## 1. Key Ecological Damages Arising from the War

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### Introduction and climate trends
- Average annual temperatures over 2010–22 were 9.9°C, versus 8°C over 1901–1980.
- Under IPCC Shared Socioeconomic Pathway scenarios, temperatures would rise further, including in a scenario keeping increases below 2°C.
- Rainfall patterns are expected to become more volatile, increasing frequency of damaging droughts and floods and reducing river discharge, resulting in more arid lands.

### Impacts on economy and vulnerability
- Agricultural sector: mild-to-moderately warmer temperatures could be beneficial, but greater volatility and extreme temperature rises are damaging; south and center of Ukraine are more exposed.
- Natural disaster management capacity could be weakened by higher poverty, an aging population, and high urbanization—factors exacerbated by the war.
- Reconstruction and recovery present opportunities for “carbon leapfrogging” to avoid “carbon lock-in.”

### Ukraine’s mitigation commitments and energy transition context
- Revised Nationally Determined Contribution: reduce emissions by 65 percent below 1990 levels by 2030 and to zero by around 2060.
- EU accession requires alignment of tax, spending, and regulatory policies with the EU acquis.
- Pre-war energy mix:
  - 1992 fossil-fuel based generation share: 67 percent.
  - Nuclear generation expanded in the 1990s–2000s and has been the main source every year since 2014.
  - Renewable sources (excluding hydropower) grew rapidly in 2019–21; installed solar and wind capacity overtook hydropower pre-war.

### Key ecological and energy damages from the war
- Wildfires and forest damage:
  - 2022: European Forest Fire Information Service (FFIS) tabulated 1,382 fires.
  - Fires in 2022 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 was less severe than 2022, but cumulative weekly CO2 emissions were 24 percent above the same period in 2021; notable uptick around August-September coinciding with counteroffensive operations.
- Nuclear power plants:
  - Several NPPs have at times been located around areas of active hostilities and have been damaged.
  - The Zaporizhzhia NPP is currently located in temporarily occupied territories and is the largest nuclear plant in Ukraine and Europe.
  - Zaporizhzhia NPP installed capacity stated as 5.7 million MW and accounted for almost 10 percent of Ukraine’s pre-war installed generation capacity.
- Hydropower plants:
  - Available HPP generation capacity dropped by about 7½ percent between 2021 and end-2022.
  - The Kakhovka HPP was destroyed on June 6, 2023, eliminating about 3 percent of Ukraine’s pre-war generation capacity.
- Wind and solar:
  - Wind and solar power generation fell by over half in 2022 due to units being in temporarily occupied territories, destroyed, or taken offline.
- Other environmental impacts:
  - Attacks on hazardous material facilities (e.g., oil depots) have resulted in GHG emissions and other pollutants.
  - Loss of agricultural lands due to mining and environmental contamination further challenge post-war climate objectives.

### Recent emissions trajectory and projections
- Historical emissions:
  - 1989 peak: 1,030 million metric tons of CO2 equivalent (including LULUCF).
  - 2021: 318 million metric tons of CO2 equivalent, down 69 percent from the peak.
- War period and CPAT model assumptions:
  - Model assumptions: (i) real GDP growth matches the Second Review baseline through 2033 and stays at that level thereafter; (ii) no policy changes to environmental/carbon taxation; (iii) other standard parameters in the model.
  - Estimated emissions dropped by about 20 percent in 2022 due to the economic fallout of the war.
  - Under the assumed recovery, emissions would start to trend upward, crossing the pre-war (2021) level around 2030 and continuing to rise thereafter, driven mainly by GDP growth and energy intensity effects in early years.
- Carbon Border Adjustment Mechanism (CBAM) exposure:
  - Starting 2026, CBAM tax will apply to EU imports of carbon-intensive goods (iron, steel, aluminum, cement, fertilizers, electricity).
  - About 2.4 percent of GDP of Ukrainian shipments are directly exposed to the CBAM (WB index).

### Long-term debt sustainability and adaptation investment implications
- Analysis covers 2034–2053 using deterministic debt-to-GDP and gross financing needs (GFN)-to-GDP paths.
- Scenario assumptions:
  - (i) reforms embedded in the program (especially revenue-based fiscal adjustment) implemented;
  - (ii) donors and development partners provide financing on appropriately concessional terms through 2033;
  - (iii) external commercial and official bilateral creditors agree to a restructuring providing adequate debt relief.
- Starting points: public debt level of around 65 percent of GDP and GFNs that would have averaged 8 percent of GDP in the 5 years leading up to the scenario.
- Methodology draws on SRDSF climate change adaptation module; relies on projections for primary balance, real GDP growth, inflation, exchange rates, and debt service associated with outstanding debt.
- Policy implication: Climate change adaptation investments are necessary but must be planned to preserve long-term debt sustainability under EFF assumptions.

### Estimated annual fiscal cost of adaptation investments
- Annual adaptation investment for Ukraine: 0.3 percent of GDP.
  - Strengthening existing assets: 0.22 percent of GDP.
  - New assets: 0.06 percent of GDP.
  - Coastal protection against sea level rise: 0.06 percent of GDP.
- Source: Aligishiev, Bellon, and Massetti (2022); estimates cover 2021–2030 and are assumed to persist until 2053 for modeling.
- Cross-country sample average across market access countries: 0.6 percent of GDP.
- Scope: retrofitting existing public capital to withstand present flood risks (excluding capital expected to depreciate before 2030), strengthening new public capital against present flood risks, and protection against present and future sea-level rise with Benefit-Cost ratio≥1 in the period 2015-2030.

### Scenarios for long-term public debt and GFNs
- Three scenarios (common macro assumptions: real GDP growth, inflation, exchange rates, adaptation investment level):
  - Continued trends (benchmark): Macro-fiscal and borrowing terms remain at 2033 levels indefinitely.
  - Harder borrowing terms: Macro-fiscal variables as in continued trends, but 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 beginning in 2034; underlying primary deficit (without climate adaptation investments) allowed to weaken to about 2 percent of GDP; borrowing terms remain as in continued trends allowing significant concessional financing.

### Key numeric assumptions for long-term scenario analysis
- Macro-fiscal variables (all scenarios unless noted):
  - Real GDP (percent change): 4.0%
  - Inflation (percent; GDP deflator): 5.0%
  - Adaptation investments: 0.3%
- Primary deficit (percent of GDP):
  - Continued trends: -1.1%
  - Harder terms: -1.1%
  - Fiscal relaxation: 2.4%
- Underlying primary deficit:
  - Continued trends: -1.4%
  - Harder terms: -1.4%
  - Fiscal relaxation: 2.1%
- Marginal interest rates (in percent):
  - Local currency: 6.4% (all scenarios)
  - U.S. dollar denominated debt: Continued trends 4.9%; Harder terms 7.5%; Fiscal relaxation 4.9%
  - Euro denominated debt: Continued trends 0.3%; Harder terms 7.5%; Fiscal relaxation 0.3%
- Effective average maturity (years):
  - Local currency: 4.6
  - U.S. dollar denominated debt: Continued trends 6.0; Harder terms 5.0; Fiscal relaxation 6.0
  - Euro denominated debt: Continued trends 9.8; Harder terms 5.0; Fiscal relaxation 9.8

### Projected outcomes across scenarios
- Continued trends:
  - Favorable borrowing terms and tight fiscal policy → debt falls to extremely low levels before adaptation investments; with adaptation, debt rises only a little and remains low; GFNs modest.
- Harder borrowing terms:
  - Public debt around 34 percent of GDP by 2053; adaptation investments add about 7 percentage points to the debt ratio; GFNs rise but remain within generally manageable levels.
- Faster fiscal relaxation:
  - Debt rises weakly to 64 percent of GDP by 2053 excluding adaptation investments; if adaptation investments financed on concessional terms, GFN-to-GDP ratio could remain relatively stable but elevated at around 11–13 percent of GDP.

### Caveats and risks to projections
- High uncertainty due to war, recovery and reconstruction, and post-war economic/social structure could cause outcomes to differ significantly.
- Key macro-fiscal variables (growth, inflation) could deviate drastically from projections.
- Climate adaptation investment needs could differ because of ecological or infrastructure damage from the war.
- Upside: "build-back better" during reconstruction could reduce future investment needs; downside: war legacies could increase climate vulnerability and fiscal costs.

### Policy implications and recommendations (adaptation finance)
- Avoid excessive fiscal relaxations after restoring debt sustainability; maintain a somewhat elevated primary surplus for an extended period to:
  - Incorporate climate programs in the budget without crowding out priorities.
  - Leave adequate buffers for potential future shocks.
- Seek financing on adequately concessional terms (including for climate-related policies) to keep GFNs manageable and stabilize debt under the Fund’s definition of debt sustainability (IMF, 2022).

### Policies to lower greenhouse gas emissions (mitigation)
- Current carbon taxation:
  - Environmental Tax covers stationary pollution sources; carbon-related part covers electricity and industry.
  - Tax rate increases: UAH 0.2 (2011) → UAH 0.41 (2018) → up to UAH 10 (2019) → up to UAH 30 per ton of CO2 equivalent (2022).
  - Government collections from this tax: 0.3 percent of total tax revenues in 2022.
  - Effective carbon tax rate in Ukraine: around $1 per ton of CO2 equivalent versus sample average $73 per ton of CO2 equivalent.
  - Conclusion: current carbon tax rate and coverage are too low to have a material impact.
- International commitments and reforms:
  - Ukraine’s revised NDC: emissions reduction target of 65 percent by 2030 compared to 1990 levels.
  - EU accession implications: adopt an Emissions Trading System (ETS) by 2025 covering power and industry; legislative plans indicated in April 2023; business preference for gradual, predictable ETS introduction and later transition to EU ETS.

### Use of the IMF-World Bank Climate Policy Assessment Tool (CPAT)
- CPAT estimates emissions, fiscal, and economic impacts of mitigation policies using projections of income growth, fuel prices, and technological improvements.
- Outputs: fiscal indicators, GHG emissions, GDP and welfare effects, distributional impacts, air pollution, transport effects.

### Illustrative carbon pricing scenario: target US$50 per ton
- Calibration:
  - Current level about $0.8 per ton of CO2; raise carbon prices gradually beginning in 2025 to reach $50 per ton by 2035.
  - Coverage: all fuels, sectors, and industries.
  - Revenue recycling: equal allocation to public investment (recovery and reconstruction), transfers to bottom 40 percent of income distribution, and other current spending to support revenue-based fiscal adjustment.
- Emissions trajectory:
  - Policy would halt the upward trend under business-as-usual and broadly stabilize emissions.
  - A more ambitious $75 per ton target would lower emissions further and align closer to recent EU carbon prices.
- Fiscal impacts:
  - $50 per ton by 2035 → total fiscal revenues around 4½ percent of GDP in that year.
  - $75 per ton by 2035 → fiscal revenues rise to 6.1 percent of GDP.
- Distributional impacts:
  - Bottom 40 percent face larger direct fuel price effects but gain more from recycled revenues (targeted transfers and higher capital/current expenditures) and are net beneficiaries; net impact on higher-income households is relatively small.
  - Estimated impact on real GDP growth is small; effects on industry depend on post-war economic structure and exposure to CBAM.

### Alternative, more ambitious calibration aligned with EU policies
- Calibration:
  - Carbon prices rise beginning in 2025 with sectoral differentiation:
    - Power and industry (EU ETS sectors): carbon pricing around $100/ton by 2035.
    - Buildings and transport (broadly EU ETS 2 sectors): carbon price around $50/ton by 2035.
  - Excise taxes assumed to comply with EU's proposed energy tax directive; carbon prices for industries covered by CBAM reduced by the share of freely allocated allowances.
- Emissions trajectory:
  - Substantially higher effective carbon prices place GHG emissions on a gradually downward trend; by 2035 emissions about 28 percent lower than 2019 level.
- Fiscal and distributional impacts:
  - Fiscal revenue impact roughly doubles relative to the $50 per ton scenario.
  - Lower-income households made better off with revenue recycling; negligible impact for high-income households.

### Complementary mitigation measures
- Subsidy reform:
  - Heating fuel subsidies estimated at 1 percent of GDP (Aav, et. al, 2023); such subsidies discourage efficiency and renewable transition.
  - Reform of subsidies could be taken in tandem with carbon taxes; additional revenues could cushion impacts on vulnerable households and fund development priorities.
- Other measures:
  - Feebates, tradable performance standards, regulatory measures, and financial sector actions.

### Box 2 — Implementing ESG Standards in Financial Services (selected points)
- Policy context:
  - July 2023: National Bank of Ukraine, 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 to update Sustainable Finance Development Policy once a government-level national ESG agenda and prerequisites are in place.
- NBU sequencing and focus:
  - Act within current mandate; prioritize financial stability during wartime.
  - Focus on ensuring financial sector institutions internalize climate risks, not on incentivizing sustainable investment flows.
  - Implement Policy gradually: start with banks, extend to non-bank financial institutions as data and capacity gaps close.
- Implementation tools and regulatory updates:
  - Regulation and supervisory assessments, climate stress-testing, monetary policy instruments aligned with international best practices.
  - Amendments to corporate governance, risk management, disclosures, data reporting templates, SREP, ICAAP, ILAAP, and introduction of climate stress-testing and green monetary policy tools.
- Coordination and international engagement:
  - Follow BCBS and FSB recommendations; participate in NGFS and SBN for best practices exchange.

### Key findings and conclusions (E. Summary and Conclusions, paragraphs 24–27)
- Paragraph 24:
  - The war has been a setback to continued progress on Ukraine’s climate objectives.
  - Historically, Ukraine achieved significant reductions in GHG emissions, reflecting output dynamics and structural change.
  - Ukraine had made important investments in renewable energy before the full-scale war.
  - The invasion caused damage to or loss of control of low carbon energy power plants, wildfires damaging forests, and significant environmental damage.
- Paragraph 25:
  - 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 severely adverse climate scenarios.
  - Appropriate longer-term climate policies can reduce exposure to disasters and foster economic stability, efficiency, energy security, and public health.
  - Continued GHG reductions will help Ukraine meet Paris Agreement commitments and align with EU accession objectives.
  - Major recovery and reconstruction efforts risk creating setbacks on climate targets if not climate-informed.
  - Ukraine has committed to introducing an ETS as part of its EU Association Agreement; it must be designed carefully to avoid uncertainty and to mitigate risks related to the EU’s CBAM.
- Paragraph 26:
  - Essential investments in climate change adaptation are moderate sized and should be feasible over the longer term once debt sustainability is restored, without reintroducing debt vulnerabilities.
  - Indicative scenario analysis shows the importance of preserving fiscal space for these investments by avoiding excessive policy relaxations over the longer term.
  - Continued efforts to secure financing on the softest available terms are important so debt service from these investments does not exacerbate financing needs.
- Paragraph 27:
  - Carbon pricing policies can help achieve climate objectives and generate significant revenue.
  - Ukraine’s Environmental Tax functions as a form of carbon taxation but is currently too small to be impactful.
  - 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 could be implemented alongside comprehensive subsidy reform to promote mitigation.
  - If implemented carefully, a portion of carbon pricing revenues should be directed to targeted support for vulnerable households to ensure equitable implementation.

*Source: sipea2024001 - 1. Key Ecological Damages Arising from the War (IMF Selected Issues Papers).*

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

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

### Introduction and climate trends
- Average annual temperatures over 2010–22 were 9.9°C, versus 8°C over 1901–1980.
- Under IPCC Shared Socioeconomic Pathway scenarios, temperatures would rise further, including in a scenario keeping increases below 2°C.
- Rainfall patterns are expected to become more volatile, increasing frequency of damaging droughts and floods and reducing river discharge, resulting in more arid lands.

### Impacts on economy and vulnerability
- Agricultural sector: mild-to-moderately warmer temperatures could be beneficial, but greater volatility and extreme temperature rises are damaging; south and center of Ukraine are more exposed.
- Natural disaster management capacity could be weakened by higher poverty, an aging population, and high urbanization—factors exacerbated by the war.
- Reconstruction and recovery present opportunities for “carbon leapfrogging” to avoid “carbon lock-in.”

### Ukraine’s mitigation commitments and energy transition context
- Ukraine revised its Nationally Determined Contribution to reduce emissions by 65 percent below 1990 levels by 2030 and to zero by around 2060.
- As an EU candidate, Ukraine must align tax, spending, and regulatory policies with the EU acquis.
- Pre-war energy mix notes:
  - In 1992, fossil-fuel based generation share was 67 percent.
  - Nuclear generation expanded in the 1990s–2000s and has been the main source every year since 2014.
  - Renewable sources (excluding hydropower) grew rapidly in 2019–21; installed solar and wind capacity overtook hydropower pre-war.

### Key ecological and energy damages from the war (findings from Box 1)
- Wildfires and forest damage:
  - 2022: European Forest Fire Information Service (FFIS) tabulated 1,382 fires.
  - Fires in 2022 are 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 was less severe than 2022, but cumulative weekly CO2 emissions were 24 percent above the same period in 2021; notable uptick around August-September coinciding with counteroffensive operations.
- Nuclear power plants:
  - Several NPPs have at times been located around areas of active hostilities and have been damaged.
  - The Zaporizhzhia NPP is currently located in temporarily occupied territories and is the largest nuclear plant in Ukraine and Europe.
  - Zaporizhzhia NPP installed capacity stated as 5.7 million MW and accounted for almost 10 percent of Ukraine’s pre-war installed generation capacity.
- Hydropower plants:
  - Available HPP generation capacity dropped by about 7½ percent between 2021 and end-2022.
  - The Kakhovka HPP was destroyed on June 6, 2023, eliminating about 3 percent of Ukraine’s pre-war generation capacity.
- Wind and solar:
  - Wind and solar power generation fell by over half in 2022 due to units being in temporarily occupied territories, destroyed, or taken offline.
- Other environmental impacts:
  - Attacks on hazardous material facilities (e.g., oil depots) have resulted in GHG emissions and other pollutants.
  - Loss of agricultural lands due to mining and environmental contamination further challenge post-war climate objectives.

### Recent emissions trajectory and projections
- Historical emissions:
  - 1989 peak: 1,030 million metric tons of CO2 equivalent (including LULUCF).
  - 2021: 318 million metric tons of CO2 equivalent, down 69 percent from the peak.
- War period and model-based projections (CPAT scenario assumptions):
  - Model assumptions: (i) real GDP growth matches the Second Review baseline through 2033 and stays at that level thereafter; (ii) no policy changes to environmental/carbon taxation; (iii) other standard parameters in the model.
  - Estimated emissions dropped by about 20 percent in 2022 due to the economic fallout of the war.
  - Under the assumed recovery, emissions would start to trend upward, crossing the pre-war (2021) level around 2030 and continuing to rise thereafter, driven mainly by GDP growth and energy intensity effects in early years.
- Carbon Border Adjustment Mechanism (CBAM) exposure:
  - Starting 2026, CBAM tax will apply to EU imports of carbon-intensive goods (iron, steel, aluminum, cement, fertilizers, electricity).
  - About 2.4 percent of GDP of Ukrainian shipments are directly exposed to the CBAM (WB index).
  - Some industries have already projected losses from CBAM introduction.

### Long-term debt sustainability and adaptation investment implications
- Long-term debt analysis setup:
  - Projections cover 2034–2053 using deterministic debt-to-GDP and gross financing needs (GFN)-to-GDP paths.
  - Scenario assumptions: (i) reforms embedded in the program (especially revenue-based fiscal adjustment) implemented; (ii) donors and development partners provide financing on appropriately concessional terms through 2033; (iii) external commercial and official bilateral creditors agree to a restructuring providing adequate debt relief.
  - Starting points: public debt level of around 65 percent of GDP and GFNs that would have averaged 8 percent of GDP in the 5 years leading up to the scenario.
- Methodology:
  - Inspired by SRDSF climate change adaptation module; relies on projections for primary balance, real GDP growth, inflation, exchange rates, and debt service associated with outstanding debt.
  - Assumes a financing structure with specified currency composition, weighted average marginal interest rates, and effective maturity schedule; rolling over of maturing obligations follows the projected financing structure and terms on new debt.
- Policy implication:
  - Climate change adaptation investments are necessary but must be planned to preserve long-term debt sustainability under EFF assumptions.

*Source: sipea2024001 - 1. Key Ecological Damages Arising from the War (IMF Selected Issues Papers).*

### 13.          The estimated annual fiscal cost of adaptation investments is a key variable in this

### 13.          The estimated annual fiscal cost of adaptation investments is a key variable in this

### Estimated annual fiscal cost of adaptation investments
- Annual adaptation investment for Ukraine: 0.3 percent of GDP.
  - Strengthening existing assets: 0.22 percent of GDP.
  - New assets: 0.06 percent of GDP.
  - Coastal protection against sea level rise: 0.06 percent of GDP.
- Source of estimates: Aligishiev, Bellon, and Massetti (2022); estimates cover 2021–2030 and are assumed to persist until 2053 for modeling.
- Cross-country comparison: sample average across market access countries is 0.6 percent of GDP.
- Note on scope: Investments include (i) retrofitting all existing public capital to withstand present flood risks excluding capital expected to depreciate before 2030, (ii) strengthening new public capital against present flood risks, and (iii) investment for protection against present and future sea-level rise with Benefit-Cost ratio≥1 in the period 2015-2030.

### Scenarios for long-term public debt and gross financing needs (GFNs)
- Three scenarios isolate impacts of policy choices while keeping common macro assumptions (real GDP growth, inflation, exchange rates, and adaptation investment level):
  - Continued trends (benchmark):
    - Macro-fiscal and borrowing terms remain at 2033 levels indefinitely.
  - Harder borrowing terms:
    - Macro-fiscal variables as in continued trends, but 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 beginning in 2034; underlying primary deficit (without climate adaptation investments) allowed to weaken to about 2 percent of GDP, just enough to stabilize debt near 65 percent of GDP before adaptation investments; borrowing terms remain as in continued trends allowing significant concessional financing.

### Key numeric assumptions for long-term scenario analysis
- Macro-fiscal variables (all scenarios unless noted):
  - Real GDP (percent change): 4.0%
  - Inflation (percent; GDP deflator): 5.0%
  - Adaptation investments: 0.3%
- Primary deficit (percent of GDP):
  - Continued trends: -1.1%
  - Harder terms: -1.1%
  - Fiscal relaxation: 2.4%
- Underlying primary deficit:
  - Continued trends: -1.4%
  - Harder terms: -1.4%
  - Fiscal relaxation: 2.1%
- Marginal interest rates (in percent):
  - Local currency: 6.4% (all scenarios)
  - U.S. dollar denominated debt: Continued trends 4.9%; Harder terms 7.5%; Fiscal relaxation 4.9%
  - Euro denominated debt: Continued trends 0.3%; Harder terms 7.5%; Fiscal relaxation 0.3%
- Effective average maturity (years):
  - Local currency: 4.6
  - U.S. dollar denominated debt: Continued trends 6.0; Harder terms 5.0; Fiscal relaxation 6.0
  - Euro denominated debt: Continued trends 9.8; Harder terms 5.0; Fiscal relaxation 9.8

### Projected outcomes across scenarios
- Continued trends:
  - Most favorable borrowing terms and tight fiscal policy → debt falls to extremely low levels before adaptation investments; with adaptation, debt rises only a little and remains low; GFNs modest.
- Harder borrowing terms:
  - Public debt around 34 percent of GDP by 2053; adaptation investments add about 7 percentage points to the debt ratio; GFNs rise but remain within generally manageable levels.
- Faster fiscal relaxation:
  - Debt rises weakly to 64 percent of GDP by 2053 excluding adaptation investments; if adaptation investments financed on concessional terms, GFN-to-GDP ratio could remain relatively stable but elevated at around 11–13 percent of GDP.

### Caveats and risks to projections
- High uncertainty due to war, recovery and reconstruction, and post-war economic/social structure could cause outcomes to differ significantly.
- Key macro-fiscal variables (growth, inflation) could deviate drastically from projections.
- Climate adaptation investment needs could differ because of ecological or infrastructure damage from the war.
- Upside: "build-back better" during reconstruction could reduce future investment needs; downside: war legacies could increase climate vulnerability and fiscal costs.

### Policy implications and recommendations (adaptation finance)
- Avoid excessive fiscal relaxations after restoring debt sustainability; maintain a somewhat elevated primary surplus for an extended period to:
  - Incorporate climate programs in the budget without crowding out priorities.
  - Leave adequate buffers for potential future shocks.
- Seek financing on adequately concessional terms (including for climate-related policies) to keep GFNs manageable and stabilize debt under the Fund’s definition of debt sustainability (IMF, 2022).

### Policies to lower greenhouse gas emissions (mitigation)
- Current carbon taxation:
  - Environmental Tax covers stationary pollution sources; carbon-related part covers electricity and industry.
  - Tax rate increases: UAH 0.2 (2011) → UAH 0.41 (2018) → up to UAH 10 (2019) → up to UAH 30 per ton of CO2 equivalent (2022).
  - Government collections from this tax: 0.3 percent of total tax revenues in 2022.
  - Effective carbon tax rate in Ukraine: around $1 per ton of CO2 equivalent versus sample average $73 per ton of CO2 equivalent.
  - Conclusion: current carbon tax rate and coverage are too low to have a material impact.
- International commitments and reforms:
  - Ukraine’s revised NDC: emissions reduction target of 65 percent by 2030 compared to 1990 levels.
  - EU accession implications: adopt an Emissions Trading System (ETS) by 2025 covering power and industry; legislative plans indicated in April 2023; business preference for gradual, predictable ETS introduction and later transition to EU ETS.

### Use of the IMF-World Bank Climate Policy Assessment Tool (CPAT)
- CPAT estimates emissions, fiscal, and economic impacts of mitigation policies using projections of income growth, fuel prices, and technological improvements.
- Outputs: fiscal indicators, GHG emissions, GDP and welfare effects, distributional impacts, air pollution, transport effects.

### Illustrative carbon pricing scenario: target US$50 per ton
- Calibration:
  - Current level about $0.8 per ton of CO2; raise carbon prices gradually beginning in 2025 to reach $50 per ton by 2035.
  - Coverage: all fuels, sectors, and industries.
  - Revenue recycling: equal allocation to public investment (recovery and reconstruction), transfers to bottom 40 percent of income distribution, and other current spending to support revenue-based fiscal adjustment.
- Emissions trajectory:
  - Policy would halt the upward trend under business-as-usual and broadly stabilize emissions.
  - A more ambitious $75 per ton target would lower emissions further and align closer to recent EU carbon prices.
- Fiscal impacts:
  - $50 per ton by 2035 → total fiscal revenues around 4½ percent of GDP in that year.
  - $75 per ton by 2035 → fiscal revenues rise to 6.1 percent of GDP.
- Distributional impacts:
  - Bottom 40 percent face larger direct fuel price effects but gain more from recycled revenues (targeted transfers and higher capital/current expenditures) and are net beneficiaries; net impact on higher-income households is relatively small.
  - Estimated impact on real GDP growth is small; effects on industry depend on post-war economic structure and exposure to CBAM.

### Alternative, more ambitious calibration aligned with EU policies
- Calibration:
  - Carbon prices rise beginning in 2025 with sectoral differentiation:
    - Power and industry (EU ETS sectors): carbon pricing around $100/ton by 2035.
    - Buildings and transport (broadly EU ETS 2 sectors): carbon price around $50/ton by 2035.
  - Excise taxes assumed to comply with EU's proposed energy tax directive; carbon prices for industries covered by CBAM reduced by the share of freely allocated allowances.
- Emissions trajectory:
  - Substantially higher effective carbon prices place GHG emissions on a gradually downward trend; by 2035 emissions about 28 percent lower than 2019 level.
- Fiscal and distributional impacts:
  - Fiscal revenue impact roughly doubles relative to the $50 per ton scenario.
  - Lower-income households made better off with revenue recycling; negligible impact for high-income households.

### Complementary mitigation measures
- Subsidy reform:
  - Heating fuel subsidies estimated at 1 percent of GDP (Aav, et. al, 2023); such subsidies discourage efficiency and renewable transition.
  - Reform of subsidies could be taken in tandem with carbon taxes; additional revenues could cushion impacts on vulnerable households and fund development priorities.
- Other measures:
  - Feebates, tradable performance standards, regulatory measures, and financial sector actions.

*IMF Selected Issues Papers — Policies to Address Climate Change (excerpt).*

### 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)

### Background and policy context
- In July 2023, the National Bank of Ukraine, 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 strategy notes the need to update the NBU’s Sustainable Finance Development Policy to stabilize the economy during wartime and foster post-war recovery and reconstruction.
- The NBU views implementation of ESG standards in financial services (including sustainable financing) as part of a broader national initiative to achieve national ESG development goals, to be developed and approved at the Government level.
- A government-level 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.
  - Introduce necessary legislative requirements and a green taxonomy for the real sector to enable financial sector risk analysis and accounting.

### NBU approach to ESG and sequencing
- The NBU will update and operationalize its 2021 Sustainable Financing Policy once pre-requisites are implemented.
- Russia’s war against Ukraine forced the NBU to re-prioritize the financial sector agenda toward maintaining financial stability; the updated roadmap anticipates delays in certain areas due to wartime challenges.
- The NBU plans to:
  - Act within its current mandate.
  - Focus primarily on ensuring financial sector institutions internalize climate risks.
  - Abstain from incentivizing the channeling of financial flows towards more sustainable investments.
  - Implement the Policy gradually, starting with banks and extending 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 and will be integrated into traditional supervisory tools, including assessment of business models, corporate governance, and risks to capital positions of financial institutions.

### Implementation tools and regulatory measures
- Policy tools to be developed include:
  - Regulation and supervisory assessments.
  - Climate stress-testing.
  - Monetary policy instruments aligned with emerging international best practices.
- Regulatory updates for promoting sustainable financing will include amendments to:
  - Corporate governance, risk management, and disclosures to include Environmental, Social and Governance (ESG) risks.
  - Definitions of data reporting templates.
  - Assessment of financial institutions’ exposure to physical and transitional risks.
  - Incorporation of climate-related risks into the supervisory review and evaluation process (SREP), internal capital adequacy assessment process (ICAAP), and internal liquidity adequacy assessment process (ILAAP).
  - Introduction of climate stress-testing.
  - Implementation of green monetary policy tools.
- The NBU aims to formulate a National Bank framework on Sustainable development for itself.
- The NBU’s Policy is consistent with practices in other countries targeting firm-level disclosures, data, vulnerability analysis, and regulatory and supervisory practices and tools.

### Coordination and international engagement
- The NBU plans to closely follow recommendations from the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB).
- The NBU expects to benefit from participation in the Network for Greening the Financial System (NGFS) and the Sustainable Banking Network (SBFN) for exchanging views and identifying best practices on measuring and managing climate-related risks.

### Key findings and conclusions (from E. Summary and Conclusions, paragraphs 24–27)
- Paragraph 24:
  - The war has been a setback to continued progress on Ukraine’s climate objectives.
  - Historically, Ukraine achieved significant reductions in GHG emissions, reflecting output dynamics and structural change.
  - Ukraine had made important investments in renewable energy before the full-scale war.
  - The invasion caused damage to or loss of control of low carbon energy power plants, wildfires damaging forests, and significant environmental damage.
- Paragraph 25:
  - 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 severely adverse climate scenarios.
  - Appropriate longer-term climate policies can reduce exposure to disasters and foster economic stability, efficiency, energy security, and public health.
  - Continued GHG reductions will help Ukraine meet Paris Agreement commitments and align with EU accession objectives.
  - Major recovery and reconstruction efforts risk creating setbacks on climate targets if not climate-informed.
  - Ukraine has committed to introducing an ETS as part of its EU Association Agreement; it must be designed carefully to avoid uncertainty and to mitigate risks related to the EU’s CBAM.
- Paragraph 26:
  - Essential investments in climate change adaptation are moderate sized and should be feasible over the longer term once debt sustainability is restored, without reintroducing debt vulnerabilities.
  - Indicative scenario analysis shows the importance of preserving fiscal space for these investments by avoiding excessive policy relaxations over the longer term.
  - Continued efforts to secure financing on the softest available terms are important so debt service from these investments does not exacerbate financing needs.
- Paragraph 27:
  - Carbon pricing policies can help achieve climate objectives and generate significant revenue.
  - Ukraine’s Environmental Tax functions as a form of carbon taxation but is currently too small to be impactful.
  - 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 could be implemented alongside comprehensive subsidy reform to promote mitigation.
  - If implemented carefully, a portion of carbon pricing revenues should be directed to targeted support for vulnerable households to ensure equitable implementation.

*Source: Box 2. Ukraine: Implementing ESG Standards in the Area of Financial Services (concluded), sipea2024001.*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2024/english/sipea2024001.pdf_