VZCZCXRO8174
PP RUEHDBU RUEHIK RUEHLN RUEHPOD RUEHSK RUEHVK RUEHYG
DE RUEHKV #0936/01 1531000
ZNR UUUUU ZZH
P 021000Z JUN 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7885
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RUEHSW/AMEMBASSY BERN PRIORITY 0004
RUEHKO/AMEMBASSY TOKYO PRIORITY 0020
RUEHWL/AMEMBASSY WELLINGTON PRIORITY 0002
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 02 KYIV 000936 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR OES, EUR, EEB 
 
E.O. 12958: N/A 
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: UKRAINE CARBON SALES BOOST FINANCES, ENERGY 
INFRASTRUCTURE 
 
¶1.  (SBU) Summary. Needing to stave off Ukraine's budget 
crisis and simultaneously enhance the country's energy 
efficiency, Prime Minister Yulia Tymoshenko has supported 
selling 180 million metric tons of surplus carbon emissions 
rights to Japan, Switzerland, and New Zealand. 
Back-of-the-envelope calculations suggest that the GOU could 
generate over $2 billion for energy efficiency projects if 
the sales go forward as part of a carbon-for-investment trade 
program.  Since most investments have not been explicitly 
disclosed by the National Agency for Ecological Investments 
(NAEI), it is not clear whether the carbon funds can 
substitute for other budgeted revenues and help plug 
Ukraine's fiscal gap.  End summary. 
 
Carbon Takers: Switzerland and New Zealand 
------------------------------------------ 
 
¶2.  (SBU) The Cabinet of Ministers approved two separate 
deals to trade Ukraine's surplus carbon emissions on May 25. 
Resolution 549 "On Attracting Investments to Finance Projects 
that Decrease Green Gas Emissions" instructed the NAEI to 
sell 100 million Assigned Amount Units (AAUs) to the Swiss 
firm Dighton Carbon SA, as well as 50 million AAUs to New 
Zealand's Tawhaki International LP.  This Kyoto 
Protocol-based transaction helps Tymoshenko fulfill her 
two-pronged strategy of boosting revenues and investing in 
improvements to Soviet-era energy infrastructure.  (Note:  An 
AAU equals one metric ton of carbon dioxide.  Ukraine has 
pledged that monies earned under the Kyoto AAU trade system 
will be invested through clean energy "Green Investment 
Schemes."  End note.) 
 
¶3.  (SBU) NAEI department head Taras Bebeshko commented to us 
that the GOU planned to spend the money from the New Zealand 
contract on landfills, waste processing plants, and district 
heating projects.  According to public comments made by 
Minister of Housing and Municipal Services Kucherenko, 
proceeds from the Swiss contract will likely be spent on the 
reconstruction of waste water treatment facilities in Kyiv, 
Dnipropetrovsk, Zaporizhia, Vinnitsya, and Uzhgorod. 
 
¶4.  (SBU) Although the contract price for AAUs had not been 
disclosed by NAEI officials, Director of MGM International 
consultancy Vladislav Zhezherin said that AAUs sold to New 
Zealand and Swizerland would bring in 10 euros per metric ton 
of CO2.  Observers have extrapolated that if AAU sales go 
forward, the GOU would stand to receive roughly $2 billion. 
With the exception of UAH 100 million ($13 million) projected 
in the budget for the reconstruction of municipal heat 
stations, it is not clear whether AAU generated funds would 
go toward energy efficiency projects already foreseen in the 
2009 budget.  NAEI director Igor Lupaltsov noted to us, 
however, the GOU would "of course" seek to fund projects that 
were already in the budget. 
 
Carbon Trade with Japan 
----------------------- 
 
¶5.  (SBU) Kyiv authorities began fulfilling Tymoshenko's AAU 
sales program earlier this year, after the GOU authorized 
NAEI to sign a two-year contract with the Japanese 
Organization on New Energy and Industrial Technologies 
Development.  NAEI's Lupaltsov acknowledged that his agency 
had created a special foreign currency account in the 
Ukrainian ExIm Bank for the deal with Japan.  The money would 
finance project investment, he stressed, rather than be used 
as direct budget support. 
 
¶6.  (SBU) Tymoshenko has said that Ukraine would sell 30 
million AAUs to Japan in 2009 and 2010, a significant 
transfer to Ukraine's state treasury that will reportedly be 
used to refurbish thermal power and heat supply plants.  The 
PM has noted that she had made energy savings, municipal 
heating, and alternative energy her primary investment 
priorities in the deal.  Kyiv-based Japanese diplomat Megumi 
Osugi-Stepien confirmed to us that her government had 
supported the transaction, in part due to the Prime 
Minister's energetic espousal of the GOU's investment plans. 
On May 25, Kyiv authorities noted that $171 million had been 
received from Japan.  (Comment: It appears that this sum 
comports with the market rate for 15 million AAUs, equivalent 
 
KYIV 00000936  002 OF 002 
 
 
to $11.4 per metric ton.  End comment.) 
 
Future Prospects 
---------------- 
 
¶7.  (SBU) Like other Kyoto signatories, Ukraine's AAU 
allotment is based on the country's greenhouse gas emissions 
figures from 1990.  Whereas other states have seen their 
carbon emissions increase over the past two decades and are 
now struggling to meet Kyoto targets, Ukraine has seen its 
emissions drop as its industrial output has fallen 
considerably since independence.  As a result, Ukraine has 
become a main beneficiary of the Kyoto Protocol's Annex 1 AAU 
trade policy. 
 
¶8.  (SBU) Ukraine may sell roughly one billion AAUs over the 
2008-2012 period, according to NAEI's Lupaltsov, though it 
only began marketing and sales efforts in late 2008.  Mykola 
Kudin, Deputy Head of the Ministry of Environment's 
Department on Air Protection and Climate Change, told us that 
the GOU had been in talks with at least four other countries. 
 Meanwhile, Tymoshenko's government may already have moved 
forward with yet another deal.  Media reports disclosed that 
on the sidelines of the May 27 carbon market conference in 
Barcelona, the World Bank reportedly signed a pact with 
Ukraine to buy 10 million metric tons of Kyoto carbon 
emissions rights worth up to $140 million. 
 
¶9.  (SBU) Comment. While Tymoshenko touts her plan to 
increase Ukraine's energy efficiency, we suspect she is at 
least equally concerned with Ukraine's budget gap and falling 
revenue sources.  Post has seen no quantitative estimation of 
energy savings that would be generated by proposed 
infrastructure investments.  The real and immediate gains are 
more likely to be financial, and Tymoshenko's energetic 
approach to securing investors may have yielded propitious 
results.  Back-of-the-envelope calculations suggest that if 
the funds raised for Green Investment Schemes can be 
substituted for already budgeted expenses, the GOU's AAU 
trading program could help reduce a fiscal deficit now 
estimated at roughly 4 percent of GDP. 
PETTIT