeholders.
  - Require necessary legislative measures and the introduction of a green taxonomy for the real sector to enable the financial sector to analyze and account for respective risks.

### Timing, scope, and priorities for the NBU’s Sustainable Financing Policy
- Russia’s war against Ukraine forced the NBU to re-prioritize the financial sector agenda to maintain financial stability; measures aimed at promoting sustainable financing will face delays in certain areas due to the war.  
- The NBU will act within its current mandate and will mainly focus on ensuring financial sector institutions internalize climate risks rather than incentivizing the channeling of financial flows toward more sustainable investments.  
- Implementation will be gradual: starting with banks and then extending regulations to non-bank financial institutions as data, methodological, legal, and capacity gaps are closed.  
- Climate-related risks are identified as contributors to credit, operational, liquidity, and market risks; assessment of exposure to climate risks will be integrated into supervisory tools such as business model assessment, corporate governance review, and evaluation of risks to capital positions.

### Policy tools and regulatory measures
- Policy tools planned include:
  - Developing regulation and supervisory assessments.
  - Climate stress-testing.
  - Monetary policy measures aligned with emerging international best practices.
- Regulatory updates to promote sustainable financing will include amendments to:
  - Corporate governance, risk management, and disclosure regulations to include Environmental, Social and Governance (ESG) risks.
  - Data reporting templates and assessment of exposure to physical and transition risks.
  - Supervisory Review and Evaluation Process (SREP), Internal Capital Adequacy Assessment Process (ICAAP), and Internal Liquidity Adequacy Assessment Process (ILAAP) to incorporate climate-related risks.
  - Introduction of climate stress-testing.
  - Implementation of green monetary policy tools.
- The NBU aims to formulate an internal National Bank framework on Sustainable development for itself.

### International coordination and best practice alignment
- The NBU plans to closely follow Basel Committee on Banking Supervision (BCBS) and Financial Stability Board (FSB) recommendations.  
- The NBU will participate in specialized fora, including:
  - Network for Greening the Financial System (NGFS).
  - Sustainable Banking Network (SBFN).
- Participation in these fora will support exchange of views and identification of best practices on measurement and management of climate-related risks.

### Summary findings and macro-climate policy implications (Sections 24–27)
- War impacts and past performance:
  - The war has been a setback to continued progress on Ukraine’s climate objectives; prior to the full-scale war Ukraine achieved significant reductions in GHG emissions, influenced by output dynamics and structural change.
  - The invasion resulted in damage or loss of control of low carbon energy power plants, wildfires damaging forests (a natural carbon sink), and significant environmental damage.
- Long-term potential and risks:
  - Over the longer term, Ukraine can implement policies that internalize climate-related priorities alongside reconstruction, macroeconomic stability, and social protection priorities.
  - Ukraine is vulnerable to substantially warmer temperatures and more volatile rainfall patterns under adverse climate scenarios.
  - Major recovery and reconstruction efforts, if implemented without consideration of climate impacts, risk creating setbacks to climate targets.
  - Ukraine has committed to introducing an ETS as part of its EU Association Agreement and must design it carefully to avoid uncertainty; a well-designed system could help avoid risks related to the introduction of the EU’s CBAM.
- Investment and fiscal considerations:
  - Essential investments in climate change adaptation are moderate sized; Ukraine should be able to make these investments over the longer term, including after debt sustainability is restored, without causing debt vulnerabilities to reemerge.
  - Indicative scenario analysis shows the importance of preserving fiscal space for these investments by avoiding excessive policy relaxations over the longer term.
  - It is important to seek financing for these investments on the softest available terms so debt service payments do not exacerbate financing needs.
- Carbon pricing and distributional considerations:
  - Ukraine’s Environmental Tax is a form of carbon taxation but is currently too small to make an impact.
  - Modeling using the IMF-World Bank CPAT indicates that raising the price of carbon to $50/ton can help contain GHG emissions and generate substantial revenues.
  - Carbon pricing measures could be implemented alongside comprehensive subsidy reform to further promote mitigation.
  - If implemented carefully, a portion of revenues from carbon pricing should be directed toward targeted support to vulnerable households to implement environmental policies equitably.

*International Monetary Fund — Box 2. Ukraine: Implementing ESG Standards in the Area of Financial Services (concluded)*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1ukrea2023004.pdf_