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EU investments: voice of the public must be heard!

Several civil society organisations recently voiced concern over the growing tendency of governments to make decisions concerning EU funds behind closed doors, resulting in declining levels of civic participation, transparency and accountability. With further EU investment decisions on the horizon, more of the same secrecy seems likely.  

The planning and implementation of recovery plans, for example, were unique and unprecedented not only in terms of the amount of money, but also the speed with which spending plans were decided. 

In just a matter of months, most – although not all – EU Member States had drafted and submitted their recovery plans, which collectively totalled almost EUR 700 billion, to help economies recover from the COVID-19 pandemic crisis and make economies and societies more sustainable and resilient.  

The investment decisions made during this time will have long-term and far-reaching consequences. Unfortunately, such decisions were made by a select group of people, almost entirely excluding the public and civil society from having a say in where and how this money should be spent. 

Public consultations on the plans, for example, were in most cases only opened for a period of one or two weeks yet required participants to monitor and scrutinise hundreds of pages of detailed information. Similarly, additional projects were secretly snuck into plans after consultations were officially closed to avoid public scrutiny, as was the case for wind farms in state forests in Latvia.  

The preparation of recovery plans, however, showed that the Member States which involved the public in the planning process developed the most ambitious recovery plans, and made the most progress towards realising the EU Green Deal. 

As this extraordinary amount of funds is now being disbursed, and consequently projects are starting to be implemented, things have not improved. One year on, the full details of what specifically will be financed are still unknown. Moreover, civil society organisations and social partners are not associated with the roll-out of money. As our mapping shows (see table below), few Member States have managed to set up a genuine monitoring mechanism or process where decisions are deliberated publicly and collectively. In many cases, the establishment of such committees has been delayed, even though the recovery plans were approved months ago – a clear sign that governments have no intention to involve civil society organisations in monitoring the implementation of the reforms and investments. This has resulted in weakened participatory democracy, lack of transparency and citizens’ lack of trust in public institutions.  

New legislation, same problems

On 18 May, the European Commission unveiled REPowerEU, an action plan to rapidly diversify and increase the deployment of renewable energy, in light of the Russian invasion of Ukraine.  

One of the ways the Commission proposes to finance these additional investments is by giving Member States the option to transfer Cohesion Policy funds, which are typically not fully spent at the end of budgetary cycles, to the budgets for the recovery plans, which will now include an additional REPowerEU chapter. While the efforts to increase renewable energy deployment are thoroughly welcome both in terms of energy independence and decarbonisation, the issue of public participation once again is almost entirely absent.  

Cohesion Policy funds work via a ‘shared management’ process, whereby the disbursement and management of the funds are done in cooperation between the Commission and the Member States. As part of this fund’s design, Member States are required to set up monitoring committees, formal platforms where stakeholders, including civil society, can scrutinise the process and ask questions where necessary. However, the Recovery and Resilience Facility (RRF) has no such requirement. They do not work under the process of shared management. For information on the state of play on monitoring committees under the RRF, see the mapping prepared by CEE Bankwatch Network and our national partners.  

Therefore, transferring funds away from the Cohesion Policy programmes, which require public participation and consultation, to the recovery plans, which don’t have this requirement, effectively gives Member States ‘free rein’ to make investment decisions, and allows them to avoid opening up to public input and scrutiny. At the same time, there is a question about who will decide how much will be transferred away from Cohesion Policy funds to finance REPowerEU objectives, as well as what these funds will actually finance.  

It is possible that these funds could be reallocated for new investments in renewable energy. We would welcome this, unless it means removing Cohesion Policy programmes that would have important benefits for the environment and nature. Bankwatch’s assessment of available operational programmes has revealed that national authorities have earmarked funding for positive and urgent areas, such as biodiversity conservation measures. Will these positive programmes be removed in order to generate additional funds to finance REPowerEU objectives?  

There is further concern that the REPowerEU chapters that will be added to the recovery plans will need to be prepared on a very tight timeline, preventing public scrutiny. Although there is no fixed deadline for when they must be submitted, the RRF will run until 2026, with loans being committed by the end of 2023. As a result, this highly short time span will not allow for proper, meaningful public consultations. 

The Commission has already conceded that the level of public consultation and involvement during the initial recovery planning process was unsatisfactory, stating that: ‘the extent of consultations in the preparation of the initial RRPs varied’. This was further shared by the European Parliament’s report on the mid-term review of the RRF implementation. 

Another issue is that REPowerEU removes the requirement to conduct environmental impact assessments (EIAs) when mapping where renewable energy projects should be placed. Not only are EIAs a critical part of assessing the potential environmental harm at the project level, but they are also crucial for ensuring meaningful public participation in decision-making and thereby better aligning investments with needs, as well as strengthening the quality of decisions. This stands in stark contrast to treaties like the Aarhus Convention on Access to Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters, to which each EU Member State is a party. Such treaties require public participation for any plan, programme or policy related to the environment, including financial and budgetary plans, so that should also apply to the recovery and resilience plans. 

Removing this step is yet another example of the continued and growing trend towards decision-making behind closed doors and reducing public participation to a mere formality. A state of urgency doesn’t justify the exclusion of civic engagement in decision-making. Opening the processes, on the contrary, is a sign of good governance and the foundation for the green and just transformation of economies and societies, as reflected in the European Green Deal.  

How can REPowerEU benefit from greater public participation? 

Better public consultation and participation is not a bureaucratic exercise designed to slow decisions down. On the contrary, it has proven to reflect regional and local needs better by allowing stakeholders to demand more accountability, transparency and public ownership. This was the case for the Bulgarian recovery plan, in which the delayed process allowed for increased input and proposals from civil society to be included, therefore improving the overall quality and ambition of the plan. The challenge will now be to make sure sufficient scrutiny will be possible during the implementation, so that those efforts will not be wasted. The energy transition has both high social costs and needs a more holistic approach for addressing the multiple crisis we are facing. Therefore, civil society can prove a vital asset, not a burden, in sharing knowledge and expertise on what should and should not receive financing through REPowerEU.  

During initial recovery fund planning, many concerns and positive proposals for reforms and investments were simply not taken into account. Ahead of the amending of the RRF regulation, we call on the European Parliament and the Council of the EU to improve the regulation to include provisions for ensuring sufficient civic participation in REPowerEU. 

CBAM’s coming, it’s time to put a price on carbon!

The Council of EU Environment Ministers is expected to vote on this at the end of June, in the final decision for  the Proposal for a Regulation of the European Parliament and of the Council establishing a carbon border adjustment mechanism, or the Carbon Border Adjustment Mechanism (CBAM) file.

This mechanism is an important step in levelling the playing field in the European energy market, considering the high price EU citizens, alongside Western Balkan ones, pay for air pollution in health and environmental impacts.

Between 2018 and 2020, the EU imported around 8 per cent of the electricity produced by Western Balkan coal plants, which is artificially cheap because the countries do not apply carbon pricing – with the dubious exception of Montenegro – and their coal plants exceed the legal limits for air pollution. 

Paradoxically, even though the EU benefits from this cheap imported electricity, it also pays a high price. During the same period, coal power plants in the Western Balkans caused an estimated 19,000 deaths, with almost 12,000 of these due to non-compliance with power plant emissions limits. Over half of these were in the EU.

How will CBAM work and is there a way that Western Balkan countries can avoid it?

CBAM would embed a CO2 price into the cost of electricity the EU imports from the Western Balkans, synced with the EU price for one tonne of CO2. This price would be updated on a weekly basis.

If we assume a conservative price of EUR 50 / tonne of CO2, then the average annual revenue from the Western Balkans electricity sold would be approximately EUR 534 million /year. This revenue will go to the EU budget, which would return, under different schemes, as support for climate action. 

But the Western Balkan countries can avoid applying the CBAM by introducing their own carbon pricing systems and using the revenues to fund decarbonisation and just transition themselves. However, such a carbon pricing system would need to happen by 2024 or 2025, something that will be clarified in the votes by the EU Council and Parliament later this month.

The governments of the Western Balkan countries have a narrow window of opportunity to design, plan and start implementing carbon pricing and accelerate the transition that the rest of Europe is already on board with.  The Energy Community Decarbonisation Roadmap is a good place to start.

*Electricity is one of the five areas to which CBAM will apply. The rest are: iron and steel, cement, fertilisers and aluminium.

**CBAM applies to any country outside the EU, except those that are participating in or are linked to the EU Emissions Trading System (ETS) and also countries with comparable carbon prices.

On the (long) road to recovery: Poland’s plan greenlit

Although the plan has been greenlit, Poland will have to wait a bit longer for the recovery money to be disbursed. The European Parliament adopted a resolution criticising the Commission for endorsing the plan while Poland’s rule-of-law violations remain unaddressed. Members of Parliament called on the Council to withhold approval of the plan until all conditions are met. 

At the same time, the Polish Parliament passed the Supreme Court Act amendments without fulfilling the recovery plan’s milestones on the judiciary. Even if approved by the Council of the EU (expected on 17 June), the plan may remain blocked as these milestones (cancelling the Disciplinary Chamber of the Supreme Court, returning judges suspended by it to the bench and reforming the disciplinary procedure for judges) must be fulfilled prior to any disbursement. 

These funds for post-pandemic recovery are one of Poland’s last hopes for catching up with the needs of the green transition. They are much-needed by the Polish economy, which was severely weakened by the fossil fuels prices crisis, economic consequences of the Russian invasion of Ukraine and rapidly growing inflation. 

If one expected the recovery plan to mature over the year, the final version may be a disappointment. The plan was indeed improved in some aspects, especially concerning compliance with the ‘do no significant harm’ principle, but it is still clearly not ambitious enough given the current economic and international situation. 

Climate contribution  

Billions of euros that were blocked for so long should help address the dire need of a socially responsible energy transformation, since Poland is lagging behind in this respect compared to the majority of the EU Member States.  

According to the Commission’s assessment, even though Poland needs to significantly step up its ambitions in tackling the climate crisis, 42.7 per cent of the measures contributed to climate objectives, which is in line with the EU rules. 

Compliance with the ‘do no significant harm’ principle 

The Commission’s assessment of the plan states that the plan complies with the ‘do no significant harm’ principle and Poland has carried out an adequate ‘do no significant harm’ assessment. However, the low quality of the recently published assessment of Poland’s main Cohesion Policy programme (European Funds for Infrastructure, Climate, Environment) casts doubt on the thoroughness of the recovery plan’s assessment. As compliance with the ‘do no significant harm’ principle is a key criteria regarding the plan’s evaluation, its assessment should be made public together with the Commission’s analysis of the plan.  

Reforms 

Among reforms on energy that are included in the plan, there is an amendment to the Act on investments in onshore wind farms, making the infamous ‘10H’ rule more flexible. The ‘10H’ regulation sets a radius of ten times the height of the windmill that should be maintained between a wind turbine and the closest residential buildings. According to the think tank Instrat, this regulation currently excludes 99.7 per cent of the Polish territory from wind farm investments.  

Another positive reform is an amendment of the law on renewables which will implement a collective energy prosumers’ model as well as provisions on new renewable energy communities. This is urgently needed, as the current Polish law does not fully recognise the energy communities and builds up bureaucratic obstacles to their implementation instead. This results in a very slow deployment of energy communities despite big public interest.  

On the other hand, one of the reforms included in the recovery plan will aim at creating a legal framework for the use of hydrogen as an alternative fuel for transport. Promoting the use of hydrogen is controversial – in order to be most efficient, until the capacity to produce and utilise renewables-based hydrogen capacities increases, hydrogen should first be used by the branches of industry that are difficult to decarbonise, rather than by the transport sector. 

Investments 

Energy efficiency and heating  

Ninety district heating systems are planned to be modernised, whether by investing in fossil gas cogeneration units, renewables (solar, geothermal, bioenergy) or heat pumps. Fossil gas is eligible for funding under one of the ‘do no significant harm’ principle’s exception when it replaces coal, and as long as emissions remain below the threshold of 250 grams of CO2 per per kilowatt hour (kWh). Nevertheless, EU fund supported investments in new fossil gas installations will result in high energy and heat prices for consumers and prolong Poland’s dependence on fossil fuels, and thus should be re-considered. 

An important intervention under the recovery plan is heat source replacement in single-family buildings. The final plan states that as many as 791,200 heat sources should be replaced. Although there is a dramatically growing demand for replacing fossil fuels in individual heating, the final plan reduced the number of heat sources that will be replaced by almost 70,000 compared to the version of the plan submitted in May 2021 (originally 860,000).  

Gas boilers should make up no more than 40 per cent of the overall number of heat source replacements in individual houses (and 20 per cent in schools and social activity facilities). This could have been considered a progressive approach if the ongoing fossil fuels prices crisis did not make gas boilers even less preferable heat source.  

Renewable energy generation and storage 

A big focus in the recovery plan is on an expensive programme for offshore wind farm deployment (1.5 GW). According to the original version of the plan, EUR 3.7 billion out of the EUR 5 billion allocated for renewables will be spent on windmills in the Baltic Sea and their infrastructure. Yet, energy produced from offshore wind farms is significantly more expensive than from onshore wind and photovoltaics installations.  

Compared to the large-scale offshore investments, support for energy communities (EUR 97 million) is modest. And although 139 communities will receive pre-investment support, only 10 cases will see recovery money go directly to establishing the community. Also, as part of the development of energy storage systems, up to 28,000 small (4 to 5 kWh) installations will be supported for energy prosumers, but not energy communities – even though larger storages used by collective prosumers have better potential to stabilise the energy system.  

Transport 

Recovery plan investments in public zero- and low-emission public transport (in synergy with cohesion policy spending) will certainly improve the accessibility and quality of service. As many as 1,738 ‘clean’ buses will be purchased, along with 183 trains and 110 trams. Poland will also modernise 500 kilometres of railway lines. 

While public transport investments raise no concerns, the plan to reach production capacity of 100,000 new zero-emission vehicles by mid-2026 does not seem realistic. Grants supporting production of electric cars will amount to EUR 900 million. This allocation could be limited and re-allocated to sectors where there are growing needs, such as energy efficiency measures and changing heat sources connected with deep modernisation (where the target was lowered compared to an earlier version of the plan).  

Biodiversity 

As far as biodiversity is concerned, there is some substantial improvement in Poland’s recovery plan. This was not difficult to achieve since in the previous version of the plan biodiversity was almost not mentioned. According to the European Commission’s analysis, EUR 170 million has been allocated for the component Nature and biodiversity protection, natural heritage and resources, green and blue infrastructure. 

Also, there are more strings attached to the reform Support for the sustainable management of water resources in agriculture and rural areas. The last publicly known version of that reform was aimed at simplifying permitting procedures for water retention investments. This would relax or remove environmental safeguards, which are already insufficient for some water management projects in Poland. But now, amendments must not lead to any deterioration of the level of compliance with EU environmental legislation. This milestone involves projects likely to have a significant impact on the environment as well as investments in, or affecting, Natura 2000 areas.  

In addition, the controversial investment plan on water management facilities seems to be improved in the final plan. This investment was added without civil society’s knowledge, just after public hearings, and ever since then, it has been considered a significant threat to Polish rivers. Building reservoirs, dams, and gates on rivers would mean a great loss for the ecological connectivity. Now, the most disturbing multifunctional hydro-technical investments were removed from the name of the measure, yet it is unclear whether this means the actual investment will be completely excluded. For example, although the latest revision now includes references to prioritising nature-based solutions as part of the milestones, there are no explicit exclusions preventing the construction of concrete hydropower.  

Biodiversity seems to be better protected by the milestones and targets in the final version of the recovery plan. Restoration and protection are mentioned in almost every milestone attached to the reform along with any investment which could be potentially harmful to nature.  

Transparency 

The preparation of the plan was kept secret, and civil society was excluded at its early stages. Violations of the partnership principle in the preparation phase limited civil society’s ability to improve the plan and influence its shape. Also, changes to the plan – mainly positive – are a result of negotiations done behind closed doors between the Polish government and the Commission. When the negotiations were taking place, we were denied access multiple times to any newer version of the plan by both the Polish and EU sides. Problems with transparency with respect to the planning raise concerns regarding insufficient public oversight in the spending of billions of euros during the implementation phase.  

Although the creation of a monitoring committee is not explicitly required by the Recovery and Resilience Facility regulation, it was indicated as a milestone for Poland. Unfortunately, it is weakened by the lack of a requirement that the civil society representatives in the committee be ‘independent from the government’. The selection of members has already started, again behind closed doors, in a highly politicised procedure. A new law setting rules for the implementation of recovery and cohesion funds also limits access to public and environmental information.  

Altogether, these provisions limit public oversight and the ability for civil society to play a role in the monitoring and implementation of the recovery plan to the extent that EUR 35 billion may be spent in a way that undermines the green transition. The disbursement procedure used for the Recovery and Resilience Facility means that if certain investments violate the EU legislation or principles, such as ‘do no significant harm’, in the worst case, the EU would not reimburse the expenses, but would not prevent the investment from happening. The lack of transparency might prevent civil society from stopping such investments before the damage is done. 

Conclusion 

For the green transition in Poland, the endorsement of the Polish recovery plan brings positive news. A significant stream of funds will boost the green transition and mitigate the economic and social consequences brought on by the pandemic, war and inflation.  

Although the plan properly sets out the priorities, its transformative ambitions are modest, and its targets are outdated. It also needs to be amended in order to contribute to achieving the new REPowerEU goals. Currently, fossil gas investments are still possible, and a significant amount of money will go to questionable projects, such as offshore wind farming (expensive) and electric vehicles manufacturing (difficult to deliver in the timeframe of the Recovery and Resilience Facility). At the same time, expected results in energy efficiency, heating replacement and energy communities’ development remain moderate. Last but not least, weak public oversight and low transparency risk the misuse of the plan’s 42.7 per cent of climate spending. 

Note: Although approved by the Commission on 1 June, the final version of the plan has not been disclosed as of 13 June. This leaves us with documents prepared by the Commission, one of which gives us a good picture of the content of the plan and Commission’s priorities in its implementation. It is the Annex to the Proposal for a Council Implementing Decision (COM(2022) 268 final), containing milestones and targets of the plan and a clear description of reforms and investments. It does not, however, contain specific allocations, broken down by investments. They will be included in the plan itself. 

NGOs call on the European Commission to ensure transparency and public participation in Ukraine’s green reconstruction

The Russian invasion of Ukraine impacts livelihoods and economies throughout the central and eastern European region and beyond, creating threats to food security, increased poverty and inflation. In the future, Ukraine will face the double challenge – rebuilding fast but also ‘build back better’ with significant cost ranging from $500 billion to $1,000 billion.  

In the open letter, the civil society groups welcomed the Commission’s proposal for the high-level strategic Reconstruction Plan for Rebuilding Ukraine, which aims to ensure the elaboration and implementation of structural reforms, good economic policy and sustainable development goals in line with the Green Deal, which could ensure the country’s long-term and sustainable development. However, the undersigned NGO representatives call on the Commission to consider suggestions of what should be reflected in the establishment of the Ukraine Reconstruction Platform and its associated fund:

Ukrainian people’s ownership 

The success of the RebuildUkraine plan is fully dependent on its real ownership by the Ukrainian people. Therefore,

the EU Commission should ensure proper structures for public participation by impacted communities and civil society groups from Ukraine, as well as international organisations and independent experts, in the platform.

From the beginning, the financial instrument should apply the partnership principle in line with the European Code of Conduct on Partnership to ensure involvement of all stakeholders in all stages of decision-making and implementation. 

Ukraine’s Rebuild back better framework

Ukraine’s reconstruction should be based on long-term strategic documents such as a comprehensive development framework and a needs assessment study. Both should be in line with the European Green Deal and Paris Agreement.  

The documents should guide and coordinate the efforts of the entire donor community. It is important that these documents undergo strategic environmental impact assessment procedures to identify potential negative environmental and social impacts and properly mitigate them. Compliance with the principle of do no significant harm should also be ensured to guarantee that Ukrainian investments will comply with the best standards for sustainability as outlined in EU Taxonomy Regulation. 

Ukrainian civil society’s guiding green principles 

More than 50 Ukrainian groups have developed guiding principles to ensure that the country green post-war reconstruction delivers sustainable economic development and is beneficial for people.To achieve this goal, the reconstruction plans should also include the following: 

  • Transparency; community and public participation in decision-making; 
  • Using the best available technologies and practices; 
  • Sustainable development of cities and regions; 
  • Energy sector decarbonisation and decentralisation; 
  • Development of sustainable and decentralised agri-food systems; 
  • Preservation of Ukraine’s ecosystems and natural resources. 

National plan for RebuildUkraine

In advance of a ceasefire, the government of Ukraine has already set up the National Council for Recovery, which is preparing a plan for post-war recovery and development. Although this is an important step forward, there are a few concerns regarding the timeline, format and process of the plan’s implementation, the EU should provide more political and practical guidance.  

Foremost, it is unrealistic that the Council will be able to develop a long-term plan within six weeks that adequately utilises the 23 thematic working groups to ensure a thorough bottom-up approach to planning. This will also be problematic since

the plan is currently not conditioned by the EU’s major driving principles, including transparent budgeting, the European Green Deal, climate goals, gender mainstreaming, anti-corruption measures, social welfare, etc.  

The International Advisory Board that oversees the working groups consists mainly of well-known economists and does not represent the views of the other sectors and is not diverse in terms of gender. The participation of civil society and even municipalities in the working groups is limited due to constraints on information dissemination. 

Donor coordination, transparency and accountability

According to the European Commission’s communication, the platform would ‘bring together under one roof the EU support as well as other initiatives set up by other partners such as the World Bank Trust Fund or the International Monetary Fund (…)’. 

It is important to ensure that the platform not only brings donors together but also sets common rules and standards for transparency and accountability. Since different donors have different rules and procedures, it would be beneficial to have a memorandum of understanding on donor coordination, transparency and accountability. The proposed RebuildUkraine facility will have a special governance unit ensuring that investments ‘in strategic digital, transport and energy infrastructure are brought in line with climate and environmental EU policies and standards.’ 

The transparency and accountability of RebuildUkraine should also be ensured through a digital platform that collects and gives public access to the relevant information on loans and grants for Ukraine’s reconstruction. 

Protecting people and the environment 

The Ukrainian government has simplified the legislation on the Environmental Impact Assessment and Strategic Environmental Assessment, particularly for the period of the war and the subsequent reconstruction without proper procedures or discussions.  Although this is understandable in the time of war, it will be important to have safeguarding procedures in place by the time major reconstruction projects are implemented. Should the government delay the process of restoring environmental legislation provisions, EU safeguards should serve the purpose of long-term public interest. Environmental and social impact assessments, energy efficiency indicators and the clients’ capacities and track record assessments should be maintained to avoid future negative implications of the post-war reconstruction. 

The ‘RebuildUkraine’ Facility would potentially build on the EU’s experience under the EU’s Recovery and Resilience Facility (RRF) with an understanding of the unprecedented challenges of reconstructing Ukraine and accompanying it on its European path. Thus, similarly to the RRF Regulation, the RebuildUkraine Facility must have clear milestones and targets to support Ukraine’`s green transition – as, for example, climate expenditure target (37%) and respect the do no significant harm principle within the RRF.  

The European Commission plays an important role in currently supporting Ukraine and in the future plans. In order to avoid any significant obstacles in Ukraine’s green reconstruction process, the Commission needs to ensure proper adherence to the European Green Deal and Paris Agreement, transparency and public participation in decision-making, donor coordination and transparency. 

Voices of support for Ukraine echo in Morocco: takeaways from the EBRD Annual Meeting in Marrakesh

Supporting Ukraine while keeping Russia on the Board 

When the war started, the EBRD immediately reacted by condemning Russian aggression and expressing its unwavering support for Ukraine. These words turned into action when the EBRD issued a support package for Ukraine and its neighbouring countries worth EUR 2 billion.  

In addition to that, the Bank decided to close its offices in Russia and Belarus on 1 April 2022, pursuant to Article 8.3 of the Agreement Establishing the EBRD, and the Board of Governors resolved to suspend and modify access to the Bank’s resources by the Russian Federation and Belarus. The Bank is now trying to minimise activities in Russia and has stopped funding new projects in the two countries.  

The EBRD, however, is more reluctant to formally suspend Russia’s and Belarus’ membership. The Bank’s shareholders argue that such step will have limited impact since Russia continues to be a member of other international financial institutions, such as the World Bank and the International Monetary Fund.  

Need for green, inclusive and transparent reconstruction 

 The EUR 2 billion resilience package will be directed to support Ukrainian businesses, economy and infrastructure, for example, through debt restructuring, liquidity and trade finance, and reform support.   

A reconstruction programme will follow once conditions are in place. Immediate investments in Ukraine are risky as the war is still ongoing. Due to the dire economic situation caused by the war, Ukraine will rely as much as possible on grants, for example from the EU, rather than loans.  

The EBRD made clear that they want to play a key role in the reconstruction of Ukraine. The Bank has been involved in the post-war Balkans reconstruction, and is currently active in the southern and eastern Mediterranean region. With such experience, the EBRD needs to make sure that mistakes made in these post-conflict areas will not be repeated now in Ukraine.  

Reconstruction funding should go hand in hand with reforms, for example in anti-corruption and judiciary frameworks. Avoiding the misuse of the funds and strengthening the institutional resilience should be the priority for all donors. In that direction, Valdis Dombrouskis, the EU Commission Executive Vice-President, stated at the Annual Meeting that the EU will make sure that reconstruction funding will be linked with structural reforms to accelerate Ukraine’s integration in the EU.  

During the meeting, Bankwatch also advocated for the EBRD to ensure strong integrity, environmental and social due diligence standards in the projects they fund.

In particular, the Bank should support transparent, green and inclusive reconstruction and ensure community participation in project development.

Good governance practices like transparency and public participation would reduce corruption and embezzlement risks in the reconstruction planning and funding.  

To ensure that the funds are not wasted and are used to build new Ukrainian future, Bankwatch calls for:  

  • Transparent processes and due diligence for spending the funds; 
  • Inclusion of local communities and civil society in reconstruction planning and project implementation;  
  • Environmental impact assessments according to the EBRD and EU social and environmental standards; 
  • Proper coordination by the government and among the international partners supporting reconstruction;  
  • Support for sustainable and green solutions that would build cities free of carbon emissions and healthy for people to live in (emissions-free transport and sustainable mobility, energy efficiency of buildings, and energy diversification); 
  • Supporting vulnerable groups in the post-war time, ensuring accessibility and gender equality and addressing gender-based violence.  

 Renewables and safety first 

One of the fields where investments will be needed is the energy sector. The contribution to energy system distribution and energy efficiency will be crucial in view of Ukraine’s synchronisation with the European Network of Transmission System Operators for Electricity (ENTSO-E), energy transition and climate commitments. 

In recent years, the Ukrainian Ministry of Energy has been developing a hydrogen strategy as a solution for decarbonising the energy sector. However, to achieve this, Ukraine first needs to increase the share of renewable energy sources in its energy mix, because hydrogen production relies on excess energy in the system. Therefore, renewables should be one of the prioritised directions for investment. 

Instead, the EBRD expressed interest in the topic of hydrogen produced by nuclear power plants.

Whereas renewables-based hydrogen is still a possible solution, the nuclear-based alternatives carry more risks than opportunities.  

Bankwatch insists that the EBRD should avoid investments in nuclear facilities in Ukraine for the following reasons: 

  • Existing nuclear power plants have been operating beyond their original design lifespan and have not been able to undergo safety upgrades (e.g. the Zaporizhya plant is still under siege by the Russian army; thus, the planned safety upgrade cannot be conducted); 
  • Ukraine has failed to allocate sufficient resources for the decommissioning of its nuclear power plants and the existing fund is not protected from inflation; 
  • The State Nuclear Regulatory Inspectorate that controls the safety of the plants is not independent (e.g. there is a proven case of political pressure from the state-owned nuclear company Energoatom to obtain a license to operate a central nuclear waste storage facility in December 2021); 
  • Due to the low tariff for nuclear energy produced, the Ukrainian government lacks enough money to repay the loans or allocate funds for decommissioning purposes. 

Moreover, the EBRD seems to be interested in financing gas infrastructure to use it for hydrogen transmission in the future. However, a considerable part of this infrastructure cannot be repurposed and such investments run the risk of locking in gas or ending up as stranded assets. 

Time to excel for the Green Cities programme 

The EBRD was investing in and cooperating with Ukrainian cities before the war. Seven of them are part of the EBRD Green Cities programme, some of which are partly or completely in rubble now. The EBRD continues to support the Ukrainian Green Cities such as Lviv, a city that has become the hub for humanitarian aid and refugee support in western Ukraine. Since 2015 the EBRD has implemented two frameworks for financing electric trolleybuses in Ukrainian cities and should build on this experience. 

The EBRD Green Cities programme could serve as a platform for strategic vision and green reconstruction of the damaged cities.

To achieve this, the Bank will have to show its commitment to at least two of its strategic objectives while working on Ukraine’s reconstruction.  

The first is ‘green’ – the EBRD should provide funding only to sustainable and fossil-free initiatives in line with the EBRD’s green transition goals. The second is ‘equal’ – putting an emphasis on inclusion of civil society and vulnerable groups, such as women and people with disabilities, in the decision-making processes. One of the unfortunate consequences of the war in Ukraine will be an increased number of disabled people. For this reason, strong accessibility requirements will be necessary when rebuilding cities.  

The EBRD should play an important role in the reconstruction of Ukraine. The Bank has long-standing expertise in supporting the country, for example through the Ukraine Reform Architecture or the Chernobyl confinement. Continuous support for Ukraine is now needed not just for the benefit of the country, but also for the values that the Bank has committed to promote. 

EBRD President Odile Renaud-Basso reiterates the Bank’s strong commitment to support Ukraine

The cautionary tale of Montenegro’s emission trading scheme

In February 2020, Montenegro introduced a cap-and-trade scheme in which the minimum price of CO2 was set at EUR 24 per tonne. Free emissions allowances were allowed for energy intensive industries and coal power plants, which included all three relevant plants in Montenegro: the Pljevlja coal plant, the KAP aluminium plant and the Tosčelik steel mill.

Free allowances for Pljevlja were to be reduced by 5 per cent per year and phased out by 2025, but for KAP and Tosčelik they were only to be reduced by 15 per cent per year until they reached the level of the emissions factor laid out in annex 3 of the Decree setting up the scheme. Presumably the plants could then continue to receive this number of allowances indefinitely – it was not made very clear.

On the positive side, the funds collected (once auctions finally started) were to be paid into the Eco Fund and used for renewable energy, environmental protection or innovation in line with Montenegro’s smart specialisation strategy.

Flawed from the outset

In general the scheme was well-received, as it was the first in the region, so Montenegro scored points for trying. However, already from the beginning, CAN-E spotted a couple of problems:

  • The cap was planned to decrease only by 1.5 per annum until 2030, based on Montenegro’s very unambitious first NDC.
  • Knowing that the Pljevlja plant would be offline for some time during its modernisation project, there was a danger of a surplus of credits accumulating if the number of allocated credits was not reduced sufficiently.

Allocating free credits for KAP was also questionable in state aid terms, because it has been subject to bankruptcy proceedings since 2013, though this would need a more detailed examination.

Carbon pricing or just state aid for bankrupt aluminium producer?

In April 2021, after a change of government, the scheme hit the headlines. It turned out that it had enabled a transfer of around EUR 17 million from state-owned electricity company EPCG to the ailing KAP aluminium plant in February 2021, just before the new government changed the leadership of EPCG. The new leadership reportedly asked the Supreme Prosecutor to look into the case.

What had happened was that the baseline emissions for deciding on the number of free allowances for KAP and Tosčelik had been set according to the production levels of 2005-2008, which were 2-3 times the levels in 2020-2021. 

At the same time, despite supposed limitations of its operating hours under the Large Combustion Plants Directive, the Pljevlja coal plant ramped up its operating hours in 2020, making use of a newly opened undersea cable to export electricity to Italy, so it needed more emissions permits to allow it to continue operating illegally.

The European Commission Decision in force when Montenegro set up its scheme did indeed set 2005-2008 as the reference years for baseline data. However it also clearly said in Article 7 that where production levels had significantly changed, data on the changed operation should be used as the baseline. Montenegro ignored this part, arguing in the Decree that they wanted to incentivise the plants to raise their production to previous levels again.

Ambiguities in the legislation

The arguments used by the new EPCG management in the media about what should have been done differently showed they did not understand carbon trading very well, but also exposed ambiguity in the Decree. For example, the Decree stated that the minimum price of allowances was EUR 24 but it was not clear whether this applied to prices in auctions or also trading. So it was not clear whether permits were allowed to be traded at below EUR 24 per tonne (which was done in this case – KAP gave EPCG a 5 per cent discount), or not.

It was not even spelled out explicitly whether emitters needing additional permits had to buy from other emitters with free permits or whether they could ask the government to auction new ones. It may seem obvious that no auctions should be held if there were unused permits available, but it was not spelt out. If a company bought auctioned permits, it could put the money in the environmental protection fund, which it could then benefit from for investments in eg. renewables, whereas if it had to buy the allowances from other companies, the money was simply gone. So unless it was stipulated that they had to buy from other emitters instead of buying at auctions, there was no reason to.

The fines for emitting CO2 without a permit are also very low – maximum EUR 40,000.

No changes to the system despite obvious problems

In mid-2021 the government set up a working group to carry out changes in the Decree governing the scheme, but this initiative has so far not resulted in any changes. In the meantime, however, the scheme has become even more pointless due to the fact that both Tosčelik and KAP have virtually shut down production in the meantime – whether temporarily or permanently is not completely clear.

Lessons from the Montenegro case

Positively, the income from the scheme is quite clearly earmarked and the end of free allocations for the coal plant clearly stated. But the case is a cautionary tale for other countries in the Western Balkans which are gradually developing carbon pricing schemes. 

The first issue is whether there are enough installations operating in the country to make an emissions trading scheme meaningful in the medium term, or whether a carbon tax makes more sense. This should take account not only of today’s situation but what could happen in a few years’ time. Companies which are already in financial difficulties require particular analysis if plans exist for free allowances as the plans may breach state aid rules. 

If a cap-and-trade scheme is chosen, it has to be ensured that the cap on emissions is tight enough and decreases in line with the 2030 ambitions needed to tackle climate change. This also means that the end of free allowances needs to be clearly defined, and rules around trading clearly defined.

Another issue, and the main stumbling point in Montenegro, is that the baseline year for emissions has to be set realistically or it will result in a surplus of allowances.

Finally, fines for non-compliance must be sufficient to deter breaches.

As for Montenegro, it urgently needs to re-start the process of updating its carbon pricing legislation in order to create a system more suited to the country’s current situation.